Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PrivateBancorp, Inc. (NASDAQ:PVTB)

Q1 2014 Results Earnings Conference Call

April 17, 2014; 11:00 a.m. ET

Executives

Larry Richman - President and CEO

Kevin Killips - Chief Financial Officer

Kevin Van Solkema - Chief Credit Risk Officer

Sarah Lewensohn - Managing Director, Investor Relations

Analysts

Chris McGratty - KBW

Lana Chan - BMO Capital Markets

Casey Haire - Jefferies & Company

Steven Alexopoulos - JPMorgan

Brad Milsaps - Sandler O’Neill

Stephen Geyen - D.A. Davidson

Matthew Clark - Credit Suisse

Jon Arfstrom - RBC Capital Markets

David Konrad - Macquarie

Peyton Green - Sterne Agee

Operator

Good morning and welcome to PrivateBancorp Incorporated, first quarter 2014 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 first quarter 2014 earnings conference call. Participating on the call today are Larry Richman, President; Kevin Killips, Chief Financial Officer and Kevin Van Solkema will be taking questions and he is Chief Credit Risk Officer.

PrivateBancorp's first quarter 2014 earnings press release was distributed this morning over the newswires. The release and the financial supplement with additional financial tables are available on our website at investors.privatebank.com.

Before we could 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’ve made 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 the statements. The company assumes no obligation to update any of these statements in light of future events.

And with that I’ll turn the call over to Larry Richman, President and CEO of PrivateBancorp.

Larry Richman

Thank you, Sarah and good morning everyone. Thank you for joining our call. I’d like to begin this morning by making a few brief comments on our first quarter performance and how we are positioned for the rest of the year. Then I’ll turn it over to Kevin Killips for more color on our numbers.

We have built a strong commercial banking business, which helped us drive a 27% year-over-year increase in net income. We also significantly reduced credit costs relative to the same period a year ago.

Net income was $34.5 million in the first quarter 2014, our 9th consecutive quarterly increase, up from $27.3 million a year ago and higher than the $33.7 million we reported last quarter. Earnings per share were $0.44 in Q1 up from $0.35 last year and $0.43 last quarter.

Provision was lower once again this quarter, aided by about $5 million in recoveries, primarily from previously charged off commercial and industrial loans and a significantly lower level of inflows to non-performing.

Importantly compared to the prior year we have greatly improved the quality of our portfolio. Our results also were driven by our new business development activity with $392 million in new loans to new clients. Revolver usage was stable to Q4. We had $281 million of net loan growth, bringing total loans to almost $11 billion.

Net growth was the second highest in the last five quarters and was driven primarily by growth in commercial and industrial, especially in our general manufacturing and healthcare segment.

Commercial real estate had a good quarter as we are seeing increasing activity. We also saw some draws in construction facilities put in place over the past two years, primary within multi-family housing. Active payoffs, refinancing into the long-term market and property sales offset the new CRE loan activity, but overall I like where this business is heading.

Net revenue increased by $1.5 million from a year ago to $135.8 million as loan growth helped to offset the impact of lower yields. Net interest income was higher due to loan growth. Average loan balances were up over 5% year-over-year. The decline in non-interest income in that same period reflects significantly lower mortgage activity as seen across the industry and some lighter activity in capital markets, given views on the rate environment.

At the same time, treasury management continued to show strong growth as we leverage our capabilities here to build deep relationships with our commercial clients. Asset management fees were flat compared to the first quarter 2013, which included revenue from Lodestar Investment Management business we sold at the end of 2013. I am pleased with the progress we’ve made in reshaping our wealth management business to align better with the needs of our commercial clients and the owners and executives of these clients.

Assets under management and administration grew to $6 billion at the end of the first quarter, up from $5.7 billion at the end of December and $5.5 billion at the end of the first quarter last year. I feel good about the growth of AUMA and our active calling, which has led to improved penetration of our commercial client base.

Syndications activity picked up in the first quarter after a slowdown typically seen in the fourth quarter. I like our capabilities here and the opportunity to generate future syndication revenue.

Overall, fee income was just under 20% of total revenue. Our goal is to drive fee income higher over time by continuing to expand the relationships we have with our clients. Total deposits were about $12 billion and our loan to deposit ratio is 92%.

Driving client deposits remains an important focus. Despite the drop in deposits this quarter, part seasonal and part typical client activity and some pricing discipline on our part, we had new client deposit growth of $324 million, the highest in the last five quarters.

As we look into the rest of the year, and I know you’ve heard this before, the marketplace remains very competitive. I feel good about our ability to build earning assets with strong and deep client relationships.

Our pipeline for new client activity remains solid. We are winning new deals and bringing in new relationships, which I think is a testament to what our team has built. We continue to take a disciplined approach to pricing and structuring new credit opportunities.

