PrivateBancorp CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.16.14 | About: PrivateBancorp, Inc. (PVTB)

PrivateBancorp, Inc. (NASDAQ:PVTB)

Q4 2013 Earnings Conference Call

January 16, 2014 11:00 AM ET

Executives

Sarah Lewensohn - Managing Director, IR

Larry Richman - President and CEO

Kevin Killips - CFO, Principal Accounting Officer and Managing Director

Kevin Van Solkema - Chief Credit Risk Officer and Managing Director

Analysts

Chris McGratty – KBW

Brad Milsaps - Sandler O’Neill & Partners

Lana Chan - BMO Capital Markets

Casey Haire - Jefferies & Company

Steven Alexopoulos - JPMorgan Chase & Co.

Matthew Clark - Credit Suisse

Terry McEvoy - Oppenheimer

Peyton Green - Sterne, Agee

Operator

Good morning and welcome to the PrivateBancorp Inc.’s Fourth Quarter and Full Year 2013 Earnings Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question-and-answers after the presentation. Please note that the company will be taking questions from individuals and companies that have been invited to attend the live portion of the conference call.

I will now turn the call over to Sarah Lewensohn, Managing Director, Investor Relations.

Sarah Lewensohn

Good morning, and welcome to PrivateBancorp's Fourth Quarter and Full Year 2013 Earnings Conference Call. PrivateBancorp's fourth quarter 2013 earnings press release was distributed this morning over the newswires. The release and financial supplement with additional financial tables are available on our website at investors.privatebank.com.

Before we begin, I'd like to read our Safe Harbor statement. Statements made during this conference call that are not historical facts may constitute forward-looking statements within the meaning of the federal securities laws. Management's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects are disclosed in the filings we make with the SEC, including our Form 8-K dated today, relating to today's earnings release. You should consider these risks and uncertainties when evaluating any forward-looking statements, and undue reliance should not be placed on such statements. The company assumes no obligation to update any of these statements in light of future events.

Now, let me turn the call over to Larry Richman, President and CEO of PrivateBancorp.

Larry Richman

Thank you, Sarah. Good morning, everyone. Welcome to our call to discuss our fourth quarter and 2013 results. I will begin this morning with an overview of our results. Kevin Killips will discuss key drivers in more detail, and Kevin Van Solkema is here to answer your questions on credit quality.

I am going to briefly discuss our fourth quarter results I will then take a look at the full year, another very good year for us. And finally I will talk about how our 2013 performance solidly positions us for 2014 and beyond. Let’s start with our fourth quarter results.

We closed the year strong. Net income was $33.7 million or $0.43 per share, up 2% from the previous quarter and a 68% increase from a year ago. Revenue was up modestly to $136 million, largely on strong net interest income driven by increased loan volume this quarter notwithstanding ongoing pricing pressure and low interest rates.

Total loans grew to $10.6 billion to 12/31. Net loan growth was $235 million in the fourth quarter, with about two thirds coming from our commercial and industrial clients and one third from our commercial real-estate and private banking clients.

New loans to new clients were $368 million, slightly higher than the third quarter as we continue to attract new relationships to the Bank. For the third quarter in a row revolver usage tipped up by 1% and is now 47%. We continue to build strong attractive new middle market client relationships with traditional manufacturers, distributors and service companies as well as within our specialty banking businesses, such as healthcare, construction, engineering and asset based lending. We also did some corporate acquisition financing in the fourth quarter.

We had a higher than normal number of payoffs in the fourth quarter including permanent refinancings in the long term market, company and property sales, and a few clients we chose not to renew given terms and pricing that were offered elsewhere. Yet, we were able to more than offset these payoffs with new activity. So all things considered, net loan growth overall was strong.

Commercial real-estate had a good quarter. There was good activity in the market driving new business, and we are positioned with the right client relationships to seek these opportunities. We saw a nice increase in financing in both income producing property acquisitions and some built-to-suit development projects. However, commercial real-estate originations once again were offset by typical pay down activity in the CRE book and a further reduction in the legacy portfolio. Legacy now is down to about 8% of the total portfolio. At 12/31, 67% of our portfolio was C&I and 24% was commercial real-estate, I like that mix.

Turning to deposits. We grew client deposits over $321 million with slightly more than half coming from new clients. Non-interest bearing DDA grew $66 million to $3.2 billion or 26% of the deposit mix. Much of our growth originates from our commercial clients. Total deposits reached $12 billion at quarter end. I am pleased with our deposit gathering culture and execution. NIM was flat despite a seasonal increase in fed funds sold. Loan and investment yields increased and cost of funds decreased.

We continue to fight through pricing pressure with a disciplined approach to structure, pricing, and overall returns as we selectively add and develop new client relationships. We have a robust internal process to ensure relationship returns are appropriate and that remains a cornerstone of our strategy.

Similar to last quarter, loan pricing, especially renewals, remained very competitive, and we are however seeing the rate of decline in NIM moderating. Non-interest income dipped as compared to the prior quarter. Syndication’s activity, which tends to vary quarter-to-quarter, based upon the types of deals we do was down and mortgage banking activity was also down. Active cross-sell driving more products to our clients remains an important bank-wide objective. Treasury management and capital markets continue to be a very important contributor to our business, and I like the business we are doing with our expanded client base.

Trusted investments had an especially strong quarter with assets under management and administration growing 3% to $5.7 billion as of 12/31, and for the full year AUMA grew about $800 million. Credit expenses were lower as asset quality continues to improve, and while we maintain our active expense management, we did see a slight increase this quarter, Kevin will talk more about that in a moment. So, I am pleased with the quarter and now want to take a look at a few of the key metrics from a full year perspective. I think these really give a view as to the work we've done to transform our company and position us for the future.

