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Section 1: 10-K (10-K)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
 
[X]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
or
[ ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 001-34066
38297073_privatebancorplogo3qa01.jpg
Delaware
 
36-3681151
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
120 South LaSalle Street
Chicago, Illinois 60603
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (312) 564-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
 
Common Stock, No Par Value
 
Nasdaq Global Select Stock Market
 
10% Trust Preferred Securities of PrivateBancorp Capital Trust IV
 
Nasdaq Global Select Stock Market
 
7.125% Subordinated Debentures due 2042
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ].
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X].
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ].
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ ].
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yes [ ] No [X].
The aggregate market value of the registrant’s outstanding voting and non-voting common stock held by non-affiliates on June 30, 2016, determined using a per share closing price on that date of $44.03, as quoted on The Nasdaq Stock Market, was $3,446,864,642.
As of February 27, 2017, there were 80,026,661 shares of the issuer’s voting common stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be disclosed pursuant to Part III of this report either shall be: (i) deemed incorporated by reference from selected portions of the Registrant’s definitive proxy statement for its 2017 Annual Meeting of Stockholders, if such proxy statement is filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of Registrant’s fiscal year; or (ii) included in an amendment to this report filed with the Commission on a Form 10-K/A not later than the end of such 120 day period.
 


Table of Contents

FORM 10-K
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I
 
ITEM 1. BUSINESS

Overview

PrivateBancorp, Inc. (“PrivateBancorp” or the “Company” and, together with its consolidated subsidiaries, “we,” “our” or “us”), a Delaware corporation incorporated in 1989, is a Chicago-based bank holding company registered under the Bank Holding Company Act of 1956, as amended. The Company is the holding company for The PrivateBank and Trust Company (“PrivateBank” or the “Bank”), an Illinois-chartered bank founded in Chicago in 1991.

Through the Bank, we provide customized business and personal financial services to middle market companies, as well as business owners, executives, entrepreneurs and families in the markets and communities we serve. As of December 31, 2016, we had total assets of $20.1 billion, including total loans of $15.1 billion, total deposits of $16.1 billion and total stockholders’ equity of $1.9 billion and operated out of 36 offices located in 13 states, including 23 full-service banking office locations in four states. Our full-service bank branches are located principally in the greater Chicago metropolitan area, with additional branches in the St. Louis, Milwaukee and Detroit metropolitan areas. We have non-depository commercial banking offices strategically located in major commercial centers to further our reach with our core client base of middle market companies.

Pending Transaction with Canadian Imperial Bank of Commerce

On June 29, 2016, the Company entered into a definitive merger agreement with Canadian Imperial Bank of Commerce (“CIBC”), a Canadian chartered bank, and CIBC Holdco Inc. (“Holdco”), a newly-formed Delaware corporation and a direct, wholly owned subsidiary of CIBC, which contemplates that the Company will merge with and into Holdco, with Holdco surviving the merger. Closing of the transaction remains subject to the receipt of required regulatory and stockholder approvals and other customary closing conditions. Following the merger, the Bank will be headquartered in Chicago, Illinois, retain its Illinois state banking charter and be an indirect, wholly owned subsidiary of CIBC.

If approved by our stockholders, under the terms of the definitive agreement, at the effective time of the merger, shareholders of the Company would have the right to receive $18.80 in cash and 0.3657 of a CIBC common share for each outstanding share of PrivateBancorp common stock. Based on the closing price of CIBC common shares on the NYSE as of February 27, 2017, of $90.04, total consideration for the transaction is valued at approximately $4.1 billion, or $51.73 per share of Company common stock. The actual transaction value would be based on the number of shares of common stock of the Company outstanding at the closing and the price of CIBC common stock as of the closing.

The full text of and additional information about the definitive merger agreement is included in the Company’s Current Report on Form 8-K filed with the Securities Exchange Commission (“SEC”) on July 6, 2016.

Our Vision and Strategy

Our vision is to be the premier commercial bank in the Midwest and profitably and responsibly grow our business while maintaining a strong asset quality profile. Our goal is to develop meaningful long-term full banking relationships with our clients by delivering high-touch service and customized product solutions across our platform. We are a Chicago-based bank that serves commercial clients across the country. Our seasoned banking teams serve our clients through a relationship-based approach to deliver banking and wealth management solutions to meet our clients’ comprehensive needs. Due to our commercial focus and relationship-based model, we currently operate with a significantly smaller branch network than banks of generally comparable size, and we offer commercial banking products, services and expertise that enable us to compete with larger banks for middle market commercial clients.

Our business has transformed and grown significantly over the past decade since we hired a substantial group of senior commercial middle market banking executives, including our CEO, from a large Chicago-based financial institution that, at the time, recently had been acquired by a global money center bank. We initially raised a substantial amount of private equity capital to support growth under the new leadership team and invested in adding a significant number of senior commercial bankers and other professionals needed to support the expected new business. As illustrated by the chart below, over the past decade, we have significantly expanded our business, growing our total loans from $4.2 billion at year end 2007 to $15.1 billion at year end 2016, a compounded annual growth rate of 15% over that period, and successfully transformed from a commercial real estate and construction-focused lender to a more comprehensive commercial bank with approximately two-thirds of our loan portfolio comprised of commercial loans (i.e., commercial and industrial loans and owner-occupied commercial real estate):

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In addition to our large commercial banking business, we also have community banking and private wealth capabilities to meet our clients’ comprehensive needs and serve our markets and communities. We place significant emphasis on leveraging our high-touch, relationship-based approach to cross-sell products and value-added services to our clients, such as delivering:

treasury management services to our commercial borrowers, which generates non-interest fee income and serves as an important source of stable, cost-effective deposits that we use to fund loan growth;
interest rate and foreign currency risk management solutions to our commercial borrowers through our capital markets business;
private banking and wealth management services to owners and executives of our commercial clients;
consulting, advisory, custodial and trustee services to qualified and nonqualified retirement plans sponsored by our commercial clients; and
personal banking products and residential mortgages to employees of our commercial clients.

Our growth strategy is primarily focused on organic growth across our lines of business and, since implementation of our strategic transformation, most of our growth has been organic and, over the past several years, through reinvesting most of our earnings in our business. In addition to our focus on cross-selling products and services to our existing clients and acquiring new clients through referrals and business development efforts, we have, as part of our organic growth strategy, expanded our business by recruiting experienced banking professionals with specialized industry expertise and relationships. A strategic priority for us, particularly given our limited retail branch network, has been expanding our stable core deposit gathering capabilities and diversifying our overall funding base to continue supporting organic loan growth over the long term.  To address this strategic priority, in recent years we have considered various potential strategies to diversify our funding base, including potential acquisitions of retail banking franchises and other business initiatives.  In June 2016, we agreed to a strategic combination with CIBC, which would result in us becoming part of a larger, financially strong North American organization and enhancing our sources of diversified, stable funding.

Our Business

We operate Commercial Banking, Community Banking and Private Wealth businesses and seek to generate loans and fee income, gather deposits and cross-sell products and services through each business. At the corporate level, we manage our investment portfolio, hedging activities, funding and liquidity, including the supplementing of deposits generated through our lines of business.

Commercial Banking

Our Commercial Banking business focuses on the specific needs of middle market companies and serves a broad range of industries, such as manufacturing, transportation, wholesale distribution, retail and certain specialty industries discussed below. Our Commercial Banking business also includes our Commercial Real Estate group, which serves the needs of professional real estate investors and developers, and our professionals focusing on specialized industries and products, such as healthcare, finance and insurance, construction and engineering services, security alarm finance and asset-based lending. We primarily target commercial clients with approximately $10 million to $2 billion in annual revenue, although the majority of our clients generate between $20 million and $500 million annually.


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Due to our history and presence in Chicago, as well as the long-standing relationships that many of our senior executives and commercial bankers have here, our largest geographic market is the Chicago metropolitan area and surrounding areas in Illinois. Over the past decade, we have expanded our reach beyond Chicago and Illinois by establishing a National Commercial Banking group within our Commercial Banking business and opening several commercial banking offices in major commercial centers to build our brand, diversify our geographical exposure and expand our reach with our core client base. In addition to our bank branches in the Chicago metropolitan areas, we also conduct our banking business through branches in the St. Louis, Milwaukee and Detroit metropolitan areas and through commercial banking offices in Atlanta, Georgia; Cleveland, Ohio; Denver, Colorado; Miami, Florida; Des Moines, Iowa; Grand Rapids, Michigan; Indianapolis, Indiana; Kansas City, Missouri; Minneapolis, Minnesota; Pittsburgh, Pennsylvania; and Stamford, Connecticut. We may open additional commercial banking offices in other major commercial centers in the future to continue expanding our geographic reach and growing our Commercial Banking business.

Our Commercial Banking business also encompasses our Treasury Management, Loan Syndications and Capital Markets groups. A general overview of these groups, as well as the products and services delivered by our Commercial Banking teams, is set forth below.

Commercial Loans. We offer commercial borrowers revolving lines of credit for working capital needs, term loans to finance expansion, acquire inventory or equipment or otherwise support growth, and standby and performance letters of credit to facilitate transactions with trading partners. Included in our commercial loans are loans secured at least in part by non-residential owner-occupied commercial real estate where the cash flows from the borrowers’ business, as opposed to cash flows from the real estate itself, serve as the primary source of loan repayment. Also included within our commercial loans are leveraged loans, which are primarily underwritten on the recurring cash flow and earnings of the borrower, typically to finance leveraged buyouts, add-on acquisitions, recapitalizations and other strategic initiatives, and generally have higher debt-to-earnings ratios compared to other commercial loans.

At December 31, 2016, we had a $9.6 billion commercial loan portfolio, which comprised 64% of our total loan portfolio. We believe our commercial loan portfolio is well diversified among borrowers, industries and geographies. The average note size of our commercial loans is approximately $3.8 million, although given the nature of our business, we also have many significantly larger commercial loan relationships, including some that exceed $25 million.

As part of our Commercial Banking business, our relationship managers also source syndicated lending opportunities arranged by other banks in which we participate in a non-lead capacity, particularly in situations where we have a pre-existing relationship with the borrower and/or its principals or have an opportunity to cross-sell other products and services to them. Of our $15.1 billion in total loans outstanding at December 31, 2016, $3.0 billion, or 20%, were syndicated loans for which we were a non-lead participant; of this $3.0 billion, $2.2 billion were Shared National Credits (“SNCs”), which are loan transactions of at least $20 million that are shared by three or more regulated depository institutions. The SNCs in which we have participated in a non-lead role typically are led by one or more of the global money center banks or large super regional banks.

Commercial Real Estate Loans. We offer professional real estate investors and developers credit solutions for the construction, acquisition, redevelopment and refinancing for major core property types, including office, industrial, retail, multi-family, student housing and for-sale housing. We provide financing opportunities for privately-held, entrepreneurial real estate companies as well as for REITs and other institutional real estate clients. We generally are a short- and medium-term lender for commercial real estate properties. The majority of our investor and developer clients are based within our geographic footprint, although the properties financed for them may be located in other regions. Our commercial real estate specialists are located in the Chicago, Illinois; Atlanta, Georgia; Cleveland, Ohio; Denver, Colorado; Detroit, Michigan; Milwaukee, Wisconsin; Minneapolis, Minnesota; and St. Louis, Missouri markets. At December 31, 2016, we had a $4.1 billion commercial real estate portfolio (exclusive of construction loans) and a $418.0 million construction portfolio, which comprised 27% and 3%, respectively, of our total loan portfolio. The average note size of our commercial real estate loans is approximately $5.4 million, although as noted above, we also have many significantly larger credit relationships in our commercial real estate business.

Specialized Industries and Products. Within our Commercial Banking business, we have several teams of commercial bankers that focus on a particular industry or a specific product offering that can be offered across industries. These specialty banking teams employ relationship managers with relevant industry experience and/or specialized product knowledge in order to provide tailored banking solutions to fit the unique needs of clients in certain industries or offer sophisticated lending products to commercial borrowers. We believe that having banking professionals with expertise in and a focus on specialized industries and products enables us to build stronger relationships with clients and better serve their unique banking needs.

Our largest industry specialty is our healthcare team. We employ experienced healthcare industry professionals who understand the industry’s unique challenges and regulatory framework and the numerous healthcare sub-markets. We have a particular focus on the senior care sector, including independent, assisted living and skilled care/nursing facilities. Lending relationships in this

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industry group are primarily with for-profit borrowers and the average size of the credit relationship per borrower tends to be larger compared to our non-specialty commercial lending portfolio. As of December 31, 2016, we had a $2.0 billion healthcare loan portfolio, which represented 21% of our commercial loan portfolio and 13% of our total loan portfolio. We also have professionals specializing in the following industries and products:

Finance and Insurance Industry - focus on the needs of clients in the finance and insurance industry generally, with particular emphasis on a number of specific industries and product types, such as the following:
Capital Call Bridge Loans to Private Equity Funds - providing lines of credit to private equity funds secured by limited partner capital commitments, which provide temporary liquidity as a “bridge” to the next investor capital call
Specialty Finance - providing loans to nonbank specialty finance lenders that provide various types of financing, such as consumer financing, auto financing, equipment financing or other types of asset-based lending
Financial Institutions - providing depository, cash management and lending products and services to community banks, financial sponsors, hedge funds, asset managers and futures commission merchants (“FCMs”);
Construction and Engineering Industry - focuses on the needs of engineering firms, construction contractors (general, prime, sub and specialty) and building material suppliers;
Security Alarm Industry - focuses on companies engaged in providing security and medical alert services;
Asset-Based Lending - structure and originate lending solutions secured by a specific pool of assets, such as receivables, inventory or equipment, for commercial clients across a variety of industries; and
Structured Finance - collaborate with our commercial banking relationship managers across a variety of industries to deliver leveraged financial solutions, such as loans underwritten according the quality of the client’s free cash flows, to our commercial clients.

Treasury Management. We have a team of treasury management professionals that work with our commercial banking relationship managers to deliver comprehensive treasury management solutions for our commercial clients to manage their cash and liquidity needs. We offer receivables solutions, such as remote capture and wholesale lockbox services, payables solutions, reporting, reconciliation and data integration solutions and deposit account and investment options for optimizing earnings on excess cash balances.

As a commercial-focused bank, our largest source of deposits is our commercial client base and, accordingly, we actively cross-sell our treasury management products and services to our commercial clients and focus on lending relationships where we believe we have an opportunity to acquire deposits and provide treasury management products and services. We offer our commercial clients an earnings credit rate, which reduces the amount of treasury management fees charged to a client based on the average balance maintained by the client in noninterest-bearing deposit accounts. As of December 31, 2016, approximately 75% of our commercial clients had a treasury management relationship with us. For the year ended December 31, 2016, treasury management was our largest source of non-interest income at $33.9 million, or 23%, of total non-interest income.

Loan Syndications. We have a loan syndications team that generates fee revenue by arranging for other lenders to participate in a loan transaction either at a borrower’s request or in connection with us strategically managing the composition of our loan portfolio to, among other things, mitigate our risk exposure to a single borrower, transaction or industry. In larger lending transactions, we may arrange loans on a best-efforts basis (in which we commit to extend only a portion of the total commitment, pro rata with other lenders, and the borrower obtains the full credit request only if the syndications team arranges sufficient commitments from other lenders or investors) or we may fully underwrite credit facilities (in which we commit to lend the full credit facility to the client and, following the initial closing, syndicate portions of that credit to other lenders). In this way, syndications allow us to structure, and serve as the lead arranger for lending transactions that we may not otherwise be able to participate in, as we are able to reduce our credit exposure to the client relationship and/or decrease loan concentrations by industry, type or size. Serving as the lead for these lending transactions may enhance our ability to retain or acquire the deposit and treasury management relationship and obtain future business from the borrower. In 2016, our syndications team generated $21.0 million, or 14%, of total non-interest income. We syndicate both commercial loans (68% of syndication fees in 2016) and commercial real estate loans (32% of syndication fees in 2016). As of December 31, 2016, of our $15.1 billion in total loans outstanding, we had $2.5 billion of retained balances from syndicated loan transactions for which we serve as the lead or co-lead.