For us, our focus is consistent delivery and execution. We have an experienced team that is actively calling, making sure we get the right looks. We are pursuing the strongest of market transactions, being mindful of pricing and structure, and closing on transactions to provide the best opportunities to build new long term client relationships, while at the same time doing more with the clients we do business with already.

Now, I’d like to turn it over to Kevin Killips to provide a little bit more detail. Kevin.

Kevin Killips

Thank you, Larry. I'd like to take a few minutes to expand on a couple of items in today’s earnings release.

Included in our NIM calculation this quarter are some items I would like to call out and review. To start, loan yields declined 3 bps from the previous quarter, driven primarily by lower loan fees, as payoff activity declined from the fourth quarter along with lower pricing primarily on renewals and a 1.6 bp decline in 30 day LIBOR.

Included in loan yields this quarter were approximately $1.2 million in interest recoveries that contributed roughly 4 bps. We do not expect similar recoveries in quarter two, as the related loans were paid-off.

Overall the yield on average earning assets is up 3 bps quarter-on-quarter as the reduction of excess liquidity and improvements in securities yields offset the decline in loan yields.

The cost of funding declined 3 bps, driven primarily from a reduction in the cost of both interest bearing deposits and debt, along with a change in mix. As we commented last quarter, $120 million of sub-debt was retired mid-quarter and we realized a full quarter's benefit in Q1.

As you know, the loan book remains sensitive to short-term rates. At March 31, about 96% of our loans were variably priced, with 66% tied to 30 day LIBOR. We continue to see some downward pricing pressure on originations and renewals in this competitive environment, though the impact on core loan yields diminished this quarter in comparison to previous quarters.

Shifting to net interest income. Despite two fewer days in the first quarter, net interest income was up slightly to $108.8 million. The 2.2% increase in average loans, interest recoveries and lower funding cost offset the impact of declining loan yields.

Similar to past quarters, it would take approximately $38 million of average loan growth to offset 1 basis point of NIM compression, all other inputs to the NIM calculation being equal. So the ability to grow earning assets in this interest rate environment is key to net interest income growth, given the assets [onset of] [ph] position of our balance sheet.

Looking at deposits and funding. At quarter end total deposits were $1.9 billion, a decline of $127 million or 1% from the previous quarter. While we saw some seasonal utilization of liquidity similar to the past few years, we also added new clients to the deposit base. Non-interest bearing deposits represented 26% of total deposits consistent with the prior year. At the end of the quarter we increased short-term borrowings as we squared our funding positions. Subsequent to quarter end this borrowing has been reduced.

Taking a look at expenses and credit. Non-interest expense was $75.8 million, flat as compared to fourth quarter 2013. Reductions in credit related costs and marketing expense offset the increase in compensation cost and others.

Our efficiency ratio remained at 56% when compared to last quarter. We remain focused on holding expenses as we grow the business. Salary and employee benefits increased $2 million as compared to the previous quarter, primarily as a result of higher payroll taxes and 401(k) contributions as is typical in the first quarter, along with increased salary cost. These increases were partially offset by lower incentive based compensation accruals.

Marketing expenses declined $1.2 million and its again sequential basis, in line with the timing of our advertising campaigns, which will pickup in the second quarter of the year. Net foreclosed property expense declined by 22% as compared to the prior quarter and was positively impacted by the continued reduction in OREO balances.

Loan and collection expenses declined 55% as a result of lower workout related costs, as well as reduced mortgage-banking volume. While non-interest expense in recent quarters has benefit from overall asset quality improvements, we have realized most of the benefits of credit leverage, given the significant reductions in our non-performing assets.

NPA’s declined 4% benefiting from the sales of OREO. OREO balances were $24 million at March 31, down $5 million from December. Non-performing loans were flat compared to the previous quarter at $94 million.

Inflows of $15 million, which reflected a 26% decline, were largely offset by net sales and payoff activities. Non-performing assets as a percentage of total assets were 82 bips compared to 87 bips in the fourth quarter of ’13.

Looking at the allowance. Specific reserves from year-end remain flat, as there was little change to the level on non-performing assets. The ratio of the allowance for loan losses to total loans was 134 basis points, which was comparable to the previous quarter.

Provision for loan loss was $3.4 million compared to $4.9 million from the prior quarter. Net charge-offs were zero, reflecting lower charge-offs and large than average recoveries. Provision expense may vary from quarter-to-quarter if we see loan growth or unevenness in credit quality.

All in all, we held net interest income despite the decline in the loan yields. We continue to focus on our expenses and we have significantly improved non-performing assets over the past year to within an acceptable range.

With that, I’d like to turn it back to Larry.

Larry Richman

Thank you Kevin. Just a few final thoughts. We feel very good about our first quarter and also how its positions us for the rest of 2014. We are generating solid and improving performance organically from a strong team that we have invested in.