The story has two important components, first is what we've done to build our business through client relationship development. Second is the meaningful strides we've made to put our credit quality challenges behind us. Let’s start with the growth story. We have continued to add new clients and build our client base. Average year-over-year loan growth was $770 million or 8%, and average deposit growth was $700 million or about 6%, but what I think is even more compelling is that when we take a step back and look at the last eight quarters, we grew total loans $1.6 billion or an average increase of about $200 million a quarter in that period.

I think that the long view is important because while our growth might be uneven quarter-to-quarter, this shows the consistent growth we've had over the last two years. This allowed us to maintain net interest income despite the decline in yields on all asset classes. At the same time, I feel we now have the right portfolio mix. Clients added now represent 90% of our total portfolio, and importantly these are clients who generally want a fuller banking relationship. Non-interest income was up 3% year-over-year including CVA and security gains. Non-interest expense was down 7% and operating profit grew 14%. So, that’s the engine we built, and it is designed to perform even better in a stronger economic environment, which brings us to the second part of our story, credit improvement.

We brought non-performing assets, non-performing loans, charge-offs, and special mention loans down to really what we consider normalized levels. In fact, NPAs were down 44% from 12/31/12 to $123 million at the end of 2013. Net foreclosed property expense was down 47% year-over-year. Loan and collection costs related to problem loans were down 41%. Importantly, we ended 2013 with OREO balances of about $28 million, down significantly from year-end 2012 balances of $82 million. This all had a very favorable effect on results. Net income was up 91% year-over-year, very strong performance as we executed against our key strategic priorities.

Now let me talk for a moment about how this positions our business as we move into 2014. I am seeing economic conditions, and the business climate improving in the Midwest, not robust but slow steady progress. Businesses are generally seeing improved balance sheets, less overall leverage, more liquidity, and I am seeing improving CEO confidence. So, what this means to us is an increasing conversation we have with our clients and prospects about strategic growth alternatives including financing. We expect more business opportunities, while at the same time many banks are competing for the same clients. We operate in a large and diverse market with good concentrations of middle market businesses.

We have a recognizability to execute successfully and our reputation and consistency is strong. We also have the capacity to grow with our experienced banker teams. We remain very active in our calling efforts and have support from referral sources as well as client referrals. We continue to win more than our fair share of opportunities, remaining selective and disciplined, balancing growth and profitability to generate long-term relationships.

So, while interest rates are not forecasted to rise for a while and I expect pricing pressure in the banking industry to continue, I feel good about our new business prospects heading into 2014, and our pipeline for new business in the first quarter is solid. I am confident in our team’s ability to develop business relationships with new and existing clients, and as we cross-sell additional services to our clients we have the opportunity to improve our returns, an important part of growing our bank. We will keep expenses in line while driving growth and operating leverage. I like our position as we start the New Year and what it means as we continue to create value for our shareholders.

Now let me turn it over to Kevin Killips to provide some further insights around our financial results. Kevin?

Kevin Killips

I would like to take a few minutes to expand on a few items in today’s earnings release. Our net interest margin for the fourth quarter was 318 basis points, consistent with the third quarter, though there were a couple of moving parts. During the quarter, we repaid 120 million of 3.8% subordinated debt using available liquidity. The repayment reduced our cost of funds and improved NIM by 2 basis points. As you saw on the release, we had a 2 basis point increase in loan yields despite a decline in short-term LIBOR along with a 3 basis point improvement in security yields, the first upward movement we have seen in a while.

From a NIM perspective these improvements were more than offset by the increase in our year-end average liquidity position. The increase in long term interest rates led to improve security yields during the quarter by enabling higher reinvestment yields and slowing the premium amortization on the existing security book. The two basis point improvement in loan yields have a sequential basis was helped by an increase in loan fees which can fluctuate on a quarterly basis. As Larry noted we continued to see some downward pressure on loan pricing driven principally by renewals in this competitive environment, while the pace maybe somewhat slower than we saw in the second and third quarter of this year.

As we have talked before our loan book is sensitive of the short rates, at quarter end approximately 96% of our loans even with the prior quarter were variably priced with 65% tied to one month LIBOR, all relatively consistent. As you know LIBOR did move in the quarter from 17.9 to 16.8 bps. As of December 31, total deposits were 12 billion with net growth of 181 million or an increase of 2% from the previous quarter. Client deposits grew 321 million while we did reduce broker deposits by 140 million.

At quarter end broker deposits represent 3% of total deposits as compared to 5% at September 30. We ended the year with non-interest bearing deposits representing 26% of total deposits flat in comparison to September 30. The growth in interest bearing DDAs at the end of the quarter was due to an increase of transactional balances from some larger clients along with some movement from money market accounts. As we have commented before the commercial nature of our client deposit base mainly to large despot movements based on their liquidity needs. The loan to deposit ratio at quarter end was 88.6% compared to 83.29% a year ago and 87.97% at the end of the third quarter.

Looking at net interest income, we saw a growth of approximately 2% on a sequential quarter basis that was driven by 184.7 million growth in average loan balances, improved yields in the investment book and a reduction of funding costs. The aforementioned settlement of sub-debt contributed approximately 625,000 to net interest income in the fourth quarter. The ability to grow earning assets in this interest rate environment is key to maintaining net interest income. Based on fourth quarter data it takes approximately 37 million of average loan growth to offset one basis point of NIM compression all other inputs to the NIM calculation being equal.

Turning to expenses, non-interest expense was 75.8 million a reduction of 5.5 million as compared to the fourth quarter ‘12 and an increase of 4.6 million as compared to the previous quarter. Salaries and employee expenses declined 2.7 million as compared to the fourth quarter ‘12 primarily as a result of lower share-based comp. On a sequential basis, salary and benefit expense increased 1.2 million with nearly all of the growth as a result of increased accruals for performance based incentive comp. Net foreclosed property expense was positively impacted by the reduction in OREO balances. Net foreclosed property expense was 3.6 million for quarter four ‘13 declining by 18% as compared to the prior quarter and 62% as compared to the prior year.

