UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 001-34066
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 36-3681151 | |
(State or other jurisdiction of | (IRS Employer Identification No.) | |
incorporation or organization) |
120 South LaSalle Street, Chicago, Illinois | 60603 | |
(Address of principal executive offices) | (zip code) |
(312) 564-2400
Registrant’s telephone number, including area code
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated file,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerþ | Accelerated filero | Non-accelerated filero | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of August 6, 2009, there were 47,528,183 shares of the issuer’s common stock, without par value, outstanding.
EXPLANATORY NOTE
PRIVATEBANCORP, INC. IS FILING THIS AMENDMENT TO ITS QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009 (THE “INITIAL REPORT”) FILED ON AUGUST 7, 2009 SOLELY TO CORRECT THE FORMATTING ERRORS THAT OCCURRED IN THE PROCESS OF CONVERTING THE INITIAL REPORT TO AN ELECTRONIC FORMAT FOR FILING WITH THE SECURITIES AND EXCHANGE COMMISSION THROUGH THE EDGAR SYSTEM AND TO CORRECT A TYPOGRAPHICAL ERROR FOR THE AVERAGE BALANCE OF TOTAL SECURITIES FOR THE QUARTER ENDED JUNE 20, 2008 CONTAINED IN TABLE 2 UNDER ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. THE FORMATTING ERRORS CAUSED CERTAIN COLUMNS OF DATA INCLUDED IN CERTAIN TABLES UNDER ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION TO NOT BE FULLY VIEWABLE BY CERTAIN READERS. THIS FORM 10-Q/A SETS FORTH ITEM 2 IN ITS ENTIRETY; HOWEVER, THE ONLY MODIFICATIONS TO ITEM 2 ARE TO CORRECT THE FORMATTING OF THE TABLES AND THE TYPOGRAPHICAL ERROR DESCRIBED ABOVE. THIS FORM 10-Q/A DOES NOT REFLECT EVENTS OCCURRING AFTER THE FILING OF THE INITIAL REPORT OR MODIFY OR UPDATE ANY OTHER DISCLOSURES INCLUDED IN THE INITIAL REPORT. ALL OTHER INFORMATION IN THE INITIAL REPORT NOT AFFECTED BY THE AMENDMENT IS UNCHANGED AND REFLECTS THE DISCLOSURES MADE AT THE TIME OF THE FILING OF THE INITIAL REPORT. ACCORDINGLY, THIS AMENDMENT SHOULD BE READ IN CONJUNCTION WITH THE INITIAL REPORT AND OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
The discussion presented below provides an analysis of our results of operations and financial condition for the quarters ended June 30, 2009 and 2008. When we use the terms “PrivateBancorp,” the “Company,” “we,” “us,” and “our,” we mean PrivateBancorp, Inc. and its consolidated subsidiaries. When we use the term the “the Banks,” we are referring to our wholly owned banking subsidiaries, known under The PrivateBank brand. Management’s discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes presented elsewhere in this report, as well as in our 2008 Annual Report on Form 10-K. Results of operations for the quarter and six months ended June 30, 2009 are not necessarily indicative of results to be expected for the year ending December 31, 2009. Unless otherwise stated, all earnings per share data included in this section and throughout the remainder of this discussion are presented on a diluted basis.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not historical facts, but instead represent only management’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside our control. Although we believe the expectations reflected in any forward-looking statements are reasonable, it is possible that our actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in such statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking statements include statements relating to our projected growth, anticipated future financial performance and management’s long-term performance goals. Forward-looking statements also include statements that anticipate the effects on our financial condition and results of operations from expected developments or events, such as the implementation of internal and external business and growth plans and strategies.
These forward-looking statements are subject to significant risks, assumptions and uncertainties, and could be affected by many factors. Factors that could have a material adverse effect on our financial condition, results of operations and future prospects include, but are not limited to:
• | continuing deterioration of U.S. economic conditions, | ||
• | further deterioration in asset quality, including credit extended directly for commercial real estate property investment, and to investors in real estate projects, | ||
• | difficult commercial real estate market conditions, collateral values and absorption of projects available for lease and/or sale remaining soft, | ||
• | adverse developments in our loan or investment portfolios, | ||
• | any need to continue to increase our allowance for loan losses, | ||
• | unforeseen difficulties and higher than expected costs associated with the continued implementation of our Strategic Growth Plan; | ||
• | fluctuations in market rates of interest and loan and deposit pricing in our market areas, | ||
• | the effect of continued margin pressure on our earnings, | ||
• | the failure to obtain on terms acceptable to us, or at all, the capital necessary to fund our growth and maintain our regulatory capital ratios, or those of our subsidiary banks, above the “well-capitalized” threshold, | ||
• | any additional charges related to asset impairments, | ||
• | insufficient liquidity or funding sources or our inability to obtain the funding necessary to fund our loan growth on terms that are acceptable to us, | ||
• | legislative or regulatory changes, particularly changes in the regulation of financial services companies and/or products and services offered by financial service companies, | ||
• | slower than anticipated growth of our business or unanticipated business declines, including as a result of continuing negative economic conditions, | ||
• | inability to retain top management personnel due to recently-enacted legislation that restricts executive compensation, | ||
• | unforeseen difficulties relating to the mergers and integration of subsidiary banks, |
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• | unforeseen difficulties relating to the acquisition and integration of businesses acquired in purchase and assumption transactions, | ||
• | competition, | ||
• | unforeseen difficulties in integrating new hires, | ||
• | failure to improve operating efficiencies through expense controls, | ||
• | the possible dilutive effect of potential acquisitions, expansion or future capital raises, and | ||
• | risks and other factors set forth in Items 1A, “Risk Factors,” of our Annual Report on Form 10-K and Item 1A in our March 31, 2009 Form 10-Q. |
Because of these and other uncertainties, our actual future results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results.
You should not place undue reliance on any forward-looking statements, which speak only as of the dates on which they were made. We are not undertaking an obligation to update these forward-looking statements, even though our situation may change in the future, except as required under federal securities law. We qualify all of our forward-looking statements by these cautionary statements.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are consistent with predominant practices in the financial services industry. Critical accounting policies are those policies that management believes are the most important to our financial position and results of operations. Application of critical accounting policies requires management to make estimates, assumptions, and judgments based on information available at the date of the financial statements that affect the amounts reported in the financial statements and accompanying notes. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the financial statements.
We have numerous accounting policies, of which the most significant are presented in Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements of our 2008 Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that our accounting policies with respect to the allowance for loan losses, goodwill and intangible assets, and income taxes are the accounting areas requiring subjective or complex judgments that are most important to our financial position and results of operations, and, as such, are considered to be critical accounting policies, as discussed below.
Allowance for Loan Losses
We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in our loan portfolio. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based on a review of available and relevant information. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships as well as probable losses inherent in our loan portfolio and credit undertakings that are not specifically identified. Our allowance for loan losses is assessed monthly to determine the appropriate level of the allowance. The amount of the allowance for loan losses is determined based on a variety of factors, including, among other factors, assessment of the credit risk of the loans in the portfolio, delinquent loans, impaired loans, evaluation of current economic conditions in the market area, actual charge-offs and recoveries during the period, industry loss averages and historical loss experience.
Management adjusts the allowance for loan losses by recording a provision for loan losses in an amount sufficient to maintain the allowance at the level determined appropriate. Loans are charged-off when deemed to be uncollectible by management.
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Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of net assets acquired using the purchase method of accounting. Other intangible assets represent purchased assets that also lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. We test goodwill at least annually for impairment or more often if events or circumstances indicate that there may be impairment. Impairment losses on recorded goodwill, if any, will be recorded as operating expenses.
Goodwill is allocated to business segments at acquisition. Fair values of reporting units are determined using either market-based valuation multiples for comparable businesses if available, or discounted cash flow analyses based on internal financial forecasts. If the fair value of a reporting unit exceeds its net book value, goodwill is considered not to be impaired.
Identified intangible assets that have a finite useful life are amortized over that life in a manner that reflects the estimated decline in the economic value of the identified intangible asset and are subject to impairment testing whenever events or changes in circumstances indicate that the carrying value may not be recoverable. All of the other intangible assets have finite lives which are amortized over varying periods not exceeding 15 years and include core deposit premiums that use an accelerated method of amortization and client relationship intangibles and assembled workforce which are amortized on a straight line basis.
Income Taxes
The determination of income tax expense or benefit, and the amounts of current and deferred income tax assets and liabilities are based on a complex analyses of many factors, including interpretation of federal and state income tax laws, current financial accounting standards, the difference between tax and financial reporting bases of assets and liabilities (temporary differences), assessments of the likelihood that the reversals of deferred deductible temporary differences will yield tax benefits and estimates of reserves required for tax uncertainties.
We are subject to the federal income tax laws of the United States and the tax laws of the states and other jurisdictions where we conduct business. We periodically undergo examination by various governmental taxing authorities. Such agencies may require that changes in the amount of tax expense be recognized when their interpretations of tax law differ from those of management, based on their judgments about information available to them at the time of their examinations. There can be no assurance that future events, such as court decisions, new interpretations of existing law or positions by federal or state taxing authorities, will not result in tax liability amounts that differ from our current assessment of such amounts, the impact of which could be significant to future results.