Return on assets reached 1% this quarter and return on equity is almost 10.5%. These are two important performance measures that we are working to drive higher over time.

We will continue to leverage our differentiated position in the market, building from a highly client focused relationship model, with our consistent experienced team, with deep knowledge of the markets, industry specialties in areas that value that specific expertise and our ability to provide higher levels of service and attention as we create the solutions our clients need with the full breadth of our product capabilities.

With $1.7 billion in organic loan growth and $1.3 billion in organic deposit growth over the last two years, I am confident in our ability to execute over time and to drive better results in an improving rate environment.

Now let me open it up to questions. Thank you all very much.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Your first question comes from the line of Chris McGratty of KBW.

Chris McGratty – KBW

Hey, good morning guys.

Larry Richman

Good morning Chris.

Chris McGratty – KBW

Larry, in terms of the loan growth in the quarter, the $280 million, I was wondering if you could give us an update. Is that a function of Chicago, the health of Chicago recovering? Is that a market share opportunity for you guys, and is that $280 million – typically the first quarter is not great for the banks. Is that a number we’d build on for the rest of the year or was the growth pulled forward? Thanks.

Larry Richman

Yes, Chris, good morning. The general economic environment is improving and I will characterize that as the Chicago land market, but also I’ll characterize that as the mid-west market, because of course you know that we do business both in Chicago, as well as in – we’ll call it the greater mid-west.

Generally speaking the clients are feeling better about their business. Financial performance has improved. They are still liquid, they are still earning, and importantly they are talking to us about growth opportunities and again, that’s growth opportunities, but at the same time that growth to-date has been solid, but slow. I think it’s probably the best way to characterize it.

Our growth this quarter is really a reflection of a couple of things; one, some growth of existing relationship usage or activity, but importantly it's really more new clients that we’ve added to the book or to our relationship and I feel real good about that, and it's clearly coming across a number of different industry segments. I’ve highlighted general manufacturing and healthcare as the two primary areas of that growth this quarter, but it's really we are seeing a pretty diversified mix and I like that [department] [ph] as well.

I characterized the growth over the last couple of years to give you a reflection of sort of what we’ve done. Our growth is, we’ll call it uneven from the perspective of – it's dependent upon not only existing clients, but also new relationships, but at the same time I feel good about the growth opportunities. I specifically said our pipeline is solid. We are seeing a lot of activity. At the same time, it’s a very competitive market.

So we are staying very disciplined and very selective, which I say every quarter, but I think it’s a reflection of the fact that we are trying to pick the right relationships, deep relationships of course over the long term.

Chris McGratty – KBW

Great, and just may I ask one more? In the release you are making more of an emphasis on deposit gathering and your loan to deposit ratio. Larry, given your footprint and given the competitive nature of Chicago, you do have other markets; you have Atlanta, you have Detroit. Would these be markets that you would potentially or maybe even outside the footprint where you guys entertain the depository acquisition or does the deposit gathering that you’ve been speaking more freely about have to come from Chicago?

Larry Richman

Its core to our strategy to build – we make loans to build relationships and it’s the core deposits and the fees that really drive those active relationships over time. So inherent in our business model is driving deposits and we’ve done a real good job I believe driving the, we’ll call it the raw material, which is the fuel for the engine, but it's really coming from primarily a commercial client base.

So we are continuing to drive that business opportunity, while at the same time we are building our community banking business and we are looking at other alternatives. But again, the way to look at us is organic. It’s that level of growth and we expect when we are making loans to companies that they are giving us their deposits, and so that’s inherent to the philosophy.

It's primarily, as it relates to, as we talked about potential acquisitions, much more of a Chicago based locational strategy and I think that not only helps expand our community banking business segment, but it also gives us the ability to expand the footprint commercially. But the way to look at it is again, organic growth client-by-client, sort of that old-fashioned way core basis.

Chris McGratty – KBW

Thanks Larry.

Larry Richman

Thank you.

Operator

Your next question comes from the line of Lana Chan of BMO Capital Markets.

Lana Chan - BMO Capital Markets

Hi, good morning.

Larry Richman

Good morning Lana.

Lana Chan - BMO Capital Markets

You talked about competitive pricing still. Could you give us an idea of what the new loan origination yields are coming in on versus sort of the existing book?

Larry Richman

Yes, Lana it’s interesting. Again this quarter, the new business booked was modestly accretive to what we’re seeing on some of the renewals, more on the renewals. Renewals are really where the majority of the pressure is. I think the way to look at pricing from our standpoint is it is competitive. We are passing when it just absolutely doesn’t make sense. But yet on existing clients that we know they’d share a wallet, the ability, the opportunities that we have in the business, we have beyond the pricing and the loan we'll retain and defend those relationships appropriately.

