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PrivateBancorp Inc. (NASDAQ:PVTB)

Q2 2014 Results Earnings Conference Call

July 17, 2014, 11:00 AM ET

Executives

Jeanette O'Loughlin - Investor Relations

Larry Richman - President and CEO

Kevin Killips - CFO

Kevin Van Solkema - Chief CRO

Analysts

Chris McGratty - KBW

Lana Chan - BMO Capital Markets

Terry McEvoy - Sterne Agee

David Long - Raymond James

Brad Milsaps - Sandler O’Neill

Jon Arfstrom - RBC Capital Markets

Casey Haire - Jefferies & Company

Stephen Geyen - D.A. Davidson

Operator

Good morning, and welcome to PrivateBancorp Inc's Second 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 Jeanette O'Loughlin, Head of Investor Relations.

Jeanette O'Loughlin

Good morning, and welcome to PrivateBancorp's second quarter 2014 earnings conference call. Participating on the call today are Larry Richman, PrivateBancorp President and Chief Executive Officer; and Kevin Killips, our Chief Financial Officer. Kevin Van Solkema, our Chief Credit Risk Officer will also be available for questions.

PrivateBancorp's second 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.theprivatebank.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 make with the SEC, including our Form 8-K dated today, related 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, Jeanette, and welcome to your new role. I'm going to begin this morning by talking about two items. First, what drove our second quarter results and what we're seeing the market; and two, how we're positioned going forward. Kevin Killips will discuss key results in greater detail and then Kevin, Kevin Van Solkema, and I will take your questions.

Our strong second quarter results show the momentum we have built over the last several years. We recorded our tenth consecutive quarter of net income growth, with net income of $40.8 million compared to $28.9 million a year ago, and $34.5 million last quarter.

Earnings per share were $0.52 compared to $0.37 a year ago and $0.44 in Q1. Our active business development and lower credit cost year-over-year drove bottom-line performance. We have strong new client acquisitions with $365 million of new loans to new clients and we saw increased working capital line usage this quarter to 49%.

We also higher level payoffs this quarter, with most of the payoffs due to either our clients' business being sold, CRE property sales, or traditional refinancing of CRE or healthcare loans in the long-term market.

Overall, this led to net loan growth of $212 million, bringing total loans to over $11 billion at June 30. Consistent execution of our commercial strategy led to good new activity with clients across many commercial and industrial industry segments.

This new business and increased business from our existing client base help to drive a 14% increase in C&I loans year-over-year. We also see -- are seeing more activity in commercial real estate.

As you can see, commercial real estate balances are up and represent a good mix of core product types such as multi-family, industrial, retail, and student housing, and purpose acquisition, refinancing, and construction.

Our overall mix is good with about two-thirds commercial industry and one-third commercial real estate and private banking.

The legacy portfolio is about 6% of total loans. Net interest income was higher driven by loan growth and a relatively stable NIM. Average loan balances were up over $900 million from a year ago. The market remains very competitive, putting downward pressure on pricing.

Net revenues increased by $9.8 million from a year ago to $143.3 million, boosted by loan growth and an increase in non-interest income year-over-year. Our strong originations and managing our whole levels drove syndication revenue up by $2.3 million from a year ago to $5.4 million in Q2 2014. This is a record level and we expect syndications to continue to be a meaningful contributor to fee income going forward.

Treasury management, client cross-sell remains active as we gain our clients' operating business and continue to be an important -- and continues to be an important driver of fee income with $6.7 million revenue this quarter.

Capital markets revenue increased 23% from the first quarter as strong foreign exchange activity. Higher loan activity helped our interest rate hedging business this quarter, although overall demand is impacted by our clients' outlook and the rate environment.

Our mortgage revenue rebounded this quarter reflecting a pickup in home purchase activity. We also saw good performance in our trust and asset management business. Assets under management and administration increased $325 million from Q1 to over $6.3 billion. An important goal is to increase cross-sell of our private wealth, trust, and investment business as well as our private banking services to our commercial clients.

We have built private wealth relationships with about 20% of our core commercial clients, a number we want to continue to grow.

Turning to expenses, we have benefited from a significantly improved credit quality, which has allowed us to lower credit cost substantially year-over-year, including a $3 million decline in OREO expense from a year ago.

Key credit quarter quality metrics continue to be within an acceptable range. I am pleased that operating profit is up 21% year-over-year to almost $68 million. We had a -- we have built a suite of products to serve our commercial clients and our clients' use of these product solutions continues to increase.

As we develop new relationships, we have more opportunity for cross-sell and this quarter, we saw net interest income and non-interest income boost operating profit. Higher revenue and a strong efficiency ratio together demonstrate the operating leverage that exists in our model we have built over the last six plus years.