We have seen similar reductions in OREO balances over the same periods as we continue to dispose and settle properties. During quarter four we saw an increase in other expense of 2.2 million from quarter three. The increase reflects a $2.3 million movement in the provision for unfunded commitments. In quarter three we had a 1.3 million reduction in the unfunded commitment reserve. This quarter we recorded a $1 million provision for unfunded commitments to reflect both unfunded growth and reserves for specific credit.

Turning to credit, we continue to see improvement in our credit metrics as non-performing assets declined 17% benefiting from pay-downs and pay-offs of non-performing loans and OREO sales. Net charge-offs were 28 bps of average loans as compared to 40 bps in the previous quarter. Net charge-offs declined 3.2 million to 7.3 million this quarter primarily as a result of $2 million in recoveries specifically related to one credit. Specific reserves declined 16% as nonperforming loans decline by nearly the same amount in comparison to the third quarter of 2013. There was a modest increase of the general reserve reflecting the quarter’s loan growth and changes in loan mix. The ratio of the allowance for loan losses to nonperforming loans was a 152%, up 128% as we continue to resolve nonperforming credits.

We ended the quarter with nonperforming loans of 94.2 million, a 32% reduction from the prior year and 17% from the previous quarter. NPLs now constitute less than 1% of total loans. The allowance to total loans at year end was 1.34% compared to 1.40% in the prior quarter reflecting the overall strength of the loan portfolio. Moving forward, we anticipate that OREO balances will continue to decline though it may not be as linear as we have seen over the last year. And future charge-offs and recoveries will continue to influence loan loss provision levels in 2014.

With that, back to Larry.

Larry Richman

Thank you, Kevin. Just a few comments before we open it up to your questions. I’m pleased with our performance overall and also the direction we’re headed. We turned on assets rose to 0.96% this quarter from 0.67% a year ago and return on equity was 10.3%, up from 6.6% a year ago. Our efficiency ratio was 56% also improved from a year ago.

We are driving profitable growth from our client businesses. Our experienced bankers are able to leverage their understanding and expertise to drive new business and build more business with existing clients. We remained focused on consistent execution, developing profitable client relationships and gaining market share. And while I do not think it is reasonable to expect we can double net income every year, I do think we are positioned to continue to drive profitable growth and build long term shareholder value.

Operator lets open up the line to questions. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. The question and answer session will begin at this time. Your first question comes from the line of Chris McGratty.

Chris McGratty - KBW

Larry, can you talk about -- you said in your prepared remarks that there was some elevated pay-offs in the quarter. Could you quantify that and then maybe give an assessment of the outlook for first quarter, should we expect growth kind of similar to third quarter or can you do a little bit better?

Larry Richman

Sure Chris, I think that I tried to describe a number of the types of payoffs that we had. Those are the kinds of payoffs you would -- we would normally see from the perspective that we ended up having a number of refinancings of real estate loans in the long term market. We had a number of nursing home and healthcare facilities that refinanced with HUD during the quarter. We actually had a number of clients sell during the quarter, probably a bit unusual from what we saw, and the other thing I highlighted was we also -- sometimes you can't do every deal and given the fact that sometimes there is either pricing or structure that we just don’t like, we chose not to extend.

So, I think at the end of the day, roughly about $100 million of increased payoffs during Q4 relative to probably what the average was for the year. But again, you know we’re always going to have movement, and the key for us is not only being there to support our clients and support their needs which we’re also seeing activity, but again, it’s about new originations and new client relationships.

Chris McGratty - KBW

So, just trying to understand, the 100 was the total pay off, so that was above and beyond what’s normal?

Larry Richman

It was above the net increase relative to the average for the last three, four quarters.

Chris McGratty - KBW

Just more of a strategic question, given that asset values are rising really across the country, could you speak about your affiliate markets outside Chicago, whether they make strategic sense? It doesn’t sound like you are allocating a lot of capital, and wonder if there is a capital efficiency plan with some maybe Atlanta and Michigan. Thanks.

Larry Richman

Yes. There is a couple of things, one very importantly we are committed to the markets that we’re in and we actually are seeing good deal flow and activity in those markets, the markets, the business that we’re doing in those markets is you can look at it as very similar to the kind of deep commercial client relation. If these are active middle market companies that we’re after in each of those markets similar to the business that we have here. Some of the markets have C&I primarily, some of them have C&I and commercial real estate, and there is a couple that have bankers that are both C&I, CRE, and private bankers.

So, it’s a very efficient model, you know as you’ve seen over the course of the last couple of years, we've streamlined both consolidating charters, we’ve streamlined operations, and we’ve really shrunk the number of branches, and these are really commercial banking or hubs to build relationships with a hub and spoke concept of some of the services that we provide from our central core.

So, I like the business we’re seeing, it is diversified but at the same time, it's consistent. And I think importantly the bankers we have in these regions are really good bankers that are recognized in the communities and know the markets that we -- and the kinds of clients we want. And so, we’re seeing good activity there.

Chris McGratty - KBW

Okay. And just one last one, a technical for Kevin, if you look at the average balance sheet, Kevin, the long-term debt went from roughly 500 million to 412 million, which I assume is related to some of the actions you took. But the cost of the long-term debt went up. Is that 653 million cost of long-term debt -- will that come in a little bit in the coming quarter? Is that the right number to use?