Temporary differences may give rise to deferred tax assets or liabilities, which are recorded on our Consolidated Statements of Financial Condition. We assess the likelihood that deferred tax assets will be realized in future periods based on weighing both positive and negative evidence and establish a valuation allowance for those deferred tax assets for which recovery is unlikely, based on a standard of “more likely” than not. In making this assessment, we must make judgments and estimates regarding the ability to realize these assets through: (a) the future reversal of existing taxable temporary differences, (b) future taxable income, (c) the possible application of future tax planning strategies, and (d) carryback to taxable income in prior years. We have not established a valuation allowance relating to our deferred tax assets at June 30, 2009. However, there is no guarantee that the tax benefits associated with these deferred tax assets will be fully realized. We have concluded, as of June 30, 2009, that it is more likely than not that such tax benefits will be realized.
In the preparation of income tax returns, tax positions are taken based on interpretation of federal and state income tax laws for which the outcome of such positions may not be certain. We periodically review and evaluate the status of uncertain tax positions and may establish tax reserves for estimates of amounts that may ultimately be due or owed (including interest). These estimates may change from time to time based on our evaluation of developments subsequent to the filing of the income tax return, such as tax authority audits, court decisions or other tax law interpretations. There can be no assurance that any tax reserves will be sufficient to cover tax liabilities that may ultimately be determined to be owed. We had no tax reserves established relating to uncertain tax positions at June 30, 2009.
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SECOND QUARTER PERFORMANCE OVERVIEW
Overview
PrivateBancorp, Inc. (“PrivateBancorp” or the “Company”) was incorporated in Delaware in 1989 for the purpose of becoming a holding company registered under the Bank Holding Company Act of 1956, as amended (the “Act”). PrivateBancorp, through its PrivateBank subsidiaries (the “Banks”), provides customized business and personal financial services to middle-market commercial and commercial real estate companies as well as business owners, executives, entrepreneurs and families in all of the markets we serve. We seek to develop lifetime relationships with our clients. Through a growing team of highly qualified managing directors, the Banks deliver a sophisticated suite of tailored credit and non-credit solutions, including lending, treasury management, investment products, capital markets products and wealth management and trust services, to meet their clients’ commercial and personal needs. Since our inception, we have expanded into multiple geographic markets in the Midwest and Southeastern United States through the creation of new banks and banking offices and the acquisition of existing banks. Our clients also have access to mortgage loans offered through The PrivateBank Mortgage Company, a subsidiary of PrivateBancorp.
Through second quarter 2009, we continue to see strong net revenue growth as a result of the execution of the Strategic Growth Plan (the “Plan”) we launched in the fourth quarter 2007, driven by our organic balance sheet growth. We are selective in the clients we choose to do business with, opting for people and businesses we know and with which we have relationships. Based on our strategy, loans and deposits have continued to grow. We have begun to achieve the operating leverage (net revenue less non-interest expense) that we expected in the Plan, and this is reflected in the following specific results:
• | net revenue during the second quarter 2009 grew 80% over second quarter 2008 to $95.8 million and net interest margin improved 24 basis points to 2.99%, | ||
• | efficiency ratio improved to 66.79% in the second quarter 2009 from 96.35% in the second quarter 2008, | ||
• | our tangible common equity ratio was 6.81% and our Tier 1 capital ratio was 11.95% at June 30, 2009, following a successful $217.0 million common stock offering and the conversion of the Series A preferred shares held by GTCR to non-voting common stock, | ||
• | during the first six months of 2009 loans grew 9%, reflecting market conditions and selectivity, and deposits grew 4%, and | ||
• | allowance for loan losses increased to $140.1 million at June 30, 2009, representing 1.60% of total loans, reflecting continued deterioration and weakness in the broader economy and the related stress on our customers. |
Recent Developments
On July 2, 2009, we announced that The PrivateBank and Trust Company (the “PrivateBank”) agreed to acquire all of the non-brokered deposits and certain assets of the former Founders Bank from the FDIC. Founders Bank had approximately $843 million in deposits and approximately $592 million in loans receivable at July 2, 2009. The PrivateBank agreed to assume certain liabilities, including non-brokered deposits, of $767 million and $24 million of Federal Home Loan Bank (“FHLB”) advances. Assets totaling approximately $843 million were purchased at a discount of $54 million. The PrivateBank also succeeded the former Founders Bank under trusts, executorships, administrations, guardianships, agencies and other fiduciary or representative capacities with respect to assets valued at approximately $450 million. The PrivateBank did not assume any liability based on action or inaction of the former Founders Bank with respect to its trust business. The agreement with the FDIC included a loss share component that provides The PrivateBank with protection from certain loan losses, as defined. We believe this transaction provides funding diversification through a strong core deposit franchise consistent with the objectives of the Plan. Furthermore, the transaction extends our geographic footprint to the southwest suburbs of Chicago and extends our ability to offer commercial loan products through these offices.
Balance Sheet Growth
Total assets increased to $11.0 billion at June 30, 2009, from $10.0 billion at December 31, 2008. Total loans increased to $8.7 billion at June 30, 2009, from $8.0 billion at December 31, 2008. Commercial loans, including commercial and industrial and owner-occupied commercial real estate loans, increased to 53% of the Company’s total loans at June 30, 2009 from 49% of total loans at December 31, 2008. Commercial real estate loans were 28% of total loans at June 30, 2009, compared to 30% of the Company’s total loans at December 31, 2008.
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Total deposits were $8.3 billion at June 30, 2009, compared to $8.0 billion at December 31, 2008. Client deposits increased to $7.4 billion at June 30, 2009, from $6.0 billion at December 31, 2008. Client deposits at June 30, 2009, include $1.0 billion in client CDARS® deposits. Brokered deposits (excluding client CDARS®) were 11% of total deposits at June 30, 2009, a decrease from 25% of total deposits at December 31, 2008.
Net Revenue Growth
Net revenue grew to $95.8 million in the second quarter 2009, from $53.1 million in the second quarter 2008. Net interest income improved to $74.1 million in the second quarter 2009, up from $42.7 million for the second quarter 2008. Net interest margin (on a tax equivalent basis) was 2.99% for the second quarter 2009, compared to 2.75% for the second quarter 2008. The improvement in net interest margin was primarily the result of earning asset yields remaining flat while deposits and short-term borrowings re-priced downward. This, combined with an increased client deposit base and repositioning within funding types, served to reduce our cost of funds by 166 basis points.
Non-interest income, excluding securities gains and losses and early extinguishment of debt, was $14.6 million in the second quarter 2009, compared to $9.2 million in the second quarter 2008 due to a higher volume of fee based revenue given the growth in the balance sheet. Treasury management income was $2.1 million in the second quarter 2009 compared to $499,000 in the second quarter 2008. Capital markets revenue was $3.8 million, compared with $2.0 million in the second quarter 2008. Mortgage banking income increased to $2.7 million in the second quarter 2009, compared to $1.2 million for the second quarter 2008. Banking and other services income was $2.1 million in the second quarter 2009, compared to $682,000 in the second quarter 2008.
Credit Quality
The second quarter 2009 provision for loan losses was $21.5 million, compared to $23.0 million in the second quarter 2008. The allowance for loan losses as a percentage of total loans was increased to 1.60% at June 30, 2009, compared with 1.40% at December 31, 2008. Charge-offs were $12.6 million for the quarter ended June 30, 2009, offset by recoveries of $4.1 million, and $109.5 million for the quarter ended December 31, 2008, offset by recoveries of $658,000.
We had $212.8 million in total non-performing assets at June 30, 2009, compared to $155.7 million at December 31, 2008, reflecting a continuing weakening credit environment. Non-performing assets to total assets were 1.94% at June 30, 2009 compared to 1.55% at December 31, 2008. The elevated levels of nonperforming loans primarily reflect ongoing deterioration experienced in the commercial real estate portfolio as well as continued stress in general business conditions. The increased level of loan loss coverage reflects growth in nonperforming assets and recognition of underlying collateral values. There remain higher levels of vacancy and marginal sales activity across most property types. New non-performing loans are primarily development related loans that are negatively impacted by the economy.
Expenses
Non-interest expense was $64.0 million in the second quarter, compared to $51.2 million in the second quarter 2008. The increase over the second quarter 2008 reflects the ongoing investment in the Plan throughout the year as well as increased FDIC insurance premiums, due in part to the $5.1 million special FDIC assessment incurred in the second quarter 2009 as well as significant growth in insured deposits over the past year. The efficiency ratio was 66.8% in the second quarter 2009 compared to 96.4% in the second quarter 2008.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income totaled $74.1 million in the second quarter 2009, compared to $42.7 million in the second quarter 2008, an increase of 74%. For the six months ended June 30, 2009, net interest income was $138.0 million compared to $78.7 million in the prior year period. Net interest income equals the difference between interest income plus fees earned on interest-earning assets and interest expense incurred on interest-bearing liabilities. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income. Net interest margin represents net interest income as a percentage of total average interest-earning assets. The accounting policies underlying the recognition of interest income on loans, securities, and other interest-earning assets are included in the “Notes to Consolidated Financial Statements” contained in our 2008 Annual Report on Form 10-K.