Total deposits were about $12.2 billion with a nice lift in non-interest bearing DDAs. Non-interest bearing these demand deposits are 28% of total deposits at June 30th. Building client deposits remains a cornerstone to our strategy. We strive to be our clients' primary relationship bank and have their operating accounts. In fact, 75% of our core strategic commercial clients have treasury management relationships with us.

Just a few thoughts on our position going forward. Economic activity in the Midwest continues to improve at a moderate, but steady pace. Our clients tell us they continue to gain more confidence in their business prospects and are beginning to plan for more investments in their own businesses.

We're seeing M&A becoming more active in the middle market and we're seeing some client requesting increase in working capital facilities in anticipation of rising sales.

As opportunities take shape, we will continue to gain market share by doing what our experienced team of bankers do best, that is combing our expertise and understanding the middle market with our ability to advice and build solutions to meet the unique needs of our clients and prospects.

Our origination capabilities are evident in our both our loan growth and our syndication sales activity. We continue to realize the benefits of our expertise in industries that value our specialized knowledge, such as commercial real estate, healthcare, construction engineering, security, insurance, asset-based lending, for example. We have a strong and growing capital base to support our strategy.

As I look into the second half of the year, our pipeline remains solid and we're seeing more deal activity and feel good about our ability to be active, grow organically and capitalize at these opportunities. We will remain discipline and selective in building our business with solid credit, strong cross-sell, and long-term relationships with our clients.

Now, let me ask Kevin Killips to talk a bit more detail about the key drivers this quarter.

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.

Net interest income for the second quarter was 3% on a sequential basis to $112.4 million, primarily due to average loans growing $336 million as well as one extra day in the period.

Given the asset sensitive positon of our balance sheet with about 96% of our loans favorably priced, our ability to grow earning assets in this interest rate environment has been key to our net interest income growth.

NIM was 3.21 compared to 3.23 in the first quarter. The yield on average earning assets was down 3 bps on a sequential basis, primarily related to the decline in loan yields. There are couple moving parts that I would like to walk through.

Last quarter we called out a higher level of interest recoveries that contributed 4 bps for loan yields. This quarter, loan fees contributed an additional 3 bps to loan yields on a comparative basis, reflecting a higher level of payoffs as Larry mentioned. Our core loan yields continue to be impacted by decreases in LIBOR as well as downward pricing pressure on our renewals in this competitive environment.

Consistent with previous years, the second quarter had a higher level of renewal activity. If we assume new client business continues to be accretive, all things being equal, I would expect loan yields may drift down 1 bps to 2 bps each quarter until there is a meaningful increase in rates.

Walking quickly at our cost of funds. A slight reduction in the cost of interest bearing deposits brought down our cost of funds by one bp. If you take a look at our NIM tables, you will see a slight increase in average short term borrowings as we took advantages from attractive funding from the FHLB to square out this quarter's funding position.

Turning to deposits. At quarter-end, total deposits were $12.29 billion, up $350 million or 3% from the previous quarter. We added a 190.8 million of deposits primarily related to new clients, as well as some additional broker deposits.

Non-interest bearing deposits represented 28% of total deposits at June 30th, up from 26% at March 31st. Our funding mix has stayed relatively consistent over the prior year.

Taking a look at expenses and credit. Non-interest expense was $75.5 million comparable to the first quarter of 2014. Our efficiency ratio was 53%, reflecting higher revenues compared to 56% on a sequential basis. Based on our model going forward, we would expect to operate within an efficiency ratio ranging in the mid-50s as we continue to grow revenues and invest in our business.

Salary and employee benefits was comparable to the previous quarter. While the first quarter included seasonally higher payroll taxes and 401(k) contributions, second quarter compensation expense reflected increases relative to performance based incentives including our bonus accrual and other revenue related compensation. A full quarter impact of Q1's merit increases was also reflected in the second quarter's comp expense.

Marketing expenses increased $1.2 million on a sequential basis, primarily due to the launch of our advertising campaign in the second quarter of the year. Loan and collection expenses also increased primarily as we had higher mortgage origination volume.

Other expenses declined $2.3 million from the prior quarter, partially reflecting a decline in the provision for unfunded commitments as commitments related to certain non-performing assets were reduced.

Turning to credit. NPAs declined 18% benefiting from the resolution of certain non-performing loans and reduction of OREO. Non-performing assets as a percentage of total assets were 66 bps compared to 82 bps in the fourth quarter of 2013.

Looking at the allowance. The ratio of the allowance for loan losses to total loans was 1.32% compared 1.34% in the previous quarter, reflecting again resolutions of certain non-performing loans. The allowance as a percentage of non-performing loans was 191% for the second quarter compared to 156% for the first quarter of this year.