Kevin Killips

No, I think that may come in a little bit, what we did on our balance sheet positioning is that as you saw at the beginning of the quarter we had about 125 million in short term debt with the Federal Home Loan Bank. We move given some very opportune pricing arrangements that they had. We paid off the 125 short, we moved in towards right at the end of the quarter into a bigger position but at extremely attractive pricing. So, all things being equal, I could see that kind of drift down a little bit, but not in any meaningful way. These are pretty small numbers all things being equal.

Operator

Your next question comes from the line of Brad Milsaps.

Brad Milsaps - Sandler O’Neill & Partners

Kevin, just a couple of questions on the margin, and you’ve addressed a little bit of this in your comments. But on the deferred loan fees, they were up some over the third quarter, noticed the construction balances are up quite a bit. Anything differently, anything different driving that this quarter or I know they bounced around a lot, but just trying to get a handle on kind of how to think about those over the next few quarters?

Kevin Killips

From a loan-fee perspective, so what we -- we’ve said this before, given the commercial nature of our client and then also the size of the loans, as Larry said you have some increased payoffs, you can have some acceleration of those fees, so those fees really have correlations is too strong a word, but they do have some connectivity back into if we see some payoffs that were a little more unusual than that. So on a run rate basis, we saw those fees be a little bit better this quarter than they have over the last couple of quarters, but it is really more of a function of loans being paid off early or in the middle of their term as opposed to anything structural that you could push back to say the change construction loans or anything like that.

Brad Milsaps - Sandler O’Neill & Partners

Okay. And Kevin would you anticipate that the Fed funds, I think you may have mentioned this, would revert back to kind of where you were third quarter levels versus the average for the fourth quarter?

Kevin Killips

No, I think our -- where we sit today, our plan would be to get those funds repositioned into earning assets and reduce that increase that we saw at the end of -- over the quarter in average liquidity, that’s the plan.

Brad Milsaps - Sandler O’Neill & Partners

Okay. And then final question, you guys did a great job keeping a lid on expenses this year, maybe a little heavier in the fourth quarter relative to third. Do you think was there some chance you may be over accrued a little bit in the fourth as you kind of prepared to go into ’14 to kind of give yourself a little bit of a head start or do you think this is kind of a run rate as you enter the year?

Kevin Killips

Well, Brad, we know each other pretty well. I think our accruals are very fair and they’re good at the end of the quarter. What I would say is that from a run rate perspective we called out a couple of those one times from a compensation perspective as we all know, both here and on the call, when the clock, the calendar turns to January where we all start again. So we’ll have the -- those accruals will build up at the ordinary base I think foreclosed property have an impact and that has a little volatility though we feel probably very fairly positive about how that they move down. We called out the one time swing between the third and the fourth quarter on unfunded. And I would remind everybody as we go into the first quarter that you do have some front loading of FICA and benefits in the normal course of business, not just us but everybody else.

Brad Milsaps - Sandler O’Neill & Partners

Fair enough, appreciate you guys. Thank you.

Larry Richman

Thank you.

Operator

Your next question comes from the line of Lana Chan.

Larry Richman

Good morning.

Lana Chan - BMO Capital Markets

Hi. Good morning. Two question, one on the margin. Kevin if you could talk about what puts and takes that are maybe more takes on the margin going into 2014. What should we expect and if at some point we’re getting close to the bottom here?

Kevin Killips

I guess what I would say and that is kind of speculative line up but just the kind of restate what I said to Brad is; number one, we would expect, based on where we sit here today, would be our goal would be to reposition some of that excess liquidity into earning assets. So I think that could be helpful as we think about NIM albeit that when I reflect on having a little bit of excess liquidity giving our client profile on a net interest income basis I think the effect of net interest income is not what it is on NIM but we all know how that count works. We saw that short term LIBOR went down in the fourth quarter round [babyish] I think that if we take a simple calculation, a two point calculation half of the 30 day book [indiscernible] that all things being equal the other half of the book will feel that probably in the first quarter of ’14. I think we also talked about the impact of the loan fees and that could kind of bounce around a little bit. On the other hand the reduction in the -- the reduction of NIM related to the payment sub-debt I think that’s permanent, so there is a little bit of movement around there, Lana, so at these levels where we are chasing a bp or two around, it’s just kind of hard to kind of focus in.

So this quarter NIM given what I just said probably compares within a bp or two or couple of bps of where we think it may go next quarter.

Lana Chan - BMO Capital Markets

Okay and I think last quarter I said that the new loan growth was accretive to the margin, was that the case this quarter?

Kevin Killips

Lana, it was similar this quarter.

Lana Chan - BMO Capital Markets

Okay, great. And my next question was about non-interest expense, if I look at sort of the annualized run rate at about 300 million, could you frame like how much more of cost on the environmental side you know credit cost or other professional fees and stuff like that could potentially come down over the course of the year.

Larry Richman

What I would say about that is that I believe in, you know Kevin but I am not sure, I think we should get his view on this is that as it relates to the credit challenges we've dealt with I think effectively over the last couple of years I think we're starting to see that slide down whether it’s foreclosed property, broadly speaking loan and collection cost. But we have seen this quarter a little bit of a spike in unfunded related to a specific credit, but I think generally speaking, there may be a little bit to go there but we've taken a lot of costs out of that.

Kevin Killips

Good morning, Lana. We had foreclosed property expense down this quarter about 800,000, I expect that’s going to continue to drift down market activity for our OREO properties, it was a lot stronger than a year ago. There is a lot more interested parties and so our prices are a little better on that stuff. And I think there is a very close correlation right between how much we spend and how much we own. So, as we own less and less I would expect that to drift down as we look forward. So, I think there is some, what sometimes referred to as credit leverage we will have to get there in the foreclosed property expense not so much probably in the provision.

Operator

Your next question comes from the line of Casey Haire.