New business is really coming in a little bit accretive to where those renewals are, but the market continues to be very competitive. The good news from our perspective is we’ve got a very talented team that knows the market, that’s experienced, that’s actively calling and you need a lot of opportunities in order to, so to speak, land the right ones.

Lana Chan - BMO Capital Markets

Great, and also in terms of the credit quality, the recoveries this quarter and you had a sizeable recovery last quarter. Any sort of color on where you think the potential is for additional recoveries from the portfolio?

Kevin Van Solkema

Good morning Lana. This is Kevin Van Solkema; I’ll take that one.

Lana Chan - BMO Capital Markets

Good morning.

Kevin Van Solkema

Good morning. The recoveries that we saw over the last couple of quarters are clearly above the average that we’ve seen and in this case it really came from settling one larger size problem, C&I loan, and the recovery from that settlement really bridged over these two quarters and that deal is done and dusted. So my expectation is that the recoveries are not likely to continue at these levels and I think we’ll settle much closer back into our average range.

Lana Chan - BMO Capital Markets

Okay, thanks Kevin.

Larry Richman

Thank you.

Operator

Your next question comes from the line of Casey Haire of Jefferies.

Casey Haire - Jefferies & Company

Hey, good morning guys.

Larry Richman

Good morning Casey.

Casey Haire - Jefferies & Company

Just a follow-up I guess on the loan growth. Larry, you mentioned that the pipeline activity was good. I was just wondering, how does the pipeline stack-up versus year-end and then sorry if I missed this, was there any increase in utilization rates over the quarter?

Larry Richman

Sure. The new loans to new clients, which I think part of that was above $390 million and that’s relative to $370 million in Q4 and probably about $350 million in Q3. So we are seeing some good activity on the market share side.

Revolver usage has remained flat or was flat this quarter. It had tipped up 1 bp over the last three quarters and has settled around 47% this quarter. So I don’t think one quarter makes a trend.

We are seeing some activity from our existing clients requesting increased credit revolvers, increased working capital revolvers, but we are really not seeing yet any increased usage. But at the same time there’s a decent amount of activity. I feel good about the pipeline and I’ve characterized it as solid and you just have to – we just keep working hard at it.

Casey Haire - Jefferies & Company

Got you. And then what’s the outlook for CRE, because the loan growth has been very good with CRE not contributing. It feels like its stabilizing here. Do you guys feel good that – do you feel like that can turn the corner and start contributing positively to loan growth in 2014?

Larry Richman

Yes, it’s interesting. I actually feel really good and called out our CRE business and the levels of activity there. Because we’re a short and intermediate term lender, roughly 20%, 25% of the loan portfolio usually repays every year, because a good loan gets repaid and it gets recycled and it’s a long term, you know in the long term markets for example.

But there’s a lot of good activity going on. I like the clients we’re working with. They are clients that are good projects with sponsors. It’s a diversified mix. We’ve seen some increased draws on construction loans this quarter, because these are well equitized construction loans and the equity has been there first and they are starting to draw on those.

The other component of it, which I think is, to be recognized is that we have a legacy book that has been running down. A lot of that has been in the commercial real estate area and as that reduction of rundown – as the decline has reduced and its reduced materially, I think we’ll see that opportunity as our new commercial real estate loans continue to grow at around the same pace.

Casey Haire - Jefferies & Company

Okay, thank you.

Larry Richman

Thank you.

Operator

Your next question comes from the line of Steven Alexopoulos of JPMorgan.

Steven Alexopoulos – JPMorgan

Hey, good morning everyone.

Larry Richman

Good morning.

Steven Alexopoulos – JPMorgan

Larry, I want to start. Since you took over as CEO, C&I balances are up over $6 billion, which is very impressive. But because the flip side of all that growth is that C&I is now 70% of total loans right, given all the run off of the legacy book, one could argue that concentration risk of commercial real estate was part of the issue with the legacy company right before you joined. How are you thinking about concentration risk today? Are you comfortable moving that 70% of C&I up to 80%, 90%, if you could start there?

Larry Richman

Sure, sure Steve. First statement is I feel very comfortable with the book and with the C&I portfolio that we have. We’re a very specialized, focused and I’ll call it differentiated model and have great expertise in a variety or expertise in underwriting and administering C&I loans.

It is a diversified book from within and I think that’s the important message. So if you look at the portfolio and it’s in our supplement, 23% manufacturing, 23% healthcare, we’ve got wholesale trade, it’s in a variety of different industry segments. That in and of itself and then within those industry segments its also diversified. Kevin and our team manages the portfolio around concentration limits and diversification and we’re continuing to monitor that and review it.

But I think the bottom line to it is, we are a commercial bank primarily. All of our business lines are very important to us, but the majority of our loans to-date in terms of lease this quarter have come from our C&I book, but we’ve got a lot of good real estate activity and we have a lot of industry specialties that are also importantly driving some of that C&I and those are industry specialties with experienced teams, knowing the industry, knowing who to do business with and monitoring those in a specialized basis as well, and so I feel good about the diversification and hopefully that gives you my perspective.