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Our accounting and reporting policies conform to U.S. GAAP and general practice within the financial services industry. For purposes of this discussion, net interest income and any ratios or metrics that include net interest income as a component, such as for example, net interest margin, have been adjusted to a fully tax-equivalent basis to more appropriately compare the returns on certain tax-exempt loans and securities to those on taxable interest-earning assets. Although we believe that these non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. The reconciliation of such adjustment is presented in the following table.
Table 1
Effect of Tax-Equivalent Adjustment
(Amounts in thousands)
Effect of Tax-Equivalent Adjustment
(Amounts in thousands)
Quarter Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | |||||||||||||||||||
Net interest income (U.S. GAAP) | $ | 74,107 | $ | 42,712 | 74 | % | $ | 137,987 | $ | 78,669 | 75 | % | ||||||||||||
Tax-equivalent adjustment | 999 | 992 | 1 | % | 1,845 | 2,017 | (9 | )% | ||||||||||||||||
Tax-equivalent net interest income | $ | 75,106 | $ | 43,704 | 72 | % | $ | 139,832 | $ | 80,686 | 73 | % | ||||||||||||
Tables 2 and 3 below summarize the changes in our average interest-earning assets and interest-bearing liabilities as well as the average interest rates earned and paid on these assets and liabilities, respectively, for the quarters and six months ended June 30, 2009 and 2008, respectively. The tables also detail increases and decreases in income and expense for each of the major categories of interest-earning assets and interest-bearing liabilities and analyzes the extent to which such variances are attributable to volume and rate changes. Interest income and yields are presented on a tax-equivalent basis assuming a federal income tax rate of 35%, which includes the tax-equivalent adjustment as presented in Table 1 above.
Net interest margin for the second quarter 2009 of 2.99% was up from 2.75% in the second quarter 2008. Our net interest margin increased between the periods primarily due to our interest-bearing liabilities repricing downward more than our assets, along with a shift in our funding mix to less expensive funding classes. The prime rate and LIBOR reductions throughout the second half of 2008 initially compressed net interest margin as loans repriced more quickly than deposits and short-term borrowings. However as those deposits and short-term borrowings repriced downward throughout the first six months of 2009, our margin benefited.
The average balance of our interest-earning assets grew approximately 57% between the second quarter 2008 and the second quarter 2009. Our net interest income increased significantly year-over-year as a result of the substantial increase in our interest-earning assets, primarily loans. The yield we earn on our interest-earning assets decreased by 135 basis points, due to reductions in the prime rate and LIBOR between the periods, offset by a 166 basis point drop in our cost of funds, as pricing on, and the mix of, our interest-bearing liabilities reduced our funding costs in an amount greater than the reduction of interest income caused by asset re-pricing.
As shown in Table 2, second quarter 2009 tax-equivalent net interest income increased to $75.1 million compared to $43.7 million in the second quarter 2008. The increase in interest-earning assets increased interest income by $43.6 million, while a decline in the average rate earned on interest-earning assets reduced interest income by $24.0 million. Second quarter 2009 interest expense declined $11.8 million compared to second quarter 2008. The increase in interest-bearing liabilities increased interest expense by $14.8 million, but the shift to less expensive wholesale borrowings, coupled with an overall decrease in the average rate paid on interest-bearing liabilities reduced interest expense by $26.6 million.
For the six months ended June 30, 2009, net interest margin was 2.84% compared to 2.81% for the prior year period. Tax-equivalent net interest income increased to $139.8 million for the six months ended June 30, 2009 compared to $80.7 million in the prior year period. The increase in interest-earning assets increased interest income by $100.3 million, while a decline in the average rate earned on interest-earning assets reduced interest income by $54.1 million. Interest expense for the six months ended June 30, 2009 declined $13.0 million compared to the prior year period. The increase in interest-bearing liabilities increased interest expense by $42.7 million, but the shift to less expensive wholesale borrowings, coupled with an overall decrease in the average rate paid on interest-bearing liabilities reduced interest expense by $55.7 million.
We continue to use multiple interest rate scenarios to assess the direction and magnitude of changes in interest rates and their impact on net interest income. A description and analysis of our market risk and interest rate sensitivity profile and management policies is included in Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” of this Form 10-Q.
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Table 2
Net Interest Income and Margin Analysis
(Dollars in thousands)
Net Interest Income and Margin Analysis
(Dollars in thousands)
Quarters Ended June 30, | ||||||||||||||||||||||||||||||||||||
2009 | 2008(1) | Attribution of Change | ||||||||||||||||||||||||||||||||||
Yield/ | Yield/ | in Net Interest Income(2) | ||||||||||||||||||||||||||||||||||
Average | Rate | Average | Rate | Yield/ | ||||||||||||||||||||||||||||||||
Balance | Interest | (%) | Balance | Interest | (%) | Volume | Rate | Total | ||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Federal funds sold and other short-term investments | $ | 78,153 | $ | 161 | 0.82 | % | $ | 22,221 | $ | 194 | 3.47 | % | $ | 202 | $ | (235 | ) | $ | (33 | ) | ||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||||||
Taxable | 1,154,418 | 13,646 | 4.73 | % | 440,101 | 5,456 | 4.96 | % | 8,455 | (265 | ) | 8,190 | ||||||||||||||||||||||||
Tax-exempt(3) | 161,957 | 2,785 | 6.88 | % | 190,236 | 3,173 | 6.67 | % | (484 | ) | 96 | (388 | ) | |||||||||||||||||||||||
Total securities | 1,316,375 | 16,431 | 4.99 | % | 630,337 | 8,629 | 5.48 | % | 7,971 | (169 | ) | 7,802 | ||||||||||||||||||||||||
Loans : | ||||||||||||||||||||||||||||||||||||
Commercial, construction and commercial real estate | 7,775,014 | 86,419 | 4.43 | % | 5,015,049 | 74,392 | 5.95 | % | 33,889 | (21,862 | ) | 12,027 | ||||||||||||||||||||||||
Residential | 344,180 | 4,646 | 5.40 | % | 310,872 | 4,475 | 5.76 | % | 461 | (290 | ) | 171 | ||||||||||||||||||||||||
Private Client | 502,754 | 4,932 | 3.94 | % | 410,155 | 5,346 | 5.23 | % | 1,064 | (1,478 | ) | (414 | ) | |||||||||||||||||||||||
Total loans | 8,621,948 | 95,997 | 4.44 | % | 5,736,076 | 84,213 | 5.89 | % | 35,414 | (23,630 | ) | 11,784 | ||||||||||||||||||||||||
Total interest-earning assets(3)(4) | 10,016,476 | 112,589 | 4.49 | % | 6,388,634 | 93,036 | 5.84 | % | 43,587 | (24,034 | ) | 19,553 | ||||||||||||||||||||||||
Cash and due from banks | 106,722 | 59,550 | ||||||||||||||||||||||||||||||||||
Allowance for loan losses | (128,560 | ) | (69,492 | ) | ||||||||||||||||||||||||||||||||
Other assets | 383,040 | 312,476 | ||||||||||||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||||
Total assets | $ | 10,377,678 | $ | 6,691,168 | ||||||||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 420,341 | $ | 467 | 0.45 | % | $ | 170,134 | $ | 425 | 1.00 | % | $ | 373 | $ | (331 | ) | $ | 42 | |||||||||||||||||
Savings deposits | 17,837 | 30 | 0.68 | % | 14,778 | 58 | 1.57 | % | 10 | (38 | ) | (28 | ) | |||||||||||||||||||||||
Money market accounts | 2,974,206 | 6,006 | 0.81 | % | 1,926,956 | 11,237 | 2.34 | % | 4,295 | (9,526 | ) | (5,231 | ) | |||||||||||||||||||||||
Time deposits | 1,557,892 | 8,842 | 2.28 | % | 1,417,047 | 13,726 | 3.89 | % | 1,255 | (6,139 | ) | (4,884 | ) | |||||||||||||||||||||||
Brokered deposits | 1,770,985 | 11,480 | 2.60 | % | 1,543,714 | 16,229 | 4.22 | % | 2,135 | (6,884 | ) | (4,749 | ) | |||||||||||||||||||||||
Total interest-bearing deposits | 6,741,261 | 26,825 | 1.60 | % | 5,072,629 | 41,675 | 3.30 | % | 8,068 | (22,918 | ) | (14,850 | ) | |||||||||||||||||||||||
Short-term borrowings | 920,436 | 1,844 | 0.79 | % | 265,200 | 2,750 | 4.10 | % | 2,662 | (3,568 | ) | (906 | ) | |||||||||||||||||||||||
Long-term debt | 645,002 | 8,814 | 5.41 | % | 349,159 | 4,907 | 5.56 | % | 4,047 | (140 | ) | 3,907 | ||||||||||||||||||||||||