Capital Markets. We have a team of capital markets professionals that work with our commercial banking relationship managers to assist our commercial clients with their risk management objectives by offering a suite of interest rate and foreign currency hedging solutions. Our interest rate management products, such as interest rate swaps, caps, floors, collars and swaptions, assist our borrower clients in protecting themselves from unexpected interest rate movements, achieving predictable debt service payments and balancing their mix of fixed and floating-rate debt. To assist clients with their management of foreign currency

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transactions, we offer foreign currency wire transfers and facilitate collection of foreign currency drafts and checks, and to assist with their management of currency fluctuations, we offer foreign exchange forwards, window forwards, swaps and options. We also provide foreign currency risk management services to clients, such as developing foreign exchange policies and providing research. For the year ended December 31, 2016, our capital markets group generated $25.3 million, or 17%, of total non-interest income.

Community Banking

Our Community Banking business serves the personal, residential mortgage and small business banking needs of consumers and small businesses through our bank branches. Our Community Banking business is focused primarily on the Chicago metropolitan area, where most of our bank branches are located.

Retail Banking. Through a network of 23 full-service banking office locations, of which 20 are in Chicago and its surrounding communities, we provide traditional personal banking and investment products and services, including checking, savings and money market deposit accounts, certificates of deposit (“CDs”), health savings accounts, and personal lending products, such as home equity loans and lines of credit, auto loans (primarily for used cars), secured and unsecured loans (often used to fund educational costs or consolidate debt) and overdraft protection loans. We also offer retail deposit products through The Palladian PrivateBank, our online banking portal.

Residential Mortgage Banking. We offer a full range of residential mortgage loans for purchasing or refinancing one- to four-family residential properties, primarily through a correspondent model in which we originate loans for sale in the secondary market based on the underwriting standards of third-party investors and transfer servicing rights together with the sale of the loan. In certain cases, we retain originated mortgage loans for our portfolio, primarily jumbo and nonconforming loans. We currently do not service loans for other entities. We have residential mortgage origination teams in the Chicago, St. Louis, Milwaukee and Detroit markets to serve the residential mortgage needs of the communities in which we have bank branches. As of December 31, 2016, we employed 24 residential mortgage loan originators. During 2016, we originated and sold approximately $485.4 million of first mortgage loans, which generated $15.9 million, or 11%, of total non-interest income.

Small Business Banking. Our small business banking group focuses primarily on businesses with less than $10 million of revenue and their owners, as well as non-profit organizations. This group operates primarily through a Chicago-based team in our network of branch office locations and offers loans, deposits and treasury management products and services similar to those of our Commercial Banking business, but on a smaller scale. Because of the smaller size of businesses served by this group as compared to our Commercial Banking business, small business loans are generally underwritten based in part on the credit of the individual owners. We also are a participating lender in U.S. Small Business Administration loan programs. Consistent with our strategy of cross-selling products and services, we seek to identify opportunities for referring individual owners of our small business clients to our Private Wealth business and its dedicated team of private bankers.

Private Wealth

Our Private Wealth business provides private banking and financial advisory, trustee, and asset management services to high net-worth individuals (generally those with more than $1 million of investable assets) and asset management and retirement plan services to for-profit and not-for-profit corporate/institutional clients. We offer our Private Wealth services mostly in the Chicago market and from our banking offices in the St. Louis, Milwaukee and Detroit markets, where we have full-service Private Wealth teams. Consistent with our relationship-based model and focus on cross-selling products and services to our clients, our Private Wealth business places a particular emphasis on servicing our commercial banking clients and their owners and executives. As of December 31, 2016, approximately 23% of our commercial clients had a relationship with our Private Wealth business. The products and services offered to our Private Wealth clients include the following:

Private Banking and Financial Advisory - Our private banking team delivers a full range of banking solutions to high net-worth individuals, including deposits, loans and lines of credit for personal, business and investment purposes, such as residential secured loans, lines secured by investment securities and other secured and unsecured lines of credit. We also assist clients with financial planning needs around life events such as retirement or education.
Trustee Services - Our trust department serves as corporate custodian and/or trustee for a variety of personal trusts and retirement plans and provides other custodial, guardianship/conservatorship and estate administration services. We also offer escrow services for business transactions and legal settlements, qualified intermediary services for tax-deferred real estate transactions and “qualified custodian” services for clients who are holding assets on behalf of their clients.

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Asset Management - Our asset management team provides investment management services to individual and corporate/institutional clients, which involves creating asset allocation strategies for each client’s particular situation while using third-party investment managers to execute these strategies.
Corporate Retirement Plan Services - Our trust and asset management teams provide consulting, advisory, custodial and trustee (either directed or full/discretionary) services to qualified and nonqualified retirement plans sponsored by our commercial clients.

Custody and escrow services involve safeguarding and administering client assets but do not involve providing investment management services. These assets are considered to be “non-managed” assets under management and administration (“AUMA”) and have a significantly lower fee structure than “managed” AUMA, which are assets for which we provide investment management services. As of December 31, 2016, we had total AUMA of $9.7 billion from which we generated $21.1 million of non-interest income, 89% of which was attributable to managed AUMA.

Deposit Generating Activities

We rely on a relationship-based approach to generate deposits through our Commercial Banking, Community Banking and Private Wealth businesses. Generating core deposits is one of our key strategic objectives for our lines of business, as deposits serve as our primary source of funding for loan growth. Given the commercial focus of our business, a majority of our deposit base is comprised of commercial accounts, which typically have larger average deposit balances than retail accounts. As of December 31, 2016, approximately 70% of our deposits were attributable to accounts managed in our Commercial Banking business, including certain non-traditional commercial deposits discussed below.

An important source of deposits for us are cash sweep programs operated by broker-dealers (“BDs”) with which we have entered into a contract to serve as a program bank. The contracts governing our participation as a program bank have a specified term, set forth the pricing terms for the deposits and generally provide for minimum and maximum deposit levels that the BDs will have with us at any given time. We believe these cash sweep program deposits provide a stable, cost-effective source of funding. The regulatory definition of “brokered deposits,” however, includes any non-proprietary funds deposited, or referred for deposit by a third party. As a result, our cash sweep program deposits are classified for regulatory purposes as brokered deposits. We refer to these and other similar deposits as “non-traditional” brokered deposits to distinguish them from traditional brokered time deposits that are acquired through deposit brokers in the wholesale market.

We also maintain access to a number of wholesale funding sources, including traditional brokered time deposits, which we use, as needed, to supplement our funding sources and manage liquidity. Over the past decade, as part of our strategic plan to transition to a middle market focused commercial bank, we have significantly reduced our reliance on traditional brokered time deposits.

We have a relatively small number of commercial depositors that maintain substantial balances with us (including BDs for which we serve as a cash sweep program bank), resulting in concentrations of large deposits. The table below provides detail on our large deposit relationships, a significant portion of which are financial services-related businesses. The amount of large deposits classified as brokered provided in the table below are primarily cash sweep program deposits.

Large Deposit Relationships
(Dollars in thousands)
 
December 31,
 
2016
 
2015
Ten largest depositors:
 
 
 
Deposit amounts
$
2,378,709

 
$
2,229,471

Percentage of total deposits
15
%
 
16
%
Classified as brokered deposits
$
1,399,271

 
$
1,255,315

Deposit Relationships of $75 Million or More:
 
 
 
Deposit amounts
$
4,383,939

 
$
3,247,548

Percentage of total deposits (all relationships)
27
%
 
23
%
Percentage of total deposits (financial services businesses only)
15
%
 
15
%
Number of deposit relationships
31

 
22

Classified as brokered deposits
$
2,284,536

 
$
1,752,329



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For information regarding our deposits, see “Funding and Liquidity Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 8 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

Investment and Hedging Activities

We maintain a managed investment securities portfolio intended to provide liquidity, maximize risk-adjusted total return, and provide a means to modify our asset/liability position as deemed appropriate. We invest primarily in collateralized mortgage obligations and residential and commercial mortgage-backed securities issued or guaranteed by U.S. Government agencies or U.S. Government-sponsored enterprises, which totaled 72% of our investment portfolio at December 31, 2016. We also invest in bank-qualified tax-exempt obligations of states and local political subdivisions, which totaled 12% of our investment portfolio at December 31, 2016. We also invest in U.S. Treasury and U.S. agency securities. The investment portfolio is one of the tools we use to manage our net asset/liability position in an attempt to mitigate the interest rate risk sensitivity and characteristics of our loan portfolio. For information regarding our investment portfolio, see “Investment Portfolio Management” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 3 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

We also use interest rate derivatives as part of our asset/liability management strategy to hedge interest rate risk in our primarily floating-rate loan portfolio. These interest rate derivatives essentially convert certain floating-rate commercial loans to fixed-rate in order to reduce the variability in forecasted interest cash flows due to market interest rate changes. Depending on market conditions, we may reduce or expand this program and enter into additional interest rate swaps. For more information regarding our use of these cash flow hedges, and the potential impact on interest income and other non-interest income on our consolidated statements of income, see Note 17 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

Competition

We conduct business in the highly competitive financial services industry, which has been and continues to be impacted by significant and increasing government regulation, increasing technological demands and disruption and the presence of many new non-bank competitors. In particular, there is significant competition among commercial banking institutions in the Chicago market, which continues to be a fragmented market with a large number of banking organizations despite significant consolidation over the past decade, and in the broader Midwestern market in which most of our operations and relationships are located. According to the FDIC’s Summary of Deposits as of June 30, 2016 (the most recent date publicly available), there were 208 banking organizations operating in the Chicago metropolitan statistical area (“MSA”). As of such date, we had the seventh highest deposit market share in the Chicago MSA, and the third highest among banking organizations headquartered in the Chicago MSA, at 3.3%. The three largest banking organizations operating in the Chicago MSA (JPMorgan Chase Bank, NA, BMO Harris Bank, NA and Bank of America, NA) collectively had a 46.0% deposit market share.

We compete for loans, deposits, treasury management, wealth management and other financial products and services with community, regional, national, and international commercial banks, thrifts, credit unions, asset-based non-bank lenders, specialty finance companies, consumer finance companies, commercial and residential mortgage banking companies, investment banks, brokerage firms, investment advisors, and other providers of financial products and services. More specifically, with respect to our Commercial Banking business, because our core client base is middle market companies with $10 million to $2 billion of annual revenue, we generally find ourselves competing primarily with super-regional and national commercial banks, asset-based non-bank lenders and commercial mortgage banking companies. Many of these competitors have substantially greater financial resources, lending limits and larger office and branch networks, and greater access to lower cost deposits and capital, than we do and therefore may be able to compete more effectively on loan pricing or terms and/or offer products and services beyond what we offer. Additionally, the non-bank lenders are not subject to the same degree of regulation as that imposed on banking organizations and often are able to structure and price loans more aggressively than us. While we face pressure on loan structure, pricing and other terms for commercial lending relationships, we focus on lending transactions where we currently have, or believe we have the opportunity to develop, a comprehensive banking relationship with the client.

In all of our businesses, we seek to distinguish ourselves through consistent delivery of superior levels of client service, customized solutions and responsiveness expected by our clients rather than competing on price.

We also face competition in attracting and retaining qualified employees. Our ability to continue to compete effectively will depend upon our ability to attract new employees and retain and motivate existing employees, particularly our relationship bankers.

For more information on competition-related and other risks facing the Company, see “Risk Factors” in Item 1A of this Form 10-K.

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Employees

As of December 31, 2016, we employed a total of 1,301 full-time-equivalent employees, which is a significantly smaller employee base than banks of similar size, due in part to our commercial bank model and comparatively small branch network.

Segments

For information regarding our three business segments for financial reporting purposes—Banking (comprised of our Commercial Banking business, Community Banking business and the private banking business within Private Wealth), Asset Management (comprised of the trust and asset management business within Private Wealth) and Holding Company Activities—see “Operating Segments Results” of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 21 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10‑K.

Available Information

Our investor relations Internet address is investor.theprivatebank.com. We make available at this address, free of charge, our annual report on Form 10-K, our annual reports to stockholders, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

SUPERVISION AND REGULATION

General

Banking is a highly regulated industry. The following is a summary of certain aspects of various statutes, regulations and supervisory guidance applicable to the Company and our subsidiaries. This summary is not complete, however, and is qualified in its entirety to the applicable statutes and regulations. These statutes and regulations may change, or additional statutes or regulations could be adopted, in the future and we cannot predict what effect, if any, these changes or new statutes or regulations could have on our business or revenues. Following the U.S. federal elections in November 2016, the new Presidential administration and Congress have expressed their desire to significantly reshape the financial regulatory landscape over the next couple of years, which could result in changes to the regulatory framework outlined below. The supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of customers and the banking system in the United States. As such, actions taken by bank regulatory agencies may conflict with or be adverse to the interests of the stockholders of banks and bank holding companies.

PrivateBancorp is registered as a bank holding company with the Board of Governors of the Federal Reserve System (the “FRB”) pursuant to the Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act of 1956, as amended, and the regulations issued thereunder, are collectively referred to as the “BHC Act”), and we are subject to regulation, supervision and examination by the FRB. PrivateBank is an Illinois state-chartered bank and, as such, is subject to supervision and examination by the Illinois Department of Financial and Professional Regulation (the “IDFPR”). As a FRB non-member bank, the Bank’s primary federal regulator is the FDIC.

Bank Holding Company Regulation

Basel III Capital Rules. The capital rules of the FRB and the FDIC applicable to us are referred to as the “Basel III Capital Rules.” These rules, which became effective January 1, 2015, establish a comprehensive capital framework for U.S. banking organizations based on the Basel Committee on Banking Supervision’s December 2010 framework for strengthening international capital standards as well as certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the prior U.S. risk-based capital rules.

Under the Basel III Capital Rules, the minimum capital ratios that are currently applicable are as follows:

4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital to risk-weighted assets;
8.0% Total capital to risk-weighted assets; and
4.0% Tier 1 capital to average quarterly assets (the “Leverage Ratio”).

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The Basel III Capital Rules also impose a capital component referred to as the “capital conservation buffer,” which is designed to enhance a banking institution’s ability to absorb losses during periods of economic stress by placing restrictions on the institution’s dividends, equity repurchases and discretionary bonus payments to executive officers if the institution does not have capital meeting or exceeding the required buffer. The capital conservation buffer began being phased in on January 1, 2016 and will be fully phased-in as of January 1, 2019. When fully phased-in, the capital conservation buffer will require a banking institution to maintain additional CET1 over the minimum risk-based capital ratios described above, which will result in the following minimum capital ratios to avoid restrictions on dividends, equity repurchases and discretionary bonus payments:

7.0% CET1 to risk-weighted assets;
8.5% Tier 1 capital to risk-weighted assets; and
10.5% Total capital to risk-weighted assets.

Regarding the phase-in schedule, the applicable capital conservation buffer amount as of January 1, 2017 is 1.25% of risk-weighted assets, and will increase by 0.625% each year for the next two years, resulting in full implementation at 2.5% of risk-weighted assets beginning January 1, 2019.