Steven Alexopoulos – JPMorgan

So Larry, we shouldn’t think about the portfolio budding up against any type of concentration limit here is what your saying?

Larry Richman

No, I mean we are always monitoring and reviewing our portfolio limits and sub-limits, but I feel good about our adequacy of our capacity and our ability to take on good quality clients, good quality credits and good quality relationships.

Steven Alexopoulos – JPMorgan

Okay, that’s helpful. Maybe just one for Kevin Killips. Given the 90% of loans that you referenced floating and 66% with one month LIBOR, Kevin, from a 30,000 foot view, can you help me understand why the loan portfolio yields are still so high over 4%. I can imagine new loans over the past year have gone on close to 4%. Thanks.

Kevin Killips

Yes Steve. I think what I could say to that is that we looked at overall pricing; it’s still up. Remember commercial loans do have kind of a base amount of loan fees that contributes roughly speaking somewhere between 21, 22 to 27 bips to yield, depending on pay offs and kind of flow month to month.

In addition to that we do have a hedging program, which we’ve talked about. We haven’t talked about this quarter, but we’ve talked about it before, where we swap back into fixed. Given the interest rate environment over the last couple of years and the positioning of the curve, that does contribute a little under $2 million pretax a quarter into loan yields. So, well both things are helping the portfolio, but I think that kind of gives you the components of it as we think about raw yields.

Steven Alexopoulos – JPMorgan

Thanks. Kevin, are you guys doing anything different than other banks in terms of putting lender incentive comp or other types of cost into the NIM, maybe its in the expense line.

Kevin Killips

Steve, I want to make sure I understand that comment, your question. Could you give me that again?

Steven Alexopoulos – JPMorgan

Yes. So we know some banks take different approaches in terms of a allocate lender cost right, incentive comp; some will move it to the comp expense line; others will include it as a loan origination cost. I was just wondering if you were perhaps putting more of the cost on the expense line and that’s why the loan yields were higher.

Kevin Killips

No, no, absolutely not. We have our normal, what used to be called the FAS 91 and I’m too old of an accountant to know the new site, so maybe some of the younger accountant can give me the new site on that, but that is a very small component into our yield. That is a reduction because of the costs that we amortize against loan fees, but that is a really small cost as part of that and it is absolutely consistent, clearly from the day I came in here more than five years ago. So I don’t really think that’s a contributing factor at all.

Steven Alexopoulos – JPMorgan

Okay. Okay, thanks for all the color.

Larry Richman

Thank you Steve.

Operator

Your next question comes from the line of Brad Milsaps of Sandler O’Neill.

Larry Richman

Good morning Brad.

Brad Milsaps - Sandler O’Neill

Hey, good morning. Hey Larry, you mentioned most of the pricing pressure your seeing on renewals. Just curious if the second and third quarters were heavier for renewals, maybe relative to the last couple?

Larry Richman

Yes, loans renew on an ongoing basis, but I would also suggest that we probably have more renewals in the second and third quarter when we have annual reviews of 12/31 financial statements for our commercial clients that are reviewed and renewed during that time period. So that maybe a little bit of a factor.

Some of that is – first, its all anticipated from our standpoint and secondly, in a competitive environment you always have to be in a position with your existing clients to be pricing it competitively, because if you don’t, your going to loose that. So I don’t have that same level of inks related to, oh my gosh, we’re going to have this level of renewals in Q2 and Q3, but to answer your specific question, in a commercial book Q2, Q3 is usually the highest.

Brad Milsaps - Sandler O’Neill

Sure, sure and maybe a good segway to Kevin. Are you more concerned about the margin or the new stuff coming on, since its accretive or at least in line with where the current loan yield is that can help offset some of the renewals that your seeing.

Kevin Killips

I think that’s a fair comment, but as I said in the comments today and as we’ve talked about the last couple of quarters, the fact that the renewals are coming in and we quite frankly have more renewals than we have new names coming into the book, that does act to kind of put – kind of it does compress the yield balance somewhat. So all things being equal, which they never are, but if they were, we will probably see the impact of that continue until we see some changes in conditions or pricing.

So yes, it is a little bit of a squeeze as it has been on our raw yields. This quarter we had the benefit of about $1.2 million of interest recoveries and what ride into yields, which we won’t see those again next quarter based on everything we see as we sit here today.

Brad Milsaps - Sandler O’Neill

Okay. Now that’s helpful and Kevin, just again on the expenses, you guys have done a great job keeping a tight lid there. The last few years the first quarter has kind of been your high point and you gave some disclosure around marketing expenses, a couple of other things. Would you view that the first quarter again would be sort of a high watermark as you get some relief on some of the season personnel stuff and then maybe offset with a few other items. Is that fair? Are there other things coming down the pipe that might draw that number higher?