Total interest-bearing liabilities | 8,306,699 | 37,483 | 1.81 | % | 5,686,988 | 49,332 | 3.47 | % | 14,777 | (26,626 | ) | (11,849 | ) | |||||||||||||||||||||||
Non-interest bearing demand deposits | 1,030,753 | 409,254 | ||||||||||||||||||||||||||||||||||
Other liabilities | 67,232 | 54,919 | ||||||||||||||||||||||||||||||||||
Stockholders’ equity | 972,994 | 540,007 | ||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 10,377,678 | $ | 6,691,168 | ||||||||||||||||||||||||||||||||
Net interest spread | 2.68 | % | 2.37 | % | ||||||||||||||||||||||||||||||||
Effect of non-interest bearing funds | 0.31 | % | 0.38 | % | ||||||||||||||||||||||||||||||||
Net interest income/margin(3) | $ | 75,106 | 2.99 | % | $ | 43,704 | 2.75 | % | $ | 28,810 | $ | 2,592 | $ | 31,402 | ||||||||||||||||||||||
Quarterly Net Interest Margin Trend
2009 | 2008 | |||||||||||||||||||
Second | First | Fourth | Third | Second | ||||||||||||||||
Yield on interest-earning assets | 4.49 | % | 4.58 | % | 5.30 | % | 5.58 | % | 5.84 | % | ||||||||||
Rates paid on interest-bearing liabilities | 1.81 | % | 2.19 | % | 3.01 | % | 3.27 | % | 3.47 | % | ||||||||||
Net interest margin(3) | 2.99 | % | 2.68 | % | 2.62 | % | 2.70 | % | 2.75 | % |
(1) | Prior period net interest margin computations were modified to conform to the current period presentation. | |
(2) | For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to such categories in proportion to the absolute amounts of the change in each. | |
(3) | Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. See Table 1 for a reconciliation of the effect of the tax-equivalent adjustment. | |
(4) | Average loans on a nonaccrual basis for the recognition of interest income totaled $170.1 million as of June 30, 2009 and $52.4 million as of June 30, 2008 and are included in loans for purposes of this analysis. Non-accrual loans are included in the average balances and the annualized interest foregone on these loans was approximately $7.7 million for the quarter ended June 30, 2009 compared to approximately $3.1 million in the prior year quarter. |
9
Table 3
Net Interest Income and Margin Analysis
(Dollars in thousands)
Net Interest Income and Margin Analysis
(Dollars in thousands)
Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||
2009 | 2008(1) | Attribution of Change | ||||||||||||||||||||||||||||||||||
Yield/ | Yield/ | in Net Interest Income(2) | ||||||||||||||||||||||||||||||||||
Average | Rate | Average | Rate | Yield/ | ||||||||||||||||||||||||||||||||
Balance | Interest | (%) | Balance | Interest | (%) | Volume | Rate | Total | ||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||
Federal funds sold and other short-term investments | $ | 86,190 | $ | 449 | 1.05 | % | $ | 23,313 | $ | 440 | 3.75 | % | $ | 510 | $ | (501 | ) | $ | 9 | |||||||||||||||||
Securities: | ||||||||||||||||||||||||||||||||||||
Taxable | 1,192,362 | 28,192 | 4.73 | % | 391,389 | 9,742 | 4.98 | % | 18,962 | (512 | ) | 18,450 | ||||||||||||||||||||||||
Tax-exempt(3) | 164,447 | 5,483 | 6.67 | % | 190,164 | 6,442 | 6.78 | % | (858 | ) | (101 | ) | (959 | ) | ||||||||||||||||||||||
Total securities | 1,356,809 | 33,675 | 4.97 | % | 581,553 | 16,184 | 5.57 | % | 18,104 | (613 | ) | 17,491 | ||||||||||||||||||||||||
Loans : | ||||||||||||||||||||||||||||||||||||
Commercial, construction and commercial real estate | 7,572,400 | 169,661 | 4.49 | % | 4,464,167 | 140,192 | 6.30 | % | 77,796 | (48,327 | ) | 29,469 | ||||||||||||||||||||||||
Residential | 346,019 | 9,604 | 5.55 | % | 297,956 | 8,788 | 5.90 | % | 1,356 | (540 | ) | 816 | ||||||||||||||||||||||||
Private Client | 500,582 | 9,676 | 3.90 | % | 398,381 | 11,346 | 5.71 | % | 2,495 | (4,165 | ) | (1,670 | ) | |||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||||
Total loans | 8,419,001 | 188,941 | 4.50 | % | 5,160,504 | 160,326 | 6.23 | % | 81,647 | (53,032 | ) | 28,615 | ||||||||||||||||||||||||
Total interest-earning assets(3)(4) | 9,862,000 | 223,065 | 4.54 | % | 5,765,370 | 176,950 | 6.15 | % | 100,261 | (54,146 | ) | 46,115 | ||||||||||||||||||||||||
Cash and due from banks | 97,855 | 69,693 | ||||||||||||||||||||||||||||||||||
Allowance for loan losses | (121,526 | ) | (59,261 | ) | ||||||||||||||||||||||||||||||||
Other assets | 386,126 | 288,356 | ||||||||||||||||||||||||||||||||||
Total assets | $ | 10,224,455 | $ | 6,064,158 | ||||||||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity: | ||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 374,780 | $ | 866 | 0.47 | % | $ | 161,328 | $ | 847 | 1.05 | % | $ | 680 | $ | (661 | ) | $ | 19 | |||||||||||||||||
Savings deposits | 16,903 | 55 | 0.66 | % | 14,482 | 109 | 1.51 | % | 16 | (70 | ) | (54 | ) | |||||||||||||||||||||||
Money market accounts | 2,964,313 | 12,545 | 0.85 | % | 1,754,941 | 24,407 | 2.79 | % | 10,996 | (22,858 | ) | (11,862 | ) | |||||||||||||||||||||||
Time deposits | 1,581,005 | 19,392 | 2.47 | % | 1,345,242 | 28,270 | 4.21 | % | 4,344 | (13,222 | ) | (8,878 | ) | |||||||||||||||||||||||
Brokered deposits | 1,944,568 | 27,814 | 2.88 | % | 1,274,713 | 28,043 | 4.41 | % | 11,641 | (11,870 | ) | (229 | ) | |||||||||||||||||||||||
Total interest-bearing deposits | 6,881,569 | 60,672 | 1.78 | % | 4,550,706 | 81,676 | 3.60 | % | 27,677 | (48,681 | ) | (21,004 | ) | |||||||||||||||||||||||
Short-term borrowings | 856,556 | 4,832 | 1.12 | % | 269,821 | 5,860 | 4.30 | % | 5,706 | (6,734 | ) | (1,028 | ) | |||||||||||||||||||||||
Long-term debt | 631,281 | 17,729 | 5.59 | % | 299,285 | 8,728 | 5.77 | % | 9,336 | (335 | ) | 9,001 | ||||||||||||||||||||||||
Total interest-bearing liabilities | 8,369,406 | 83,233 | 2.00 | % | 5,119,812 | 96,264 | 3.76 | % | 42,719 | (55,750 | ) | (13,031 | ) | |||||||||||||||||||||||
Non-interest bearing demand deposits | 901,887 | 380,105 | ||||||||||||||||||||||||||||||||||
Other liabilities | 73,241 | 65,466 | ||||||||||||||||||||||||||||||||||
Stockholders’ equity | 879,921 | 498,775 | ||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 10,224,455 | $ | 6,064,158 | ||||||||||||||||||||||||||||||||
Net interest spread | 2.54 | % | 2.39 | % | ||||||||||||||||||||||||||||||||
Effect of non-interest bearing funds | 0.30 | % | 0.42 | % | ||||||||||||||||||||||||||||||||
Net interest income/margin(3) | $ | 139,832 | 2.84 | % | $ | 80,686 | 2.81 | % | $ | 57,542 | $ | 1,604 | $ | 59,146 | ||||||||||||||||||||||
(1) | Prior period net interest margin computations were modified to conform to the current period presentation. | |
(2) | For purposes of this table, changes which are not due solely to volume changes or rate changes are allocated to such categories in proportion to the absolute amounts of the change in each. | |
(3) | Interest income and yields are presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. See Table 1 for a reconciliation of the effect of the tax-equivalent adjustment. | |
(4) | Average loans on a nonaccrual basis for the recognition of interest income totaled $155.0 million as of June 30, 2009 and $48.2 million as of June 30, 2008 and are included in loans for purposes of this analysis. Non-accrual loans are included in the average balances and the annualized interest foregone on these loans was approximately $7.2 million for the six months ended June 30, 2009 compared to approximately $3.0 million in the prior year period. |
10
Provision for Loan Losses
The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable and reasonably estimable losses inherent in the existing loan portfolio. The provision for loan losses totaled $21.5 million for the quarter ended June 30, 2009 compared to $23.0 million for the quarter ended June 30, 2008 due to less loan growth, offset by an increase in net charge-offs, an increase in the level of non-performing loans, as well as the quarterly assessment of the allowance to maintain a level determined appropriate. The allowance for loan losses to total loans, or coverage ratio, increased from 1.23% at June 30, 2008 to 1.60% at June 30, 2009. Net-charge offs were $8.4 million for the quarter ended June 30, 2009 compared to $6.0 million for the quarter ended June 30, 2008. For the six months ended June 30, 2009, the provision for loan losses totaled $39.3 million compared to $40.2 million for the prior year period. Net-charge offs were $11.9 million for the six months ended June 30, 2009 compared to $10.0 million for the six months ended June 30, 2008. For further analysis and information on how we determine the appropriate level for the allowance for loan losses and the factors on which provisions are based, see the “Loan Portfolio and Credit Quality” section on page 49.