The provision for loan and covered loan losses was $327,000 compared to $3.7 million for the first quarter. As mentioned in our earnings release, the provision included $2 million related to loans and $1.7 million of covered loan recoveries.

Net charge-offs were $2.3 million, reflecting a lower level of charge-offs as recoveries returned to more normalized levels. Looking ahead, provision expense may vary from quarter-to-quarter if we see loan growth or unevenness in credit quality.

All-in-all, it was a clean quarter. We grew net interest income despite continued pressure on loan yields, and syndication revenue contributed nicely to improve fee income. We continue to focus on managing expenses, while continuing to invest in our business.

With that, back to back to Larry.

Larry Richman

Thank you, Kevin. Again, very strong quarter. Along with bottom line improvement, our key performance's metrics are also improving. Return on assets reached 1.14% at the end of Q2 and return on equity was 11.88%.

Our clients tell us they value our focus, middle market relationship approach, our commitment to high tech service and our ability to work with them to deliver solutions to meet their needs.

We will continue to leverage our differentiated approach to the market that has served us well. We have a demonstrated track record of success in growing our business with over $900 million of loan growth and about $800 million of client deposit growth since this time last year.

And our goal remains to drive consistent, improving results over time by adding and building quality clients and long term full banking relationships with them. We believe this will continue to create lasting and improving shareholder value.

Thank you very much. Operator, we will now up the line to questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions)

Your first question comes from the line of Chris McGratty with KBW.

Larry Richman

Good morning, Chris.

Chris McGratty - KBW

Larry, the comment you made on utilization rates going to 49%, can you remind us where that may have been last quarter?

Larry Richman

Sure. 47%.

Chris McGratty - KBW

Okay. And then with regard to the elevated payoffs, I was wondering how much of that may have kind of impacted the growth in the quarter? May be how much about the average was it in the second quarter?

Larry Richman

Yeah, Chris, there was increased payoffs last quarter, probably in the range of call-it $450 million in total for the quarter. It was higher and it was really an interesting as we -- we saw more activity, we saw some of our client sell of which in some those -- many of those cases we ended up with their private wealth business.

We also saw property sell because if the greater liquidity in the commercial real estate market. And we also -- as we always do, you know, we are a short and intermediate term lender, so as you would expect there would be refinancing into the long term market both insurance company as well as HUD.

So there was more activity this quarter than there has been in the past. It’s about $90 million about the five-quarter average, I guess, is probably the short answer to that.

Chris McGratty - KBW

Okay. Great. And just one other question. You talked about the syndication fees being the highest in the company's history. Can you give maybe an outlook and whether this level of, call-it, $5.5 million is sustainable? And then maybe remind us how much production you actually syndicated out in the quarter?

Larry Richman

Sure. You know, syndications is a very important part of our business strategy. And I feel good that we have a team in place and a client base and a prospect base that will allow us to continue to do syndications. It is, however, a -- you know, I will call-it uneven or lumpy business in the sense that it is the transaction of doing the deal that creates the syndication. So our strategy is to build and lead relationships and to manage home positions at the same time.

And so that gives us the ability for we will call maybe the larger clients that are in the middle market, the ability to be their lead, to be their primary bank, to seek their cross-sell. And also because of the kinds of clients we are doing business with both C&I and CRE, there is continued strong demand for that business at the same time.

So it’s lumpy, but I -- my message is it’s an important business to us. I feel good about its outlook. And I feel good that we have got coordinated effort that will allow us to continue to build syndications. But it’s not linear.

Chris McGratty - KBW

Okay. Thank you.

Operator

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

Lana Chan - BMO Capital Markets

Hi. Good morning.

Larry Richman

Good morning, Lana.

Lana Chan - BMO Capital Markets

Can you talk about the loan pricing environment and if it is, I guess, qualitatively has it gotten any worse or any better versus three or six months ago, and what the new loan yields are coming in on?

Larry Richman

Sure. The short answer is loan pricing remains competitive and under pressure. We -- and I suspect that that will continue. I am seeing really nothing in the market that leads to me to believe that that it won't continue.

And I think for us that really represents an ability to be, so to speak, selective and disciplined. And we have a number of different business segments that we are in including some of our industry specialties as well as our regions that give us -- we will call it diversification or diversity of opportunity.

And so we have to remain very disciplined. You can't do it on loan alone. You have got to maintain and you have got to build other banking relationships as a result of it. But I would suspect that it will continue to be pressured. While at the same time that it is pressured, you know, we had a big renewal season, so to speak, in the second quarter. And we were -- I feel pretty good that we have been able to hold our own. That's really where we are seeing some of the major pressures.