The Basel III Capital Rules also provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1, or all such categories in the aggregate exceed 15% of CET1. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded for purposes of determining regulatory capital ratios; however, non-advanced approaches banking organizations, such as PrivateBancorp and the Bank, were permitted to make a one-time permanent election when the Basel III Capital Rules became effective to continue the approach under the former capital regulations of excluding accumulated other comprehensive income items from regulatory capital. PrivateBancorp and the Bank made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s available-for-sale securities portfolio.

The Basel III Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from being included as Tier 1 capital of bank holding companies, subject to a phase-out period. Trust preferred securities no longer included in an organization’s Tier 1 capital may nonetheless be included as a component of Tier 2 capital on a permanent basis without phase-out. Under the rules, however, for bank holding companies like us that had less than $15 billion in total consolidated assets as of December 31, 2009, trust preferred securities that were issued prior to May 19, 2010 are grandfathered in as a component of Tier 1 capital. Bank holding companies with grandfathered trust preferred securities will become subject to the Tier 1 capital treatment phase-out schedule for other bank holding companies with assets greater than $15 billion at the time of any acquisition that results in post-closing total consolidated assets equal to or greater than $15 billion. The Tier 1 capital treatment of our existing $167.7 million in trust preferred securities is currently grandfathered under the rules, but we believe that the completion of our merger with CIBC will cause our trust preferred securities to lose their Tier 1 capital treatment. Similarly, even if the pending merger with CIBC is not consummated, if we were to pursue balance sheet growth through acquisitions or mergers, our trust preferred securities may lose their Tier 1 capital treatment. In either case, we believe the trust preferred securities may be included as a component of Tier 2 capital.

Implementation of the deductions and other adjustments to CET1 began at 40% on January 1, 2015 and are being phased-in over a four-year period (an additional 20% was added on July 1, 2016 and an additional 20% will be added in the following two years).

The Basel III Capital Rules also revised the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act (the “FDI Act”), which are applicable to the Bank. Specifically, under the Basel III Capital Rules, to be deemed to be “well-capitalized” for prompt corrective action purposes, an institution must meet the following minimum ratios:

6.5% CET1 to risk-weighted assets;
8.0% Tier 1 capital to risk-weighted assets;
10.0% Total capital to risk-weighted assets; and
5.0% Leverage Ratio.

Please see the “Capital Requirements and Prompt Corrective Action” section below for more information.


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The well-capitalized thresholds described above for the Bank are also relevant to the Company’s capital ratios on a consolidated basis, as the FRB’s Regulation Y provides that well-capitalized bank holding companies are entitled to certain exemptions and expedited processing for certain requested corporate transactions. Additionally, in the current regulatory environment, a bank holding company may be unable to obtain regulatory approval for a proposed acquisition or merger if it is not well-capitalized and will not be well-capitalized on a pro forma basis.

The Basel III Capital Rules prescribe a standardized approach for risk weightings depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures.

Under its current capital adequacy guidelines, the FRB emphasizes that the foregoing standards are supervisory minimums and that banking organizations generally are expected to operate above the minimum ratios. These guidelines also state that banking organizations experiencing growth, whether internally or by making acquisitions, are expected to maintain strong capital positions substantially above the minimum levels. The FRB may also require a banking organization to maintain capital above the minimum levels based on factors such as the organization’s financial condition or anticipated growth, or perceived risk profile of its statement of financial condition.

As of December 31, 2016, PrivateBancorp and the Bank satisfied all capital adequacy requirements under the Basel III Capital Rules, including the capital conservation buffer on a fully phased-in basis, with a 9.83% CET1 to risk-weighted assets ratio, a 10.73% Tier 1 capital to risk-weighted assets ratio, a 12.49% total capital to risk-weighted assets ratio and a 10.28% Leverage Ratio.

Liquidity Requirements

Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. Liquidity risk management has become increasingly important since the financial crisis. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements are expected to incent banking entities subject to these tests to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.

The federal bank regulators have adopted final rules implementing the LCR, which is applicable only to banking organizations with total consolidated assets of $250 billion or more or on-balance sheet foreign exposure of $10 billion or more. Organizations with $50 billion or more in total assets are subject to a “modified” LCR with less stringent requirements. The LCR generally requires these large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil. While the LCR technically only applies to these larger banking organizations and not to PrivateBank due to our size, certain elements are expected to filter down to all insured depository institutions through the supervisory process. Similarly, although the rules proposed by the federal bank regulators to implement the NSFR do not apply to organizations, such as PrivateBank, with less than $50 billion in total assets, certain elements of those rules, if adopted as final rules, can be expected to filter down to all insured depository institutions through the supervisory process.

Source of Strength. In accordance with longstanding policy of the FRB, which was codified by the Dodd-Frank Act, a bank holding company is expected to act as a source of financial and managerial strength to its banking subsidiaries and commit resources to support them. The FRB takes the position that in implementing this policy, it may require a bank holding company to provide financial support to its subsidiaries at times it deems appropriate.

Acquisitions and Activities. The BHC Act requires prior FRB approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With limited exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities that the FRB has determined, by regulation or order, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto, such as owning and operating a savings association, performing functions or activities that may be performed by a trust company, owning a mortgage company,

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or acting as an investment or financial advisor. The FRB, as a matter of policy, may require a bank holding company to be well-capitalized at the time of filing an acquisition application and upon consummation of the acquisition and will consider the pro forma impact of the proposed transaction on capital adequacy.

The Gramm-Leach-Bliley Act allows bank holding companies that are in compliance with certain requirements to elect to become “financial holding companies.” Financial holding companies may engage in a broader range of activities than is otherwise permitted for bank holding companies. At this time, PrivateBancorp has not elected to become a financial holding company.

Redemptions. Under the BHC Act, bank holding companies are required to provide the FRB with prior written notice of any purchase or redemption of their outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by or written agreement with the FRB. This prior notice requirement does not apply to any bank holding company that meets certain well-capitalized and well-managed standards and is not subject to any unresolved supervisory issues.

Tie-in Arrangements. Under the BHC Act and FRB regulations, we are prohibited from engaging in tie-in arrangements in connection with an extension of credit, lease, or sale of property or furnishing of services. Accordingly, we may not condition a client’s purchase of one of our products on the purchase of another product, unless both products are considered traditional banking products for regulatory purposes.

Interstate Banking and Branching Legislation. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”), bank holding companies that are well-capitalized and managed are allowed to acquire banks across state lines subject to certain limitations. States may prohibit interstate acquisitions of banks that have not been in existence for at least five years. The FRB is prohibited from approving an application for acquisition if the applicant controls more than 10% of the total amount of deposits of insured depository institutions nationwide. In addition, interstate acquisitions may also be subject to statewide concentration limits.

Furthermore, under the Interstate Banking Act, banks are permitted, under some circumstances, to merge with one another across state lines and thereby create a main bank with branches in separate states. Approval of interstate bank mergers is subject to certain conditions, including: well-capitalized and well-managed standards, Community Reinvestment Act (“CRA”) compliance and deposit concentration limits, compliance with federal and state antitrust laws and compliance with applicable state consumer protection laws. After establishing branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law. In addition, the Interstate Banking Act, as amended by the Dodd-Frank Act, permits a bank, with the approval of the appropriate federal and state bank regulatory agencies, to establish a de novo branch in a state other than the bank’s home state if the law of the state in which the branch is to be located would permit establishment of the branch if the out of state bank were a state bank chartered by such state.

Ownership Limitations. Under the federal Change in Bank Control Act, a person may be required to obtain the prior regulatory approval of the FRB before acquiring the power to directly or indirectly control the management, operations or policies of PrivateBancorp or before acquiring control of 10% or more of any class of our outstanding voting stock. Under the Illinois Banking Act, any acquisition of PrivateBancorp stock that results in a change in control may require prior approval of the IDFPR.

Dividends. In the FRB’s policy statement on the payment of cash dividends by bank holding companies, the FRB has expressed its view that a bank holding company should inform the FRB and should eliminate, defer or severely limit the payment of dividends if (i) the bank holding company’s net income for the past four quarters is not sufficient to fully fund the dividends; (ii) the bank holding company’s prospective rate of earnings retention is not consistent with the bank holding company’s capital needs and overall current and prospective financial condition; or (iii) the bank holding company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The policy statement also provides that the FRB should be informed in advance prior to declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid or that could result in a material adverse change to the organization’s capital structure. Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to prohibit or limit the payment of dividends. Additionally, as discussed above under “—Basel III Capital Rules,” the capital conservation buffer began being phased in on January 1, 2016, with full phase-in by January 1, 2019. If we do not maintain the required amount of CET1 to meet the capital conservation buffer amounts, our ability to pay dividends will be restricted.


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In addition to the restrictions on dividends imposed by the FRB, Delaware law also places limitations on the ability of a corporation to pay dividends. Corporations may only pay dividends out of surplus or net profits in accordance with Delaware law. The ability of a holding company to pay dividends may also depend on the receipt of dividends from its banking subsidiaries. During 2016 and 2015, the Bank did not make any dividend payments to the holding company and we used the cash maintained at the holding company level to pay dividends.

Bank Regulation

The Bank is subject to extensive supervision and regulation by various federal and state authorities. Additionally, as an affiliate of the Bank, PrivateBancorp is also subject, to some extent, to regulation by the Bank’s supervisory and regulatory authorities. As mentioned above, the Bank is an Illinois state-chartered bank and as such, is subject to supervision and examination by the IDFPR. As a FRB non-member bank, the Bank’s primary federal regulator is the FDIC and, as a depository institution with more than $10 billion in assets, the Bank is subject to the jurisdiction of the Consumer Financial Protection Bureau (the “CFPB”) relative to consumer protection laws.

Regulatory Approvals and Enforcement. Federal and state laws require banks to seek approval by the appropriate federal or state banking agency (or agencies) for any merger and/or consolidation by or with another depository institution, as well as for the establishment or relocation of any bank or branch office and, in some cases, to engage in new activities or form subsidiaries.

Federal and state statutes and regulations provide the appropriate bank regulatory agencies with great flexibility and powers to undertake enforcement actions against financial institutions, holding companies or persons regarded as “institution affiliated parties.” Possible enforcement actions range from the imposition of a capital plan and capital directive to a cease and desist order, civil money penalties, receivership, conservatorship or the termination of deposit insurance.

Transactions with Affiliates. Federal and state statutes place certain restrictions and limitations on transactions between banks and their affiliates, which include holding companies. Among other provisions, these laws place restrictions upon:

extensions of credit by an insured depository institution to the bank holding company or any non-banking affiliates;
the purchase by an insured depository institution of assets from affiliates;
the issuance by an insured depository institution of guarantees, acceptances or letters of credit on behalf of affiliates; and
investments by an insured depository institution in stock or other securities issued by affiliates or acceptance thereof as collateral for an extension of credit.

Permissible Activities, Investments and Other Restrictions. Federal and state laws provide extensive limitations on the types of activities in which our subsidiary bank may engage and the types of investments it may make. For example, banks are subject to restrictions with respect to engaging in securities activities, real estate development activities and insurance activities and may invest only in certain types and amounts of securities and may invest only up to certain dollar amount thresholds in their premises.

Monetary Policy. The Bank is affected by the credit policies of the FRB, which regulate the national supply of bank credit. Such regulation influences overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans and paid on deposits. The FRB’s monetary policies have had a significant effect on the operating results of commercial banks in the past and this trend is likely to continue in the future.

Dividends. Federal and state laws restrict and limit the dividends the Bank may pay. Under the Illinois Banking Act, the Bank may not pay dividends of an amount greater than its net profits after deducting losses and bad debts. For the purpose of determining the amount of dividends that an Illinois bank may pay, bad debts are defined as debts upon which interest is past due and unpaid for a period of six months or more unless such debts are well secured and in the process of collection.

In addition to the foregoing, the ability of the Bank to pay dividends may be affected by the various minimum capital requirements (previously described) and the capital and non-capital standards established under the Federal Deposit Insurance Corporation Improvements Act of 1991 (“FDICIA”), as described below.

Reserve Requirements. The Bank is subject to FRB regulations requiring depository institutions to maintain noninterest-earning reserves against its transaction accounts. For net transaction accounts in 2017, the first $15.5 million of a bank’s transaction accounts (subject to adjustments by the FRB) are exempt from the reserve requirements. The FRB regulations generally require 3% reserves on a bank’s transaction accounts totaling between $15.5 million and $115.1 million. For transaction accounts totaling over $115.1 million, FRB regulations require reserves of $3.0 million plus 10% of the amount over $115.1 million.

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Cross-Guaranty. Under the FDI Act, an insured institution that is commonly controlled with another insured institution shall generally be liable for losses incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled insured institution, or for any assistance provided by the FDIC to such commonly controlled institution, which is in danger of default.

Standards for Safety and Soundness. The FDI Act, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the FDIC, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation and compensation. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal bank regulatory agencies adopted regulations that authorize, but do not require, the agencies to order an institution that has been given notice that it is not satisfying the safety and soundness guidelines to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDICIA. If an institution fails to comply with such an order, the agency may seek to enforce its order in judicial proceedings and to impose civil money penalties. The federal bank regulatory agencies have also adopted guidelines for asset quality and earning standards. State-chartered banks may also be subject to state statutes, regulations and guidelines relating to safety and soundness, in addition the federal requirements.

Capital Requirements and Prompt Corrective Action. FDICIA currently defines five capital levels: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”

FDICIA requires the federal banking regulators to take prompt corrective action with respect to depository institutions that fall below minimum capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions, including restrictions on growth, investment activities, capital distributions and affiliate transactions, and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (for example, the Company or a stockholder controlling the Company). In other respects, FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for critically undercapitalized institutions. The capital-based prompt corrective action provisions of FDICIA and its implementing regulations apply to FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to the prompt corrective action provisions of FDICIA. State-chartered banks may also be subject to similar supervisory actions by their respective state banking agencies.

Depository institutions that are less than well-capitalized are also subject to restrictions under the FDI Act relating to accepting and renewing brokered deposits, as well as deposit rate restrictions.

The capital rules discussed previously set forth the current prompt corrective action requirements to be deemed well-capitalized and adequately capitalized. See the “Capital Requirements” section above.

Stress Testing. Financial institutions with total consolidated assets between $10 billion and $50 billion are subject to rules adopted by the federal bank regulatory agencies implementing the stress test requirements under the Dodd-Frank Act. Specifically, under the stress rest rules required by the Dodd-Frank Act, we are required to assess the potential impact of a minimum of three macroeconomic scenarios—baseline, adverse and severely adverse scenarios—on our consolidated balance sheet (including risk-weighted assets), income statement and capital. This assessment is referred to as “DFAST.” We are required to conduct the DFAST on an annual basis, submit the results to the FRB and the FDIC and publicly disclose a summary of such results under the supervisory severely adverse scenario. We completed the required DFAST and submitted the results to the FRB and the FDIC in July 2016, and in October 2016 publicly disclosed a summary of the results under the supervisory severely adverse scenario.

Insurance of Deposit Accounts. Under FDICIA, the Bank, as a FDIC-insured institution, is required to pay deposit insurance premiums based on the risk it poses to the Deposit Insurance Fund (“DIF”). The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve required ratios in the insurance fund and to impose special additional assessments.