Kevin Killips

Now what I would say Brad on that is I’ll use my usual caution and caveat on that. I think your right. We’ll get some relief from the seasonal or the typical first quarter charges, because we front-loaded the 401(k) and benefits as everybody does. If the performance stays about the same as it was in the first quarter, we wouldn’t expect any movements in either our performance or activity based compensation accruals.

But again if performance moves up, we’ll get a little bit of move up in that, because the compensation follows performance and as we said, also as part of this, which is a little different than we said in the last couple of years, is I think we’re starting to get to the point. There’s not a ton left to pull out of OREO or credit related costs. So all that being said, I think the first quarter with those caveats and some volume caveats is probably the high watermark for the year.

Brad Milsaps - Sandler O’Neill

Okay, great. Thank you.

Operator

Our next question comes from the line of Stephen Geyen of D.A. Davidson.

Stephen Geyen - D.A. Davidson

Hey, just one follow on question to Brads question on the compensation line. Just curious if merit increases, do they kick in the first quarter or is it some other time during the year?

Larry Richman

We have – very insightful question. In the first quarter our compensation round really starts at the beginning of March, so we have essentially a third of any (inaudible), any merit or any other adjustments that are made. So while the 401(k) benefit will essentially go away, we will have a little bit of incremental increase in the second quarter given three months of an increased comp level versus one month in this quarter.

Brad Milsaps - Sandler O’Neill

Got it. Okay, thank you.

Larry Richman

Thank you.

Operator

Your next question comes from the line of Matthew Clark of Credit Suisse.

Matthew Clark - Credit Suisse

Hey, good morning guys.

Larry Richman

Hey.

Matthew Clark - Credit Suisse

Just maybe first on pricing. It sounds like a fair amount of the growth came from maybe more of the specialty lines of business. Just trying to get a sense for what that blended coupon was on new production this quarter to last.

Larry Richman

Yes, just to clarify, we had some really good growth in some of the specialty lines and I highlighted healthcare. We also had some really good growth this quarter in our – I call it general manufacturing, but a variety of our traditional middle market companies as well and so it wasn’t all in healthcare this quarter. It was really a nice blend across a number of different places.

So its really across and I guess a characterization I may give is our specialty business lines are able to generate a little bit higher pricing than the traditional middle market client base and where we see the most pressures around the smaller end of the middle market and maybe the higher end and the higher end and smaller end meaning in terms of the average sales volume. Those are really the most competitive components of it.

Well we really played the most. I think its sort of our suite spot. Its sort of in the middle of that range and so everything is very competitive and we will appropriately pass on deals that are priced too poorly and we can’t generate an overall return that’s adequate in our view and we will do that both existing and new with appropriate discipline recognizing that we’re after the overall relationship, its not all in pricing.

So hopefully that gives you a feel for it. Its hard because there’s a mix in each of our specialties and different components of middle market are different and sometimes regional pricing is a little bit different than Chicago pricing and so its very difficult generally.

I guess overall the new pricing came in a bit over where we’re pricing our renewals and I think that given so is a bit accretive to overall. But again, from our standpoint its not just pricing. Pricing is a big driver, but its overall relationship that’s really important, so deposits and fees that are critical too.

Matthew Clark - Credit Suisse

Okay. And then just drilling down a little bit more on growth, was there any increase in your portfolio this quarter.

Kevin Van Solkema

Good morning. This is Kevin Van Solkema; let me take that one. Really the key measure that I look at regarding shared national credits is what is the percentage of what I would call new relationship fundings that were shared national credits.

So we did have some growth there this quarter, although our total new relationship fundings, which were as Larry mentioned just short of $400 million. We had about $80 million that were shared national credits, so about 20%.

I take that percentage Matt and I look at that against the overall percentage of our portfolio that is shared national credits, which is also about 20%. So that’s very much in line and I like that consistency, so that we’re not adding disproportionately to the portfolio from new relationships compared to where we are on an overall basis.

I might just take a minute to share with you that the asset quality for the shared national credits continues to be in line with the rest of the portfolio as well and the things that I look at there are looking at like on a weighted average risk rating basis, looking at the percentage of shared national credits that are criticized compared to the overall portfolio; the fact that we don’t have any non-performing loans that are shared national credits, things like that and so.

I don’t really see anything in that population that worries me at this stage. It goes through the same origination and underwriting process. We’re not dialing for dollars and just generally across the portfolio, the metrics and the composition of it is very similar to what we’ve got on an overall C&I basis.

Matthew Clark - Credit Suisse

Great. And then just last one on the tax rate. Its just dipped down in the last couple of quarters. Is this a good run rate of 38% or should we think it might bounce back up to the 39% going forward?