And as you can see it is declined, but as Kevin mentioned, maybe it’s the rate of decline is declining a little bit, but we should -- we would expect see there continue to be pressure.

Lana Chan - BMO Capital Markets

Okay. Thank you. And my second question was on credit quality. There was increase in both special mention and classified loans this quarter. Can you address that and where you're seeing the increase in problems?

Kevin Van Solkema

Lana, this is Kevin Van Solkema. Good morning.

Lana Chan - BMO Capital Markets

Good morning.

Kevin Van Solkema

I'm not worried about it. But appreciate your question and clearly we saw a little bit of an uptick this quarter. I think, all in all criticized loans up about 12%. So I took a really close look at that, and I think there is a few things to keep in mind.

First of all, we're coming off from a very low level of criticized loans and we probably saw the low points sometime in late 2013 there. If you look back on page 13 of the supplement, you can see how those loan levels really reached a very, very modest level at that point in the cycle.

When I went back and looked at what's been coming in, I looked for a pattern. All right? I looked for a pattern of -- is there an industry concentration, is there is a particular vintage of loans or even why was the loan downgraded, what was the root cause? And I'm just not seeing anything there that’s really a consistent message to me.

The other thing I would offer is like, I went back and looked at some discrete pools of migration over the last five quarters and what I'm seeing is a lot of velocity with our reps resolving these credits. And if I go back say five quarters and look at what's still in for the criticized loans, there is been a good amount of movement up and over.

So it’s a very active portfolio. We are very, very diligent about that. And finally, the second quarter, I would say, was a quarter that had more potential for downgrade than probably the other quarters.

It had couple of things going on. We had recited the year-end financial statements as most of our clients are on a calendar year-end. And we had our Shared National Credit exam results. And all-in-all we did okay and I feel okay about it.

Lana Chan - BMO Capital Markets

And I guess, could you give us any color about how much of the increase was related to this sneak (ph) portfolio?

Kevin Van Solkema

I think we had one credit, Lana, for around 20 million.

Lana Chan - BMO Capital Markets

Okay. Thank you.

Kevin Van Solkema

Welcome.

Larry Richman

Thank you.

Operator

Your next question comes from the line of Terry McEvoy with Sterne Agee.

Larry Richman

Hi, Terry. Good morning.

Terry McEvoy - Sterne Agee

Hi, good morning. Larry, I guess, a question for you. Just looking at client penetration within your fee products, could you just talk about maybe market share, looking at the numbers, because the revenue is growing? I am assuming you are getting more of your customer's wallet.

And then maybe compare that to where was that number at your legacy bank suggesting maybe some upside from here within the fee businesses?

Larry Richman

Yes. Terry, its cross-sell is absolutely critical component of what we do and how we develop business. And we are looking forward we define as long-term relationships and relationships are defined as more in the loan and is doing other business.

So, we, over the course of the last six years have built a product suite that is sophisticated, but most importantly is the type of products that our clients need. And so -- so then lets get into some of the products and I've mentioned a couple of them on the call.

Treasury Management which is a real key go-to product, and as we've talked over time, it lags because you essentially -- many times you will establish the lending relationship and then there is a conversion period of time for the company to move its Treasury Management to us. But this relates to most of the strategic core relationships that have been developed.

The penetration in Treasury Management is about 75%. So that’s really good. And its because we have good products, good team and good coordination. So that growth will be more as additional products within Treasury Management get penetrated and as we bring in new clients.

The -- on the other hand, the opportunity that I also mentioned was in our trust asset management in private banking capability, and there we've grown -- we've talked about the number of strategic relationships that we developed and there we have cross sold about 20% of our clients and that’s a longer sell. And some of it is transactional related to liquidity of that.

But I do really good about that opportunity and our ability to deliver. And, again, this is on a very coordinated relationship based approach. Capital markets was very good this quarter and what was interesting was, capital markets is both our rates business as well as our foreign exchange business.

And what we noticeably saw this quarter was a big pickup in foreign exchange and that’s good not only because we've done more business with our existing clients and we had some of our new clients that needed that products, but we also had some clients that did acquisitions globally or internationally that required some capabilities and we were able to provide.

So, again, sophisticated service to meet the needs of our clients. And probably the cornerstone to all of this is driving core deposits which is really where we get it is really from our overall client base. And everyone is very focused on how do we build these long-term relationships.

So, hopefully that gives you some color. But I feel good about the opportunity. In a low rate environments its some of the businesses are more challenged than others. But when rates do rise and there will be some opportunities to provide some interest rate derivative products, for example, that right now we've got some volume and it's coming from new deal activity.

But our current client base may decide to do something than because your alpha maybe be different.