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The FDIC rules on deposit insurance assessment implement a provision in the Dodd-Frank Act that broadened the assessment base from one based on domestic deposits to one based on total assets less average tangible equity. Such rules also establish a separate risk-based assessment system for “large institutions” with more than $10 billion in assets, such as PrivateBank, and for other large, highly complex institutions. Under these rules, large institutions are subject to different minimum and maximum total assessment rate ranges. The ranges are subject to certain adjustments by the FDIC without further rulemaking. The large bank pricing system is intended to result in higher assessments for banks with concentrations of “higher-risk assets,” less stable balance sheet liquidity, or potentially higher loss severity in the event of failure. The FDIC defines higher-risk assets for deposit insurance assessment purposes as “higher-risk commercial and industrial loans,” construction and development loans and “higher-risk consumer loans.” Higher-risk commercial and industrial loans are defined as loans to borrowers who have an operating leverage ratio exceeding a specified amount and are using the proceeds for specified purposes; a portion (but not all) of our leveraged loans are considered to be higher-risk assets under for this purpose. Refer to Table 13 in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for our levels of higher-risk assets as of December 31, 2016 and 2015. Brokered deposits generally contribute to an increase in FDIC insurance assessments due to their impact on the loss severity factor and the core deposit and balance sheet liquidity ratios used to calculate the assessments.

The FDIC provides deposit insurance on qualifying accounts in an amount up to $250,000. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Such terminations can only occur, if contested, following judicial review through the federal courts. We do not know of any practice, condition or violation that might lead to termination of deposit insurance for the Bank.

The Dodd-Frank Act raised the minimum reserve ratio of the DIF from 1.15% to 1.35% of estimated insured deposits, which ratio is required to be attained by September 30, 2020, eliminated the size limit of the DIF, and directed the FDIC to issue a rule establishing a new designated reserve ratio. Pursuant to this directive, the FDIC issued a rule setting a designated reserve ratio at 2.0% of insured deposits. These policies may result in increased assessments on certain institutions, including the Bank, with more than $10 billion in assets.

Anti-Money Laundering & OFAC Sanctions Programs. The Bank Secrecy Act (“BSA”), as amended by the USA PATRIOT Act of 2001, imposes significant obligations on financial institutions to detect and deter money laundering and terrorist financing. Financial institutions are required to establish programs designed to implement BSA requirements that include: verifying customer identification, reporting certain large cash transactions, responding to requests for information by law enforcement agencies, and monitoring, investigating and reporting suspicious transactions or activity. The U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) enforces economic and trade sanctions based on U.S. foreign policy and national security goals against entities such as targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in the proliferation of weapons of mass destruction. We are subject to these rules and have implemented policies, procedures and controls to comply with the anti-money laundering regulations and the OFAC sanctions programs.

Compliance with Consumer Protection and Fair-Lending Laws. The Bank is subject to many state and federal statutes and regulations designed to protect consumers, such as privacy laws, the Truth in Lending Act (Regulation Z), the Truth in Savings Act (Regulation DD), the fair lending laws including the Equal Credit Opportunity Act (Regulation B) and the Fair Housing Act, the Real Estate Settlement Procedures Act, the Home Mortgage Disclosure Act (Regulation C) and the Fair and Accurate Credit Transactions Act. Among other things, these statutes and regulations:

require lenders to disclose credit terms in meaningful and consistent ways;
prohibit discrimination against an applicant in any consumer or business credit transaction;
prohibit discrimination in housing-related lending activities;
require certain lenders to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions;
require financial institutions to implement identity theft prevention programs and measures to protect the confidentiality of consumer financial information; and
prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.

The CFPB has primary responsibility for implementing, examining, and enforcing compliance with federal financial consumer protection laws with respect to banking organizations with total consolidated assets of $10 billion or more, such as the Bank. The

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CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and practices and to enforce consumer lending and nondiscrimination laws. Pursuant to its responsibility, the CFPB frequently brings enforcement actions against banks and their affiliates and continues to conduct various studies that may lead to future regulation.

In addition, the CFPB is responsible for overseeing compliance with the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). In particular, these regulatory provisions:

prohibit certain compensation for mortgage brokers based on certain loan terms (e.g., compensation based on yield spread premiums);
more highly regulate mortgage servicing activities including error resolution, force placing insurance, and loss mitigation and collection activity;
require financial institutions to make a reasonable and good faith determination that borrowers have the ability to repay loans for which they apply. If a financial institution fails to make such a determination, a borrower can assert this failure as a defense to foreclosure and will have the potential to recover their finance charges, fees, damages and attorney’s fees. The rules create a “safe harbor” (a conclusive presumption for loans that meet certain criteria and are not high-priced loans that the financial institution made a good faith and reasonable determination of the borrower’s ability to repay); and
impose appraisal requirements for high cost loans and loans secured by first lien residential mortgages.

The CFPB has implemented rules that simplify and integrate the mortgage disclosures required under TILA and RESPA. The Bank believes that it is in compliance with these disclosure requirements.

With respect to electronic transfers of foreign currency originated by consumers, the Bank is required to make certain disclosures of, among other things, U.S. and foreign taxes and fees, foreign exchange rate, total amounts paid and to be received, and error resolution and cancellation rights.

In part due to the formation of the CFPB pursuant to the Dodd-Frank Act, there has been increased attention to enforcement of consumer protection laws by federal regulatory authorities, particularly with respect to “unfair, deceptive or abusive” acts and practices as well as increased scrutiny of banks’ programs for compliance with consumer lending laws and regulations, including fair lending laws. Among other things, fair lending laws prohibit practices that result in disparate treatment or disparate impact on minority groups in connection with residential mortgages and other consumer lending activities. Failure to comply with laws, regulations, or new consumer protection standards applicable to us or the expectations of our regulators relating to compliance practices could result in regulatory sanctions, civil money penalties or adverse actions against us, which in turn could increase our compliance burden and costs of doing business, restrict our ability to expand our business or damage our reputation.

Community Reinvestment. Under the CRA, a financial institution has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, or limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is tested in three areas: (a) lending, to evaluate the institution’s community lending performance, particularly to low- and moderate income individuals and neighborhoods and small businesses in its assessment areas, taking into account fair lending practices; (b) investment, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low- or moderate-income individuals and small businesses; and (c) service, to evaluate the institution’s delivery of products and services through its branches and automated teller machines, as well as its service to the community. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions.

The CRA requires that all institutions make public disclosure of their CRA ratings. In the first quarter 2016, the Bank was assigned a “satisfactory” rating for its most recent CRA performance evaluation, which covers our performance during 2013, 2014 and a portion of 2015.

Real Estate Lending Concentrations. The FDIC, FRB and the Office of the Comptroller of the Currency (the “OCC”) have jointly issued supervisory guidance on concentrations in commercial real estate lending. The guidance reinforces and enhances existing regulations and guidelines for safe and sound real estate lending. The guidance provides supervisory criteria, including numerical

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indicators to assist in identifying institutions with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny. The guidance focuses on institutions properly identifying whether they have a commercial real estate concentration and, if so, instituting the appropriate risk management procedures and increasing capital so that it is commensurate with the risk of having such a concentration.

Leveraged Lending Guidance. In March 2013, the FDIC, the FRB and the OCC jointly issued supervisory guidance on leveraged lending to update and revise their previous interagency guidance issued in April 2001, which addressed expectations for the content of credit policies, the need for well-defined underwriting standards, the importance of defining an institution’s risk appetite for leveraged loan transactions, and the importance of stress-testing exposures and portfolios. The impetus for the updated guidance was the significant growth in the volume of leveraged credit and in the participation of unregulated (i.e., non-bank) investors in the leveraged loan market since the original guidance was issued, as well as changes in the loan structures and underwriting standards in the industry over such time. The updated and revised regulatory guidance describes expectations for the sound risk management of leveraged lending activities, including the importance for institutions to maintain, among other things, a credit limit and concentration framework consistent with the institution’s risk appetite, strong pipeline management policies, and procedures and guidelines for conducting periodic portfolio and pipeline stress tests. As a predominantly commercial bank, we participate in the leveraged lending market, both as an originator, underwriter and (in some cases) syndicator of such loans and as a non-lead participant in syndicated leveraged loans. Although the revised interagency guidance does not impose specific limitations on leveraged lending, in accordance with the expectations set forth in the guidance, we have enhanced our risk management practices with respect to such lending, with ongoing monitoring of the level of leveraged loans in relation to our capital.

Allowance for Loan and Lease Losses. In December 2006, the federal bank regulatory agencies issued an Interagency Policy Statement revising their previous policy on the Allowance for Loan and Lease Losses (“ALLL”), which was issued in 1993. The policy statement was updated to ensure consistency with U.S. generally accepted accounting principles (“U.S. GAAP”) and post-1993 supervisory guidance. According to the revised policy statement, the ALLL represents one of the most significant estimates in an institution’s financial statements and regulatory reports. Because of its significance, each institution has responsibility for developing, maintaining and documenting a comprehensive, systematic, and consistently applied process appropriate to its size and the nature, scope, and risk of its lending activities for determining the amounts of the ALLL and the provision for loan and lease losses.

The policy statement provides that to fulfill this responsibility, each institution should ensure controls are in place to consistently determine the ALLL in accordance with U.S. GAAP, the institution’s stated policies and procedures, management’s best judgment and relevant supervisory guidance. Consistent with long-standing supervisory guidance, the policy states that institutions must maintain an ALLL at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan portfolio as of the evaluation date. Estimates of credit losses should reflect consideration of all significant factors that affect the collectability of loans in the portfolio as of the evaluation date. Arriving at an appropriate allowance involves a high degree of management judgment because of the inputs and assumptions that are used in our ALLL model, the lagging characteristics of a historical loss model and the qualitative adjustments that are applied to the quantitative output from such model.
 

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EXECUTIVE OFFICERS OF THE REGISTRANT

The name, age, position and office, and business experience during at least the past five years, of our current executive officers are set forth below.

Name (Age)
Position or Employment for Past Five Years
Executive
Officer Since
Larry D. Richman (64)
President and Chief Executive Officer, and member of the Board of Directors, of PrivateBancorp and The PrivateBank since November 2007. Prior to joining the Company, Mr. Richman was President and Chief Executive Officer of LaSalle Bank, N.A. and President of LaSalle Bank Midwest N.A., which were sold to Bank of America Corporation on October 1, 2007. Mr. Richman began his career with American National Bank and joined Exchange National Bank in 1981, which merged with LaSalle Bank in 1990.
2007
C. Brant Ahrens (46)
Executive Vice President of the Company and President of Personal Client Services of the Bank since February 2012 overseeing Private Wealth and Community Banking. Prior to that, he was Chief Operating Officer from 2008 until October 2009, with leadership responsibility for community banking, operations, information technology, strategic development, human resources, marketing and communications. Mr. Ahrens joined PrivateBancorp as Chief Strategy Officer in 2007. Mr. Ahrens was previously Group Senior Vice President and head of the Financial Institutions Group at LaSalle Bank, N.A., where he spent 15 years in various capacities including risk management, strategic development and as head of International Corporate Banking.
2007
Karen B. Case (58)
Executive Vice President of the Company and President of Commercial Real Estate of the Bank. Prior to joining the Company in October 2007, Ms. Case was Executive Vice President of LaSalle Bank, N.A. overseeing the Illinois Commercial Real Estate group. Prior to joining LaSalle Bank in 1992, Ms. Case established and managed the Midwest real estate lending operations for New York-based Marine Midland Bank.
2007
Jennifer R. Evans (58)
Executive Vice President, General Counsel and Corporate Secretary of the Company. In addition to her strategic advisory role and responsibility for all legal functions, Ms. Evans assumed oversight responsibility for compliance and regulatory affairs functions in mid-2016. Prior to joining the Company in January 2010, Ms. Evans was a consultant to various financial institutions, audit committees and public companies regarding compliance, regulatory and disclosure matters. Ms. Evans served as Executive Vice President and General Counsel for MAF Bancorp, Inc. and its subsidiary Mid America Bank from 2004 to 2007 following 20 years in private practice with the law firm Vedder Price P.C.
2010
Bruce R. Hague (62)
Executive Vice President of the Company and President of National Commercial Banking of the Bank, with responsibility for our regional banking and commercial lending offices. Prior to joining the Bank in October 2007, Mr. Hague spent 15 years at LaSalle Bank, N.A., where he ultimately became Executive Vice President of National Commercial Banking, responsible for 23 regional banking offices, including all commercial regional offices located throughout the United States, International Corporate Banking, the LaSalle Leasing Group, Corporate Finance, and Treasury Management Sales.
2007
Kevin M. Killips (62)
Executive Vice President of the Company and Chief Financial Officer of the Company and the Bank since March 2009. In addition to his responsibility for all financial functions, Mr. Killips has leadership responsibility for operational and technology functions. Prior to joining the Company, Mr. Killips served as controller and chief accounting officer of Discover Financial Services (NYSE: DFS) from March 31, 2008. Prior to joining Discover Financial Services, Mr. Killips was employed by LaSalle Bank, N.A., where he worked for nearly ten years and ultimately served as Corporate Executive Vice President, North American Chief Accounting Officer and Corporate Controller. Prior to working at LaSalle Bank, he was director of Internal Audit, and then Vice President-Finance for leasing operations at Transamerica Corporation. Mr. Killips, a certified public accountant, also worked for Ernst & Young from 1979-1993.
2009


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Name (Age)
Position or Employment for Past Five Years
Executive
Officer Since
Bruce S. Lubin (63)
Executive Vice President of the Company and President of Illinois Commercial Banking of the Bank. From December 2009 to February 2012, he also had leadership responsibility for the Private Wealth group. Prior to joining the Bank in October 2007, Mr. Lubin was executive vice president and head of the Illinois Commercial Banking Group at LaSalle Bank, N.A. Mr. Lubin had been employed by LaSalle Bank since 1990, when it acquired Exchange National Bank. Mr. Lubin was an employee of Exchange National Bank beginning in 1984.
2007
Kevin J. Van Solkema (56)
Executive Vice President and Chief Risk Officer of the Company, a position he has held since July 2016. Prior to becoming the Chief Risk Officer, he served as the Chief Credit Risk Officer since joining the Company. Prior to joining the Company in January 2008, Mr. Van Solkema was employed by LaSalle Bank, N.A. as Deputy Chief Credit Officer. From March through June 2007, Mr. Van Solkema was employed by CitiMortgage before rejoining LaSalle Bank. Prior to that, Mr. Van Solkema served as Head of Consumer Risk Management for ABN AMRO North America/LaSalle Bank, which included responsibility for all credit and operational risk management activities for ABN AMRO Mortgage Group, as well as LaSalle Bank’s consumer lending and portfolio mortgage units. Mr. Van Solkema was Head of Risk Management at Michigan National Bank prior to it being acquired by LaSalle Bank in 2001.
2008
Vicki Znavor (56)
Executive Vice President and Chief Human Resources Officer of the Company. Prior to joining the Company in 2013, Ms. Znavor was Vice President, Performance Management Program Manager for The Northern Trust Company from November 2009. Previous to that, she held the role of Vice President Continuous Improvement for Sara Lee Corporation, where she worked for over 27 years and served in various roles which included responsibilities over executive compensation, recruitment and talent management, employee relations, payroll, benefit plans, employee communications, human resources information systems, strategic planning and transformation management.
2013

AVAILABLE INFORMATION

We file annual, quarterly, and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). These filings are available to the public over the Internet, free of charge through the investor relations section of our website at http://investor.theprivatebank.com and through the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Copies of these documents also can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington D.C. 20549 or by calling 1-800-SEC-0330 for additional information on the operation of the public reference facility.

The following documents can be accessed through our web site or are available in print upon the request of any stockholder to our Corporate Secretary:

certificate of incorporation,
by-laws,
charters of the audit, compensation, and corporate governance committees of our board of directors
corporate code of ethics,
corporate governance guidelines, and
excessive or luxury expenditures policy.

