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PrivateBancorp, Inc. (NASDAQ:PVTB)

Q4 2007 Earnings Call

January 28, 2008 11.00 a.m. ET

Executives

Ralph Mandell – Chairman

Larry Richman – Chief Executive Officer

Dennis Klaeser – Chief Financial Officer

Paul Berley – Treasurer

Julie Cuadros - Director of SEC Reporting

Analysts

Steven Alexopoulos – JP Morgan

Terry McEvoy – Oppenheimer & Co.

Ben Crabtree – Stifel Nicolaus & Company

David Long – William Blair & Co.

Christopher Marinac – FIG Partners

Daniel Arnold – Sandler O’Neill & Partners

John Rowan – Sidoti & Co.

David Priego – Litmus Capital

Mac Hodgson – SunTrust Robinson Humphrey

Operator

Good morning and welcome to the PrivateBancorp, Inc. fourth quarter 2007 earnings call. (Operator Instructions) I will now turn the conference over to Ralph Mandell, Chairman of PrivateBancorp, Inc. Please go ahead, sir.

Ralph Mandell

Good morning and welcome to our fourth quarter earnings conference call. I will lead off the call and joining me this morning is Larry Richman, our Chief Executive Officer, Dennis Klaeser, our Chief Financial Officer, Paul Berley, our treasurer and Julie Cuadros our Director of SEC Reporting.

Prior to discussing our fourth quarter results, I will ask Dennis to read our Safe Harbor statement. Dennis.

Dennis Klaeser

Good morning. Statements made during this conference call that are not historical facts may constitute forward-looking statements, within the meaning of Federal Security Clause. 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 affect on our operations and future prospects are disclosed in the filings we make with the SEC, including our Form 8-K dated today, relating to our fourth quarter 2007 results. 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 publicly any of these statements in light of future events.

Ralph Mandell

Thanks Dennis. We will organize our discussion today into three parts. First, I will discuss the progress we have made in executing our strategic growth plan. Second, Larry and Dennis will discuss our fourth quarter earnings results and year-end financial condition. And finally, Larry will discuss our strategic focus going forward.

I will begin with a brief summary of the strategic growth plan we unveiled in early November, 2007, and give you a measure of our execution under that plan. On November 2nd, 2007 we announced two landmark events for our company. One of the events we announced was that our Board of Directors had appointed Larry Richman as President and CEO of PrivateBancorp and Chairman, President and CEO of the PrivateBank and Trust Company, our Chicago bank. The second event was the Board's adoption of a strategic growth and transformation plan.

We have added to our senior management team, experienced middle market, commercial bankers in order to substantially expand our client base and achieve significant balance sheet growth and greater diversification of our loan portfolio. We have made significant progress towards implementing this plan, beginning, and importantly with the hiring of Larry as well as the hiring of a substantial number of some senior commercial bankers and other new employees.

We have also reorganized our senior management team and adopted a Transformational Equity Awards program for both our new and existing management in order to promote the achievement of exceptional performance benchmarks. In so doing, we align management's interests with those of all of our stockholders with the goal of creating long-term stockholder value.

Given our substantial loan growth and new clients in the fourth quarter, we believe we are on our way to becoming the premier middle market commercial, commercial real estate, private and wealth management bank in all of our markets. The company hired a net total of 56 new Managing Directors during the fourth quarter 2007, and an additional 15 Managing Directors were hired during the first half of January 2008.

While the majority of these new hires were based in Chicago, the company has added commercial bankers and other personnel in all of its offices and has added three Managing Directors in Cleveland, Ohio, as a result of the establishment of a new business development office in that market during the fourth quarter. This development office will be a very efficient operation which will leverage off the infrastructure of our Chicago bank. We believe the business development office will quickly become productive and will soon add to the company's profitability.

At the end of 2007, the total number of Managing Directors was 224 compared to 148 at the end of 2006 and 168 at September 30, 2007. Full time employees increased 27% to 597 from 471 at the end of 2006. The company expects to hire an additional 15 Managing Directors during the first quarter 2008 which includes starting a new business development office in Minneapolis, Minnesota, and an additional 15 during the remainder of 2008. In 2009, the company anticipates its personnel growth rate to return to historical levels.

As planned, the company incurred substantial costs related to the recruitment of a significant number of experienced middle market commercial bankers. Reflecting early success with our plan, the company achieved record loan growth during the quarter which resulted in a substantial increase in loan loss provision expense. While this is the first time PrivateBancorp has posted a loss for the quarter as a public company, we believe we are investing in the necessary people and infrastructure to execute the strategic growth plan. We are already beginning to see the results of our investment as evidenced by our record 12% loan growth during the quarter. Dennis will later explain the accounting for this increase in the provision required for the new loans funded.

Now, I'd like to turn the call over to Larry to provide more information on the quarter.