Kevin Killips

Yes, the tax, I think we’ll probably, I think this mathematical calculation is a little bit below 38%. I would think that as we sit here at the end of the year, we’d probably be looking at an overall rate, a little close to 38.5%, so a little higher than we were effectively this quarter.

Matthew Clark - Credit Suisse

Okay, thanks.

Operator

Your next question comes from the line of Jon Arfstrom of RBC Capital Markets.

Jon Arfstrom - RBC Capital Markets

Hey, good morning guys. Good morning to you, good morning to you. Just a couple of follow up questions here as long as we’re on syndication activity. Larry you talked a little bit about your optimism for loan syndication fees. Can you maybe expand on that a little bit and then remind us of how you go about your keep versus hold decision.

Larry Richman

Sure, sure. Syndication is an important part of the business and I’ll call it a core part of the business and as we reflected in some of the previous quarters, a good origination capability and with that we have been able to – we also manage our hold positions with the concept being we want to be the leader agent bank or co-agent bank and try to get a disproportionate share of the other business, and we also manage our diversification by also syndicating and these are sort after credits and so…

We had good activity in Q1. I feel very good about the Q2 pipeline and roughly speaking, we probably did about, call it $700 million of total commitments and held and sold probably $400 million during Q1 and so it just gives you a sense of what the activity was this past quarter in addition to the net loan growth that we held ourselves and that crosses a number of different companies that we did business with.

And so its diversified and I feel good about it and I feel good about the pipeline. Its part of our regular activity and its also part of our regular discipline in terms of whole position and our credit operating process.

Jon Arfstrom - RBC Capital Markets

Okay good, that’s helpful. And I guess this may be ties into somewhat, but back to the loan to deposit ratio. Any limit in your mind? I covered you only had been over 100% and when you’ve been far below that, but is there any threshold in your mind where you have to not cross in terms of loan to deposit?

Kevin Killips

John, its Kevin. That’s kind of hard to say, but I would tell you that we’re probably more comfortable where we are now than if we were over 100%. Over the last few years we’ve been very careful and I think judicious on using non-client driven funding for our book albeit that as we’ve spoken many times, we do have larger deposits as we have larger loans, because we are dealing with the mid-market commercial client base.

So I really, not sure I have a definitive position on that, albeit that I think we believe that client deposits that we understand and that we have some level of insight to is a much better indicator of how we want to control liability flows than if we went, not saying that would but if we went and just say that’s rolled up on debt, what’s rolled up on broker deposits, not that there is anything wrong with broker deposits.

But I think we want to kind of manage our business based on how we see our clients developing versus funding our self some different ways. But that’s probably the most I could say about that in the general setting.

Jon Arfstrom - RBC Capital Markets

Okay, and then just one more clean up question on the margin. Maybe its just my misunderstanding, but a little bit of mixed signals on I think what you’re saying is some pricing pressure naturally, but maybe a little better on new client business. Am I reading that correctly in thinking that maybe there is a little bit of margin pressure, but not a lot of inherent margin pressure here. Is that the right way to think about it?

Larry Richman

Yes, I would probably think about that. We talked about that as we think the rate of change is slowing down a little bit. As clients re-price there is a little bit – the delta is starting to kind of collapse a little John. The other thing I would add from just a quarter-on-quarter basis, that interest recovery that actually aligns with some of the stuff Kevin was talking about in his credit recoveries, that added close to 4 bips this quarter, that all things being equal that will not be repeated. So that does add to it, to the loan yield and then to the NIM pressure.

Jon Arfstrom - RBC Capital Markets

Okay, okay. That helps. Thanks a lot.

Larry Richman

Great. Thank you.

Operator

The next question comes from the line of David Konrad of Macquarie.

Larry Richman

Good morning David. David, we can’t hear you.

David Konrad – Macquarie

How about now, can you hear me now?

Larry Richman

Yes, perfect.

David Konrad – Macquarie

Okay, sorry about that. I have a question on the loan to deposit ratio. I know deposit is pretty challenging in the first quarter seasonally, but the balance sheet growth was almost entirely funded by short term borrowings, so maybe Kevin if you could follow up with some more color on your prepared remarks regarding what you did post quarter in terms of the shot term borrowings and how they flowed, whether into core deposits or long term borrowings?

Kevin Killips

Look and I think and I won’t reference it, but if you look at our rate volume table, especially on that line, you can see that that borrowing was very, very late. There was a short term borrowing that was very, very late in the quarter as we actually had some good success at closing some loans later in the quarter.

Again, deposits come in, deposits go out. I think you have some natural flow and our clients are more interested in running their business than helping us manage our quarterly balance sheet if you know what I mean. So while I’d like them to help me manage my quarters, they are not all that interested in that. They are interested in their own businesses.