Within the time period required by the SEC and The NASDAQ Stock Market, we will post on our web site any substantive amendment to our code of ethics and any waiver to the code of ethics applicable to any of our executive officers or directors. In addition, our website includes information concerning purchases and sales of our securities by our executive officers and directors. References to our website addressed in this report are provided as a convenience and do not constitute, and should not be deemed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information should not be considered part of this report.

Our Corporate Secretary can be contacted by writing to PrivateBancorp, Inc., 120 South LaSalle Street, Chicago, Illinois 60603, Attn: Corporate Secretary. Our investor relations department can be contacted by telephone at (312) 564-2000.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this report that are not historical facts may constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements represent management’s current beliefs and expectations regarding future events, such as our anticipated future financial results, credit quality, liquidity, revenues, expenses, or other financial items, and the impact of business plans and strategies or legislative or regulatory actions. Forward-looking statements are typically identified by words such as “may,” “might,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “project,” “potential,” or “continue” or other comparable terminology.

Our ability to predict results or the actual effects of future plans, strategies or events is inherently uncertain. Factors which could cause actual results or conditions to differ from those reflected in forward-looking statements include:

the possibility that the transaction with CIBC does not close when expected or at all because required regulatory, stockholder or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all; or the possibility that, as a result of the announcement and pendency of the proposed transaction, we experience difficulties in employee retention and/or clients or vendors seek to change their existing business relationships with us, or competitors change their strategies to compete against us, any of which may have a negative impact on our business or operations;
unanticipated changes in monetary policies of the Federal Reserve or significant adjustments in the pace of, or market expectations for, future interest rate changes;
uncertainty regarding U.S. regulatory reform proposals, geopolitical developments and the U.S. and global economic outlook that may continue to impact market conditions or affect demand for certain banking products and services;
unanticipated developments in pending or prospective loan transactions or greater-than-expected paydowns or payoffs of existing loans;
competitive pressures in the financial services industry relating to both pricing and loan structures, which may impact our growth rate;
unforeseen credit quality problems or changing economic conditions that could result in charge-offs greater than we have anticipated in our allowance for loan losses or changes in value of our investments;
availability of sufficient and cost-effective sources of liquidity or funding as and when needed;
unanticipated losses of one or more large depositor relationships, or other significant deposit outflows;
loss of key personnel or an inability to recruit appropriate talent cost-effectively;
greater-than-anticipated costs to support the growth of our business, including investments in technology, process improvements or other infrastructure enhancements, or greater-than-anticipated compliance or regulatory costs and burdens; or
failures or disruptions to, or compromises of, our data processing or other information or operational systems, including the potential impact of disruptions or security breaches at our third-party service providers.

Forward-looking statements are subject to risks, assumptions and uncertainties and could be significantly affected by many factors, including those set forth in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this Form 10-K as well as those set forth in our subsequent periodic and current reports filed with the SEC. These factors should be considered in evaluating forward-looking statements and undue reliance should not be placed on our forward-looking statements. Forward-looking statements speak only as of the date they are made, and we assume no obligation to update any of these statements in light of new information, future events or otherwise unless required under the federal securities laws.
ITEM 1A. RISK FACTORS

Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities. The risks discussed below are those that we believe are the most significant risks to our business plans and strategies and financial performance, although additional risks not presently known to us or that we currently deem less significant may also adversely affect our business, financial condition and results of operations, perhaps materially. Before making a decision to invest in our securities, you should carefully consider the risks and uncertainties described below and elsewhere in this report.


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A significant portion of our loan portfolio is comprised of commercial loans, many of which are larger credit relationships, including some that are leveraged loans. The repayment of such loans is largely dependent upon the financial success and viability of the borrower and the state of the economy.

Our commercial loan portfolio, which includes commercial and industrial loans and owner-occupied commercial real estate loans, totaled $9.6 billion, or 64% of our total loan portfolio, at December 31, 2016. The repayment of the commercial loans is largely dependent upon the financial success and viability of the borrower, which generally is impacted by the state of the overall economy, rather than through the operation or liquidation of the underlying collateral. The collateral securing commercial loans, such as accounts receivable, inventory, equipment and real estate specific to the borrower’s use, may be difficult and costly to liquidate given its often unique nature. As a result, if a commercial loan defaults and we foreclose on the underlying collateral, we may not be able to recover the full principal amount of the loan, which would increase our credit costs.

A portion of our commercial and industrial loans are leveraged loans, which are primarily underwritten on the basis of the recurring earnings of the borrower, and have a higher ratio of debt-to-earnings and lower collateral coverage as compared to commercial and industrial loans not characterized as leveraged. As a result, in the event of a default, the loss potential generally is greater for leveraged loans as compared to more traditional commercial and industrial loans with more collateral coverage.

Over the past few years, the federal bank regulatory agencies have jointly issued updated supervisory guidance, and increased their examination focus, on leveraged lending by regulated institutions due to the significant growth in the volume of leveraged credit issued, developments in how some leveraged loans are structured and their desire to ensure risk management practices in the leveraged loan market keep pace with market developments. A majority of our leveraged loan portfolio are loans that are classified as “higher-risk assets” by the FDIC under its risk-based deposit insurance assessment framework.  Refer to Table 13 in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As we manage our overall risk appetite to adapt to market and economic conditions affecting the leveraged loan market, including reduced demand by the banking industry to participate in syndicated leveraged loan transactions, our future loan growth could be impacted.

Many of our commercial loans involve larger relationships. We had 182 individual credit relationships with credit commitments exceeding $25 million, most of which are commercial loans, which totaled $6.2 billion of commitments and represented $3.6 billion of outstanding loans, or 24% of our loan portfolio, at December 31, 2016. The borrowers in some of these credit relationships may be related to other obligors as guarantors or share related ownership structures. Of our largest commitments, commitments exceeding $50 million represented $916.4 million in total commitments and $336.4 million of outstanding loans at December 31, 2016, compared to $688.3 million in total commitments and $232.1 million of outstanding loans at December 31, 2015. Because of their size relative to our overall loan portfolio, the unexpected occurrence of an adverse event or development affecting one or more of these large client relationships could materially affect our results of operation and financial condition, including by causing quarterly fluctuations in our credit costs and credit quality metrics.

Consistent with our middle market commercial lending focus, we have several industry and product type concentrations within our loan portfolio. These particular industries and product types are subject to specific risks that could adversely affect our business.

Several industry and product type concentrations within our loan portfolio are subject to specific risks that could adversely affect our financial condition and results of operations to the extent they have correlated risk. Some of these portfolio concentrations and their particular risks include the following:

Healthcare - This is the largest industry classification within our commercial loan portfolio, as 21% of our commercial loan portfolio, or $2.0 billion, at December 31, 2016, consisted of healthcare-related loans. Such loans are comprised primarily of loans secured by skilled nursing and assisted living facilities that are dependent, in part, on the receipt of payments and reimbursements under government contracts for services provided. Accordingly, our clients and their ability to service debt may be adversely impacted by the financial health of state or federal payors and the ability of governmental entities, many of which have experienced budgetary stress in the recent economic environment, to make payments for services previously provided. Additionally, across the healthcare industry, structural changes to the government reimbursement model may negatively impact performance for managed care facilities as borrowers adapt to these changes, which could impact their ability to service debt. As of December 31, 2016, 53% of the healthcare portfolio was secured by facilities in five states, with Illinois representing the highest percentage of facilities at 23%.
Manufacturing - This is the second largest industry classification within our commercial loan portfolio, with 19% of our commercial loan portfolio, or $1.8 billion, at December 31, 2016 consisting of loans to borrowers whose primary business activity was manufacturing. During the second half of 2015 and into 2016, the U.S. manufacturing sector experienced a significant slowdown, as evidenced by declines or slowing rates of growth in a number of key indicators, due in part to

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the economic headwinds of lower commodity prices (including oil and gas prices) and a strong U.S. dollar, with particular stress faced by durable goods manufacturing. Although the U.S. manufacturing sector began to rebound toward the end of 2016, the sector’s performance may continue to experience volatility due to the impact of commodity prices, currency exchange rates, possible U.S. corporate tax reform, U.S. political developments and broader geopolitical developments on this sector. Any stress or volatility experienced by the U.S. manufacturing sector specifically could adversely impact our existing loan portfolio and/or our future loan growth rate.
Commercial Real Estate - In addition to our large commercial loan portfolio, we have a significant commercial real estate portfolio, with $4.1 billion of commercial real estate loans (excluding construction loans) as of December 31, 2016, representing 27% of our total loan portfolio. The commercial real estate industry has exhibited strong performance over the past several years, but significant new development volume in recent years, particularly in certain asset classes such as multifamily, could place pressure on rents and vacancy rates, which could adversely impact borrowers’ ability to service debt. Additionally, although commercial real estate values, and the net operating income generated by them, are influenced by the overall health of the U.S. economy, they also can be significantly impacted by other factors such as market interest rates, excess capacity or lack of supply of comparable properties in the particular market and global geopolitical events given the importance of foreign investor participation in U.S. real estate markets. If the value of commercial real estate were to decline materially due to the foregoing or other factors, a significant portion of our commercial real estate loan portfolio could become under-collateralized. If our commercial real estate loans were to become troubled during a time of depressed commercial real estate values, we may not be able to realize the value of the collateral that we anticipated at the time of originating the loan, which could increase our credit costs and have a material adverse effect on our financial condition and results of operations.

The success of our business is dependent on ongoing access to sufficient and stable, cost-effective sources of liquidity.

Our primary sources of funding are deposits and, to a lesser extent, Federal Home Loan Bank (“FHLB”) borrowings. We rely on these funding sources to provide sufficient liquidity to support our loan growth on a cost-effective basis while accommodating the transaction and cash management needs of our clients. Our deposit base is primarily comprised of commercial clients and institutional depositors and relatively concentrated in large relationships, with our ten largest deposit relationships comprising 15% of total deposits at December 31, 2016. At year end 2016, we had 31 client relationships with greater than $75 million in deposit balances, which totaled $4.4 billion, or 27%, of total deposits. The unanticipated loss of one or more large deposit relationships, or significant movements in large deposit accounts, could stress our liquidity and possibly require us to utilize higher cost contingency funding sources. A majority of our large deposit relationships of $75 million or more come from financial services clients, such as securities broker-dealers for which we serve as a cash sweep program bank, hedge funds and fund administrators and futures commission merchants.  Financial services clients have a higher propensity to generate large transactional flows, which contributes to liquidity risk, and some of these deposits, particularly from hedge funds, fund administrators and futures commission merchants, may exhibit elevated volatility and be more sensitive to financial stress as compared to other commercial deposits due to the more complex liquidity and cash flow needs of financial services clients given the nature of their businesses. Additionally, large commercial deposits may be more sensitive to interest rate increases as compared to smaller retail deposits, which could cause our deposit costs to increase more quickly in a rising rate environment than if we had a larger retail deposit base. Since the U.S. presidential election in November 2016, market expectations about future interest rate increases have changed significantly and the Federal Reserve increased the federal funds target rate by 25 basis points in December 2016. If market interest rates continue to increase, we could experience more competition for deposits, as money market funds and other liquid fixed income alternatives could become more attractive to commercial depositors relative to bank deposits. In such case, our net interest margin could be negatively impacted if we must pay more to continue attracting sufficient commercial deposits to fund our growth and/or increase our reliance on wholesale funding sources, such as FHLB borrowings. Furthermore, if we were to experience increased challenges in attracting and maintaining stable, cost-effective sources of liquidity, we may need to moderate our loan growth to adhere to prudent risk management objectives.
As of December 31, 2016, we had outstanding borrowings from the FHLB of $1.6 billion. Because we rely on FHLB borrowings to supplement our deposits, if we were unable to borrow additional amounts from the FHLB because of insufficient eligible collateral or other conditions, we would need to supplement our deposits with an alternate source of funds, which could increase our cost of funding and may not match our funding needs as well as FHLB borrowings.
The importance of stable sources of funding is heightened for a predominantly commercial banking business because of unfunded commitments extended to commercial clients. Our total unfunded commitments to extend credit, including obligations to issue letters of credit, were $6.8 billion as of December 31, 2016. Given the large size of many of our credit relationships, significant draws on outstanding commitments by a few clients may adversely impact our liquidity and require us to utilize higher cost contingency funding.

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A prolonged period of economic uncertainty or a downturn in economic conditions, in the U.S. or globally, could have a material adverse effect on our financial condition and results of operations.

Banking, and the financial industry in general, is reliant on the strength of the broader economy. Although the U.S. economy has experienced gradual improvement since the depths of the last recession in 2009, including significant improvement in the unemployment rate, there continue to be economic headwinds from muted GDP growth, limited wage growth, low inflation, and a strong U.S. dollar. Market conditions are also impacted by continued uncertainty related to U.S. and European fiscal issues, a slowdown in economic growth in China, the U.S. political climate at the national and local levels and the new U.S. Presidential administration, future U.S. corporate tax policy, global economic conditions and geopolitical tensions. In addition, the financial condition of the State of Illinois and the City of Chicago (higher corporate tax rates, significant budget deficits, large unfunded pension obligations and a deteriorating credit rating), where we do the majority of our business, may contribute to an adverse climate for doing business in the state and city, which could negatively impact us to the extent it leads to declines in business activity in Illinois and the greater Chicago metropolitan area. Although we do not hold direct obligations of the State of Illinois, such conditions can also negatively affect the market value of those municipal bonds that are obligations of municipalities domiciled in Illinois. The foregoing uncertainties could result in, among other things, a deterioration of credit quality, impairment of real estate and other collateral values or reduced demand for credit or other products and services we offer to clients, which could materially adversely affect our financial condition and results of operations.

Our allowance for loan losses may be insufficient to absorb losses in our loan portfolio.

Every loan we make carries a certain risk of non-payment. This risk is affected by, among other things:

the credit risks posed by the particular borrower and loan type;
the duration and structure of the loan;
in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;
the ability to identify potential repayment issues in loans at an early stage; and
changes in economic and industry conditions.

We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in our loan portfolio. The allowance for loan losses is assessed quarterly and represents an accounting estimate of probable losses in the portfolio at each balance sheet date based on a review of available and relevant information at that time. We determine the allowance using our historical default and loss information, current risk ratings for our loans and certain qualitative factors that are assessed by management. The application of qualitative factors, in particular, requires a significant amount of management judgment. We may incur aggregate losses on our loan portfolio that exceed, perhaps by a significant amount, the $185.8 million that we have reserved in the allowance at December 31, 2016, particularly if economic conditions were to materially worsen.

Because the predominantly commercial nature of our loan portfolio results in us having a greater number of larger credit relationships than many other banks of a generally comparable size, as evidenced by the fact that 24% of our loan portfolio at December 31, 2016 was comprised of credit relationships in amounts exceeding $25 million, adverse developments with respect to even a small number of credit relationships could lead to a significant increase in our allowance for loan losses and related provision expense in a given period. The occurrence of an adverse rating migration for one or more large loans, particularly a leveraged loan, could require a meaningful increase in our allowance for loan losses and related provision expense under our allowance methodology. In light of the foregoing, we may experience significant variability in our quarterly provision expense and charge-offs and overall credit quality trends.

We may be adversely affected by the failure of interest rates to meaningfully increase from their prolonged historically low levels.

Our operating results are largely dependent on our net interest income, which is the difference between the interest income earned on earning assets, primarily loans and investment securities, and the interest expense paid on deposits and borrowings. The spread between the yield on our interest-earning assets and our overall cost of funds has been compressed in the prolonged low interest rate environment, with our ability to increase contractual loan yields limited by continued strong competition in the lending market. Because we price loans primarily on a variable-rate basis (generally to LIBOR), we believe our balance sheet is well-positioned to benefit from a rising interest rate environment.  However, it is more difficult to predict the impact of a rising interest rate environment on our cost of funds, as funding costs are significantly dependent on a number of factors outside of our control, such as client deposit behavior and deposit pricing pressure from competitors. Interest rates are affected by numerous factors, including monetary policy of the Federal Reserve and expectations regarding the same, and future interest rate levels are inherently difficult

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to predict. Although the Federal Reserve increased by the target federal funds rate by 25 basis points in December 2015 and again in December 2016, market interest rates still remain near historically low levels. There can be no assurances as to when or if the Federal Reserve will continue to raise interest rates or the extent to which our net interest income will benefit if such increases occur.

Over the past several years, the Federal Reserve implemented various significant economic strategies that impacted interest rates, inflation, and the shape of the yield curve and future actions or strategies could further impact such conditions, which could adversely affect our operating results.

Over the past several years, the Federal Reserve implemented a series of domestic monetary policy initiatives in response to economic conditions, including the purchase of U.S. treasury securities and mortgage-backed securities (commonly known as “quantitative easing” (“QE”)). Among other things, QE strategies were intended to create or maintain a low interest rate environment and stimulate economic activity, and have theoretically caused interest rates to remain lower than they would have been without such involvement. The Federal Reserve formally ended the QE program during the fourth quarter of 2014, but market interest rates nevertheless remain highly dependent on actions of the Federal Reserve and market participants’ expectations about such actions. As discussed above, our net interest income is significantly dependent on the level of market interest rates given their impact on loan yields and deposit costs. More generally, market interest rates also influence many other elements of our business, such as asset management fees (as interest rates impact equity and fixed income values, which drive such fees), mortgage banking revenue (as interest rates impact the demand for mortgages and gains on sales to the secondary market), capital markets revenue (as interest rates, and expectations about future direction, impact client demand for interest rate derivatives and foreign currency volatility), syndication fees (as interest rates impact pricing and demand for syndicated loans), loan growth (as interest rates can impact the overall economy and, as a result, demand for new credit) and gains, losses and yields on our investment securities portfolio. Accordingly, actions by the Federal Reserve and market expectations about potential actions could adversely affect our operating results, including by creating volatility in such results.

Our business could be significantly impacted if we, or our third party service providers, suffer failure, cyber-attack or disruptions of information systems, our employees cause an operational failure or our clients suffer losses due to fraudulent or negligent acts by their employees or third parties in connection with their banking transactions.

We rely heavily on communications, data processing and other information processing systems to conduct and support our business, many of which are provided through third-parties. If our third party providers encounter difficulties or become the source of an attack on or breach of their operational systems, data or infrastructure, or if we have difficulty communicating with any such third party system, our business operations could suffer. Any failure or disruption to our systems, or those of a third party provider, could impede our transaction processing, service delivery, customer relationship management, data processing, financial reporting or risk management. Our computer systems, software and networks, and those of our third party providers, may be vulnerable to unauthorized access, loss or destruction of data (including confidential client information), account takeovers, unavailability of service, computer viruses, denial of service attacks, malicious social engineering or other malicious code, or cyber-attacks that circumvent our prevention measures or are beyond what we can reasonably anticipate, and such events could result in material loss. Additionally, we could suffer disruptions to our systems or damage to our network infrastructure from events that are wholly or partially beyond our control, such as electrical or telecommunications outages, natural disasters, widespread health emergencies or pandemics, or events arising from local or larger scale political events, including terrorist acts. Furthermore, in light of rapid technological advancements, we must continually mature our cybersecurity risk management program to address emerging risks. If significant failure, interruption or security breaches do occur in our processing systems or those of our third party providers, we could suffer significant damage to our reputation, a loss of customer business, additional regulatory scrutiny, or exposure to civil litigation, additional costs and possible financial liability.

Due the nature of our business, we regularly process transfers of large amounts of money to and from our clients’ accounts. To do so, we are dependent on the actions of our employees and instructions from our clients and, therefore, we are exposed to operational and fraud risks. We could be materially adversely affected from a financial or reputational perspective if our employees cause a significant operational failure that leads to significant client loss. Additionally, if our clients are victim to operational failure or fraud by their own employees or third parties relating to their accounts with us, we could suffer reputational harm and loss of business even if we have no liability for such failure or fraud.

The loss of one or more key employees or lending teams may adversely affect our business.

We are a relationship-driven organization. Our continued growth and development is dependent in large part upon the efforts of our key relationship managers who have primary contact with our clients and responsibility for maintaining personalized relationships with our client base. These personalized relationships are a key aspect of our business strategy. The loss of one or more of these key employees, or a lending team, could have a material adverse effect on our business if we are unable to hire

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suitable replacements or we are unable to successfully retain the client relationships of departing employees. Uncertainty about the effect of the pending CIBC merger, or about the timing of closing the merger, could impact our ability to retain key employees during the pendency of the merger.

We have counterparty risk; the creditworthiness of other financial institutions could expose us to losses on contracts we have with these institutions and adversely affect our ability to provide services to our clients, specifically products and services relating to foreign exchange, interest rate derivatives and letters of credit.

Our ability to provide certain products and services could be adversely affected by the actions and financial health of other banks. Banks are interrelated as a result of lending, clearing, correspondent, counterparty and other relationships. As a result, defaults by, or even rumors or questions about, one or more banks, or the banking industry generally, have in the past led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of the transactions engaged in by us in the ordinary course of business, particularly in our capital markets group, expose us to credit risk in the event of default of a financial institution counterparty. While we hold collateral in most such transactions, collateral may be insufficient to mitigate our losses, as we may be unable to realize or liquidate at prices sufficient to recover the full amount of our exposure. Such losses could have a material and adverse effect on our financial condition and results of operations.

Our capital markets group offers to clients a range of foreign exchange and interest rate derivatives products. Although we do not engage in any proprietary trading and we structure these client-generated trading activities to mitigate our exposure to market risk, we remain exposed to various risks, the most significant of which is counterparty risk, which may be most significant in foreign exchange transactions where timing differences between settlement centers can result in us paying the counterparty before actually receiving the funds. In addition, for swaps we execute with counterparties to mitigate the market risk of our customer trades, we may be required to post collateral to secure our obligations related to those trades; if such a counterparty invokes the protection of insolvency laws, then the collateral posted to secure our obligations to that counterparty may be trapped with, and potentially subject to claims of creditors of, that counterparty.

We are highly regulated and may be adversely affected by a failure to comply with banking laws, regulations and regulatory expectations or changes in such laws, regulations and regulatory expectations.

We, like all banking organizations, are subject to extensive supervision, regulation and examination. This regulatory structure gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies to address not only compliance with applicable laws and regulations (including laws and regulations governing consumer protection, fair lending, privacy, information security and anti-money laundering and anti-terrorism laws), but also capital adequacy, asset quality, risk management, management ability and performance, earnings, liquidity, and various other factors. Under this structure, the regulatory agencies have broad discretion to impose restrictions and limitations on our operations if they determine, among other things, that our operations are unsafe or unsound, fail to comply with applicable law or regulations or are otherwise inconsistent with regulatory expectations or with the supervisory policies of these agencies. This supervisory framework could materially impact the conduct, growth and profitability of our operations. For example, regulatory scrutiny of compliance with consumer lending and protection laws and regulations has increased significantly over the past several years since the creation of the CFPB following enactment of the Dodd-Frank Act, particularly with respect to “unfair, deceptive or abusive” acts or practices and alleged fair lending violations. A failure by us to comply with applicable laws and regulations or expectations of our regulators (including the CFPB) relating to safe and sound banking or compliance practices could result in regulatory sanctions, civil money penalties or other adverse actions against us, which in turn could increase our compliance burden and costs of doing business, restrict our ability to expand our business or result in damage to our reputation.

Changes in laws, regulations and other regulatory requirements affecting the financial services industry, and the effects of such changes, are difficult to predict and may have unintended consequences. New regulations or changes in the regulatory environment could limit the types of financial services and products we may offer, the demand for existing products and services, and/or increase the ability of non-banks to offer competing financial services and products, among other things. We may incur increased costs related to additional staffing, professional services and information technology resources to support compliance or data collection and data analytics to satisfy evolving expectations for enhanced risk and liquidity management processes and new regulatory reporting requirements.

Since the U.S. federal elections in November 2016, there has been significant discussion about future financial regulatory reform. For example, in February 2017, President Trump issued an executive order calling for the U.S. Treasury Secretary to consult with the federal banking agencies and deliver a report on how existing financial regulation aligns with core principles articulated in the order to guide regulatory reform. Additionally, the Financial CHOICE Act has been introduced in the House Financial Services Committee, which would make intricate changes to the Dodd-Frank Act, such as provide a Dodd-Frank off-ramp for highly-rated banking organizations that satisfy a heightened leverage ratio requirement, repeal the Volcker Rule and Durbin Amendment, revamp

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the CFPB and eliminate or substantially modify the federal banking agencies’ authority to exercise extraordinary powers in financial crises. At this time, it is uncertain whether or to what extent the executive order or proposed legislation such as the Financial CHOICE Act will result in any material changes to current financial industry laws and regulations and, if so, to what extent such changes would impact the Company, or the competitive landscape in the banking and broader financial services industry.

Changes in taxes and other assessments may significantly impact us and our clients.

The legislatures and administrations in the U.S. and state and local tax jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our clients are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes. Any change in tax law, such as proposed changes to the statutory U.S. federal corporate income tax rate that has been discussed by Congress and the new U.S. Presidential administration, the current tax depreciation system and the deductibility of interest expense, or any other change made in connection with any comprehensive U.S. federal tax reform, may affect our tax position and the tax position and financial performance of our clients. The effects of these changes and any other changes that result from enactment of potential tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our financial performance or our business, in part due to the impact on our clients. For example, if U.S. federal tax reform included a reduction in the deductibility of interest expense, that could impact the cash flow of our borrowers. Although a reduction in the statutory U.S. federal corporate rate may lower our tax provision expense in future periods, it may also significantly decrease the value of our deferred tax asset which would result in a reduction of net income in the period in which the tax change is enacted.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.

We conduct business in the highly competitive financial services industry, which has been and continues to be impacted by significant and increasing government regulation, increasing technological demands and disruption and the presence of many new non-bank competitors. Our future success will depend on our ability to compete effectively in this environment. With respect to our Commercial Banking business, we compete primarily with super-regional and national commercial banks, asset-based non-bank lenders and commercial mortgage banking companies. Many of these competitors have substantially greater financial resources, lending limits and larger office and branch networks, and greater access to lower cost deposits and capital, than we do and therefore may be able to compete more effectively on loan pricing or terms and/or offer products and services beyond what we offer. In recent years, in which credit costs and interest rates have been low, we have experienced significant competitive pressure in pricing and structuring loans in certain of our loan segments. Because we generate earnings primarily from the difference between the interest earned on loans and the interest we pay on deposits, this pricing pressure has impacted, and is expected to continue impacting, our margins.

Remaining competitive will require ongoing investments in technology to satisfy expectations of our clients, enhance service delivery, support new products and services and efficiently grow our business. Additionally, increasing our retail deposit gathering capabilities in a competitive environment may require significant investments by us, such as by enhancing digital strategies, opening new branches or acquiring retail deposit franchises, which also could impact our results of operations.

Risk Factors Related to the Merger

We will be subject to business uncertainties and contractual restrictions while the merger is pending, which could adversely affect our business.

Uncertainty about the effect of the merger on our employees and clients may have an adverse effect on the Company and, consequently, the surviving corporation. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause clients and others that deal with us to seek to change our existing business relationships. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to uncertainty about the timing of closing the merger, the uncertainty and difficulty of integration or a desire not to remain with the business, our business prior to the merger (and CIBC’s business following the merger) could be negatively impacted. In addition, until the merger occurs, the merger agreement restricts us from making certain acquisitions or entering into new lines of business, entering into or modifying material contracts and taking other specified actions without the consent of CIBC. These restrictions may prevent or delay us from pursuing attractive business opportunities that may arise prior to the completion of the merger. The merger agreement also restricts us from increasing our dividend prior to the merger.


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Table of Contents

The merger agreement may be terminated in accordance with its terms and the merger may not be completed.

The merger agreement is subject to a number of conditions that must be fulfilled in order to complete the merger. Those conditions include, among others, the approval of the merger proposal by our stockholders, the receipt of all required regulatory approvals (which include approvals of the Office of the Superintendent of Financial Institutions (Canada), the Federal Reserve Board and the Illinois Department of Financial and Professional Regulation) and expiration or termination of all statutory waiting periods in respect thereof, the accuracy of representations and warranties under the merger agreement (subject to the materiality standards set forth in the merger agreement), CIBC’s and the Company’s performance of their respective obligations under the merger agreement in all material respects and each of CIBC’s and the Company’s receipt of a tax opinion to the effect that the merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Code. These conditions to the closing of the merger may not be fulfilled in a timely manner or at all and, accordingly, the merger may be delayed or may not be completed.

In addition, if the merger is not completed by June 29, 2017, either CIBC or the Company may choose not to proceed with the merger, and the parties can mutually decide to terminate the merger agreement at any time, before or after our stockholder approval has been obtained. In addition, CIBC and the Company may elect to terminate the merger agreement in certain other circumstances. If the merger agreement is terminated under certain circumstances, we may be required to pay a termination fee of $150 million to CIBC.

Failure to complete the merger at all, or a material delay in completing the merger, could negatively impact our stock price and future business and financial results.

If the merger is not completed for any reason, including as a result of our stockholders declining to approve the merger agreement or the failure of the parties to obtain the required regulatory approvals, or if we and CIBC experience a material delay in completing the merger, our stock price and ongoing business may be adversely affected. In such case, we would be subject to a number of risks, including the following:

we may experience negative reactions from the financial markets;
our stock price, as well as the prices for our publicly-traded debt securities, could be materially impacted due to changing expectations from market participants about the timing or likelihood of completion of the merger and our future prospects;
we may experience negative reactions from our clients, employees and/or vendors, and if there is a material delay in completing the merger, we may find it more challenging to retain our clients and key employees due to the perceived uncertainty about the transaction;
we will have incurred substantial transaction-related expenses and will be required to pay certain costs relating to the merger, whether or not the merger is completed;
the merger agreement places certain restrictions on the conduct of our businesses prior to completion of the merger and such restrictions (the waiver of which is subject to the reasonable consent of CIBC) may prevent or delay us from making certain acquisitions or entering into new lines of business, entering into or modifying material contracts and taking other specified actions without the consent of CIBC during the pendency of the merger;
matters relating to the merger (including integration planning) require substantial commitments of time and resources by our management, which would otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company; and
during the pendency of the merger, our stock price is likely to be impacted by factors affecting CIBC’s ongoing business, prospects and stock price because a majority of the merger consideration is in the form of CIBC common shares; the longer period of time that the merger is pending, the more our stockholders (including employee stockholders) may be exposed to fluctuations in the price of CIBC common shares, which could have an adverse impact on our business.

In addition to the above risks, if the merger agreement is terminated and our board of directors seeks another merger or business combination, our stockholders cannot be certain that we will be able to find a party willing to offer equivalent or more attractive consideration than the consideration CIBC has agreed to provide in the merger.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.