Terry McEvoy - Sterne Agee

Thanks helpful. Thanks Larry. And then maybe question for Kevin, there was the covered loan recoveries. Is there any offset at all as I look at the income statement as it relates to the indemnification asset, anything that I need to take out going forward?

Kevin Killips

No, Terry, to be honest with you, we've kept our eye on that and keep in mind that we only did one FDIC deal back in 2009 and that the covered loan balance has gone down pretty much. And, in fact, the loss share agreement on the non-residential loans will expire at the beginning of the fourth quarter. We do not see any material impact on that part of the loss share expiring at all.

Terry McEvoy - Sterne Agee

Perfect. Thank you.

Larry Richman

Thank you.

Operator

The next question comes from the line of David Long with Raymond James.

Larry Richman

Good morning, David.

David Long - Raymond James

Good morning, guys. Commercial loan growth, obviously, has been pretty strong for several quarters and I want to see if you can give me any color on a breakdown of the growth by geography.

Obviously, a lot of its got to be coming from Chicago were you've got your biggest presence. But what about some of your secondary markets, where it's St. Louis, Denver, the suburbs or Michigan. Can you talk a little bit growth in those markets?

Larry Richman

Yeah, absolutely. And, I guess, David, what I will do is I will talk about it both by region, but also by -- some of this is also by industry specialty as well. We had really good, and I'm pleased with the growth we had in the Chicago business market. So the middle market and these are the traditional manufacturers, wholesale distributors and service companies. There was a lot of good activity this quarter, and I felt good that this was reflected in -- from that perspective.

We also saw active growth in our regions. Some of that is lumpy or non-linear in a sense of driving new business. But it sounds good that some of our regional markets had some very, very nice activity and they are very important to us.

And I will go through the -- some of the key ones which is our St. Louis, our Milwaukee and our Michigan markets, and also our other regions. We saw some really good activity and we saw some really good activity in Minneapolis in Cleveland, for example.

The other part of it is, we do business in a number of industry specialties that had some good activity, including healthcare and that healthcare was both in Chicago in the Midwest and some of that business is national, and then some of our other businesses as well as our security alarm and our insurance specialty.

So, all in all, I think my message is that it's not coming from any one exclusively. I actually felt that the mix was good in terms of industry and geography this quarter. And I also felt good that we had opportunities going forward. So, as I look to the pipeline, I feel good that its really coming from a number of different places as well.

David Long - Raymond James

Okay, great. Thank you for the color. And then the other question I had is regarding loans that are held to maturity. It looked you moved some syndicated credits in the held to maturity or I guess maybe that’s with available for sale, I should say.

And is the intention to sell those here in the third quarter, and if so, what can we expect on -- again on sale spread?

Larry Richman

Yeah, let me take just the first part of it. We have a very active syndication business as evidenced by the fee income and we did about 17 deals in Q2 and we also for a few of our existing clients led underwrote to clients that we know that represented some of the product that was -- the loans that were in the held for maturity level.

The short answer to your question is, yes, those are expected to be sold and expected to be sold very soon, so -- in this quarter. So, yes, that’s the case and Kevin do you want to speak to this?

Kevin Killips

So, David, when I say as you noted, we've always had some loans held for sale in that category. In the balance sheet category, I think, the number is around $80 million. $60 million of that relates to commercial loans, as Larry described underwriting mandates, the $20 million is mortgage held for sale. And the -- ordinary course as we role number our mortgage business is sold servicing release. I would imagine again on sale on that mortgage will be consistent with what we had in this quarter.

When you talk about gain on sale for a syndicated activity, David, it's really about the syndication revenue and each one of those are different given fee levels, given the type of loan, given the unique situation as we sell those off. So, it's very difficult to talk about that on a broad gain for sale basis, and that’s what really the question. But they are very different from deal to deal.

We expect, as Larry said, that 60D (ph) we sold in the next month or so if not sooner, and we will see how that goes, because it is a timing issue. For instance, if those were fully syndicated prior to the end of the quarter they wouldn’t be in either place, because they would be gone.

But the held for sale specification allows everybody to understand the difference between earning assets and then assets that are poised to be sold and then is a precursor to non-interest income.

David Long - Raymond James

Got it. Thanks guys, appreciated.

Larry Richman

Thank you.

Operator

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

Larry Richman

Good morning, Brad.

Brad Milsaps - Sandler O’Neill

Hey, nice quarter guys. Kevin just wanted to follow-up on some of your comments around the efficiency ratio. I think you were -- you said around 53% this quarter and talked about kind of mid-50s and don’t want to split hairs. But did you anticipate that was -- is more coming from volatility related to fees or do you have some investments kind of in the back half on the expense side that you expect making. Just kind of want to get a little more color on some of your comments there.