Larry Richman

Thank you, Ralph. I am truly excited about the progress we've made and the momentum we have gained during the last couple of months. We have expanded our senior management team with the goal of significantly growing and diversifying our banking and wealth management business. As I stated, during the investor day we hosted in early December, it is our goal to become the premier middle market commercial, commercial real estate, private and wealth management bank in our chosen market. This is a long-term goal that we believe will substantially enhance shareholder value in the long-term. On a short-term basis, we are making significant investments in people and infrastructure, to achieve that goal.

I am pleased to be joined by our new Executive Managing Directors who lead our lines of business, including seasoned professionals, Karen Case, Gary Collins, Bruce Hague, Wally Head, Bruce Lubin, Hugh McLean and Bob Frentzel and Jeff Steele. They are a part of my executive management team and are all strong relationship bankers and leaders in our business.

I will give you an overview of our performance in the fourth quarter and our December 31st, 2007 financial position. And then, I'll turn it over to Dennis to provide more detail and analysis.

For the fourth quarter 2007 we reported a $15.1 million loss or a loss of $0.68 per diluted share. This is compared to a net income of $9.1 million or $0.42 per diluted share for the fourth quarter of 2006. This resulted to a major part from a higher onetime and ongoing cost related to our strategic growth plan.

Reflecting early success with our strategic growth plan we achieved record loan growth of 12% during the quarter. We considerably increased our provision for loan losses to build appropriate reserves for these new loans and also to account for the credit quality deterioration we experienced in the existing loan portfolio.

Net income for the year ended December 31st, 2007 was $11.8 million or $0.53 per diluted share, compared with $37.8 million or $1.76 per diluted share for the year ended December 31st, 2006. Our balance sheet grew by 12% over the third quarter and grew by 18% over last year's fourth quarter. During the fourth quarter, we added $452 million of loans, and commercial and owner occupied commercial real estate loans grew to become 32% of our total loan portfolio at period end, as compared to 28% at the end of the third quarter.

Year-over-year, our total loans grew by almost $690 million or 20%. During the quarter, core deposits grew 4% or $131 million. Year-over-year, core deposits grew at a rate of 9% or $257 million. As we grow and attract new commercial clients, as well as continue to serve our existing clients, we expect our core deposits will become a considerable funding source for our loan growth.

There is, of course, a lag between the time a commercial client begins a relationship with us and a lending contact, and when we are able to capture the treasury management business associated with that new commercial customer. Our goal is to reduce that time lag and we are working aggressively toward that end in order to attract more core deposits and facilitate our liquidity management.

We strengthened our balance sheet and put ourselves in a strong capital position by completing a $200 million equity capital raise in December as we previously reported. This additional equity capital gives us a foundation to support the growth we are experiencing now. Our goal is to maintain a well capitalized banking organization with a strong credit culture and one focused on nurturing core deposit growth, essential ingredients to maintaining a strong balance sheet long-term.

This is a challenging banking environment, but this is an opportune time for us to capture quality market share. We believe we have a strong balance sheet and the investments we are making now will set us apart from other banks.

PrivateBancorp has a solid foundation and a history of meeting and exceeding client expectation. Each new client relationship we build can bring lending, deposit gathering, fee income from expanded services and products, and wealth management opportunities, and we are presenting our clients with a full array of financial service offerings. This is the very definition of relationship banking, and what distinguishes our bank and our people.

My role, to be sure, is to be sure that all of our employees stay focused on and committed to doing absolutely the best for our clients, deepening existing relationships, creating new deep relationships and to do it on a cost efficient and productive basis. We are doing that today and will continue to do that as we execute our strategic growth plan.

And now I'd like to ask Dennis to present more details about our fourth quarter 2007 financial results.

Dennis Klaeser

Thank you, Larry. The press release was distributed today at the open of markets and is available on our website at www.pvtb.com. I would like to summarize our financial results for the fourth quarter and comment on some key financial trends.

For the fourth quarter 2007, earnings per share reflect a loss of $0.68 compared to earnings of $0.42 for the third quarter and earnings of $0.42 for the fourth quarter 2006. Year-over-year the company earned $0.53 as compared to $1.76 for 2006. The net loss for the fourth quarter was $15.1 million compared to net income of $9.2 million in the third quarter of 2007 and $9.1 million for the fourth quarter of 2006.

During the fourth quarter, the company incurred $13.7 million of expense in sign-on bonus payments to new hires. This expense is reflected in the salaries and benefits operating expense line item. We expect to incur additional sign-on bonus expense in the first quarter although the expense will be substantially lesser amount and is expected to be in the $2 million range for the first quarter.

Also, during the fourth quarter, we incurred substantially higher professional fees than normal with at least $2.5 million of the fees associated directly with the recruitment and hiring of new employees. Going forward, we would expect our professional fees to move back down to the mid to high $2 million range on a quarterly basis.

Additionally, the company made Transformation Equity Awards to new employees and certain foundation employees. Transformation Equity Awards had a total GAAP value in the range of $45 million at December 31st, 2007. The cost of these Transformation Equity Awards will be expensed over a five-year period ending December 31st, 2012. Amortization costs associated with these awards totaled $2 million for the fourth quarter of 2007.

Salary expense for transformation hires made during the quarter were just over $2 million. When considering the salary expense for new hires, additional sign-on bonuses to be paid in the first quarter, the cost of amortizing the Transformation Equity Awards, we expect our total salary and benefit expense to be in the mid to higher $20 million for the first quarter.

As of December 31st, 2007, consolidated loans increased 12% to $4.2 billion from the third quarter 2007 and increased 20% from December 31st, 2006. Commercial loans including owner-occupied commercial real estate grew by $283 million or 27% and total non-owner-occupied commercial real estate loans, including multi-family loans, grew by $106 million or 7%. Personal loans grew by $31 million or 9%. Our construction loan portfolio grew by $27 million, or 5% during the quarter. Growth in the construction loan portfolio was essentially all from non-residential commercial type properties. In total, loans grew by $452 million during the quarter with $332 million of this growth occurring during the month of December. Obviously, this exceptionally strong loan growth should result in stronger revenue growth in the first quarter of 2008. However, in the fourth quarter of 2007 this strong growth results in higher loan loss provision expense during the quarter.

If you take a look at our balance sheet, you will note that our allowance for loan loss increased by $6.8 million to $48.9 million at year end from $42.1 million at the end of the third quarter. Much of this increase resulted from the loan growth we experienced during the fourth quarter. When looking at the income statement, the provision for loan losses in the fourth quarter 2007 was $10.2 million, compared to only $770,000 in the fourth quarter of 2006 and $2.4 million in the third quarter of 2007. The very significant increase in the provision expense is a reflection of our strong loan growth during the quarter.

Additionally, our provision expense was higher because charge-offs were relatively high for the quarter. Net charge-offs totaled $3.4 million or an annualized charge-off rate of 35 basis points for the fourth quarter versus net charge-offs of only $49,000 or one basis point of average loans in the prior year quarter, and net charge-offs of $1.6 million, or 17 basis points of average loans in the third quarter of 2007. The charge-off rate for the full year 2007 was 17 basis points. Fourth quarter charge-offs consisted of $980,000 of charge-offs in Chicago, $775,000 in Michigan, $1.4 million in St. Louis, and $190,000 in Georgia.

The allowance for loan losses as a percentage of total loans was 1.17% at December 31, 2007 versus 1.13% at September 30, 2007 and 1.09% at December 31, 2006. Non-performing assets to total assets were 0.96% at December 31, 2007 as compared to 0.80% at September 30, 2007 and 0.23% in the prior year’s fourth quarter.

Of total non-performing assets 36% are construction loans, 34% are commercial real estate, 20% are commercial and industrial loans, and the remaining 10% are classified as residential or personal loans. The majority of non-performing construction and commercial real estate loans are residential development related loans.

With regards to credit quality in our different markets, 27% of non-performing assets are from Chicago, 36% from St. Louis, 14% from Michigan and 23% from Georgia. The company owned $9.3 Million of repossessed real estate at December 31, 2007. $2.1 million is from Chicago, $4.5 million is from St. Louis, $1.5 million is from Michigan, and $1.1 million is from Georgia.

During the fourth quarter we incurred approximately $1.9 million of costs associated with OREO. Most of this cost resulted from us writing down the value of real estate owned. The $1.9 million of cost is reflected in other operating expense and is the reason other operating expense increased to $4.1 million in the fourth quarter from $1.7 million in the third quarter.

There are significant credit quality differences in our different market areas. This is demonstrated by the non-performing asset ratios for our different banks which range from 0.39% in Chicago to 3.51% in St. Louis. The non-performing asset ratios are 3.44% for Georgia, 0.98% for Michigan, and none of the loans in Wisconsin or Kansas City are currently non-performing.

Consolidated core deposits grew 9% to $3.2 billion as of December 31st, 2007 compared to core deposits of $3 billion at December 31, 2006 and grew 4% from $3.1 billion at September 30, 2007. Broker deposits were $542 million at December 31, 2007, down 8% from $589 Million at December 30, 2006, and up 8% from $500 Million at September 30, 2007.

To follow up on Larry’s earlier comment, we remain focused on attracting core deposits for our client relationships and new client acquisitions. However, it’s likely that loan growth will lead core deposit growth, so I expect us to increase our reliance on broker deposits and other wholesale funding over the next few quarters.