But all that being said, towards the end of the quarter we saw a little bit more activity in loan growth. We took some opportunity as I said to square our position at the end of the quarter with some short term, very, very attractive funding from the Federal Home Loan Bank. That has been reduced and we settled that down to zero and that came after the quarter from usual flow. So clients coming in the natural course and we’re also looking at other positions we can take.

David Konrad – Macquarie

So to pick up a seasonal deposit helps kind of cure that, (inaudible).

Kevin Killips

Absolutely, and again we’re looking at the clients, looking at the pricing and make sure that we kind of keep all those things in mind as we move our flow in a normal course. Again, there is flows, clients move up, clients move down and then again, that was just scoring out that position.

David Konrad – Macquarie

Okay, great. Thank you.

Larry Richman

Thank you.

Operator

Your next question comes from the line of Peyton Green of Sterne Agee.

Peyton Green - Sterne Agee

Yes, good morning. Congratulations on a solid quarter. I was just wondering maybe Kevin if you could talk a little bit. The special mention numbers I guess on a relative basis are still in great shape, but the special mention and potential probable numbers moved up.

I was just wondering, how would you expect the seasoning of what you all originated over the last two or three years to affect provision going forward or the charge-off numbers going forward. I mean certainly the net recovery is a great quarter, but is this a year where you think you could have close to zero in charge-offs just because there maybe some good recovery activity versus what you might see, the charge-offs from an improving economy or what’s the right way to think about that?

Kevin Van Solkema

Sure, good morning. Well let me address the criticized loans first. I mean we are going to see those move up and down and I wouldn’t read too much into that. As you said, we’re really at a very, very low base here and when I look at my criticized loan levels compared to some of the peers and certainly compared to where we’ve been before, we’re in a great place there. So we’re going to see that move around.

As far as how does it effect provision, we look at the drivers of that every quarter and I would break it down this way Peyton. First of all, what do you need to provide for the new loan growth quarter-on-quarter, and we have and as we’ve been talking about, some very healthy loan growth this quarter, so that created a little bit of a need.

Then you got what’s going on with the portfolio that you had coming though the quarter already and what’s happening to the model factors. A little bit of increase there, nothing really to speak about that way, but that of course gets chewed up every quarter. And then on the specific reserve basis, we’ll probably see that drift down. I mean we didn’t see non-performers move a lot this quarter, we didn’t see specific reserve on those move much this quarter, so little bit of a quite period on that. My expectation is that will drift down as we go through the rest of the year.

Then it comes down to what you need, and that’s really the last part of your question, about the charge-offs. We are not going to see zero charge-offs for the year. I mean we charged off $5 million this quarter on a gross basis to $11 million last quarter on a gross basis. We did have some outsized recoveries to offset that, but I don’t see zero or even $3 million, $4 million of charge-offs coming through on a regular basis. I think its going to be higher than that.

Peyton Green - Sterne Agee

Okay, so I mean a reasonable expectation given gradually improving economy and kind of the bulk of the clean up work being done. It can get down to 25 to 30 basis points would be okay over the next three quarters say?

Kevin Van Solkema

I don’t think that’s unreasonable, but I think one has to recognize its going to be a little bit choppy, because we have a commercial book and now its very event driven, right. So this too not like a consumer portfolio where you can do a lot of convenient modeling, this is a very idiosyncratic evaluation every period and its going to move around. But clearly we are in a good sport and I think the economy is looking better as Larry talked about, so we are in for a good period here, but I wouldn’t annualize my numbers this quarter.

Peyton Green - Sterne Agee

Yes, no, thank you. Okay, great. I appreciate it.

Larry Richman

Thank you.

Operator

Your next question is a follow-up from Chris McGratty of KBW.

Chris McGratty - KBW

Hey Kevin, just a quick follow-up on the personnel comments. Maybe I missed it or misinterpreted it. Did you say the 44.5 this quarter was the highest of the year, because of the seasonality?

Kevin Killips

I said Chris, in terms of total expenses, I would think that all things being equal without volume impacting us, I’ve said there many times, if some of our products really catch fire, there is going to be some cost of sales and there is going to be some performance based comp. But all that being said, I think that from an expense perspective, driven somewhat by the comp lines given the benefits of FICA, that would probably be a high water mark for the year.

Chris McGratty – KBW

Okay, thank you.

Larry Richman

Great, thank you.

Operator

As there are no future questions, I’ll now turn the conference back to Mr. Richman.

Larry Richman

I wanted to just close by thanking all of you for being on the call, thank you for your questions and really importantly thank you for your interest in PrivateBancorp. Have a great day.

Operator

A digital rebroadcast of the call will be available beginning approximately two hours after the call until midnight on April 30, 2014 by calling 855-859-2056 in the U.S. and Canada or 404-537-3406 for international and entering passcode number 158-90-768. All parties may now 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!

Source: PrivateBancorp's CEO Discusses Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts