Executives
Ralph Mandell – Chairman
Larry Richman – President & CEO
Dennis Klaeser – CFO
Kevin Van Solkema – Chief Risk Officer
Analysts
Steven Alexopoulos - JP Morgan
David Long [ph]
Ben Crabtree [ph]
Daniel Arnold [ph]
Terry McEvoy [ph]
Kenneth James [ph]
John Rowan [ph]
Christopher Miramax [ph]
Peyton Green [ph]
Mike Hodes [ph]
Justin Mauer [ph]
Daniel Cardenas [ph]
PrivateBancorp, Inc. (PVTB) Q2 2008 Earnings Call Transcript July 29, 2008 11:00 AM ET
Operator
Welcome to PrivateBancorp, Inc. second quarter 2008 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 at the end of 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 conference over to Larry Richman, CEO of PrivateBancorp, Inc. Please go ahead sir.
Larry Richman
Good morning and welcome to our second quarter earnings conference call. Joining me this morning is Ralph Mandell, Chairman of the Board; Dennis Klaeser, our Chief Financial Officer; and Kevin Van Solkema, our Chief Risk Officer.
Prior to discussing our second quarter results, I'd like to 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’s Laws. Management’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which 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 second quarter 2008 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.
Larry Richman
Thank you Dennis. We'll begin our call with insights on our second quarter results from Ralph Mandell, the co-founder of PrivateBancorp and its Chairman. Ralph?
Ralph Mandell
Thank you Larry and good morning. I thought I'd start by commenting on just a couple of important developments in the quarter. First, while we completed to develop with the hiring for the primary phase of our strategic growth plan in the fourth and first quarters, we continue to take advantage of opportunities in our various markets to bring on talented, experienced professionals. These are people who can quickly help us attract new clients and improve our ability to serve existing clients. That includes additional resources and support areas such as risk management and operations. As well as client-facing professionals in banking, treasury management and capital markets.
Since November 1, we have added 115 managing directors and associate managing directors with 25 in the most recent quarter, and our total employee count as of June 30 is 712. These are all quality individuals who share a common commitment to serving our clients and creating value for our stockholders.
Secondly, the changing landscape for banks and other financial services companies has benefited us on a number of fronts besides just the great professionals we've signed down. We also have been able to leverage the disruption and uncertainty into attracting clients as well. In times like this, clients warrant deep, stable relationships. We have the bankers to provide those. We can also be more selective in the deals we are doing and more discipline in how we structure them. These factors certainly leave us well positioned to realize significant benefits once the markets turn.
I and our other board members continue to be pleased with the great progress we are making against our strategic growth plan. We have a clear vision for what we want this company to be. Larry and the entire executive leadership team have done a great job of getting our employees in all of our offices engage achieving our vision, serving our clients, and delivering results for our stock holders. Now Larry will provide additional insights on our company.
Larry Richman
Thank you Ralph. Before I talk in more detail about our second quarter results, I wanted to make one special comment. As I'm sure all of you are aware earlier this month, Norman Bobins joined the board of our holding company and I had the distinct privilege of turning over the chairmanship of the Private Bank Chicago to him.
Norman's a good friend to both Ralph and me, and we look forward to having his experienced insight and counsel as we continue to grow our company and move towards our vision.
Now let me turn to our second quarter performance. Today, we reported a net loss for the second quarter of 2008 of $13.3 million or $0.48 per diluted share compared to net income of $8.8 million or $0.40 for diluted share for the second quarter of 2007.
The loss was primarily due to two factors. The first is the ongoing investment in our strategic growth plan. This includes expenses related to the adding of quality members to our team as well as professional fees to support the rapid expansion of our product and service offering and related development costs. Additionally, reflected in our compensation expenses is the correction of the accounting errors which was explained in the release.
The second is the continued increase in our provision for loan loss, mostly related for the strong growth in our loan portfolio. Let me start with our Strategic Growth Plan expenses. One key component of our strategic growth plan calls for the appropriate investment in our people. The value of our organization really lies in the value of our people. As Ralph mentioned, we continued to add high-quality professionals to our team. As such, our employee expenses increased by $19.1 million compared with a year ago or $17.8 million excluding the accounting error correction.
Most of the second quarter’s hires fell into two areas. First, we added several professionals for our treasury management and capital markets group to help us grow our deposit base and increase cross sale the income for Private's developed specifically to meet our clients’ needs. And as you read in this release, these investments are paying off with about $2 million in new capital markets revenue and strong deposit growth from our treasury management activities in the second quarter.
The second group of hires fell largely in our operations and risk management areas. Making sure we have an infrastructure in place to support our growth trajectory is critical to our success. Speaking more broadly about expense control for just a minute, we are actively managing our expenses given the current economic environment. The investments we are making are in areas which we see a fast and greater rate of return. So, we won’t stop investing in our Strategic Growth Plan but we will be smart and disciplined about managing our expenses with an eye towards achieving greater operating leverage through a continued, sustainable, organic revenue growth.
The second area I want to focus on relates the credit quality and risk mitigation. The second quarter loan delinquencies were significantly reduced. We are pleased with the decrease in our past due accounts and we remain closely focused on all past due loans. Like all others in the market right now, we continue to experience higher loan loss provisions and that was another significant factor in our second quarter loss. Dennis will discuss our loan portfolio and provisions in greater detail in a moment. I will say historically, non-performing loans and charge-offs were very low. So the increases we’re reporting are from very low bases.
Our weakened credit trends remain disproportionately attributable to the residential development sector. When we look at our current level of non-performing loans, the numbers are higher than we’d like but they are certainly are manageable. The residential development sector is experiencing considerable softness with slow selling of both homes and lots. The market conditions in this segment of our portfolio are expected to remain weak.
In order to manage our exposure, we review our entire residential development portfolio each month. This allows us to validate our risk ratings and analyze current borrower and guarantor information. This leads me to a brief discussion of what we are doing to enhance and improve our risk management practices overall.
As I have mentioned at the outset, Kevin Van Solkema is in the room here today. Kevin came on board earlier this year, and in a very short time, has done a great job to enhance our risk management procedures given the growth and diversification of our business. Under Kevin’s leadership and with the strong addition to his team, we have restructured our risk management function, decentralized policy and processes to align organizationally, to better the growth of our loan portfolio.
The risk management team has implemented common lending practices and policies to strengthen our credit review and underwriting standards. The changes we have made and will continue to make, allow us to be highly responsive to our clients while more aggressively managing our risk.
With all that said, we continue to make great progress against the Strategic Growth Plan objectives. We remained focus on our five core business groups; Illinois Commercial and Specialty Banking, National Commercial Banking, Commercial Real Estate, Private Clients and wealth management.
We are introducing more of these capabilities across these business lines into all of our regional markets. Yet, from a client’s perspective, we are one company, one team – working together to deliver the comprehensive solutions of the private bank. We have added important new products to enhance the relationships we are building with our clients. And while products are important and certainly are a means to meet our client needs, we are committed to our relationship-based business (inaudible).
We know the clients who come to us are looking for a trusted advisor. Someone who will take the time, to know them, knows their ambitions and craft tailored solutions to meet their goals. In fact, the great majority of our clients are individuals and companies who our bankers who have known well for many years. This depth of knowledge is another factor that allows us to control our risk exposure. We have high quality clients and we are able to provide them with high quality solutions delivered by our team of high quality professionals.
In my view, our approach works. We have seen new client acquisition continue to increase. In the Chicago market, for example, our business DDA accounts are up 24% and total DDA accounts are up 15% since December 31st. We continue to make good progress despite a very difficult economic environment. Our capital position is strong and will support our growth into 2009.
And across our company, our people are committed to servicing our clients and achieving our vision of being the bank of choice for middle market commercial and commercial real estate companies as well as business owners, executives, entrepreneurs and wealthy families in all of our markets. And now I would like to turn it over to Dennis to walk through our results in more detail, Dennis?
Dennis Klaeser
Thank you Larry. In my part of the presentation, I will discuss selected key performance indicators that management has focused on as we continue to execute our Strategic Growth Plan including operating efficiency, revenue growth, deposit and loan growth, asset quality and capital. These are the fundamental elements with which we evaluate our performance as we continue to implement our plan and work towards building our franchise value.
As we have stated since the announcement of our Strategic Growth Plan, our goal is to generate sustainable organic revenue growth by building long-term client relationships. This quarter our revenue grew by 17% for the first quarter and grew 33% over second quarter 2007. The primary driver of our strong revenue growth was the exceptionally growth in that interest income which grew by 19% in the second quarter to $43.1 million from $36.3 million in the first quarter.
Given the strong growth in earning assets during the second quarter, we expect that interest income growth will continue to be strong during the third quarter. Included in this quarter’s revenue is Capital Markets’ product income which contributed $2 million or 21% of total fee income. Most of the members of the Capital Markets’ team joined us in the second quarter so we are pleased to see how quickly they are contributing to topline growth.
We also saw a strong growth in banking and other services fees, which is a reflection of the strong growth of new commercial banking clients. The Private Wealth group fee revenue was flat for the quarter as a result of declining stock market and mortgage banking income declined given the slow residential mortgage market.
Operating expenses increased 19% during the quarter to $51.2 million. Excluding the impact of correcting the prior period accounting error, operating expenses grew by 16%. Salaries and benefits increased by $4.1 million with $1.3 million of this expense resulting from correcting the prior period accounting error.
It is important to note that the majority of the remaining $2.8 million increase in salaries and benefits expense is a result of an increase in a non-cash cost of options and restricted stock plans [ph]. Also you should remember that a large portion of the options of restricted stock only best if we achieve certain performance hurdles that we discussed in our previous earnings calls. The significant amount of hiring and granting of transformational equity grants related to our Strategic Growth Plan is completed, and we expect the pace of growth in salaries and benefits to moderate as we go into the third quarter.
Operating expenses were also impacted by higher professional fees which grew as we rapidly expanded our products and service offering, building our operations and IT infrastructure, and generally building the foundation of our growing franchise so that we can increase the depth and breadth of relationships we have with our clients.
Our occupancy expenses increased because of the additional space we needed for our new personnel in downtown Chicago and because of new office space we are leasing for our new business development offices in Minneapolis, Cleveland, Des Moines, and Denver. Our insurance cost increased primarily because of higher FDIC insurance premiums because of the substantial growth in our deposit base.
As Larry mentioned, we are disciplined in our expense management and expect to gain increased operating leverage going forward as a result of this focus and ongoing revenue growth. Excluding the one-time expense associated with the accounting error, we achieved a very modest amount of operating leverage in the second quarter. Looking forward, our goal is to achieve more substantial operating leverage in the third and fourth quarters.
Total deposits increased 23% to $6.2 billion at June 30, 2008 from $5.0 billion at March 31, 2007. Total deposits have grown by 69% from $3.6 billion as of the second quarter 2007. Quarter-over-quarter, we experienced an increase in client deposits of $649 million or 18%. We define client deposits as total deposits less brokered deposits. The CDARs Deposit Program which we initiated during the fourth quarter 2007 has been a good product for us and is a good product we can offer to our clients especially in this market, and those deposits have grown by $157 million during the quarter. CDARs are classified as broker deposits for regulatory reporting purposes, but a large portion of these deposits are traditional for deposits and may help us decrease our reliance on broker deposits.
Broker deposits, excluding CDARs, grew $336 million or 29% during the quarter. This growth is a result of our need to fund our loan demand that we have experienced and because as we expect it, loan growth continues to lead deposit growth.
During the second quarter total loans grew by 25% as compared to the first quarter 2008 and grew by 73% as compared to second quarter 2007. We are continuing to see greater diversification of our loan portfolio as you can see on the pie chart included at the end of our earnings release.
Commercial and industrial loans and owner-occupied commercial real estate loans now make up 42% of our total loan portfolio from 36% last quarter and 26% as of June 30, 2007. Conversely, our commercial real estate portfolio, including multifamily loans, has decreased to 34% of our total loan portfolio as compared to 39% last quarter and 41% as of June 30, 2007.
Net interest margin decreased to 2.75% for the second quarter 2008 compared to 2.88% for the first quarter 2008 and 3.19% for the second quarter of 2007. Net interest margin declined as a result of the substantial decrease in short-term rates in the first and second quarters. Further affecting the margin was the additional cost of funds incurred as a result of the Trust Preferred offering we completed in May.
Total non-performing assets at the end of the first quarter were $73.1 million or 0.98% to total assets compared to $65.9 million or 1.1% of total assets at the end of the first quarter, and compared to $31.3 million or 0.70% at the end of the second quarter 2007.
At the end of the second quarter, net charge offs totaled $6 million or an annualized rate of 42 basis points of average total loans compared to net charge offs of $4.1 million or 35 basis points of loans at the end of the first quarter and compared to net charge offs of $571,000 or only 6 basis points of total loans at the end of the second quarter 2007.
In the second quarter 2008 we had $23 million of provision expense compared to $17.1 million in the prior quarter at $3 million in the second quarter 2007.
The large majority of this increase is attributable to the substantial loan growth the company achieved during the second quarter. Additionally, we have provisions to make up for the charge offs that we made in the second quarter, and we increased our loan loss reserve coverage ratio. We increased the allowance for loan-loss as the percentage of total loans to 1.23% at the end of the second quarter versus 1.21% at the end of the first quarter 2008 and 1.11% at June 30, 2007. We are comfortable with this level of reserve in part because our methodology was enhanced this quarter and now uses discreet loss factors in each of the different markets that we serve.
We had a rigorous process in regularly assessing and updating our risk ratings and all of our watch loans are reviewed formally on a quarterly basis and our residential development loans are reviewed monthly.
As Larry has already noted, loan delinquencies reported this quarter were significantly reduced. Our lending team are actively reducing past due accounts. This is indicative of the consistent risk management we have established across our organization.
The residential development sector of our portfolio continues to receive close attention given the overall softness in this market. I want to give you just a bit of additional color on this segment of our portfolio. Total exposure across the companies is approximately $500 million. About 60% of the total exposure is in Chicago, by far, our largest market. The segment is well-diversified across borrowers with very limited exposure over $10 million and average exposure of about $2 million, and the vast majority of this exposure is supported by personal guarantees. Our residential development exposure is almost evenly split between lots and constructed homes.
Moving on to capital. During the quarter we engaged in two capital raises that resulted in proceeds of more than $310 million in new capital. We issued $144 million of trust preferred securities and raised $166 million of equity during the quarter. Since the announcement of our Strategic Growth Plan, we have raised over $500 million in capital to support our plan and the investments we are making in our franchise growth. Our ability to raise capital quickly in this environment is a testament to the strong plan we have in place for future growth. The new capital that we have raised should allow us to support our continued substantial growth to the early part of 2009.
As of June 30, 2008, the company remained well capitalized for regulatory purposes, we have a total risk-based capital ratio of 13.7% well exceeding the 10% threshold or well capitalized status, and our Tier 1 risk-based capital ratio was 10.98% well above the 6% level required to be well-capitalized. Of course, we are committed to maintaining our strong capital position.
And now let me turn it back to Larry.
Larry Richman
Thank you Dennis. Anticipating that there are some questions, I would now like to go into the Q&A part of our quarterly call.
Question-and-Answer Session
Operator
Thank you, sir. (Operator instructions) Your first question comes from Steven Alexopoulos from JP Morgan.
Steven Alexopoulos - JP Morgan
Hey guys this is Steve Alexopoulos.
Larry Richman
Hi Steve.
Steven Alexopoulos - JP Morgan
Hi. First question, if we look at the non-interest bearing deposits, the period-end growth was much stronger than the average. Just wondering, does that imply the pipeline that those are pretty strong going into the third quarter here?
Larry Richman
Steve, the pipeline is very strong. The level at the end of the quarter was frankly a bit of an aberration. We have a number of clients come in. A couple of significant clients come in late in the quarter and they deposit the funds in non-interest bearing checking, but a good portion of that flowed out into other deposit products in the early part of July. So I would focus on the average balance for the quarter as the trend there -- but the trends have continued to be strong.
Steven Alexopoulos - JP Morgan
Okay. When we look at this $6 million in net charge offs in the quarter, do you hear that as close to a peak number or could we trend higher from here if (inaudible) of net charge offs?
Larry Richman
Steve, I'm going to ask Kevin to address that question.
Kevin Van Solkema
Hi Steve. This is Kevin Van Solkema. Good morning.
Steven Alexopoulos - JP Morgan
Hi.
Kevin Van Solkema
I think it would be a mistake to look at it as a peak. I think that we will continue to see softness especially in the residential development phase while I don't have guidance to give here this morning about charge offs. I do see continued stress in that segment. Suggesting a peak would be, I think, not correct.
Steven Alexopoulos - JP Morgan
And maybe just one final question. Dennis, if we look at the $32-million salary and benefits, do you know what the cash salary number was in the quarter and how should we think about that going forward here?
Dennis Klaeser
Yes. First of all there was that $1.3 million of that amount that is really related to this prior period of accounting year? The accounting year really dates back to 2002 in the purchase accounting of the entity Lone Star. So you got to take that $1.3 million out to understand the run rate and then within the run rate, approximately, I think it's just around $5 million, is related to option and restricted stock expense. So roughly $5 million of that serve non-cash accounting charge related to the amortization of the stock and options.
Steven Alexopoulos - JP Morgan
Okay. And if we look at the cash portion, so you would expect that to continue to trend higher but not as high as we've seen in recent quarters without the guidance?
Dennis Klaeser
That's correct. Yes.
Steven Alexopoulos - JP Morgan
Okay. Thanks.
Larry Richman
Thanks Steve.
Operator
Your next question comes from David Long [ph].
Larry Richman
Hi David.
David Long
Regarding non-performers and net charge offs, are any of those tide to loans originated since November when you guys established a strategic growth plan?
Kevin Van Solkema
Hi. This is Kevin again. The answer is no. We have had very careful client selection of our new business that we brought in since November 1. We have seen almost no delinquency whatsoever and certainly no non-performers or charge offs.
David Long
Okay. Great. And then on being consigned with the capital markets number obviously substantially higher in the second quarter, how is that -- how did that grow throughout the quarter? You said you hired the team in the second quarter. I guess that I'm getting confused. What's a good run rate looking at the capital market line?
Kevin Van Solkema
Yes. David at this point based on one quarter it's difficult for us to give a run rate but in general, over time, we think there's a lot of upside of that number. But at this point it's hard to give you a run rate there.
Larry Richman
David, I guess -- it's Larry. Just a couple of brief thoughts. First, not only has the team executed some -- a number or very nice transactions, but they've done a very good job educating the banking teams of the opportunities here and the opportunities that exist within the portfolio are large, and so therefore we're very optimistic that there will be continued gross sale opportunities both from capital markets as well as, of course, treasury management, private clients, and wealth management opportunities within the new base of clients we're building. It's clearly been one of the focuses we've had and will continue to be one of the focuses. So we're very impressed with the early returns but yet at the same time we're optimistic that it'll continue.
David Long
Okay. Great. Thanks.
Larry Richman
Thanks David.
Operator
Your next question comes from Ben Crabtree [ph].
Larry Richman
Hi Ben.
Ben Crabtree
Yes. Good morning. Thank you. Dennis, I was trying to figure out something in terms of the margin. I noticed that if I look at your loan yield, it declined more this quarter than any other bank that I follow which -- it would suggest one or two things. One is that your loan portfolio is unusually rate sensitive but I also want to explore the possibility that the kind of changing customer focus here is leading to -- customers basically don’t have to pay higher rates and that going forward as the loan portfolio continues to shift at the margin will inherently contract everything else we need.
Dennis Klaeser
No, Ben. I think the primary contributor is we do have an asset-sensitive balance sheet and when you think about how prime change between the first quarter and the second quarter, it went from an average prime, I think 3625 in the first quarter to 5% or so in the second quarter. And so the majority of our foundation portfolio was a prime-based portfolio and so that change in prime really resulted in a lot of the large proportion of those loans pricing down faster than deposits. On the new loan production, the credit spreads are there – are pretty strong, we think, and our – in line with the foundation portfolio – and if anything we’re seeing credit spreads widening somewhat given the market place. So I don’t think your assessment there is correct.
Ben Crabtree
And then presumably if the general expectations of increasing rates later in the year occur that the margin should be positively margined for your net interest margin?
Dennis Klaeser
We hope there’s -- on the other side is the cost of the wholesale funding that has begun to moderate particularly at the short end of the curve but when you get into one -- plus years worth of wholesale funding the cost, they are still aberrationally high relative to live work. So it’s hard to predict really what that cost of wholesale funding will be. We are pleased with the good growth of the quarter -- client deposits and the strong growth of non-interest bearing deposits obviously helps as well.
Ben Crabtree
And how does the CDARs pricing fit within that perspective?
Dennis Klaeser
The CDARs are priced much more closely to core deposits and so the more we bring in CDARs the more positive because they price and many of them –the majority of them really would behave like core deposits. So that’s a very positive product for us to have.
Ben Crabtree
And one last question. The CDAR depositors, are these basically people where there’s an opportunity to do some other fee businesses like treasury management or anything like that?
Larry Richman
Yes. There’s lots of opportunities. Many of these are coming from both existing clients as well as new clients but some of the clients that are moving since CDAR has built business to us are early deposits of deeper relationships to come.
Ben Crabtree
Okay. Thank you.
Larry Richman
You’re welcome. Thank you.
Operator
Your next question comes from Daniel Arnold [ph].
Daniel Arnold
Good morning.
Larry Richman
Good morning Dan.
Daniel Arnold
Hey. First question, just on the credit fund, it looked like there is some deterioration in the Chicago commercial real estate market. I just want to see what you guys are seeing there, if you felt that that had some more room to follow-up if there any new developments there?
Kevin Van Solkema
This is Kevin. The answer is there room to fall? Yes. The deterioration that we’re seeing though is very limited to the for sale residential development space. We’re not seeing any deterioration occur on the commercial real estate front and has Dennis as indicated that’s a pretty manageable portfolio for us here in Chicago and across the company for that matter and that’s where you’re seeing the deterioration for us.
Daniel Arnold
So you're providing like office space or anything like that?
Kevin Van Solkema
No, it’s not.
Daniel Arnold
Okay. And then just – the next question was on a capital raise issue. I think you guys mentioned that you guys were good with capital into 2009. I wondered if that meant through the end of the year or if you thought that it’s just kind of I guess given the wider than expected loss this quarter and probably the stronger than expected growth, maybe the capital raise was moved up a little bit from what you had previously thought.
Dennis Klaeser
No, it’s -- I think the window in time there’s -- it's early 2009 to the middle part of 2009 and obviously dependent on the pace of loan growth between now and then. But I think we’re comfortably well capitalized to that period of time. We could supplement capital a bit with some of that or trust preferred when and if we would market would be reasonable for to issue some additional trust preferred or stock debt.
Larry Richman
We are always going to manage to a very strong well-capitalized basis and in our forward thinking and projecting to make sure that we always maintain and manage to those levels. We are very pleased with the capital that we raised. It’s given us strong strength in the market and in recognition from our clients for that strength and we’re going to continue to be very conscious in this environment but really in any environment to make sure that we always have a very solid balance sheet.
Daniel Arnold
And just one last question in the loan growth. I was just wondering, what percentage of that, if you could break it down, kind of is from prior with the clients that you guys are able to bring over and what percentage is from completely new relationships that you guys will be forging?
Kevin Van Solkema
This is Kevin. I would say in excess of 75% is from prior to relationships that we had at La Salle [ph]. We certainly are tracking clients from other spaces, however, and other banks but certainly the preponderance is from the prior (inaudible).
Larry Richman
The other component of it is that not only in all cases the clients are well known to us and I think that’s very important to know as well. If we could – whether not they bank with the bankers or not, the bankers have known them and have checked them out and have received strong referrals and the after-selection process and really the careful selection process continues to be very important to us and very strong.
Daniel Arnold
Now did the pipeline for you guys remained as strong as it has been? Can we expect to see billion plus-dollar increase in loan balances for the next quarter or two?
Larry Richman
I feel very confident in a very strong pipeline and a very strong activity and yet at the same time as I mentioned earlier the selection process and the choice of doing business with these companies is as disciplined as it ever been but we're very optimistic to see similar or we’ll call it billion dollars of loan growth roughly into the next quarter.
Daniel Arnold
Great. Well, I appreciate the time guys. Thanks a lot.
Larry Richman
Thank you.
Operator
Your next question comes from Terry McEvoy [ph].
Terry McEvoy
Good morning.