Net interest margin was 2.96% for the fourth quarter, 2007 compared to 3.13% in the third quarter, 2007 and 3.25% in the fourth quarter of 2006. Yields on earning assets decreased 38 basis points over the prior year quarter while our cost of funds decreased 11 basis points. Net interest margin decreased 17 basis points compared to the third quarter of 2007. During the quarter we reversed $634,000 of accrued interest income due to loans placed on non-performing status.

The interest reversal during the quarter accounted for six basis points of margin compression. We expect to have additional pressure on our net interest margin in the first quarter of 2008 as a result of the 75 basis point reduction in Fed funds rate and the expected additional rate cuts yet to come this quarter. However, net interest income should show stronger growth as a result of the strong loan growth that we experienced in the fourth quarter.

Non-interest income increased to $6.2 million in the fourth quarter, 2007 compared to $5.6 million in the fourth quarter of 2006, and decreased from $6.8 million for the third quarter of 2007. Residential mortgage fee income was $828,000 compared to $1.2 million in the third quarter, 2007, and up from $807,000 in the fourth quarter of 2006. Wealth management fee income was $4.3 million during the fourth quarter of 2007, an increase of 19% from $3.6 million in the fourth quarter, 2006 and up from $4 million in the third quarter of 2007.

Wealth management assets under management increased 16% to $3.4 billion at December 31, 2007 from $2.9 billion at the end of 2006, and increased 2% from $3.3 billion at September 30, 2007.

During the quarter the company added 56 Managing Directors and increased the number of Managing Directors to 224 compared to 168 at September 30, 2007, and 148 at December 31, 2006.

Full time equivalent employees increased to 597 at the end of the fourth quarter from 517 at the end of the third quarter, and 471 at the end of the fourth quarter, 2006, reflecting the continued growth of our company pursuant to our strategic plan.

Now, let me turn it back to Larry.

Larry Richman

Thank you, Dennis, for your review of the fourth quarter, 2007 earnings. Before we go into Q&A, I’d like to give you an overview of our strategic priorities.

First: integration. 67 new Managing Directors have joined PrivateBancorp since the third quarter of 2007. The majority of these new Managing Directors joined us during the later half of the fourth quarter. Integrating these new hires is our first priority, and giving them the tools and systems to be immediately productive.

These are experienced bankers. That’s approximately $332 million of our $452 million of fourth quarter loan growth occurred during the month of December. Our new hires, working along with our existing MDs and staff, are becoming productive very quickly.

As discussed earlier, we are very focused on the importance of funding that growth. Core deposit gathering is, in addition to loans, a key priority. Establishing deep banking relationships brings with it loans, deposits and expanded fees for products and services provided. We always focus on long-term relationships and being a value added advisor and a strong high-touch client service.

Second: infrastructure. Given our fourth quarter growth rate and the expected growth in 2008 and beyond, we have to ensure that we have the appropriate infrastructure to accommodate our expansion. This is a priority for us. Brant Ahrens, who heads Strategy and Integration Planning, and Jay Williams, our Chief Operating Officer, are working closely with me to analyze where we need to enhance infrastructure and we are taking the necessary steps to do that. This type of infrastructure is critical as part of our plan.

Third: client acquisition and expansion of existing relationships. Our fourth quarter loan growth underscores our early success in acquiring new business from existing and new relationships. The 67 MDs who have joined us since September have, and will, contribute to our growth. But the Managing Directors, who have been part of The PrivateBancorp before I arrived in November, continue to make substantial contributions as well.

We are working together as one team staying focused on identifying, nurturing and acquiring new client relationships as well as expanding our existing relationships. We are adding products and services to the suite of services we offer our clients, and I believe this will contribute to our ongoing success in growing our client base as well as diversifying our revenue source.

Fourth: setting high performance standards. As we announced in early November, the company adopted a Transformational Equity Award program to attract talent and promote the achievement of exceptional performance benchmarks. Two thirds of those awards have performance-vesting divisions that create an incentive for management to achieve significant stock appreciation and earnings per share growth hurdles. 100% vesting occurs if the company achieves a 20% compounded annual growth rate in stock price over the next five-year period, and a 20% compounded annual growth rate in earnings per share. Performance counts in our organization. And while we believe that these are exceptional performance benchmarks, I believe they are attainable.

Fifth: risk management. We recognize the risks inherent in our business and we manage to them. As we grow, we have a keen focus on credit and interest rate risk management, among others. We are hiring professionals where we need in order to supplement our risk management systems and continually review our systems to determine where enhancements are justified.

In closing, I want to emphasize our commitments to our clients we serve and to our communities that we live and work in. This has been the foundation of The PrivateBancorp since its inception and it will continue as we expand. We, as a combined team, are now in the next phase of our development. We will continue to build upon this foundation and seize opportunities. We are creating something very, very special. Anticipating that there are some questions, we will now go directly to the Q&A portion of our quarterly call.