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ITEM 2. PROPERTIES

The executive offices of PrivateBancorp are located in downtown Chicago, Illinois at 120 South LaSalle Street. This building which houses a majority of our general corporate functions is leased from an unaffiliated third party. We conduct our business primarily through the Bank at 23 full-service banking office locations in the greater Chicago, Detroit, Milwaukee, and St. Louis metropolitan areas. We also have business development offices located in Colorado, Connecticut, Florida, Georgia, Indiana, Iowa, Michigan, Minnesota, Missouri, Ohio and Pennsylvania. With the exception of 11 offices that are owned by us, all other facilities are leased from unaffiliated third parties. At certain Bank locations, excess space is leased to third parties.

We also own 30 automated teller machines (“ATMs”) primarily located at our banking facilities.

We believe our facilities in the aggregate are suitable and adequate to operate our banking and related business. Additional information with respect to premises, equipment and lease arrangements is presented in Note 6 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

Following the announcement of the proposed transaction with CIBC, three putative class actions were filed on behalf of our public stockholders in the Circuit Court of Cook County, Chicago, Illinois. The three actions have been consolidated and styled In re PrivateBancorp, Inc. Shareholder Litigation, 2016-CH-08949. All of the actions name as defendants the Company and each of its directors individually, and assert that the directors breached their fiduciary duties in connection with the proposed transaction. Two of the complaints are also brought against CIBC and assert that the Company and CIBC aided and abetted the directors’ alleged breaches. The actions broadly allege that the transaction was the result of a flawed process, that the price is unfair, and that certain provisions of the merger agreement might dissuade a potential suitor from making a competing offer, among other things. The plaintiffs subsequently filed an amended complaint, adding a claim alleging breaches of the fiduciary duty of disclosure by the directors. Plaintiffs seek injunctive and other relief, including damages. The plaintiffs in the three actions have agreed in principle not to pursue the actions as a result of the inclusion of certain additional disclosures in the proxy statement for the Company’s special meeting of stockholders. The defendants, including the Company, believe the demands and complaints are without merit and there are substantial legal and factual defenses to the claims asserted, and the proxy statement for the special meeting disclosed all material information prior to the inclusion of the additional disclosures.

As of December 31, 2016, and in the ordinary course of business, there were various other legal proceedings pending against the Company and our subsidiaries that are incidental to our regular business operations. Management does not believe that the outcome of any of these proceedings will have, individually or in the aggregate, a material adverse effect on our business, results of operations, financial condition or cash flows.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


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PART II
 
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded under the symbol “PVTB” on the NASDAQ Global Select Market. As of February 27, 2017, we had approximately 438 stockholders of record. The following table sets forth the high and low intraday sales prices and quarter-end closing price of our common stock, dividends declared per share, dividend yield and book value per share during each quarter of 2016 and 2015. As of February 27, 2017, the closing market price of our common stock was $56.93 per share.
 
 
2016
 
2015
 
Fourth
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Market price of common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
$
55.12

 
$
46.70

 
$
44.84

 
$
41.81

 
$
45.79

 
$
42.93

 
$
41.44

 
$
36.95

 
Low
$
44.18

 
$
42.60

 
$
34.00

 
$
31.18

 
$
35.76

 
$
33.70

 
$
34.52

 
$
29.62

 
Quarter-end
$
54.19

 
$
45.92

 
$
44.03

 
$
38.60

 
$
41.02

 
$
38.33

 
$
39.82

 
$
35.17

 
Cash dividends declared per share
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
$
0.01

 
Dividend yield at quarter-end (1)
0.07
%
 
0.09
%
 
0.09
%
 
0.10
%
 
0.10
%
 
0.10
%
 
0.10
%
 
0.11
%
 
Book value per share at quarter-end
$
24.04

 
$
23.64

 
$
23.04

 
$
22.29

 
$
21.48

 
$
20.90

 
$
20.13

 
$
19.61

(1) 
Ratios are presented on an annualized basis.

Payment of future dividends is within the discretion of the Board and will depend on the capital adequacy of the Company and the Bank. The Board does not have any current plans to increase future dividends, as our current strategy is focused on retaining capital to support growth in our balance sheet. The Board evaluates dividends on a quarterly basis and may adjust those plans from time to time; however, the merger agreement that we have entered into with CIBC restricts us from increasing our dividend prior to the merger without the prior consent of CIBC, which we would not expect to receive. A discussion regarding the restrictions applicable to our ability and the ability of the Bank to pay dividends to us is included in the “Bank Holding Company Regulation- Dividends” and “Bank Regulation-Dividends” sections of “Supervision and Regulation” in Item 1 and Note 16 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.


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Stock Performance Graph

The graph and table below illustrate, over a five-year period, the cumulative total return (defined as stock price appreciation plus dividends) to stockholders from an investment in our common stock against a published industry total return equity index and broad-market total return equity index. The published industry total return equity indices used in this comparison are the Center for Research in Security Prices index for NASDAQ Bank Stocks and the S&P Regional Banking Industry Index, and the broad-market total return equity index used in this comparison is the Russell 2000 Index. In 2017, we changed our published industry total return equity index from the NASDAQ Bank Index to the S&P Regional Banking Index. The S&P Regional Banking Index further aligns us with other banks of a relatively similar size.

38297073_pvtb123120_chart-29182a05.jpg

Comparison of Five-Year Cumulative Total Return Among
PrivateBancorp, Inc., the NASDAQ Bank Index, and the Russell 2000 Index (1) 
 
 
December 31,
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
PrivateBancorp
$
100.00

 
$
139.90

 
$
264.67

 
$
305.98

 
$
376.17

 
$
497.40

NASDAQ Bank Index
100.00

 
118.69

 
168.21

 
176.48

 
192.08

 
265.02

Russell 2000 Index
100.00

 
116.35

 
161.52

 
169.43

 
161.95

 
196.45

S&P Regional Banking Industry Index
100.00

 
117.37

 
173.61

 
177.69

 
187.32

 
253.66

(1) 
Assumes $100 invested on December 31, 2011 in PrivateBancorp’s common stock, the NASDAQ Bank Index, the Russell 2000 Index, and the S&P Regional Banking Industry Index with the reinvestment of all related dividends.

To the extent this Form 10-K is incorporated by reference into any other filing by us under the Securities Act of 1933 or the Securities Exchange Act of 1934, the foregoing “Stock Performance Graph will not be deemed incorporated, unless specifically provided otherwise in such filing and shall not otherwise be deemed filed under such Acts.


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Table of Contents

Issuer Purchases of Equity Securities

The following table summarizes the Company’s monthly common stock purchases during the quarter ended December 31, 2016, which were made solely in connection with the administration of employee share-based compensation plans for employees. Under the terms of these plans, we accept shares of common stock from plan participants if they elect to surrender previously-owned shares upon exercise of options to cover the exercise price or, in the case of both restricted shares of common stock or stock options, the withholding of shares to satisfy tax withholding obligations associated with the vesting of restricted shares or exercise of stock options.

Issuer Purchases of Equity Securities
 
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plan or Programs
October 1 - October 31, 2016
509

 
$
45.51

 

 

November 1 - November 30, 2016
222

 
44.90

 

 

December 1 - December 31, 2016
245

 
53.31

 

 

Total
976

 
$
47.33

 

 


Unregistered Sales of Equity Securities

None.


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Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

Consolidated financial information reflecting a summary of our operating results and financial condition for each of the five years in the period ended December 31, 2016 is presented in the following table. This summary should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Form 10-K. A more detailed discussion and analysis of the factors affecting our operating results and financial condition is presented in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.
 
 
Year Ended December 31,
(Dollars in thousands, except per share data)
2016
 
2015
 
2014
 
2013
 
2012
Operating Results
 
 
 
 
 
 
 
 
 
Interest income
$
665,018

 
$
582,212

 
$
524,387

 
$
492,238

 
$
487,036

Interest expense
82,592

 
67,797

 
69,650

 
71,175

 
67,103

Net interest income
582,426

 
514,415

 
454,737

 
421,063

 
419,933

Provision for loan and covered loan losses
33,710

 
14,790

 
12,044

 
31,796

 
71,425

Fee revenue (1)
146,647

 
129,190

 
117,060

 
112,816

 
111,246

Net securities gains (losses)
1,111

 
822

 
530

 
1,174

 
(205
)
Non-interest expense
372,473

 
333,237

 
312,076

 
303,314

 
327,132

Income before income taxes
324,001

 
296,400

 
248,207

 
199,943

 
132,417

Income tax provision
115,644

 
111,089

 
95,128

 
76,994

 
54,521

Net income
208,357

 
185,311

 
153,079

 
122,949

 
77,896

Preferred stock dividends and discount accretion

 

 

 

 
13,368

Net income available to common stockholders
$
208,357

 
$
185,311

 
$
153,079

 
$
122,949

 
$
64,528

Weighted-average common shares outstanding
78,900

 
77,968

 
77,007

 
76,398

 
71,951

Weighted-average diluted common shares outstanding
80,484

 
79,206

 
77,822

 
76,645

 
72,174

Selected Operating Statistics
 
 
 
 
 
 
 
 
 
Net revenue (2)
$
735,036

 
$
648,749

 
$
575,560

 
$
538,300

 
$
533,847

Operating profit (2)
362,536

 
315,512

 
263,484

 
234,986

 
206,715

Provision for loan losses (3)
$
33,954

 
$
14,667

 
$
13,169

 
$
31,164

 
$
70,876

Effective tax rate
35.7
%
 
37.5
%
 
38.3
%
 
38.5
%
 
41.2
%
Per Share Data
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
2.62

 
$
2.36

 
$
1.96

 
$
1.58

 
$
0.88

Diluted earnings per share
2.57

 
2.32

 
1.94

 
1.57

 
0.88

Cash dividends declared
0.04

 
0.04

 
0.04

 
0.04

 
0.04

Book value at year end
24.04

 
21.48

 
18.95

 
16.75

 
15.65

Tangible book value at year end (2)(4)
22.85

 
20.25

 
17.67

 
15.43

 
14.26

Market price at year end
$
54.19

 
$
41.02

 
$
33.40

 
$
28.93

 
$
15.32

Dividend payout ratio
1.53
%
 
1.69
%
 
2.04
%
 
2.53
%
 
4.55
%
Performance Ratios
 
 
 
 
 
 
 
 
 
Return on average common equity
11.36
%
 
11.57
%
 
10.91
%
 
9.76
%
 
5.76
%
Return on average assets
1.13
%
 
1.13
%
 
1.04
%
 
0.90
%
 
0.60
%
Return on average tangible common equity (2)
12.06
%
 
12.43
%
 
11.90
%
 
10.82
%
 
6.54
%
Net interest margin (2)
3.30
%
 
3.26
%
 
3.22
%
 
3.23
%
 
3.42
%
Efficiency ratio (2)(5)
50.67
%
 
51.37
%
 
54.22
%
 
56.35
%
 
61.28
%

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Table of Contents

ITEM 6. SELECTED FINANCIAL DATA (continued)

 
December 31,
(Dollars in thousands)
2016
 
2015
 
2014
 
2013
 
2012
Credit Quality (3)
 
 
 
 
 
 
 
 
 
Nonperforming loans
$
83,688

 
$
53,749

 
$
67,544

 
$
94,238

 
$
138,780

OREO
10,203

 
7,273

 
17,416

 
28,548

 
81,880

Total nonperforming assets
$
93,891

 
$
61,022

 
$
84,960

 
$
122,786

 
$
220,660

Restructured loans accruing interest
$
66,002

 
$
16,546

 
$
22,745

 
$
20,176

 
$
60,980

Net charge-offs
$
8,925

 
$
6,429

 
$
3,780

 
$
49,472

 
$
101,053

Total nonperforming loans to total loans
0.56
%
 
0.41
%
 
0.57
%
 
0.89
%
 
1.37
%
Total nonperforming assets to total assets
0.47
%
 
0.35
%
 
0.54
%
 
0.87
%
 
1.57
%
Allowance for loan losses to total loans
1.23
%
 
1.21
%
 
1.28
%
 
1.34
%
 
1.59
%
Balance Sheet Highlights
 
 
 
 
 
 
 
 
 
Total assets
$
20,053,773

 
$
17,252,848

 
$
15,596,724

 
$
14,076,480

 
$
14,048,167

Average earning assets
17,821,134

 
15,923,831

 
14,206,113

 
13,129,470

 
12,369,945

Loans (3)
15,056,241

 
13,266,475

 
11,892,219

 
10,644,021

 
10,139,982

Allowance for loan losses (3)
(185,765
)
 
(160,736
)
 
(152,498
)
 
(143,109
)
 
(161,417
)
Deposits, excluding deposits held-for-sale
16,065,229

 
14,345,592

 
13,089,968

 
12,013,641

 
12,173,634

Noninterest-bearing deposits
5,196,587

 
4,355,700

 
3,516,695

 
3,172,676

 
3,690,340

Long-term debt
338,310

 
688,215

 
338,130

 
618,527

 
490,445

Equity
1,919,675

 
1,698,951

 
1,481,679

 
1,301,904

 
1,207,166

Capital Ratios
 
 
 
 
 
 
 
 
 
Total risk-based capital
12.49
%
 
12.37
%
 
12.51
%
 
13.30
%
 
13.17
%
Tier 1 risk-based capital
10.73
%
 
10.56
%
 
10.49
%
 
11.08
%
 
10.51
%
Tier 1 leverage ratio
10.28
%
 
10.35
%
 
9.96
%
 
10.37
%
 
9.56
%
Common equity Tier 1 ratio (6)
9.83
%
 
9.54
%
 
9.33
%
 
9.19
%
 
8.52
%
Tangible common equity to tangible assets (2)(7)
9.14
%
 
9.34
%
 
8.91
%
 
8.57
%
 
7.88
%
Average equity to average assets
9.99
%
 
9.75
%
 
9.56
%
 
9.22
%
 
10.12
%
Selected Information
 
 
 
 
 
 
 
 
 
Assets under management and administration
$
9,665,068

 
$
7,291,073

 
$
6,645,928

 
$
5,791,308

 
$
5,196,094

Full-time equivalent employees
1,301

 
1,219

 
1,168

 
1,116

 
1,105

 
(1) 
Computed as total non-interest income less net securities gains (losses) and loss on early extinguishment of debt.
(2) 
This is a non-U.S. GAAP financial measure. Refer to Table 25 of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K for a reconciliation from non-U.S. GAAP to U.S. GAAP.
(3) 
Excludes covered assets.
(4) 
Computed as total equity less preferred stock, goodwill, and other intangible assets divided by outstanding shares of common stock at end of year.
(5) 
Computed as non-interest expense divided by the sum of net interest income on a tax equivalent basis (assuming a federal income tax rate of 35%) and non-interest income.
(6) 
Effective January 1, 2015, the common equity Tier 1 ratio became a required regulatory capital measure and is calculated in accordance with the new capital rules. Refer to Table 25, “Non-U.S. GAAP Financial Measures” for a reconciliation from non-U.S. GAAP to U.S. GAAP for periods prior to 2015.
(7) 
Computed as tangible common equity divided by tangible assets, where tangible common equity equals total equity less preferred stock, goodwill, and other intangible assets and tangible assets equals total assets less goodwill and other intangible assets.


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Table of Contents

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

INTRODUCTION

The following discussion and analysis highlights the significant factors affecting our consolidated statements of income for the years ended 2016, 2015, and 2014 and consolidated statements of financial condition as of December 31, 2016 and 2015. When we use the terms “PrivateBancorp,” the “Company,” “we,” “us,” and “our,” we mean PrivateBancorp, Inc. and its consolidated subsidiaries. When we use the term “the Bank,” we are referring to our wholly-owned banking subsidiary, The PrivateBank and Trust Company. The following discussion should be read in conjunction with the consolidated financial statements, accompanying notes thereto, and other financial information presented in this Form 10-K.