Larry Richman
Good morning
Terry McEvoy
Larry, you sounded a little frustrated when you’re running through you’re non-performing asset numbers at 98 basis points of assets. It seems like in this environment that should be pretty respectable given what some of your peers have been reporting and also taking into account that a lot of the asset that has already mentioned are still very clean so, implying maybe a core private bank NTA ratio of over 2% had this whole initiative never happened. So are you simply saying 1% is just too high for an organization like PrivateBancorp today given what the balance sheet looks like?
Larry Richman
If you try to (inaudible) something like telling it was probably where I was, it really wasn't. I actually do feel good about the process and the disciplines around it and historically, I am a credit person as well and always want the credit portfolio to be cleaner but yet given the current environment and given the discipline and given the real act of work that all of our officers are taking to actively manage the portfolio, I feel reasonably strong and positive that we’re doing everything we can and are continuing to manage the portfolio. But again as a credit person, you really don’t want to have anything and yet you recognize it in today’s environment. We think this is very respectable.
Kevin Van Solkema
Yes. This is Kevin. I would say the tone should be interpreted as a serious tone because we are very tightly looking at all of the metrics across the board and while we report some mixed metrics for this quarter, on the good side delinquencies are down substantially. That’s the good news. On the bad side, we have higher NPL. So until we shape all of that up and we remain very intense and serious about them.
Terry McEvoy
The need for loan growth for the last couple quarters come from participation loans or shared national credits where PrivateBancorp is not the lead?
Larry Richman
Yes, the majority of the business we do is we’re worried that the sole bank, lead bank or the colleague bank. There are few selected cases where we are a participant but in those cases that we’ve chosen to be a participant it's only where we have a direct active relationship with management and an opportunity to continue to enhance our position over time. So, everyone of the relationships are not a participation purchase in the sense of being able to of buying debt. In all cases, this is traditional relationship banking.
Terry McEvoy
One last question, if I could – since like this capital markets grew biz is new to the company, could you just give me maybe an example of a transaction that -- one of the larger transactions that happened in the quarter just to get a better sense from where that revenue is just coming from?
Larry Richman
Sure. An example with this is that we – we established a new relationship with a little market company and we do a revolving credit and we do a term loan and we do it a price over labor, so it’s a floating rate, both floating rate line and floating rate termed loan. The company may choose either in its termed loan or a portion of its revolver to adjust and take a – and do an interest rate to rev it up to be able to fix the portion of its debt while protect some of the interest rate volatility. And so therefore, these are all done on a client basis and are all done where we are not taking any positions but are really just making it providing a capability to be able to protect and allow the client to fix some interest rate protection.
Terry McEvoy
Thank you very much.
Larry Richman
You’re welcome.
Operator
Your next question comes from Kenneth James [ph].
Kenneth James
Hi, good morning. My question was on the expense growth coming on the last quarter, I think – I expected a little bit more moderation or a smaller jump on expenses. I’m just wondering given the magnitude of what you guys are undertaking, if you run across stuff that has surprised you or not in your plan in terms of hiring or product build ups that you need and if expenses can kind of continue to ramp higher given the infrastructure you need and maybe even push up the time period of when you reach the profitability farther than you expected strictly from an expense perspective?
Larry Richman
Well, we do expect the operating expense grow to moderate -- hit the pace of growth to moderate meaningfully in the second quarter and in the fourth quarter. I would say there isn’t really any particular item that would -- I would say is unexpected. We did – going into the quarter, our professional fees were higher than we had anticipated but, I would say the investments are all important investments to build your infrastructure. The pace of hiring is moderating and we have essentially completed the granting of the transmission equity grants. So those transmission equity grants were our key driver of the growth of the compensation expenses in the second quarter.
Kenneth James
Okay. In that professional fee item in particular, did -- more than doubled, can we expect to see that come down substantially?
Larry Richman
I believe you will only see it come down substantially – the degree to which it comes down, not sure yet but I think it’s going to move back at least a bit closer to the more historic levels.
Dennis Klaeser
I want to add that the – we have been very diligent and conscious to build a very strong infrastructure and foundation around the growth in our business. Very important is we build our organization, yet at the same time, I feel very good that the key components of our infrastructure and foundation are essentially completed so we will continue to opportunistically hire where appropriate, but again with a discipline around expense management and also with an understanding that the foundations are essentially in place.
Kenneth James
Okay. Was there any kind of meaningful amount of REO expense that ran through the other expense line that wouldn’t be considered maybe part of that franchise as core expense base?
Larry Richman
I believe in the press release, we identified our $820,000 of expense that’s line item.
Kenneth James
Okay, sorry.
Kevin Van Solkema
Yes. This is Kevin. We had some meaningful REO activity this past quarter both – unfortunately incoming as well as some ex-sales but the good news is that we had marked those assets to market in the expense impact’s (inaudible).
Kenneth James
Okay. And then in terms of kind of core funding growth, obviously we’ve been talking about at lagging longer for a while which is understandable. When do you think in terms of time, not exact, but maybe floodgates really open on that term of important type for funding in the sense that it decrease your reliance on wholesale funding and even start to shift to next -- more towards core funding, I mean is that like a mid to late ‘09 type process do you think or could it happen sooner than that?