Question-and-Answer Session

Operator

Thank your sir. The question-and-answer session will begin at this time. (Operator Instructions) The first question comes from the line of Steven Alexopoulos with JP Morgan.

Steven Alexopoulos – JP Morgan

Good morning everyone. First question, I’m curious, the range of charge-offs was fairly wide in ‘07. What do you view as the normalized level that we should look for here for 2008?

Dennis Klaeser

Steve this is Dennis. It’s always difficult to predict it quarter-to-quarter. But clearly the charge-off rate that we had in the fourth quarter was higher than what we would think would be normal. When we look for the full year, 2008, we would expect our full year charge-off rate to be in the low to mid teen range. So that would suggest a rate, a level meaningfully less than the charge-offs we had in the fourth quarter.

Steven Alexopoulos – JP Morgan

Okay. In terms of the growth we’re seeing, as you work through the year, do you plan to limit the difference between the loan and deposit growth to protect the margin? Are you thinking about that?

Larry Richman

Steve, it’s Larry. We review each new relationship as it comes in and as we evaluate its level of profitability and are very, very focused on driving complete relationships that include both loans deposits and fees. So there will be always a focus on balance so that we make sure that not only are we generating loan volume, but we’re also generating a core deposit gathering capability to help us fund that growth. And so there is always a balance and even though each relationship will be different, we’re seeking not only loans and deposits. But we are also seeking new deposit relationships separate from lending relationships as well.

Steven Alexopoulos – JP Morgan

Ok. And just a final question, I think Ralph said this was the first quarterly loss we’ve seen. What’s your projection for when you think we get to break even on an earnings basis?

Dennis Klaeser

Well, Steve, as you know we don’t like to give earnings guidance. So, we would expect there to be some modest loss again in the first quarter. But, those losses are occurring for what we think are the right reasons. It’s investing our infrastructure, investing our people, and seeing the results, the early success of our growth. The provision expense obviously leads the net interest income. So, this is a transition period. But long term we think this will pay good dividends and generate good strong franchise value growth for the shareholders.

Steven Alexopoulos – JP Morgan

In terms of positive operating leverage Dennis, do you think we could see that as early as second quarter for it to play out?

Dennis Klaeser

We’ll start seeing that trend in the second quarter, right. But I don’t feel I should predict second quarter bottom line results at this point.

Steven Alexopoulos – JP Morgan

Right, okay, thank you.

Dennis Klaeser

Thank you, Steve.

Operator

The next question comes from the line of Terry McEvoy with Oppenheimer and Co.

Dennis Klaeser

Hi Terry.

Terry McEvoy – Oppenheimer & Co.

Could you comment at all about the average loan size in Q4, particularly in the month of December?

Dennis Klaeser

The average loan size definitely has migrated up some. But it’s still- it’s not dramatically higher than what PrivateBank historically was pursuing.

Terry McEvoy – Oppenheimer & Co.

Okay, and just out of curiosity, any of the loan growth in the fourth quarter come from the local businesses who are now equity investors in the company? And if so was it meaningful?

Dennis Klaeser

In terms of the loan portfolio, no. It would be a very minor, if at all, contribution. But we are seeing strong deposit flows from those strategic investors.

Terry McEvoy – Oppenheimer & Co.

And just one last question; If I look at the provision and look at loan growth - I think Dennis in the past you had said, you would be provisioning about 1.3% of new loan growth. So, of the $452 million about $5.9 million to account for the loan growth in the quarter. Is that still the thinking as we move into 2008?

Dennis Klaeser

No, Terry, I don’t know if I said 1.3, I think that’s a little bit high for the incremental loan growth. I think it’s more likely in the high 120 range or a little bit lower than that actually, so it depends on the mix of the credits.

Terry McEvoy – Oppenheimer & Co.

Okay. I understand, great. Thank you.

Larry Richman

Terry, it’s Larry. Let me add something to the first point which is the investors' support. We have received very, very good solid support from our investors and although the initial loan growth is not coming from those investors, their support in the markets have been exceptional and have helped us in other ways.

Terry McEvoy – Oppenheimer & Co.

Thank you. Appreciate it.

Operator

Your next question comes from Ben Crabtree with Stifel Nicolaus.

Ben Crabtree – Stifel Nicolaus & Company

I’d like to talk a little bit about the loan production office strategy that you have initiated in Cleveland and then you’re going to be opening up here. I guess, two questions, it does look like something new for you, maybe I’m not right on that, but I’m assuming that this gets around a little bit of the front end costs of de novo expansion that’s always kind of troubled Ralph. The question I would have is, do these typically generate much in the way of deposits, or is it pretty much just loans?