Non-interest Income
We continue to seek ways to increase and diversify the sources of our non-interest income. Our total non-interest income increased $11.3 million, or 119%, to $20.7 million for the second quarter 2009 compared to $9.4 million in the second quarter 2008. The period over period increase reflects the significant contribution of our expanded products and services in the past year offered through the capital markets and treasury management groups, $7.0 million in net securities gains recognized during the quarter, as well as a significant increase in mortgage banking income. In the prior year second quarter, non-interest income was driven by revenue from The PrivateWealth Group, which contributed $4.4 million, or 46%, of the $9.4 million, in non-interest income. In the second quarter of 2009, The PrivateWealth Group contributed $3.5 million, or 17%, of our non-interest income, while capital markets and treasury management products contributed $3.8 million and $2.1 million, respectively, representing 18% and 10%, respectively, of non-interest income for the second quarter of 2009, demonstrating the continued diversification of our sources of non-interest income and our focus on providing the “whole” Bank to our clients. As our client base continues to grow, we believe we will be able to continue to grow and diversify our non-interest revenue.
Table 4
Non-interest Income Analysis
(Dollars in thousands)
(Dollars in thousands)
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | |||||||||||||||||||
The PrivateWealth Group | $ | 3,500 | $ | 4,350 | (20 | %) | $ | 7,294 | $ | 8,769 | (17 | %) | ||||||||||||
Mortgage banking | 2,686 | 1,230 | 118 | % | 4,861 | 2,760 | 76 | % | ||||||||||||||||
Capital markets products | 3,830 | 1,959 | 96 | % | 15,063 | 2,350 | 541 | % | ||||||||||||||||
Treasury management | 2,110 | 499 | 323 | % | 3,715 | 683 | 444 | % | ||||||||||||||||
Bank owned life insurance (“BOLI”) | 453 | 437 | 4 | % | 842 | 869 | (3 | %) | ||||||||||||||||
Banking and other services | 2,054 | 682 | 201 | % | 5,648 | 1,428 | 296 | % | ||||||||||||||||
Subtotal fee revenue | 14,633 | 9,157 | 60 | % | 37,423 | 16,859 | 122 | % | ||||||||||||||||
Gains on securities sales, net | 7,067 | 286 | 2,371 | % | 7,839 | 1,100 | 613 | % | ||||||||||||||||
Early extinguishment of debt | (985 | ) | — | n/m | (985 | ) | — | n/m | ||||||||||||||||
Total non-interest income | $ | 20,715 | $ | 9,443 | 119 | % | $ | 44,277 | $ | 17,959 | 147 | % | ||||||||||||
n/m | Not meaningful |
The capital markets group delivers customized interest rate risk management and payment solutions that help our clients achieve their financing and risk management objectives. Within capital markets, we provide interest rate swaps, caps and collars and foreign exchange spot trading. We take no overnight market, currency or interest rate risk because we run a matched back-to-back book with a variety of liquidity providers who are market makers in this arena. We are exposed to the credit risk of our counterparties, which we manage in line with our credit policies and procedures outlined in our risk management policies. Capital markets revenue in the second quarter 2009 grew to $3.8 million compared to $2.0 million for the year ago period as the group had just been formed in first quarter 2008. The current quarter revenue includes a $1.3 million unfavorable movement in the credit valuation adjustment (“CVA”). The CVA represents the credit component of fair value with regard to both client-based trades and the related matched trades with interbank dealer counter-parties. Capital markets revenue is sensitive to the pace of loan growth and a steepened LIBOR curve. Also, low short term interest rates have accelerated the yield protection trend of embedding floors in loans, resulting in fewer derivatives cross sell opportunities.
11
We continue to enhance our treasury management capabilities and now provide all aspects of receivables and payables services in addition to online banking and reporting. We offer remote capture, liquidity management, and lockbox services to meet our clients’ needs and drive non-interest and interest-bearing deposits to the bank. Treasury management income was $2.1 million in the second quarter 2009 compared to $499,000 in the second quarter 2008. This increase is attributable to growth in delivery of services to new and existing clients and is evidence, we believe, of the strong, deep relationships we are building with our clients.
The PrivateWealth Group’s fee revenue was down in the second quarter 2009 to $3.5 million, compared to $4.4 million in the second quarter 2008. The PrivateWealth Group’s assets under management declined to $3.2 billion at June 30, 2009, compared with $3.3 billion at June 30, 2008. Fee revenue for a quarter is predominantly based on the market value of assets under management. Significantly higher volatility in the market value of assets under management throughout 2009, and an increase in assets held in non-fee producing cash equivalents, combined to cause fee revenue to decrease disproportionately to the decrease in assets under management.
Mortgage banking income increased to $2.7 million in the second quarter 2009, compared to $1.2 million during second quarter 2008. Mortgage banking income increased over the prior period due to the interest rate environment during the quarter, which continues to buoy market demand for refinancing and a higher volume of loans sold.
Bank owned life insurance (“BOLI”) revenue represents the change in cash surrender value (“CSV”) of the policies, net of premiums paid. The decrease in the BOLI revenue was attributable to lower earnings credited to policies, based on investments made by the insurer. The tax-equivalent yield on BOLI was 5.92% for second quarter 2009 compared to 5.95% for second quarter 2008. Income recognized on this product includes policies covering certain higher-level employees who are deemed to be significant contributors to the Company. The cash surrender value of BOLI at June 30, 2009 was $46.8 million, compared to $45.0 million at June 30, 2008.
Banking and other services income increased to $2.1 million in the second quarter 2009, compared to $682,000 in the second quarter 2008 due to an increase in letter of credit fees, syndication and unused commitment fees and other transaction-related fees due to new product offerings.
Securities gains were $7.1 million for the second quarter 2009 compared to $286,000 in the second quarter 2008 due largely to the sale of $101.0 million treasury securities during the quarter. Included in non-interest income was a $985,000 early extinguishment of debt charge, representing the fee associated with paying off the underlying funding related to the treasury securities sold.
Year-to-date Non-interest Income
For the six months ended June 30, 2009, non-interest income was $44.3 compared to $18.0 million in the prior year period primarily due to increases in capital markets, treasury management and mortgage banking income. Capital markets income, which includes a $2.5 million CVA, grew to $15.1 million for the six months ended June 30, 2009, compared with $2.4 million in the prior year period. Treasury management income was $3.7 million for the six months ended June 30, 2009, compared to $683,000 in the second quarter 2008 as new products and services were rolled out throughout the year. Mortgage banking income increased to $4.9 million for the six months ended June 30, 2009, compared to $2.8 million in the prior year period. The PrivateWealth Group’s fee revenue was down for the six months ended June 30, 2009 to $7.3 million, compared to $8.8 million in the prior year period. Income recognized on BOLI was $842,000 for the six months ended June 30, 2009 compared to $869,000 in the prior year period as the yield on BOLI was 5.97% in the prior year period, compared to 5.56% for the six months ended June 30, 2009. For the six months ended June 30, 2009, banking and other services income was $5.6 million, compared to $1.4 million in the prior year period primarily due to fees related to increased product offerings such as syndication fees, unused commitment fees and an increase in letter of credit fees. Securities gains were $7.8 million for the six months ended June 30, 2009 compared to $1.1 million in the prior year period due to treasury sales made during the second quarter 2009.
Non-interest Expense
During the first quarter 2009, we achieved the operating leverage we sought since announcing the Plan in November 2007. Our revenue growth continues to outpace growth in our expenses and we continue to actively run our business to maintain tight cost control and expense management. Operating leverage is evidenced through the improvement in our second quarter 2009 efficiency ratio (non-interest expense as a percentage of tax-equivalent net interest income plus total non-interest income) of 66.79% from 96.35% in the second quarter 2008.
12
Table 5
Non-interest Expense Analysis
(Dollar amounts in thousands)
(Dollar amounts in thousands)
Quarters Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
2009 | 2008 | % Change | 2009 | 2008 | % Change | |||||||||||||||||||
Compensation expense: | ||||||||||||||||||||||||
Salaries and wages | $ | 16,615 | $ | 14,796 | 12 | % | $ | 32,793 | $ | 28,379 | 16 | % | ||||||||||||
Share-based payment costs | 4,748 | 5,382 | (12 | %) | 10,655 | 8,155 | 31 | % | ||||||||||||||||
Incentive compensation, retirement costs and other employee benefits | 12,937 | 11,637 | 11 | % | 25,973 | 23,030 | 13 | % | ||||||||||||||||
Total compensation expense | 34,300 | 31,815 | 8 | % | 69,421 | 59,564 | 17 | % | ||||||||||||||||
Net occupancy expense | 6,067 | 4,346 | 40 | % | 12,127 | 8,191 | 48 | % | ||||||||||||||||
Technology and related costs | 1,967 | 1,270 | 55 | % | 4,531 | 2,500 | 81 | % | ||||||||||||||||
Marketing | 1,933 | 2,721 | (29 | %) | 3,775 | 5,549 | (32 | %) | ||||||||||||||||
Professional services | 2,492 | 4,357 | (43 | %) | 5,006 | 6,438 | (22 | %) | ||||||||||||||||
Investment manager expenses | 556 | 812 | (32 | %) | 1,165 | 1,780 | (35 | %) | ||||||||||||||||
Net foreclosed property expense | 967 | 596 | 62 | % | 1,411 | 1,154 | 22 | % | ||||||||||||||||
Supplies and printing | 392 | 464 | (16 | %) | 734 | 814 | (10 | %) | ||||||||||||||||
Postage, telephone, and delivery | 821 | 547 | 50 | % | 1,402 | 1,088 | 29 | % | ||||||||||||||||
Insurance | 9,157 | 1,737 | 427 | % | 12,989 | 2,607 | 398 | % | ||||||||||||||||
Amortization of intangibles | 325 | 422 | (23 | %) | 654 | 656 | 0 | % | ||||||||||||||||
Other expenses | 5,018 | 2,118 | 137 | % | 8,837 | 3,796 | 133 | % | ||||||||||||||||
Total non-interest expense | $ | 63,995 | $ | 51,205 | 25 | % | $ | 122,052 | $ | 94,137 | 30 | % | ||||||||||||
Operating efficiency ratios | ||||||||||||||||||||||||
Non-interest expense to average assets | 2.47 | % | 3.07 | % | 2.41 | % | 3.11 | % | ||||||||||||||||
Net overhead ratio | 1.67 | % | 2.50 | % | 1.53 | % | 2.52 | % | ||||||||||||||||
Efficiency ratio(1) | 66.79 | % | 96.35 | % | 66.29 | % | 95.43 | % |
(1) | The efficiency ratio is presented on a tax-equivalent basis, assuming a federal income tax rate of 35%. See Table 1 for a reconciliation of the effect of the tax-equivalent adjustment. |
Non-interest expense was $64.0 million in the second quarter, increasing $12.8 million or 25%, compared to $51.2 million in the second quarter 2008. The increase compared to the second quarter 2008 is a direct result of significantly higher insurance costs, increases in compensation expense, net occupancy expense, net foreclosed property expenses and is partially offset by a decrease in professional fees, investment management fees and marketing expenses.
The increase of $2.5 million in compensation costs compared to the prior year quarter reflects the continued investment in human capital necessary to support the Company’s growth. The number of full-time equivalent employees increased 13% to 807 at June 30, 2009 compared to 712 at June 30, 2008.
Net occupancy expense grew by $1.7 million compared to the second quarter 2008 to $6.1 million and reflects the investments we have made in growing our office space to accommodate our larger downtown Chicago team.
Technology and related costs, which include fees paid for information technology services and support, increased 55% to $2.0 million for the second quarter 2009, compared to $1.3 million in the prior year period due to increased operational costs and investment in technology to support our expanded products and services as a result of our growth under the Plan.
Professional fees, which include fees paid for legal, accounting, consulting and information systems consulting services, decreased by $1.9 million compared to the second quarter 2008 due to a concerted effort to supplant reliance on third-party professionals with in-house professionals through expansion of our internal human resources.
13
Second quarter 2009 insurance costs increased $7.4 million over second quarter 2008 due to higher Federal Deposit Insurance Corporation (“FDIC”) assessment fees and a special assessment of $5.1 million levied during the second quarter 2009. The increase in FDIC insurance fees is attributable to a 34% growth in deposits year over year for which fees are assessed and an increase in fee rates since the second quarter 2008. In December 2008 the FDIC finalized a rule that raised the then current assessment rates uniformly by 7 basis points effective with the first quarter 2009 assessment. The new rule resulted in annualized assessment rates for Risk Category 1 institutions ranging from 12 to 14 basis points. The increase in deposit insurance expense during the second quarter of 2009 compared to the second quarter of 2008 was also partly related to the additional 10 basis point assessment paid on covered transaction accounts exceeding the $250,000 under the Temporary Liquidity Guaranty Program. As a result of the requirement to increase the FDIC’s Bank Insurance Fund to statutory levels over a prescribed period of time and increased pressure on the fund’s reserves due to the increasing number of bank failures, FDIC insurance costs for 2009 continue to be significantly higher for all insured depository institutions as the rules allow the FDIC to levy additional 5 basis point special assessments on banks in the third and fourth quarters of 2009.
Net foreclosed property expenses increased by $371,000 compared to the second quarter 2008 and is directly correlated with growth in our other real estate owned portfolio. Marketing expenses declined $788,000 compared to the prior year quarter as we reduced client entertainment and other activities in line with the current economic environment.
Other expense increased $2.9 million for the quarter ended June 30, 2009 compared to the prior year quarter with loan and collection costs contributing $1.3 million to the current period increase.
Year-to-date non-interest expense
Non-interest expense was $122.1 million for the six months ended June 30, 2009, increasing $27.9 million or 30%, compared to $94.1 million in the prior year period. The increase represents the ongoing investment in the Plan throughout the year and is a direct result of a combined increase in compensation expense, net occupancy expense and significantly higher insurance costs partially offset by a decrease in professional fees and marketing expenses.
Compensation costs increased $9.9 million compared to the prior year period. The $2.5 million increase in share-based payments is attributable to a greater number of employees with equity awards for the six months ended June 30, 2009 compared to 2008 and equity awards granted during the first quarter 2009 to certain senior level executives. Compensation expense also includes incentive compensation accruals and additional revenue-based compensation expense recognized during the 2009 period.
Net occupancy expense for the six months ended June 30, 2009 grew by $3.9 million compared to the prior year period to $12.1 million and reflects the investments we have made in growing our office space to accommodate our larger downtown Chicago team.
Technology and related costs increased 81% to $4.5 million for the six months ended June 30, 2009, compared to $2.5 million in the prior year period due to the growth of the Company and continued investment in technology, support for facility relocations and upgrading.
Professional fees decreased by $1.4 million for the six months ended June 30, 2009 compared to the prior year period due to a Company-wide effort to internally support various strategic initiatives in lieu of using third party providers.
For the six months ended June 30, 2009, insurance costs increased $10.4 million compared to the prior year period due to higher Federal Deposit Insurance Corporation (FDIC) assessment fees as described above and deposit growth year over year.
Net foreclosed property expenses increased by $257,000 for the six months ended June 30, 2009 compared to the 2008 period. Marketing expenses declined $1.8 million over the prior year period as the Company reduced client entertainment and other activities in line with the current economic environment.
Other expenses for the six months ended June 30, 2009 include $3.7 million of loan and collection expenses, $1.6 million in fees paid to third party service providers used on a recurring basis and $1.0 million in fees related to CDARS®.
Income Taxes
Our provision for income taxes includes both federal and state income tax expense. The effective income tax rate for the three months ended June 30, 2009 was 36.2% compared to (39.2)% for the three months ended June 30, 2008. The effective income tax rate for the six months ended June 30, 2009 was 37.3% compared to (40.2)% for the six months ended June 30, 2008. These year-over-year differences largely reflect the net income generated in the 2009 quarterly and six-month periods compared to net losses in the comparable 2008 periods.
The effective income tax rate varies from the statutory federal income tax rate of 35% principally due to state income taxes, the effects of tax-exempt earnings from municipal securities and bank-owned life insurance and non-deductible compensation and business expenses.
14
In determining that realization of the deferred tax assets is more likely than not and no valuation allowance is needed at June 30, 2009, we considered a number of factors including reversing taxable temporary differences in future periods and our ability to generate future taxable income.
Operating Segments Results
We have three primary business segments: Banking (which includes our lines of business; Illinois Commercial Banking, National Commercial Banking, Commercial Real Estate, and The PrivateClients Group); The PrivateWealth Group; and Holding Company Activities. The PrivateBank Mortgage Company results are included in the Banking segment.