Unless otherwise stated, all earnings per share data included in this section and through the remainder of this discussion are presented on a diluted basis.

PENDING TRANSACTION WITH CANADIAN IMPERIAL BANK OF COMMERCE

On June 29, 2016, the Company entered into a definitive merger agreement with Canadian Imperial Bank of Commerce (“CIBC”), a Canadian chartered bank, and CIBC Holdco Inc. (“Holdco”), a newly-formed Delaware corporation and a direct, wholly owned subsidiary of CIBC, which contemplates that the Company will merge with and into Holdco, with Holdco surviving the merger. Closing of the transaction remains subject to the receipt of required regulatory and stockholder approvals and other customary closing conditions. Following the merger, the Bank will be headquartered in Chicago, Illinois, retain its Illinois state banking charter and be an indirect, wholly owned subsidiary of CIBC.

OVERVIEW

For 2016, net income available to common stockholders was $208.4 million, increasing $23.0 million, or 12%, from 2015. Diluted earnings per share were $2.57 for 2016, an increase of 11% compared to $2.32 per diluted share for 2015. Results for the current year included $6.7 million of transaction-related expenses related to the pending merger with CIBC, which reduced earnings per share by $0.05 on an after-tax basis. Our return on average assets of 1.13% for 2016 was consistent with the prior year, and our return on average common equity was 11.4%, compared to 11.6% for 2015.

Net interest income increased by $68.0 million, or 13%, compared to 2015, reflecting higher interest income from $1.9 billion of growth in average interest-earning assets and the impact from a rise in short-term rates. Net interest margin was 3.30% for 2016, increasing four basis points from the prior year, primarily due to increased loan yields and the benefit from continued growth in noninterest-bearing funds in a higher rate environment, offset in part by increased costs for interest-bearing funds.

Non-interest income for the current year was $147.8 million, a 14% increase from 2015, with growth in all major fee categories, excluding deposit service charges and fees and other income as 2015 included a $4.1 million gain on the sale of our Georgia branch. As a result of the growth in net interest income and non-interest income, net revenue increased $86.3 million from 2015. Non-interest expense increased 12% from prior year, primarily due to higher salary and employee benefit expense, professional services and technology costs.

Growth in earning assets continued to benefit operating profit, which increased 15% from $315.5 million for 2015 to $362.5 million for 2016. The efficiency ratio was 50.7% for the year ended December 31, 2016 and included the impact of the $6.7 million in transaction-related expenses, compared to 51.4% for the year ended December 31, 2015.

Total loans grew $1.8 billion, or 13%, to $15.1 billion at December 31, 2016, primarily driven by growth in commercial and industrial and commercial real estate (“CRE”) loans. Total commercial loans and CRE loans comprised 64% and 27%, respectively, of total loans at December 31, 2016, compared to 65% and 25%, respectively, at December 31, 2015.

Asset quality remained strong, with nonperforming loans representing 0.56% of total loans at December 31, 2016, compared to 0.41% at December 31, 2015. The provision for loan losses, excluding covered assets, increased to $34.0 million in 2016 from $14.7 million in 2015, reflecting the impact of $1.8 billion in loan growth and some credit migration during the year. The provision for loan loss will fluctuate from period to period depending on the level of loan growth and unevenness in credit quality due to the size of individual credits. At December 31, 2016, our allowance for loan losses as a percentage of total loans was 1.23%, compared to 1.21% at December 31, 2015. The ratio of net charge-offs to average loans outstanding for the year was 0.06% for

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Table of Contents

2016, relatively consistent with 2015. Nonperforming assets to total assets were 0.47% at December 31, 2016, compared to 0.35% at December 31, 2015.

Total deposits increased $1.7 billion, or 12%, from December 31, 2015 to $16.1 billion, primarily due to increases in noninterest-bearing and interest-bearing demand deposits and money market deposits. Noninterest-bearing demand deposits represented 32% of total deposits at December 31, 2016, up from 30% at the prior year end. Our deposit base is predominately comprised of commercial client balances, which will fluctuate from time to time based on our clients’ business and liquidity needs. During 2016, deposit funding was supplemented with short-term borrowings, which increased by $1.2 billion from December 31, 2015. The loan-to-deposit ratio was 93.7% at December 31, 2016, compared to 92.5% at the prior year end.

Please refer to the remaining sections of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for greater discussion of the various components of our 2016 performance, statement of financial condition, and liquidity.

RESULTS OF OPERATIONS

The profitability of our operations depends on our net interest income, provision for loan and covered loan losses, non-interest income, and non-interest expense. Net interest income is dependent on the amount of and yields earned on interest-earning assets as compared to the amount of and rates paid on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest as well as to the execution of our asset/liability management strategy. The provision for loan and covered loan losses is primarily affected by changes in the loan portfolio’s composition and performance, the identification of nonperforming loans and management’s assessment of the collectability of the loan portfolio, based on historical loss experience as well as current economic and market factors. Non-interest income consists primarily of fee revenue from asset management, mortgage banking, capital markets products, syndications, treasury management, loan and credit-related fees, and other services charges and fees. Net securities gains/losses, if any, are also included in non-interest income.

Net Interest Income

Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income and fees earned on interest-earning assets, such as loans and investments, and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Net interest income is affected by (1) the volume, pricing, mix and maturity of earning assets and interest-bearing liabilities; (2) the volume and value of noninterest-bearing sources of funds, such as noninterest-bearing deposits and equity; (3) the use of derivative instruments to manage interest rate risk; (4) the sensitivity of the balance sheet to fluctuations in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies; (5) loan repayment behavior, which affects timing of recognition of certain loan fees as well as penalties; and (6) asset quality.

Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. Net interest margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and equity, also support interest-earning assets.

The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in Note 1 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.

For purposes of this discussion, net interest income and any ratios or metrics that include net interest income as a component, such as net interest margin, have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt securities to those on taxable securities, assuming a federal income tax rate of 35%. The effect of the tax-equivalent adjustment is presented at the bottom of the following table.

Table 1 summarizes the changes in our average interest-earning assets and interest-bearing liabilities as well as the average interest rates earned and paid on these assets and liabilities, respectively, for the three years ended December 31, 2016. The table also presents the trend in net interest margin on a quarterly basis for 2016 and 2015, including the tax-equivalent yields on interest-earning assets and rates paid on interest-bearing liabilities. In addition, Table 2 details variances in income and expense for each of the major categories of interest-earning assets and interest-bearing liabilities and indicates the extent to which such variances are attributable to volume versus yield/rate changes.

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Table of Contents

Table 1
Net Interest Income and Margin Analysis
(Dollars in thousands)

 
2016
 
 
2015
 
 
2014
 
Average
Balance
 
Interest (1)
 
Yield/
Rate
 
 
Average
Balance
 
Interest (1)
 
Yield/
Rate
 
 
Average
Balance
 
Interest (1)
 
Yield/
Rate
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and interest-bearing deposits in banks
$
287,908

 
$
1,477

 
0.51
%
 
 
$
349,803

 
$
903

 
0.26
%
 
 
$
309,535

 
$
770

 
0.25
%
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
2,919,718

 
62,542

 
2.14
%
 
 
2,440,429

 
55,283

 
2.27
%
 
 
2,279,054

 
53,500

 
2.35
%
Tax-exempt (2)
453,432

 
14,178

 
3.13
%
 
 
400,258

 
12,592

 
3.15
%
 
 
286,551

 
9,406

 
3.28
%
Total securities
3,373,150

 
76,720

 
2.27
%
 
 
2,840,687

 
67,875

 
2.39
%
 
 
2,565,605

 
62,906

 
2.45
%
FHLB stock
24,269

 
622

 
2.56
%
 
 
26,743

 
295

 
1.10
%
 
 
29,058

 
189

 
0.65
%
Loans, excluding covered assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
9,089,131

 
399,475

 
4.40
%
 
 
8,447,121

 
359,794

 
4.26
%
 
 
7,592,012

 
330,220

 
4.35
%
Commercial real estate
3,613,835

 
140,144

 
3.88
%
 
 
3,052,095

 
114,868

 
3.76
%
 
 
2,568,603

 
93,123

 
3.63
%
Construction
582,799

 
23,156

 
3.97
%
 
 
433,123

 
17,245

 
3.98
%
 
 
360,711

 
14,152

 
3.92
%
Residential
530,769

 
18,379

 
3.46
%
 
 
430,332

 
15,145

 
3.52
%
 
 
359,621

 
13,299

 
3.70
%
Personal and home equity
295,061

 
9,331

 
3.16
%
 
 
313,758

 
9,353

 
2.98
%
 
 
348,815

 
10,552

 
3.03
%
Total loans, excluding covered assets (3)
14,111,595

 
590,485

 
4.18
%
 
 
12,676,429

 
516,405

 
4.07
%
 
 
11,229,762

 
461,346

 
4.11
%
Covered assets (4)
24,212

 
566

 
2.34
%
 
 
30,169

 
1,056

 
3.50
%
 
 
72,153

 
2,409

 
3.34
%
Total interest-earning assets (2)
17,821,134

 
$
669,870

 
3.76
%
 
 
15,923,831

 
$
586,534

 
3.69
%
 
 
14,206,113

 
$
527,620

 
3.71
%
Cash and due from banks
184,166

 
 
 
 
 
 
176,586

 
 
 
 
 
 
154,334

 
 
 
 
Allowance for loan and covered loan losses
(177,316
)
 
 
 
 
 
 
(165,994
)
 
 
 
 
 
 
(161,001
)
 
 
 
 
Other assets
532,947

 
 
 
 
 
 
495,437

 
 
 
 
 
 
478,025

 
 
 
 
Total assets
$
18,360,931

 
 
 
 
 
 
$
16,429,860

 
 
 
 
 
 
$
14,677,471

 
 
 
 
Liabilities and Equity: (5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
1,620,817

 
$
5,221

 
0.32
%
 
 
$
1,447,298

 
$
3,845

 
0.27
%
 
 
$
1,289,190

 
$
3,728

 
0.29
%
Savings deposits
401,485

 
1,941

 
0.48
%
 
 
341,709

 
1,434

 
0.42
%
 
 
293,316

 
912

 
0.31
%
Money market accounts
6,017,268

 
25,601

 
0.43
%
 
 
5,799,593

 
18,735

 
0.32
%
 
 
4,966,272

 
15,945

 
0.32
%
Time deposits
2,326,362

 
25,811

 
1.11
%
 
 
2,389,460

 
23,092

 
0.97
%
 
 
2,623,243

 
21,366

 
0.81
%
Total interest-bearing deposits
10,365,932

 
58,574

 
0.57
%
 
 
9,978,060

 
47,106

 
0.47
%
 
 
9,172,021

 
41,951

 
0.46
%
Short-term borrowings
759,701

 
3,413

 
0.45
%
 
 
230,402

 
656

 
0.28
%
 
 
42,797

 
638

 
1.49
%
Long-term debt
488,399

 
20,605

 
4.22
%
 
 
548,075

 
20,035

 
3.66
%
 
 
618,556

 
27,061

 
4.37
%
Total interest-bearing liabilities
11,614,032

 
82,592

 
0.71
%
 
 
10,756,537

 
67,797

 
0.63
%
 
 
9,833,374

 
69,650

 
0.71
%
Noninterest-bearing demand deposits
4,694,213

 
 
 
 
 
 
3,915,032

 
 
 
 
 
 
3,308,345

 
 
 
 
Other liabilities
217,924

 
 
 
 
 
 
156,840

 
 
 
 
 
 
132,220

 
 
 
 
Equity
1,834,762

 
 
 
 
 
 
1,601,451

 
 
 
 
 
 
1,403,532

 
 
 
 
Total liabilities and equity
$
18,360,931

 
 
 
 
 
 
$
16,429,860

 
 
 
 
 
 
$
14,677,471

 
 
 
 
Net interest spread (2)
 
 
 
 
3.05
%
 
 
 
 
 
 
3.06
%
 
 
 
 
 
 
3.00
%
Contribution of noninterest-bearing sources of funds
 
 
 
 
0.25
%
 
 
 
 
 
 
0.20
%
 
 
 
 
 
 
0.22
%
Net interest income/margin (2)
 
 
587,278

 
3.30
%
 
 
 
 
518,737

 
3.26
%
 
 
 
 
457,970

 
3.22
%
Less: tax equivalent adjustment
 
 
4,852

 
 
 
 
 
 
4,322

 
 
 
 
 
 
3,233

 
 
Net interest income, as reported
 
 
$
582,426

 
 
 
 
 
 
$
514,415

 
 
 
 
 
 
$
454,737

 
 
(footnotes on following page)


37

Table of Contents

Quarterly Net Interest Margin Trend
 
 
2016
 
2015
 
Fourth
 
Third
 
Second
 
First
 
Fourth
 
Third
 
Second
 
First
Yield on interest-earning assets (2)
3.70
%
 
3.65
%
 
3.74
%
 
3.74
%
 
3.67
%
 
3.65
%
 
3.60
%
 
3.65
%
Cost of interest-bearing liabilities
0.73
%
 
0.72
%
 
0.70
%
 
0.68
%
 
0.64
%
 
0.63
%
 
0.62
%
 
0.63
%
Net interest spread (2)
2.97
%
 
2.93
%
 
3.04
%
 
3.06
%
 
3.03
%
 
3.02
%
 
2.98
%
 
3.02
%
Contribution of noninterest-bearing sources of funds
0.26
%
 
0.25
%
 
0.24
%
 
0.24
%
 
0.22
%
 
0.21
%
 
0.19
%
 
0.19
%
Net interest margin (2)
3.23
%
 
3.18
%
 
3.28
%
 
3.30
%
 
3.25
%
 
3.23
%
 
3.17
%
 
3.21
%
(1) 
Interest income included $31.1 million, $31.0 million, and $26.4 million in net loan fees for the years ended December 31, 2016, 2015, and 2014, respectively.
(2) 
Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. This is a non-U.S. GAAP measure. Refer to Table 25, “Non-U.S. GAAP Financial Measures,” for a reconciliation of the effect of the tax-equivalent adjustment.
(3) 
Includes loans held-for-sale and nonaccrual loans. Average loans on a nonaccrual basis for the recognition of interest income totaled $71.3 million for 2016, $57.9 million for 2015, and $82.7 million for 2014. Interest foregone on impaired loans was estimated to be approximately $3.0 million for the year ended December 31, 2016, $2.3 million for 2015 and $3.2 million for 2014, calculated based on the average loan portfolio yield for the respective period.
(4) 
Covered interest-earning assets consist of loans acquired through a Federal Deposit Insurance Corporation (“FDIC”) assisted transaction that are subject to a loss share agreement and the related indemnification asset. Refer to the section below entitled “Covered Assets” for a detailed discussion.
(5) 
2014 includes deposits held-for sale.


38

Table of Contents

Table 2
Changes in Net Interest Income Applicable to Volumes and Interest Rates (1) 
(Amounts in thousands)
 
 
2016 compared to 2015
 
 
2015 compared to 2014
 
Volume
 
Rate
 
Total
 
 
Volume
 
Rate
 
Total
Federal funds sold and interest-bearing deposits in banks
$
(184
)
 
$
758

 
$
574

 
 
$
103

 
$
30

 
$
133

Securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
10,395

 
(3,136
)
 
7,259

 
 
3,700

 
(1,917
)
 
1,783

Tax-exempt (2)
1,663

 
(77
)
 
1,586

 
 
3,592

 
(406
)
 
3,186

Total securities
12,058

 
(3,213
)
 
8,845

 
 
7,292

 
(2,323
)
 
4,969

FHLB stock
(29
)
 
356

 
327