Larry Richman

It’s Larry, and let me start by saying that we’ve had experience building and the leadership team that is leading this charge has had experience building. We call them business development offices as opposed to business loan production offices and we do that because each relationship developed is really not only loans but it’s the ability to create deposits and other services and fees. And even though we will not be taking deposits locally because of the effectiveness of the treasury management capabilities, you could centralize and still provide very good, effective cash management capabilities, while at the same time not having local branches. And so it gives you the ability to generate deposits and fees, as well as generation of loans and what it also allows you to, it allows us to cross-sell our private banking and wealth management to these recognized deep relationships in those local markets.

Ben Crabtree – Stifel Nicolaus & Company

And you can generate wealth management business in that kind of an office?

Larry Richman

You can generate introductions to a centralized wealth management capability that we have here in Chicago.

Ben Crabtree – Stifel Nicolaus & Company

Okay. And Dennis, you gave us a sense, kind of what normalized charge-off rates ratios might be. I guess I’m - if we could translate that over to the margin discussion, and you mentioned the trends in generating deposits and things like that, it strikes me that the LIBOR situation has rectified itself a little bit and some of your cheaper money might now be in things like broker deposits and especially FHLB advances. Am I interpreting that correctly and is there potential for some margin of improvement once we get beyond the asset sensitivity impact from the Fed cuts?

Dennis Klaeser

Ben, I think you’re thinking it exactly correctly. There is a transition point here where the re-pricing of loans is a bit faster than the deposits. However, we have seen this correction to a degree with the LIBOR rates where in the first quarter so far, as I’m sure you know, LIBOR has come down, I think it’s in the neighborhood 150 bases points or so, whereas Prime has come down 75 bases points and those LIBOR rates are oftentimes the more important determinants of the wholesale funding cost. So, I think that’s a good trend and would suggest that after we get past the initial downward pressure on margin that we should see stabilizing and then improving margin coming in after that.

Ben Crabtree – Stifel Nicolaus & Company

Okay, great. And a last question, which kind of has to do with, I guess, would be under the category of Managing Director productivity. Obviously you’ve greatly boosted the number of Managing Directors and they’re relatively new. I guess I’m trying to get a sense of how long it might take before we start getting, say, revenues per Managing Director back to a more normalized level. I mean, is that three quarters down the road, is it six or eight quarters down the road?

Dennis Klaeser

Well, we need to get another quarter or two of experience to become completely predictive of that. However, I should say that the new Managing Directors that we’re hiring are becoming productive exceptionally quickly. I think you can, and that’s evidenced by, clearly by the loan growth that we’ve generated in the fourth quarter. So, we’re very pleased with how quickly they hit the ground and gotten running and we think we’re going to be able to turn the corner in a relatively quick fashion.

Larry Richman

It’s Larry. Let me add a couple things. First, we actually have added, the organization has added a number of new Managing Directors quickly but these are very seasoned and productive Managing Directors and, so I feel very good about the team that Ralph and the organization has brought together.

Ben Crabtree – Stifel Nicolaus & Company

Okay. Thank you.

Operator

Your next question comes from David Long with William Blair

Larry Richman

Hi, David.

David Long – William Blair & Co.

Just wondering if you could provide a little bit more color on the investment in the infrastructure? I know in Chicago there, you guys moved into a new facility last year that had some extra space but do you foresee needing more space in Chicago or your other markets at this point?

Larry Richman

David, its Larry. We are paying very close attention to infrastructure and it’s infrastructure so that we could maintain an efficient and productive work force. And in that regard we are clearly tight for space, so we’re addressing that issue. But at the same time that we’re addressing the tightness of space, in today’s environment, there’s great productivity because of all the technology to allow the officers to be effectively out on the street calling and developing business. The infrastructure that we’ve focused on has really included the credit risk function and the other systems and capabilities, to make sure that we are doing all the things correctly and prudently as we build upon a very strong organization.

And it’s really in that regard that we have built infrastructure and in that regard we have just recently hired, Ralph has recruited a fellow named [Kevin Van Sulcama], Kevin is a very experienced Chief Risk Officer and he just came on board last week.

David Long – William Blair & Co.

Great. Thanks.

Larry Richman

Thank you.

Operator

Your next question comes from Christopher Marinac with FIG Partners

Christopher Marinac – FIG Partners

I have a follow up on Ben’s question earlier about deposits and I was curious on deposit pricing. What is necessary to win deposits Larry, and from a pricing perspective, how much do you have to pay up to win them on the core side?

Larry Richman

Well, it’s interesting and I’ll have Dennis speak to the specifics of pricing but what we have found, very positively, is that relationship funding has been a key component of our core deposit gathering capability. And it’s for those active relationships that our Managing Directors have what they’re, we’ll call it their prospects in their clients, and our existing client base, that is really a center point of where we are driving deposits. And so in that regard, we always have to be competitive but we’re not doing it because we’re the highest, we’re doing it because we’re, we believe we’re the best, from the standpoint of building those long-term relationships. Those relationships are multi-faceted so it’s loans, it’s deposits, it’s doing other banking services as well. And as we integrate, as we have already, some of the treasury management products and services, that similarly will drive sticky core deposit gathering which will help. And that is a center point of what we’re trying to, what we’re building here.