Banking
The profitability of each of our bank subsidiaries is primarily dependent on net interest income, provision for loan losses, non-interest income and non-interest expense. Net income for the banking segment for the quarter ended June 30, 2009 was $14.1 million compared to a net loss of $3.0 million for the prior year period. The increase in net income for the banking segment resulted primarily from a 65% increase in net interest income, offset by a 39% increase in operating expenses, including greater compensation-related expense. For the six months ended June 30, 2009, net income for the banking segment was $30.4 million, compared to a net loss of $6.1 million in the prior year period. Total loans for the banking segment increased 9% to $8.7 billion during the first six months of 2009 as compared to $8.0 billion at December 31, 2008. Commercial loans, including commercial and industrial and owner-occupied commercial real estate loans, continue to be the fastest-growing segment of the loan portfolio and increased to $4.6 billion, or 53% of our total loans, from $4.0 billion, or 49%, of total loans at December 31, 2008. Commercial real estate loans decreased to 28% of our total loans at June 30, 2009, compared to 30% of total loans at December 31, 2008. Total deposits increased 6% to $8.5 billion at June 30, 2009 from $8.0 billion at December 31, 2008.
The PrivateWealth Group
The PrivateWealth Group segment includes investment management, investment advisory, personal trust and estate administration, custodial and escrow, retirement account administration, and brokerage services. The PrivateWealth Group’s assets under management remained relatively flat at $3.2 billion at June 30, 2009 as compared to approximately $3.3 billion at December 31, 2008, despite declines in the market values of equities and many other investments during this period. The PrivateWealth Group’s fee revenue was $3.5 million, a decrease of 20%, for the quarter ended June 30, 2009 compared to $4.4 million for the prior year period. This decrease was primarily due to significantly lower market values of equities and certain other assets under management and an increase in assets held in non-fee producing cash equivalents during the second quarter of 2009. Net income for The PrivateWealth Group decreased 66% to $140,000 for the quarter ended June 30, 2009 from $417,000 in the prior year period primarily due to the decrease in fee revenue. For the six months ended June 30, 2009, The PrivateWealth Group earned $7.3 million in fee revenue compared to $8.8 million in the prior year period, netting income of $404,000 for the six months ending June 30, 2009 compared to $796,000 in the prior year period.
For a number of our wealth management relationships, we utilize third-party investment managers, including Lodestar Investment Counsel, LLC (“Lodestar”), a subsidiary of the Company. Fees paid to third party investment managers decreased to $556,000 for the quarter ended June 30, 2009, compared to $812,000 in the prior year period. The 2009 decrease is attributable to a decline in assets under management and an increase in assets held in cash equivalents. Fees paid to Lodestar, which are eliminated in consolidation, totaled approximately $86,000 in the second quarter 2009 compared to $113,000 in the prior year period. For the six months ended June 30, 2009, fees paid to third party investment managers decreased by $615,000 compared to the prior year period. Fees paid to Lodestar for the six months ended June 30, 2009 were $177,000 compared to $232,000 in the prior year period.
Holding Company Activities
The Holding Company Activities segment consists of parent company only matters. The Holding Company’s most significant assets are its net investments in its three banking subsidiaries and its mortgage banking subsidiary. Holding Company financial results are impacted primarily by interest expense on borrowings and operating expenses of the parent company. Recurring holding company operating expenses consist primarily of compensation (amortization of share-based compensation) and professional fees. The Holding Company segment reported a net loss available to common stockholders of $11.3 million for the quarter ended June 30, 2009, compared to a net loss available to common stockholders of $10.7 million for the prior year period. The increase in the net loss year over year is primarily due to an increase in the preferred stock dividend and related amortization associated with the issuance of Series B preferred stock to the Treasury under the TARP CPP. For the six months ended June 30, 2009, the Holding Company segment reported a net loss of $22.5 million, compared to a net loss of $17.1 million in the prior year period primarily due to an increase in interest expense and the preferred stock dividend.
15
FINANCIAL CONDITION
Total Assets
Total assets increased to $11.0 billion at June 30, 2009, an increase of 9% from $10.0 billion at December 31, 2008. Asset growth from December 31, 2008 was primarily due to loan growth of 9% during the period.
Investment Portfolio Management
We manage our investment portfolio to maximize the return on invested funds within acceptable risk guidelines, to meet pledging and liquidity requirements, and to adjust balance sheet interest rate sensitivity to attempt to protect net interest income against the impact of changes in interest rates.
We adjust the size and composition of our securities portfolio according to a number of factors, including expected liquidity needs, the current and forecasted interest rate environment, our actual and anticipated balance sheet growth rate, and the relative value of various segments of the securities markets.
Table 6
Investment Portfolio Valuation Summary
(Dollars in thousands)
(Dollars in thousands)
At June 30, 2009 | At December 31, 2008 | |||||||||||||||||||||||
Fair | Amortized | % of | Fair | Amortized | % of | |||||||||||||||||||
Value | Cost | Total | Value | Cost | Total | |||||||||||||||||||
Available-for-Sale | ||||||||||||||||||||||||
U.S. Treasury securities | $ | 17,140 | $ | 16,765 | 1.2 | $ | 127,670 | $ | 117,875 | 8.8 | ||||||||||||||
Collateralized mortgage obligations | 214,696 | 206,253 | 14.6 | 267,115 | 263,393 | 18.4 | ||||||||||||||||||
Residential mortgage-backed securities | 1,024,157 | 1,000,554 | 69.6 | 825,942 | 803,115 | 56.9 | ||||||||||||||||||
Corporate collateralized mortgage obligations | 5,753 | 5,746 | 0.4 | 6,240 | 6,499 | 0.4 | ||||||||||||||||||
State and municipal securities | 181,902 | 175,639 | 12.4 | 198,597 | 190,461 | 13.7 | ||||||||||||||||||
Total available-for-sale | 1,443,648 | 1,404,957 | 98.2 | 1,425,564 | 1,381,343 | 98.2 | ||||||||||||||||||
Non-marketable Equity Investments | ||||||||||||||||||||||||
FHLB stock | 24,289 | 24,289 | 1.6 | 23,663 | 23,663 | 1.6 | ||||||||||||||||||
Other | 4,297 | 4,297 | 0.2 | 3,550 | 3,550 | 0.2 | ||||||||||||||||||
Total non-marketable equity investments | 28,586 | 28,586 | 1.8 | 27,213 | 27,213 | 1.8 | ||||||||||||||||||
Total securities | $ | 1,472,234 | $ | 1,433,543 | 100.0 | $ | 1,452,777 | $ | 1,408,556 | 100.0 | ||||||||||||||
As of June 30, 2009, our securities portfolio totaled $1.5 billion, increasing 1% from December 31, 2008. During the second quarter 2009, we took advantage of market conditions to sell $101.7 million of securities, primarily treasury securities funded by securities sold under agreement to repurchase (“repo funding”), at a net gain of $7.1 million. In conjunction with the sale of a $101.0 million U.S. Treasury security, we recorded a $985,000 early extinguishment of debt charge, representing the fee associated with paying off the underlying funding. We reinvested the majority of the net proceeds back into investments similar to those already in the portfolio.
Investments in mortgage related securities, collateralized mortgage obligations and residential mortgage-backed securities comprise 86% of the available-for-sale securities portfolio at June 30, 2009. Virtually all of the mortgage securities are backed by U.S. Government-owned agencies or issued by U.S. Government-sponsored enterprises. All mortgage securities are composed of fixed rate, fully amortizing collateral with final maturities of 30 years or less.
Investments in debt instruments of state and local municipalities comprised 13% of the total available-for-sale securities portfolio at June 30, 2009. This type of security has historically experienced very low default rates and provided a predictable cash flow since it generally is not subject to significant prepayment. Insurance companies regularly provide credit enhancement to improve the credit rating and liquidity of a municipal bond issuance. Management considers the credit enhanced and underlying municipality credit rating when evaluating a purchase or sale decision.
16
At June 30, 2009, our reported stockholders’ equity reflected unrealized securities gains net of tax of $24.1 million. This represented a decrease of $3.4 million from unrealized securities gains net of tax of $27.6 million at December 31, 2008.
Non-marketable equity investments include Federal Home Loan Bank (“FHLB”) stock and other various equity securities. At June 30, 2009, our consolidated investment in FHLB stock was $24.3 million, compared to $23.7 million at December 31, 2008. Our FHLB stock holdings are necessary to qualify for FHLB advances, and we are monitoring the financial condition of the FHLBs in which we have an investment. At June 30, 2009, we owned $4.3 million in other securities, which consist of equity investments to fund civic and community projects, some of which qualify for CRA purposes.
As of June 30, 2009, we do not own any Freddie Mac or Fannie Mae preferred stock or subordinated debt obligations, bank trust preferred securities, nor do we own any sub-prime mortgage-backed securities.
LOAN PORTFOLIO AND CREDIT QUALITY
Portfolio Composition
Our loan portfolio is comprised of commercial, real estate (which includes commercial real estate, construction, and residential real estate) and personal loans. Outstanding loans totaled $8.7 billion as of June 30, 2009, an increase of 9% from December 31, 2008. The increase since December 31, 2008 was led by growth in commercial loans which grew 15% from December 31, 2008 comprising 53% of the Company’s loan portfolio. We believe we are well positioned to both pursue and take advantage of prudent, targeted lending opportunities.