Larry Richman

That’s a good, Brad. What I would say there is, I think that comment related to how we see the business model playing out. In the intermediate future, so as I look out and as we become more and more normalized, whether rates are going to be normalized, your guess is as good as mine.

But, it was more a broad statement about how do we think this business model comprise itself and the relationship both revenue and expenses. Again, I don’t think we want to talk about how we may precisely go from one number to another quarter-on-quarter. But it was a broad statement thinking about where we are.

We'll have to see how that plays itself out. But it was a looking forward model type of comment as opposed to trying to prognosticate or hone in on next quarter.

Brad Milsaps - Sandler O’Neill

Great. That’s helpful. And just wanted to ask, you guys have had a good deposit growth across the board, but wanted to specifically talk about kind of the growth in money market accounts.

Can you talk about kind of what you're doing there or was that nothing -- maybe it's nothing real specific just kind of curious on the stickiness of those deposits and given your commercial focus. Just kind of curious if you have any additional color on how you've been able to obtain that growth?

Larry Richman

Probably the philosophy -- and client deposits are really important to us and we always strived for their operating business and their demand deposits, yet at the same time as clients have excess liquidity that’s not in their normal operations, they will invest that. And so a big part of the money market in investment balances represents excess liquidity.

And also from time-to-time where we have other client that are -- that we are doing business with we'll seek some of their excess liquidity and pay them for it and they'll keep money market. I feel good that that's a business that's not only diversified but has a stickiness to it.

And we have to be attuned to where the market is but at the same time, these are clients that we do business with and we know that we've got active conversations with in many different cases and maybe borrowing or may not be borrowing.

Some clients are keeping liquidity despite the fact that they are borrowing simply because they -- some still remember the troubles that the economic environment had. So, they are just being more liquid today and they may be choosing to get some spread on some of those deposits even though there is a negative arbitrage relative to a loan.

Brad Milsaps - Sandler O’Neill

Great. Thank you, guys.

Larry Richman

And I guess the only other comment that I think is probably relevant is if we look at the deposit growth for the quarter, we had about $200 million of deposits from new clients this quarter and that's a nice healthy level for us.

Operator

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

Jon Arfstrom - RBC Capital Markets

Good morning.

Larry Richman

Hey, Jon.

Jon Arfstrom - RBC Capital Markets

A question for Kevin Killips, just a clarification on the margin. You talked about a couple of basis points each quarter on loan yields, is it safe to assume you're seeing the same thing on the margin?

Kevin Killips

Well, that's an interesting question, Jon, because I specifically talked about the yield on the loans because I think we have data that may help us get to that point. As rates move around a little bit especially the longer rates, we could see -- and on our investment securities some slow down, speed up of prepayment speed assumptions which of course would affect that. So that kind of X that and that does go into NIM.

And on the cost of funds perspective, look I've been saying this for a while that I'm not sure how much we can squeeze out of that, we took a bp out of it this quarter. So, I think it would -- it may have a same directional impact on NIM if you know what I'm saying? Does 1 bps or 2 bps in overall loan yield contribute exactly 1 bps or 2 bps to NIM?

All other things being equal, no, it wouldn't because of the proportionality, NIM being a proportionality calculation. So, I think it would influence the direction, Jon, but there are a couple other moving parts in NIM. My comment was specifically on loans.

Jon Arfstrom - RBC Capital Markets

Okay. And then on the loan fee piece, there was I guess a pleasant surprise this quarter, but it seems to be a bit more payoff-driven. Is it a sustainable loan fee amount that came in or is that something that you expect to drop off as well?

Kevin Killips

Jon, we look at that and it does kind of move around. The loan fees this quarter were in what we would see as kind of our normal range, but maybe a little -- not at the high end of the range, but a little higher than it was last quarter.

Last quarter was a little lower on the range, but last quarter as we talked about both last quarter and this quarter, we did have about 4 bps that came from recoveries on one or two problem accounts that got settled in the first quarter.

So, we don't include that in this computation. We really think about the normal fees that come into net interest income on an accretable basis. And clearly this quarter, given the size of some of the payoffs we saw that move that number up a bp or so.

Jon Arfstrom - RBC Capital Markets

Okay, okay. And then Larry or Kevin, just the capital markets revenue that you talked about FX, is that a couple of big items or was that pretty broad based?

Larry Richman

It actually was broad-based in the sense -- broad-based meaning it was in one or two large fees. There is always a few that are larger than others but noticeably there were more trades that we saw and we also saw it both from new clients as well as from existing clients. So, I felt good that there was a lot of activity going on.