Larry Richman
Yes, it’s probably not sooner than that. Clearly the next few quarter, we’re going to see these modest growth in the reliance of brokered deposits but then as we get longer term, maybe like 2009 -- probably more likely 2010 or so, that we begin to reverse course on that.
Kenneth James
Okay, thank you.
Larry Richman
You could see that there has been strong growth in deposits and there is, so to speak, a religion around making sure that we focus on deposit activity and deposit growth and some of the new opportunistic hires that were recruited this past quarter as well as all of our bankers are very, very focused on generating deposits as well as generating loans. So they're generating relationships and I think that’s the key.
Kenneth James
Okay. Any kind of rule of thumb you guys use are targets for how much of a banker’s loan book? You guys expect to be supported by -- is this deposit based?
Dennis Klaeser
In terms of the loan growth over the next few quarters. Our plan is that 45% or 50% of it is supported with client deposits and then the remaining is funded with either wholesale funding, FHLB borrowings or broker deposits. That’s our expectation over the next few quarters and we’ve been on plan and executing quite a little bit in terms of the client deposit growth.
Kenneth James
Okay. Great. Thank you.
Larry Richman
Thank you.
Operator
Your next question comes from John Rowan [ph].
John Rowan
Good morning.
Larry Richman
Good morning, John.
John Rowan
Do you expect any more hires in the second quarter?
Larry Richman
Do you mean the third quarter?
John Rowan
Yes, the third quarter. Excuse me.
Larry Richman
There will continue to be some small opportunistic hires during the third quarter and there will always be. We did indicate that the hiring will similarly return to normalized levels and so there will be but what I think we have also indicated that the majority of the Strategic Growth Plan hires have already been completed.
John Rowan
Dennis, can you just discuss the margining. Kind of how it was trajecting through the quarter, maybe on month-by-month basis?
Dennis Klaeser
The margin actually was fairly stable across the quarter so I didn’t see any particular trend during the quarter that would indicate a substantial shift in the third quarter.
John Rowan
Okay. And what’s the reasonable tax rate to use?
Dennis Klaeser
Once we start making money the reasonable tax rate is 32% to 33%.
John Rowan
Okay. And just to housekeeping items, do you have the average assets and the average liabilities for the quarter?
Dennis Klaeser
Yes there is, in the supplemental financial --
John Rowan
No, I didn’t see that. I (inaudible).
Dennis Klaeser
Yes.
John Rowan
Alright. Thanks.
Dennis Klaeser
Thank you.
Operator
Your next question comes from Christopher Miramax [ph].
Christopher Miramax
Dennis, I was curious on the growth of risk-weighted assets versus total assets in the future quarters as in the prospective modeling versus regulatory ratios?
Dennis Klaeser
Yes. So the loan portfolio obviously is growing strongly and Larry indicated that this billion dollar range seems to be reasonable at least for the third quarter. Proportionally, we're looking to keep our securities portfolio at roughly 8%, 9% or 10% of the loan portfolio and the bulk of that securities portfolio would be 20% or 50% risk weighting. So the bulk of our growth is risk weighted given it's a loan growth that has a risk rating of 1.
Christopher Miramax
Great. And then a separate question I guess for Larry or whomever is. As you've been opening new deposits and gearing up for more of the future, are you doing any different to make it easy and kind of reduced resistance that customers have been moving or corroborating account to you?
Larry Richman
Yes. These are client-relationship deposits. So these are clients that know their bankers and in it's part of an overall -- in most cases it's part of an overall relationship and so much of what is being done is as I mentioned being evaluated advisors to these clients and the clients is part of their commitment to do their banking with us are moving deposits to us because they know not only is it meaningful but also we have a team in place that can provide a number of liquidity solutions which are attractive to the company to meet their needs as well. And so there are teams in place from a liquidity perspective, teams in place to implement and execute, and then most importantly relationship banker teams that are working very closely with their clients which we're building these relationships over the long term. So it’s not all declines which are building these relationships over the long the term.
Larry Richman
So it's not only a question of rate, it’s a question of relationship, that’s the key here.
Christopher Miramax
Good. Thanks Larry.
Larry Richman
Thank you.
Operator
Your next question comes from Peyton Green [ph].
Peyton Green
Good morning Dennis, my question is more of the funding side, I guess some of the (inaudible) match just might have gone forward, I guess historically, you will have more of lines on labor-based funding and prime-based plans, I just wondering if you could talk about how that’s changing in fact, would possibly mean that the margin soon may cast [ph] a spread what would be more stable on the operating environment.
Dennis Klaeser
Yes, the majority of the new production is labor-based where as the majority of the foundation portfolio is prime-based, since so as you know, labor [ph] has moved up as little bit and so that’s benefiting our margin a little bit. The funding, just shortly – I am going forward really is at least the whole sale funding is primary labor driven so and we run a fairly close matching but we tend to be always little bit asset sensitive because the bulk of what we are doing is floating rate lending.