Casey Haire - Jefferies & Company

So, just want to dig in a little bit on the loan yields. You guys highlighted competitive pressures as well as tighter LIBOR and yet the loan yields continue to -- well not continue but did go up particularly C&I up 6 bps quarter-to-quarter. I am just curious what’s driving it, is there any noise from success fees or it was just a big quarter for some of your specialty [plants] businesses?

Larry Richman

To give you a little bit of color. It really relates to the types of loans that we end up doing quarter-to-quarter and when we are doing we have some nice growth in some of our specialty businesses and I attempted to highlight that in the prepared remarks. So, some of the specialty areas where we have specialized expertise, there is an opportunity to price those differently than the traditional middle market business. When we're doing financing for middle market companies that represent either an acquisition or some kind of a need that they have, sometimes those are priced differently than usage of revolvers for example. And so, again a lot of it depends on what kind of business we're doing quarter-to-quarter and what kind of needs our clients have. But I think the important point is that all of our bankers are really actively out there seeking opportunities both from existing as well as from new and so I feel good that even though it’s transactional and it depends on what the mix is quarter-to-quarter, we are building good profitable relationships and I think that’s really what it’s all about which is we just keep building.

Casey Haire - Jefferies & Company

Okay. And on the deposit side up slightly, I mean are you guys feeling more pressure competitively from peers on deposits and should we expect that to continue to trend up in 2014?

Larry Richman

Casey, what I was saying that is that we went from 45 to 46, I think there is a little bit of mix movement around, while we did get rid of a lot of brokers, we brought in a little bit of duration, CD rates may move a little bit but all in all these are reasonable numbers and we don’t have any broad expectation of deposit costs moving up. I think it just is as mix moves around a little bit and as we look at the last couple of quarters you know I think we are kind of where we are. I said that there is probably not a lot of gas left in the tank of being able to take cost down in deposits and I think we see that but a big move on the quarter given that it’s almost $10 billion, $12 billion book, I don’t think that gives us much pause as we sit here today.

Casey Haire - Jefferies & Company

Just a big picture question on loan growth, Larry in your remarks you talked about increased confidence and a little bit more activity in the Chicago marketplace. We’re certainly seeing some GDP forecast from economists go to like 3%, I am just curious at what GDP level acceleration pace do we need to see sort of the utilization rates within the C&I books start to move in the right direction for you guys?

Larry Richman

It’s a very good question and I don’t think I can give you a specific number but I think generally speaking the clients are feeling better and as they feel better and have more confidence they begin to do more and as they do more we have more conversations and have a better chance to create and build some loan to support -- build loan demand by supporting their needs. Revolver usage is really related mostly to growth in working capital. And so if company sales volumes grow because GDP is better, their need for to supplement their own internal cash with revolver usage rose. And so we saw about a bp increase tick up each quarter over the last three, to about 47%. My experience in history tells me that’s still relatively low based upon where I would expect it to be particularly given the fact that we’re sizing revolvers to meet current needs.

So I think there is some upside there, I think where I am seeing GDP growth is where I sort of characterize this slow and steady, nothing robust but at the same time they're feeling better. And as a result it’s given us more opportunity, so it’s busy from that standpoint.

Operator

The next question comes from Steven Alexopoulos.

Steven Alexopoulos - JPMorgan Chase & Co.

So on the C&I side it appears you have good momentum but it’s interesting that you are flagging a couple of times that some loans are renewed due to the competitive environment. So when you layer this competitive environment in, do you think it will be a challenge this year 2014 to do similar level of C&I loan growth that you saw last year 2013 which is surveyed 8% to 10%.

Larry Richman

One we have a bigger base and I clearly see it as competitive, but as you know, we know how to compete in a very competitive market and a lot of the experience active calling referral source capabilities gives us more looks and so in a better environment we’ll have more opportunities and again I tried to characterize it as balancing growth and profitability and being selective. But at the same time I actually feel good about sort of not only where we ended the year but our position going into ‘14, and so the bank is in a much better position. I think there is a recognition in the market of where we are and what we have been able to do. And again for us it’s steady, consistent, actively out there. But I think we’ll have a lot of good wins in 2014 but at the same time it’s not to just grow to grow, it’s to grow because these are going to be clients that we’re going to have for a long time and we’re going to build other business with them and generate the right long term returns.

And so again I feel good that we’re making the right choices and we’re getting better looks probably in 2014 than even we did in 2013, at least my expectation right now.

Steven Alexopoulos - JPMorgan Chase & Co.

When you look at the loans that you did lose over pricing structure, is it typically to the larger banks or is it a case where Chicago had a ton of very weak banks right, high taxes ratio banks. Are those banks getting back on their feet now, is that where the competition is coming from?

Larry Richman

As you know as well I don’t really talk about the other banks, but I think generally speaking we see competition more from banks of our similar size and larger. We provide that high touch customized offer that competes very well with the larger banks and that’s -- it's the local offering. And so again that’s where we see most of the competition from and so those are the ones that we end up competing with generally. But I don’t think I could point to any one or any type that represents the primary, we're just -- there is a lot of -- there is isn't as much loan demand if there is bank’s willingness to lend and we want clients that want to bank with us as much as we want the right pricing for the deal at the moment. And so it’s a lot of choice, lot of considerations go into it, hopefully that helps.

Steven Alexopoulos - JPMorgan Chase & Co.

Maybe for Kevin, can you give a little color on the construction loan growth in the quarter, we haven’t seen this kind of growth and actually I think it’s quite a few years from you guys. Was that resi, CMB what kinds of loans are they?