Christopher Marinac – FIG Partners

So I guess for Dennis, for you, I mean, as you go through this the next several quarters and years, do you end up coming back to, sort of a Rayrock profitability model, do you look at margin as your dividing line of over how successful or not you’re being?

Dennis Klaeser

Well, we have a profitability model where we look at the - are we down to the client level returning allocated capital to the client level. And margin is important but it’s not the only key metric that we’re going to look at because we’re also going to look at related fee income that we can generate with the client relationships. So, our measure of success is probably, a better indication of it is revenue growth rather than the short-term margin direction.

Christopher Marinac – FIG Partners

Great, that's helpful, thank you.

Larry Richman

It’s Larry, and just to reinforce the point, that it is revenue growth by client relationship. But there is a very strong institutional belief here at The PrivateBancorp that deepening client relationships and achieving strong return on equity at the client level is a very important measure of our success. And there’s greater precision that we are putting in place to measure client relationships that drive to the overall organization’s relationship. That profitability is not only the margin on the loan obviously, but it’s really the margin we achieve on the entire banking relationship.

And part of the key to our long-term success is not only to achieve deep cross-sell or margin and effective sale, but it’s really to achieve cross-sell across lines of business and that’s with private banking, it’s with wealth management and it’s within the commercial lines of business.

That’s really where we’re going to see the best, biggest long-term success and of course we’re building from a very strong foundation and that culture does very much exist in our organization with a deep belief in client service, but again that’s really, those are some of the bench marks that we’re going to be measuring going forward.

Christopher Marinac – FIG Partners

Ok great. Thanks very much.

Operator

Your next question comes from Daniel Arnold with Sandler O’Neill.

Dennis Klaeser

How you doing?

Daniel Arnold – Sandler O’Neill & Partners

Good. First question is on the loan growth front. I just wondered, you know, the pace in December seemed to pretty quick. Well first of all I was hoping you could repeat that number that you said you guys grew in December as versus the entire quarter, you know that Larry had mentioned earlier, I kind of missed it.

Dennis Klaeser

Well, $332 million in the month of December.

Daniel Arnold – Sandler O’Neill & Partners

And, I’m just wondering, is that December pace going to continue? I mean, how much of that is kind of getting a low hanging fruit versus just kind of standard loan growth that you’re going to see over the next couple of years from all the new Managing Directors you guys have hired?

Dennis Klaeser

In any quarter, there’s a bit of intra-quarter seasonality and so you generally do have stronger growth in the third month of each quarter. So I wouldn’t project $332 million as a monthly run rate at all. But, that said, we have built a very strong pipeline and we’re feeling very bullish about our growth prospects.

Larry Richman

I guess to add to that and - it's Larry - there’s been very positively growth from the foundation and the existing organization, as well as some very good growth of new business relationships and it’s both that really makes us feel good.

Daniel Arnold – Sandler O’Neill & Partners

I was wondering if you guys could give an update, just kind of on the number of shares maybe that you guys have issued in the equity incentive or just given, kind of, the rapid pace of hiring that just continued. Maybe that’s for Dennis.

Dennis Klaeser

I’m sorry could you repeat the question?

Daniel Arnold – Sandler O’Neill & Partners

Just how many shares have been issued from the equity incentive programs? I think the last update was a while ago and I think there's been some significantly hires since then.

Dennis Klaeser

I’ll have to get you that number but I believe it’s 4.1 million shares, but I need to confirm that number.

Daniel Arnold – Sandler O’Neill & Partners

And then, just one last question on the charge-offs and the rate was, I guess, significantly higher in the fourth quarter than what you’re looking for, and I was wondering if there was anything causing that or if maybe you guys did, kind of, like a comprehensive loan review or anything like that, given the quarter, to try to clean up the balance sheet a little bit?

Dennis Klaeser

Well, we’re always diligent and do comprehensive loan review and I would say we did a very comprehensive loan review in the fourth quarter as you’d expect.

Daniel Arnold – Sandler O’Neill & Partners

I guess, what’s the reason that’s going to come down?

Dennis Klaeser

Well, we have a pretty good feel for the pipeline of charge-offs and our loan ratings and we do believe that the charge-off rate should come down from that level.

Daniel Arnold – Sandler O’Neill & Partners

Maybe I asked the wrong - is the rate going to come down just as a result of an increase in loan growth with new loans not really having (inaudible) the absolute number to come down?

Dennis Klaeser

Well, historically our charge-off rate obviously we had single-basis point charge-off rates so on the foundation business, the charge-off rates are higher than average, but you’re right the charge-off rate is also benefited by the fact that we’re having good growth in the denominator, in the total loan portfolio.