Peyton Green
But its still 70% floating rate versus the fixed to some degree.
Dennis Klaeser
Yes, I would say it’s a little bit higher than that, probably 75% to 80% of the new production is floating and the fix that we doing would tend to be relatively short, maturities are reprising in a short period of time anyway.
Peyton Green
Okay, all right great. Thank you very much.
Operator
Your next question comes from Mike Hodes [ph].
Mike Hodes
Hi, good morning guys, quick question, the delinquency remediation efforts that seems to be very successful in the quarter, is it safe to assume that that’s just the more aggressive collections or are there other tools in your arsenal that were deployed like a extending loans or maybe reworking loans, can you just give a little detail on how you achieve the improvement?
Dennis Klaeser
Sure. This is kind of a mean above midway through the quarter, I‘m looking at the delinquencies and I am looking below the surface that why are these loans delinquent, and what we saw is that there was a mixture of payment past dues which of course are our primary concern and to that we tied the risk ratings that very, very closely and then we looked in, we also found some administrative past dues loan that were past due because the renewals weren’t processed for a permanent extension. So we really focused on both areas very tightly, we held weekly meetings, we continue to have a (inaudible) become a part of our culture and our conversation in the company.
Mike Hodes
I’m sorry, when you say that renewals were in process for permanent extension, what does that mean?
Dennis Klaeser
That means that the officers were gathering financial information preparing the write ups and seeking the approval they needed to get the loan extended.
Mike Hodes
Got you. So, was it significant portion for the loan, extended, I just like a --
Dennis Klaeser
No, I think it was a balance there between payment past dues that were directed to more aggressive collection efforts, officers really knowing their customers in getting out to get the payments that we should have and processing through the paper work.
Larry Richman
Let me give you an example for clarity purposes, some of the extensions that Kevin is talking about, the maturity of those are likely more credit facilities that are (inaudible) taking the annual review that needed a full discipline around the loan committee process before renewed, so its not in extension because of trouble, it’s an ongoing review of the relationship before any annual review process takes place.
Mike Hodes
Got you. Thank you very much.
Operator
Your next question comes from Justin Mauer [ph].
Justin Mauer
Good morning guys.
Dennis Klaeser
Good morning.
Justin Mauer
Dennis, just on the funding again relative to the Securities portfolio, why wouldn’t you use that some one -- and I understand wanting to maintain some balance there but just the idea that since you’re have applied some leverage and or the brokered CDs thinking that you couldn’t shrink the security’s portfolio and use that as opposed to just put on an additional liability.
Dennis Klaeser
Well, given the personal – give the pace of growth liquidating the security’s portfolio with all this funded a small portion of this growing business. It’s like – it’s a good question, I think in terms of our liquidity ratios and maintaining collateral available, collateral for pledging purposes for example, the deposits that we get through our wealth management business, the majority of those are collateralized with securities and so we do need a certain level of securities for those balance sheet management and collateral needs. The new securities we are putting on, we are able to earn a very modest spread, so that, that does negatively impact a little bit of our net interest margin but it does add a little bit of non-interest income to the bottom line.
Justin Mauer
Yes, okay. I guess to that point is more of the issue of feeling like you need to grow it at that same – keeping with the percentage (inaudible) loan growth is so robust as opposed to just letting it interest kind of drift downs, not to see yet the liquidated to your point [ph].
Thank you very much.
Dennis Klaeser
Thank you.
Operator
Your next question comes from Daniel Cardenas [ph].
Daniel Cardenas
I just wanted you to talk a little bit about watch list trans [ph].
Kevin Van Solkema
This is Kevin. We see deterioration in our watch list trans. Again, that’s very centered around the for-sale residential sector. We have seen deterioration throughout the year and some spillage to the MPL. We have a very rigorous process around looking at watch list trans. We -- events that quarterly watch list review program here at the bank. We call on the officers. We have them prepare quarterly reports on individual clients, they present the status of those clients to a watch list committee and we make a decision at that point whether or not the credits properly respirated, classified, and if needed to transfer to our workout department. So, the trans are up but the process has improved and in placed and that I would say that we have fully identified at the present time all watch list loans that we have.
Daniel Cardenas
The deterioration are seen at that throughout your footprint or is there any market driving down.
Kevin Van Solkema
(inaudible) footprint, we probably have seen more for-sale residential deterioration occurring at Atlanta followed by Michigan, and certainly Chicago and St. Louis of which have more diversified economies.
Daniel Cardenas
Just another question, can you comment on your thoughts on the dividend.
Dennis Klaeser
Given our long term view of our earnings, I think the dividend should remain steady and that there’s no reason for us to consider cutting the dividend at this point but conversely we were not be looking at increasing the dividend at this point.
Daniel Cardenas
Great. Thank you.
Dennis Klaeser
Thank you.
Operator
If there are follow-up questions, I will now turn the conference back to Mr. Richman.
Larry Richman
Well, thank you. We appreciate everyone’s attention and questions and have a great day.
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