And the other component of this which is I think worthy to talk about is that we have active conversations with our clients about their interest rate hedging strategy and to-date with the interest rates being low longer, their interest is less.

As rates are viewed as rising later that we believe that could create some nicer activity for us going forward. So that's another component that I feel good about. And again, you do it when by actively communicating and providing advice and strategy to our clients, not just when rates rise. And so I think there is some good upside opportunity there too that I am upbeat about.

Jon Arfstrom - RBC Capital Markets

Okay. Good. And then Kevin Van Solkema, my question for you. Obviously, you are seeing much better credit. And I obviously understand the comments earlier about some of the deep dives that you did. But how do you view the competitive environment? It seems like things are pretty good, but I am curious if there is anything you are a little more nervous about or watching more carefully?

Kevin Van Solkema

I think the whole industry is watching leverage lending, right? I mean, the regulators are all over that. We ourselves are very attentive to that. We have a specific policy around that. We have a specific group in fact that governs and oversees our leverage lending activity. All-in-all for us it’s something less than 10%, so it’s not a real large component. But, you know, 10% on notional dollars is still a lot of money. So we spend a lot of time looking at that.

I look at the relative levels of leverage that we have compared to, you know, what I read in the press and I am in a pretty good place there. We are certainly on average well below, you know, any of the elevated levels that you might read. I think the FDIC has given or the joint agencies actually have given guidance about three and four times as sort of a threshold to define it. We have been following that same definition.

So we are watching it. I am not really seeing any trouble there. But it’s an amount that we have and we will continue to have. That would be the one area, Jon, that I think we are especially attentive to. The rest of it, you know, it’s pretty benign right now, right? This is sort of the sweet spot for credit in the cycle and our numbers reflect that.

Jon Arfstrom - RBC Capital Markets

Okay. All right. Thanks for everything, for the help.

Larry Richman

Great. Thank you.

Operator

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

Casey Haire - Jefferies & Company

Good morning, guys.

Larry Richman

Hi, Casey.

Casey Haire - Jefferies & Company

Larry, a question for you. Utilization rates ticked up nicely this quarter, was one. And the commentary on the outlook was pretty constructive. I was just wondering if you could maybe give us what's a reasonable target for that to -- if it does expand, what is a reasonable number over the next, let's say, the back half of this year? And then just a reminder on the sensitivity of what 100 bps of utilization does in terms of loan balances?

Larry Richman

Sure. I will answer the first. It’s about 100 -- it’s about 200 bps really represented about $100 million of increase. I think that's generally the way it works. I think at least that's a around number that I -- as I look at it.

Utilization was up this quarter and it had been 47 for two quarters. It had gone from 46 to 47, to 47 to 47 then 49. It’s still too early I think to my mind to see if that's a trend or not. But what I can tell you are two views or two experiences. One is, we are seeing more of our clients that are talking about their outlook for their business. And in anticipation of increasing sales, our bankers are working with them to increase credit facilities appropriately. And so there is more conversations going with that.

And two, increase utilization mean, typically mean is working capital facility, so it’s growth of sales which represent growth in receivables and inventory or working capital assets. And so those are positives as it relates to revenue. And as long as they are operating at the right appropriate margins, drives bottom line profitability from their standpoint.

If I said 49 today and what would I expect long term, it maybe in the 50, 52 bp to moderate 50 range as what I would suspect the challenge today is that we have sized credit facilities to meet client's needs where maybe in the historical time period, not here, we may have put together a bigger credit facilities to allow companies to grow into it. Now we are upsizing credit facilities to beat increasing needs.

And so, again, a little bit challenging to be able to tell you specifically. But I am optimistic that 49% was a better number than 47%. And the trends of conversations are better.

Casey Haire - Jefferies & Company

Okay. Great. And then just, Larry, I know you have talked in the past about wanting to get a little bit more granularity in the deposit base. I am just curious are you guys still looking? Obviously, capital is in pretty good position with Tier 1 common at 9.5. What is the appetite there?

Larry Richman

Sure. Acquisition strategy, I think, is really what you are in -- and our focus to reinforce is organic. And I like our position in the opportunities that exist for our business and for our teams as it relates to middle market and that is both Chicago regions and specialties as we talked about and also the opportunity to penetrate more of our products.

I guess, as it relates -- I am active and very active on outreach and are having some good active conversations. And, of course, you never know when opportunities take place. But I think the way to really look it from our perspective is longer term. It’s really more opportunistic. It’s for the right opportunity. It needs to be strategic. You know, the focus is sort of the same as we talked about before which is primarily organic deposits or granular deposits having complementary locations and other products that clients need, but probably the best way to look at it. It’s just a longer term organic, but if the right opportunity takes place then we will see.

Casey Haire - Jefferies & Company

Okay. Thank you.