When you consider the growth as well as the expected charge-off rate, the dollar amount of charge-offs, we would expect that the charge-off rate would be in this 13, 14, 15 basis point range for the full year based on what we know now.

Daniel Arnold – Sandler O’Neill & Partners

Okay. Thank you very much guys.

Operator

(Operator Instructions). Your next question comes from John Rowan with Sidoti & Company.

John Rowan – Sidoti & Co.

Just a couple of quick questions, can you just go over the guidance you gave one more time on compensation and professional fees?

Dennis Klaeser

The professional fees at $6.4 million are unusually high and we could expect that to come down to the mid to the high $2 million range in the first quarter of 2008. The salaries and benefits expenses, there’s a number of items going on there with new hires and the cost of the Transformation Equity Awards. When you look at the first quarter of 2008, considering all those factors, the salary and benefit expense should come out to the mid 20 to higher $20 million range.

John Rowan – Sidoti & Co.

Okay.

Dennis Klaeser

Included within that is going to be about $2 million worth of additional sign-on payments to be paid during the first quarter.

John Rowan – Sidoti & Co.

Okay, and what should we use as the tax rate going forward?

Dennis Klaeser

The likely tax rate going forward is around 33%, I would say would be the reasonable range of rate to be using.

John Rowan – Sidoti & Co.

Okay, and just one question for Larry. Looking at fees, where do you see opportunities for additional lines of fee revenue, and when can we expect to see that start coming through?

Larry Richman

Sure, fees will come from deepening client relationships and it will include a number of different categories. One is treasury management fee income, so that as we provide deepening products for our clients, deepening products and services for our clients, there is fees paid in addition to balances generated. In addition to that we are starting to do more foreign exchange and more derivative product capabilities for our client base and we expect that to continue, as well as we believe that there will be greater cross-sell income from wealth management, which is again another key component strategy. We’re expecting that to continue and it is beginning as we speak, on an ongoing basis. It’ll clearly accelerate over time, but that’s something that’s starting to take place with every new client relationship.

John Rowan – Sidoti & Co.

Okay, thank you.

Larry Richman

Sure.

Operator

Your next question comes from David Priego with Litmus Capital.

Dennis Klaeser

Hi, David.

David Priego – Litmus Capital

So I’m looking at the regional mix in non-performing assets, and it seems to me like the non-Chicago market gets a disproportionate amount of NPA’s. First of all, is this the case? And what’s the driver for that, are you guys seeing different risk profiles outside of Chicago or is it more of one off specific cases we’re talking about?

Larry Richman

In our press release in the supplemental financials we show in detail the non-performing assets by geography and the non-performing asset rates, and in my prepared text I talked about how the non-performing assets as a percentage of total loans varies considerably from market to market. There is differing risk profiles in the different markets in the St. Louis and Atlanta markets, we do have greater exposure to residential development lending and that’s reflected in the higher - that results in the higher non-performing asset ratios in those markets.

David Priego – Litmus Capital

Okay, is this active, is this part of the legacy book or are we targeting different customer profiles depending on the state?

Larry Richman

I don’t think I understand your question, but it’s part of the legacy portfolio.

David Priego – Litmus Capital

Thank you.

Larry Richman

Sure, you’re welcome.

Operator

Your next question comes from Mac Hodgson with SunTrust Robinson

Dennis Klaeser

Hi Mac.

Mac Hodgson – SunTrust Robinson Humphrey

Hey, good morning. A couple of quick questions on expenses again. Dennis, on professional fees, 6.4 million for the quarter, I think you said it’s going to be the mid to high $2 million range going forward. I believe there were at least mentioned $2.5 million of that is related to new hires in the quarter. What else makes up that difference that’s non-recurring this quarter?

Dennis Klaeser

There are various other expenses, professional fee expenses that we incurred in the quarter, some of which you might attribute to onetime costs, but the $2.5 million was what’s specifically attributable to the hiring of people.

Mac Hodgson – SunTrust Robinson Humphrey

Okay thanks. And is the marketing expense of $2.4 million, is that more indicative of what we’re going to see going forward?

Dennis Klaeser

That is a bit high as well, and I would think it would come marginally below $2 million going forward probably is a more reasonable range, and that’s more consistent with the trends that you’ve seen in prior quarters.

Mac Hodgson – SunTrust Robinson Humphrey

Okay, great, thanks guys.

Dennis Klaeser

Thank you.

Operator

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

Larry Richman

Thank you. Ladies and gentlemen, this concludes the conference for today. Thank you all for participating and for your continued interest in the Private Bancorp. Have a great day.

Operator

A digital rebroadcast of this conference will be available commencing at 2:00 PM ET today through midnight January 31, 2008 (Operator Instructions).

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Source: PrivateBancorp, Inc. Q4 2007 Earnings Call Transcript
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