Kevin Killips

Steve this is really a function of the construction loans that have been added to the portfolio, probably over the last 12 months or so where our commercial real estate team has been consistently out there finding good quality opportunities to developers that we know, people that have come through the last downturn that really have appropriate levels of equity to contribute to these projects. As far as any concentration in that I wouldn’t really point to anything that way, I think it’s a very nice mix of a product type; it’s in the various markets we serve and I really like the construction portfolios performance, I am really not concerned about it at all.

Steven Alexopoulos - JPMorgan Chase & Co.

Okay. And maybe just one final, thank you Kevin, one final question on capital, capital levels built really nice for the year, I think key fee is up about a 100 million or so. At what point do you revisit the dividend, right so in the [pattern or meet] the full dividend, at the current stock price would you favor dividends over buybacks.

Kevin Killips

Steven, this is Kevin. I think so way we were thinking about it today is that our first and foremost we think the best use of both capital and liquidity, irrespective of the price or -- is how do we build the business and serve existing client base and the new clients that we want to bring on Board. I think with this level of loan growth that we’ve seen the last quarter or two clearly in the second half of the year I think that that is a way to really employ our capital in the best way.

But clearly, clearly as the profitability of the organization continues, that’s something that we’ll kind of have to keep our eye on and keep thinking about as we kind of progress into 2014 and beyond. Not to be evasive but I think that’s something we’re really thinking about but our first goal is to serve and build the client base.

Steven Alexopoulos - JPMorgan Chase & Co.

What’s the next Board meeting that you could revisit the dividend?

Kevin Killips

We have Board meetings all the time during the year and our next Board meeting specifically is next week.

Operator

The next question comes from the line of Stephen Geyen.

Stephen Geyen - D.A. Davidson & Co.

Hey, good morning. Just a question on the revolving, it was up by 1% you noted to 47% and again that was up by 1% last quarter as well in third quarter. Larry, you had mentioned kind of the sizing of the lines to businesses and of course taking in consideration the growth that you saw in the quarter or last couple of quarters. Do you have a feel for the actual usage across businesses some of the commercial customers and then how it relates to deposits have you seen a like decline in deposits from some customers as well?

Larry Richman

I think, usage has increased but I think it’s still lower than I would expect in a more vibrant economic environment. You know, one bp increase is equivalent to about 30 million of roughly of loans -- increase in loans. We’re seeing that some clients as well are starting to utilize some of their deposits to supplement their financing to support acquisitions and to support other things that they’re doing. And so, I think the level of liquidity is still high, I think companies generally are still remembering the past.

But at the same time, I think they’re feeling more confident, with more confidence there is a level of deposits that are starting to be used. For us we’re -- and one of things I noted was not only is deposits an incredible important focus for us but half the growth of deposits this quarter came from new clients and so when we bring on a new banking relationship, having their banking is really important to us. And so, again we’re just, we’re building our base.

Stephen Geyen - D.A. Davidson & Co.

Okay. And last question. For new loans, you’ve given us a couple different numbers. I might have missed one of them. You had told us that there was total loan growth around 230 million or so, 100 million of increased payoffs, did you gave us a number as far as loan growth from new relationships in the quarter.

Larry Richman

I did and it was roughly what we did the Q3 and it was above $370 million of new loan growth. New loans to new relationships and you could compare that to roughly 350 that I think I said in Q3 and on average Q2 was maybe I think about 200 in the quarter. So, it showed some healthy activity during the quarter.

Operator

Your next question comes from the line of Matthew Clark.

Matthew Clark - Credit Suisse

On the loan growth -- is it fair to assume that the increased utilization offset, the payoffs for the most part and that as we look into the start of this year, can you talk to at least directionally the pipeline whether or not you could say it’s up or down relative to last quarter. Just trying to get some visibility on whether or not this high single digit growth can continue.

Larry Richman

Sure. A couple of thoughts, the one we had about one bp increase in revolver usage that it probably equates to roughly 30 million, 35 million of increased loans. We had about a $100 million increase in payoffs relative to average of what we saw during the year. The pipeline I’ve said is solid and I usually speak about it and that’s pipeline for new business opportunities and I gave color that we’re seeing good activity. But its -- you’ve got a close it but generally speaking I feel good about the level of pipeline, but I didn’t really -- haven’t really addressed how it looks relative to the other quarter other than feeling good about where it is and our level of capability to close.

Matthew Clark - Credit Suisse

Okay, and then on the deposit side, I think last quarter you had mentioned that a couple, one or two depositors, larger depositors that you had in last quarter and they might -- that you think you thought they might migrate to maybe a higher cost category. It doesn’t look like that occurred. I’m not sure if they did or not, just curious whether or not if you can get that -- yes just asking for an update there?

Kevin Killips

Yes, this is Kevin. We did say during the quarter that in the third quarter we had a larger growth in DDA specifically around a couple of names, our clients which we thought and some of that will then be used for other needs in their business. What I would tell you is that our expectation -- they probably took out somewhere around a third to a half of what we thought they would. So they did do some of it but they didn’t do all of it.

Operator

Your next question comes from the line of [indiscernible].

Unidentified Analyst

Another question on deposits, looking at period balances looks like they were down on a year-over-year basis. Can you give us some color on how you’re thinking about your deposit base, any initiatives to shore up your core funding as you’ve highlighted some constructive origination opportunities going forward on the loan side?

Larry Richman

We talked about -- I think if you recall last year fourth quarter was a very-very robust quarter probably for the industry as well as for us. And in both loan activity as well as the fact that I think was the just prior to the exploration of TAG, so there was an intentional build-up of deposits that took place. And so striking that deposit growth was reasonably healthy and our loan to deposit ratio is at a comfortable level. Saying all that focusing on client deposit generation is really important to us. So our bankers look to build, make loans to establish relationships in its core deposits and doing other business that’s really important.

And so everyone is thinking about it all the time. We’ve got really good products that fit in, what I also like is that we’ve got really good treasury management capabilities that allows companies to move their banking and move their deposits to us. And so we’re always asking and we’re always competitive, but we’re always seeking that at the same time.

Unidentified Analyst

Great. And a follow up, with consolidation occurring in the Chicago market, I want to get your updated thoughts on your bank's appetite for acquisition, management has mentioned branch acquisitions in the past. Wanting to see how you would handicap that opportunity going forward.

Larry Richman

Sure. Again the best way to think of us is an organic growth story and that’s how we’re thinking about it. At the same time if there is the right opportunity we would supplement that organic growth with acquisitions. We’ll not do it for growth sake but we will do it if it’s the right acquisition and strategic. And I guess that the considerations that I mentioned last quarter really still hold which is that we’re looking for locations, primarily Chicago land, but locations that are within regions that so we can supplement our commercial banking strategy. And we like diversification of granular deposits and if we could find the right thing there that would be very-very important and helpful.

And again the other thing we’re looking to do is find additional products that we can utilize to support the suit of products to support our client base. And we’re building them organically and we feel really good about the initiatives and the work that we’ve done. But at the same time we’re on the hunt so to speak in the sense the sense that we’re looking at other things as well. Hopefully those are the three considerations that -- and those are consistent with last quarter.

Operator

The next question comes from the line of David Long.

Unidentified Analyst

Talking about the organic growth aspect, when you look at your current lending team, how much capacity do you have to increase loans? I think you came in here at the end of the year about 10.6 billion, where can you go with that or what can you get to with your current lending team and infrastructure in place?

Larry Richman

Sure. We built the infrastructure to support a good capable growing organization and we also have a really good team that has capacity and capability. So all of our bankers are busy and they’re busy with service and clients and building new relationships. We have intentionally over the course of the last few years and I may have mentioned this on the last quarter’s call, built a training program and built some young bankers that are again helping us be able to leverage the skills and the capabilities of our key new business developers as well.

So I feel good about our capacity. I haven’t sized it but I feel good that we -- we have the team in place to continue to support the growth strategy that we have. At the same time we see other bankers that maybe helpful we’re not intention to build big teams but we also mentioned on the last call that selectively where they’re additive particularly in some of our industry specialties, there is capability and we become an attractive alternative. So, again we know a lot of people in the market and we are focused on our bankers and our core but at the same time we are selectively opportunistic in that sense.

Unidentified Analyst

Okay. And on that note were there any additions here in the fourth quarter?

Larry Richman

We have made some additions as it relates to younger bankers and we have also been able to build some of our, supplement some of our specialties, primarily in our big group that’s given us I think a good capability for a lot of product sales and also deposit gathering. And that’s one of the things I mentioned last quarter but we were able to supplement that group with some really good experienced talent that I am really optimistic about.

Operator

Your next question comes from the line of Terry McEvoy.

Terry McEvoy - Oppenheimer

Hi, just a question for both Kevin and Zac. First one for Kevin Killips, are there any notable investments that need to happen in 2014 that could impact expenses and excluding OREO cost what type of core growth rate in expenses do you see in ’14?

Kevin Killips

Terry, let me bifurcate that a little bit. If we think about pure core expense growth, I would suggest that we're probably in pretty good shape there albeit that while we think we have a good understanding of where we stand from a regulatory perspective, whether its Dodd-Frank or some of the other requirements [indiscernible] I think we think we're in pretty good shape there. That does seem to continue to evolve and change. So, if that changes in any meaningful way, we'll have to clearly be responsible for that but I think we're in pretty decent shape now, that's number one.

Number two and what I have said before is that a number of our expense areas have some connection to volume and cost to sales. So, if some of our products really move up the revenue growth ladder faster than we would anticipate, you could get some movement there but again I think those would be clearly correlated and easy to understand whether it’s increase in capital markets, increase in treasury management or trusted investments, they do drag some expense with them very focused on that.

Other than that I think in our core footprint or our core functionality I think we are in pretty good shape, all things being equal, could we add a little bit here and there potentially but I don’t think in the base case it's going to drive that number in a meaningful way as we kind of come off of this quarter.

Terry McEvoy - Oppenheimer

And then for Kevin Van Solkema, I was wondering if you are in a position now to talk about normalized net charge-offs, the loan portfolio is transformed, the legacy piece is much smaller and if you look at the portfolio today, any help at all on how you would characterize normalized charge-offs?

Kevin Van Solkema

Terry, I think that depends a lot on where you are in the credit cycle right and so I think most banks and us included certainly are in a very good spot and we have clearly trended our charge-offs down, I think back over the last year probably having quarter-over-quarter improvement in that. In this quarter we had especially low level. I think the basis point annualized rate was about 28 basis points and that was clearly helped because we have this one recovery that was referred to earlier when Larry and Kevin were talking, that was about 2 million, may be a little bit more than 2 million of recovery on a larger commercial credit that we have this quarter.

So, I don’t know that, I look at 28 basis point as normal probably something higher than that but clearly we are in a very good spot and I think the normalized rate looks pretty consistent going through '14, recognizing that it’s going to move around a little bit. We've got a sizable C&I portfolio and things are going to develop period-to-period that of course we'll deal with.

Operator

Your next question comes from the line of Peyton Green.

Peyton Green - Sterne, Agee

Great, thank you. Just a couple of quick questions, I mean looking at kind of 2013, if you take revenue growth of 1% and expenses less OREO you get minus 2% year-over-year growth which was positive operating leverage of about 8.8 million on a pre-tax, pre-provision basis, which benefited EPS by about $0.07. If you think about the outlook for ’14 and I know Larry, you mentioned that the outlook for commercial loan growth I think it’s got to be a lot better today than it was a year ago even may be than six months ago, if you had a 4% or 5% or even 6% revenue growth rate which is still quite low compared to what you have done in past years, how variable would the expense base be, I mean I think it’s very impressive that you are able to ratchet down expenses in this environment, may be if you can just speak to that.

Kevin Killips

This is Kevin, let me take a half of that then I will turn it back to Larry. I think when we look at the comparison of expenses, of revenue expenses and how that manifests itself in operating profit, just to be clear when you talk about the movement of total expenses, I think we all know that there are some credit costs that were in the expense movement from year to year, quite frankly foreclosed property and loan and collection costs being two big components. So I think as we said before, while we think there is some improvement there I think the rate of change and the rate of improvement that we saw ‘12 going into ‘13 will probably be somewhat slower ‘13 going into ‘14 is that fair Kevin? So just to make sure I was correct on the expense side of it.

Unidentified Company Representative

So Peyton I think on the revenue side as you know we’re very focused on smart expense management but at the same time we’re very focused on driving client relationships. We’re challenged as everyone is from a competitive win with low rates given the fact that most of our credits are done based upon LIBOR and in fact 30 day LIBOR but at the same time it’s all about driving -- earning assets and driving relationships. And I feel the same which is I believe if you look back aside from some of the unusual things that took place in the fourth quarter of ‘12, it feels good that there is -- the business environment is better and so with that I think that gives us the opportunity to see more and hopefully win more.

Terry McEvoy - Oppenheimer

And then one last question, certainly short term rates has not gone up, in fact I mean they are slightly lower but long term rates even three to five year swap rates LIBOR swap rates basically doubled year-over-year are up pretty nicely even over a month ago and 90 days ago. At what point do you say we’re just way too asset sensitive for the near-term revenue opportunity that we can get from putting on more swaps?

Larry Richman

To make sure I understand that, are you asking given where we think the curve is where we think the curve may go versus a swap curve, time to put on more swaps or time to back off what we had.

Terry McEvoy - Oppenheimer

I mean I would think it would be a good time to add more, just to pick up some term structure on your loan book that you don’t have, I mean it seems pretty punitive when the curve is up 100 basis points and not take some advantage of the steepness.

Larry Richman

And in this quarter since we didn’t talk about it -- but in this quarter we did put on another $25 million or $50 million of notional swaps pay variable receive fixed. That is something we’re working at all the time, do we creep that up? Do we then also look at the -- at what the steepness of the curve is to see what the pricing would be as we think about adding incremental? But that’s something that we’re continuing to look at as it seems to me that the prognostication for short end movement keeps kind of drifting out there into the future. I think you would agree with that also. So that’s something we’re taking a look at on how we can deal with that, but I don’t have anything definitive to say at this moment.

Terry McEvoy - Oppenheimer

Okay, no I think that answered it well. Thank you for the color.

Larry Richman

One clarification from Chris McGratty’s original comment is that on long term debt rates, when we paid off that sub-debt of our stack of outstanding debt that was one of our lowest paid. So by lowest cost ones, so as we reduce that and I think I maybe misspoke, the overall cost of long term debt all things being equal may creep up because we took out the lowest cost piece of the stack. So while total debt went down on from long term FHL trade we did right at the end of the quarter, the existing debt say third quarter to fourth quarter we saw that one-off because we took out the most expensive piece and the arithmetic would then drive the higher cost.

Operator

We have a follow up question from Chris McGratty.

Chris McGratty - KBW

On the margin, is there any big renewal quarter coming up that we should be fearful of and second, just based on the commentary it sounds like the 318 margin, correct me if I am wrong is within a [indiscernible] basis points of a trough near term all equal?

Larry Richman

Chris I'll talk -- I'll speak to the renewal, usually on average the general answer is no because usually a big portion of our commercial clients have 12/31 year ends, we get them in 90 to a 120 days. So it’s usually in that first half where we have the bulk of renewals, but again companies can repay or refinance or do it anytime. So we’re always cautious and careful to make sure that we’re attentive to our clients. But the majority of the biggest portion of renewals always takes place in the first half of the year.

Chris McGratty - KBW

Okay, Kevin maybe on the margin question?

Kevin Killips

Could you give me that again?

Chris McGratty - KBW

You're sounding like 318 has got a couple of basis points of wiggle room, but you sound more upbeat about reprising, I guess the question is, are we within either a quarter or two and a few basis points of inflecting all else equal?

Kevin Killips

That’s really hard to say but I will give you a couple of things about how we will share it and one of the things we've been looking at is clearly, as Larry said, loans to payoffs or renegotiated anytime. But absent that, a lot of our arrangements are three year arrangements and as if we think about it in when we had a real lot of growth as we brought lot of clients on board in the 2008 and 2009 timeframe, you saw a lot of those refinanced in that three year time.

So, I think in broad strokes, a lot of that portfolio has continued to kind of repay and kind of comeback to market rates. So, what we’re thinking about and what we would like to see happen is that, as I said in my comments the rate of change we would hope would slow down materially all things being equal but as Larry commented a number of times, it is a very dynamic marketplace and we have to do make choices all the time. So, we would like to think that the rate of changes has come back to us. You know me Chris, I’m a pretty careful guy, I’m not sure I’m ready to say we fit an inflection point.

Operator

I will now turn the conference back to Mr. Richman.

Larry Richman

That’s great. I really appreciate everyone listening, I appreciate your questions and we’re pleased with the year and the quarter and thank you very much for being with us on this call. Have a great day.

Operator

A digital rebroadcast of the call will be available beginning approximately two hours after the call until midnight on January 30, 2013 by calling (855) 859-2056 in the U.S. and Canada or (404) 537-3406 for international and entering passcode #25250239. All parties may disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!