Larry Richman

Thank you.

Operator

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

Larry Richman

Good morning.

Stephen Geyen - D.A. Davidson

Questions on syndication. I know there is a lot of different factors that go into the syndication. But I was just curious if is there anything that is likely to change that could lead you to retain more of those loans?

Larry Richman

You know, we are very disciplined in hold levels. So at our size and again we are building profitable clients, and we are building relationships with clients as we have talked about it. And we are disciplined on hold levels.

And so the short answer is no. But again, in -- and each situation is, of course, different. The drive of syndications depends on the new business activity and are there opportunities for clients that to need more then we are prepare to hold. But generally, speaking our philosophy there is good. And we have got a really good set of bank partners, that are so to speak clubs that allow us to be able to drive it and a really good team is able to help us put it together and structure it in our syndications group.

Stephen Geyen - D.A. Davidson

Okay. And you had mentioned, Larry, the $365 million in new loans in the quarter, just curious how much of that was syndication club deals?

Larry Richman

That's a good question. I would say that, if I had to -- and this is really more -- about 20% of our portfolio, less than 20% of our portfolio and I don’t expect that the level of deals. The majority of the activity was not in that -- was not in that level of syndication.

Stephen Geyen - D.A. Davidson

Okay.

Kevin Van Solkema

Stephen, this is Kevin Van Solkema. I think I might be able to shed a little bit of light on it. Not specifically to answer your question, but I did go back and look at -- of the new relationship fundings that we completed this quarter, how much of those were shared national credits which are not exactly the same as what you asked, but it’s a good proxy. I think that. It was about 5%, 10% of the growth that we had.

Stephen Geyen - D.A. Davidson

Got it. Perfect. Thank you. And then the last question. The other expense line item -- sorry -- if I miss this. But I was just curious about the unfunded lending commitment, so what was the benefit in the quarter?

Kevin Killips

This is Kevin Killips. I have that in front of me here somewhere. What we -- I think that was about -- just give me one second, as I go through my -- get my work papers out here. That was -- on that line item specifically that was around $900,000 quarter-on-quarter. So there was some other items in there as we had some accruals in the first quarter that we didn’t need or that we trued them up in the first quarter didn’t need the incremental expense in the second quarter.

So there is a number of moving pieces in that. But the largest piece was we had some unfunded on credits that got solved so therefore they went down.

Stephen Geyen - D.A. Davidson

Got it. Thanks for your time.

Larry Richman

All right. Thank you.

Operator

(Operator Instructions)

And your next question comes from the line of Chris McGratty with KBW.

Chris McGratty - KBW

Kevin, just a quick follow-up on the margin, I just want to make sure I understand the second quarter. So, 3.21 you reported. I think you pointed out in your prepared remarks there were 3 basis points from elevated loan fees. So, is the right starting point based on your loan yield compression guidance of 3.18, are you saying it is more like a 3.21 and there was not a huge amount of elevated loan fees? I'm just a little confused.

Kevin Killips

Yes, I have a little schedule on there that I'm just going to refer to it for a second, Chris, so if you can give me a minute to grab that. So, give me that again because I was looking for it as you were talking.

Chris McGratty - KBW

Right. Yes, so your margin was 3.21 and I think in your prepared remarks you said there were 3 basis points from elevated loan fees. My question is, is 3.18 the right starting point? Were those 3 basis points above average or are you saying kind of the starting point is 3.21 and you said loan yields would be down a basis point or two?

Kevin Killips

Yes, I would -- here is kind of the interesting thing. Again chasing a bp and a half bp around the racetrack here makes for kind of interesting arithmetic. But what I said this quarter is our fees were on the higher side of the usual range is that maybe a bp higher maybe seven tenths of a bp higher. It's somewhat in that range if you wanted to get your microscope out and go down to the cellular level on this item.

So, yes, 3.21 maybe 3.20, maybe 3.19 -- 75 would be a good number, but I've got to tell you when we are chasing halves and quarters and tenths of bp around, it starts to even make my head hurt. Chris--

Chris McGratty - KBW

I'm not looking for that granularity. I just wanted to make sure I heard right. Okay, this helps. Thank you.

Operator

If there are no further questions, I will now turn the conference back to Mr. Richman.

Larry Richman

That's great. Thank you all very much. We really appreciate your listening, your interest in PrivateBancorp and thank you for your questions and we'll look forward to talking to you again next quarter if not before. Thank you.

Operator

A digital rebroadcast of the call will be available beginning approximately two hours after the call until midnight on July 30th, 2014 by calling 855-859-2056 in the U.S. and Canada or 404-537-3406 for international and entering passcode 57714115. All parties may now disconnect.

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