Table 7
Loan Portfolio
(Dollars in thousands)
(Dollars in thousands)
June 30, | % of | December 31, | % of | |||||||||||||||||
2009 | Total | 2008 | Total | % Change | ||||||||||||||||
Commercial and industrial | $ | 3,682,155 | 42.2 | $ | 3,437,130 | 42.8 | 7.1 | |||||||||||||
Owner-occupied commercial real estate | 899,315 | 10.3 | 538,688 | 6.7 | 66.9 | |||||||||||||||
Total commercial | 4,581,470 | 52.5 | 3,975,818 | 49.5 | 15.2 | |||||||||||||||
Commercial real estate | 1,954,692 | 22.4 | 1,980,271 | 24.7 | (1.3 | ) | ||||||||||||||
Commercial real estate – multifamily | 492,896 | 5.6 | 403,690 | 5.0 | 22.1 | |||||||||||||||
Total commercial real estate | 2,447,588 | 28.0 | 2,383,961 | 29.7 | 2.7 | |||||||||||||||
Construction | 867,660 | 9.9 | 815,150 | 10.1 | 6.4 | |||||||||||||||
Residential real estate | 319,762 | 3.7 | 328,138 | 4.1 | (2.6 | ) | ||||||||||||||
Home equity | 215,087 | 2.5 | 191,934 | 2.4 | 12.1 | |||||||||||||||
Personal | 297,359 | 3.4 | 341,806 | 4.2 | (13.0 | ) | ||||||||||||||
Total loans | $ | 8,728,926 | 100.0 | $ | 8,036,807 | 100.0 | 8.6 | |||||||||||||
The composition of our commercial real estate portfolio is geographically diverse, principally located in and around our core markets. By product type, we have good balance, with no property type exceeding 20% of our total non-owner occupied commercial real estate exposure. Our exposure to land is also of manageable size. The following table summarizes our loans secured by non-owner occupied commercial real estate by property type and collateral location at June 30, 2009 and December 31, 2008.
17
Table 8
Collateral Location by Property Type
As of June 30, 2009 | % of Total | |||||||||||||||||||||||||||
IL | GA | MI | MO | WI | Other | Portfolio | ||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||
Health Care | 0.7 | % | 0.0 | % | 0.1 | % | 0.3 | % | 0.0 | % | 7.0 | % | 8.1 | % | ||||||||||||||
Raw Land | 2.5 | % | 0.0 | % | 0.4 | % | 0.0 | % | 0.1 | % | 1.4 | % | 4.4 | % | ||||||||||||||
Land Development | 0.6 | % | 0.1 | % | 0.0 | % | 0.7 | % | 0.1 | % | 0.7 | % | 2.2 | % | ||||||||||||||
Residential 1-4 Family | 5.4 | % | 0.2 | % | 0.9 | % | 0.5 | % | 0.6 | % | 2.1 | % | 9.7 | % | ||||||||||||||
Multi-Family Rental | 7.7 | % | 0.5 | % | 0.7 | % | 1.3 | % | 0.4 | % | 3.0 | % | 13.6 | % | ||||||||||||||
Mixed Use/Other | 3.5 | % | 0.3 | % | 1.8 | % | 1.0 | % | 0.1 | % | 1.1 | % | 7.8 | % | ||||||||||||||
Office | 3.6 | % | 1.1 | % | 0.9 | % | 1.3 | % | 0.2 | % | 2.0 | % | 9.1 | % | ||||||||||||||
Warehouse | 5.4 | % | 0.9 | % | 1.5 | % | 0.2 | % | 0.1 | % | 2.7 | % | 10.8 | % | ||||||||||||||
Retail | 3.1 | % | 0.3 | % | 1.6 | % | 0.3 | % | 0.2 | % | 2.2 | % | 7.7 | % | ||||||||||||||
Total commercial real estate | 32.5 | % | 3.4 | % | 7.9 | % | 5.6 | % | 1.8 | % | 22.2 | % | 73.4 | % | ||||||||||||||
Construction | ||||||||||||||||||||||||||||
Land Development | 5.3 | % | 0.3 | % | 0.9 | % | 0.0 | % | 0.3 | % | 1.1 | % | 7.9 | % | ||||||||||||||
Residential 1-4 Family | 1.0 | % | 0.0 | % | 0.2 | % | 0.5 | % | 0.0 | % | 0.1 | % | 1.8 | % | ||||||||||||||
Multi-Family 5+ | 2.2 | % | 0.6 | % | 0.1 | % | 0.1 | % | 0.1 | % | 1.2 | % | 4.3 | % | ||||||||||||||
Industrial/Warehouse | 0.9 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.9 | % | 1.8 | % | ||||||||||||||
Office | 1.2 | % | 0.5 | % | 0.0 | % | 0.2 | % | 0.1 | % | 0.2 | % | 2.2 | % | ||||||||||||||
Retail | 1.9 | % | 0.0 | % | 0.1 | % | 0.8 | % | 0.0 | % | 1.3 | % | 4.1 | % | ||||||||||||||
Mixed Use/Other | 0.9 | % | 0.0 | % | 0.6 | % | 0.4 | % | 0.4 | % | 2.2 | % | 4.5 | % | ||||||||||||||
Total construction | 13.4 | % | 1.4 | % | 1.9 | % | 2.0 | % | 0.9 | % | 7.0 | % | 26.6 | % | ||||||||||||||
Total commercial real estate and construction | 45.9 | % | 4.8 | % | 9.8 | % | 7.6 | % | 2.7 | % | 29.2 | % | 100.0 | % | ||||||||||||||
As of December 31, 2008 | % of Total | |||||||||||||||||||||||||||
IL | GA | MI | MO | WI | Other | Portfolio | ||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||
Vacant land | 8.1 | % | 0.3 | % | 0.5 | % | 0.9 | % | 0.4 | % | 2.6 | % | 12.8 | % | ||||||||||||||
Residential 1-4 family | 3.0 | % | — | 1.3 | % | 0.4 | % | 0.3 | % | 0.7 | % | 5.7 | % | |||||||||||||||
Multi-family | 5.5 | % | 1.0 | % | 0.5 | % | 1.3 | % | 0.4 | % | 1.8 | % | 10.5 | % | ||||||||||||||
Mixed use | 2.6 | % | — | 0.3 | % | 0.5 | % | 0.1 | % | 0.2 | % | 3.7 | % | |||||||||||||||
Office | 6.4 | % | 1.1 | % | 0.9 | % | 1.8 | % | 0.3 | % | 2.3 | % | 12.8 | % | ||||||||||||||
Warehouse | 3.8 | % | 0.6 | % | 1.5 | % | 0.1 | % | 0.1 | % | 1.7 | % | 7.8 | % | ||||||||||||||
Retail | 3.9 | % | 0.8 | % | 2.8 | % | 0.2 | % | 0.3 | % | 3.8 | % | 11.8 | % | ||||||||||||||
Other | 4.1 | % | 0.4 | % | 1.3 | % | 0.3 | % | — | 9.0 | % | 15.1 | % | |||||||||||||||
Total commercial real estate | 37.4 | % | 4.2 | % | 9.1 | % | 5.5 | % | 1.9 | % | 22.1 | % | 80.2 | % | ||||||||||||||
Construction | ||||||||||||||||||||||||||||
Residential 1-4 family | 3.3 | % | 0.8 | % | 0.5 | % | 0.8 | % | 0.1 | % | 0.7 | % | 6.2 | % | ||||||||||||||
Multi-family | 0.8 | % | — | 0.1 | % | 0.1 | % | 0.1 | % | 0.3 | % | 1.4 | % | |||||||||||||||
Other | 5.5 | % | 0.7 | % | 0.7 | % | 1.1 | % | 0.6 | % | 3.6 | % | 12.2 | % | ||||||||||||||
Total construction | 9.6 | % | 1.5 | % | 1.3 | % | 2.0 | % | 0.8 | % | 4.6 | % | 19.8 | % | ||||||||||||||
Total commercial real estate and construction | 47.0 | % | 5.7 | % | 10.4 | % | 7.5 | % | 2.7 | % | 26.7 | % | 100.0 | % | ||||||||||||||
18
During the first quarter of 2009, we commenced a collateral reclassification project to enhance property type detail, particularly on land development and construction loans. The June 30, 2009 table reflects reclassifications made during the first and second quarters of 2009. The project is extensive and will progressively allow us to achieve improved transparency of our loan portfolio and collateral attributes over the next several quarters.
As the loan portfolio mix has evolved over the past several quarters, a greater percentage of commercial and industrial credit exists, improving our loan portfolio’s diversification. We regularly and routinely review the loan portfolio mix in order to determine appropriate concentration levels.
Allowance for Loan Losses
Loan quality is monitored by management and reviewed by the Loan Committee of the Board of Directors. The amount of addition to the allowance for loan losses, which is charged to earnings through the provision for loan losses, is determined based on a variety of factors, including, among other factors, assessment of the credit risk of the loans in the portfolio, delinquent loans, impaired loans, evaluation of current economic conditions in the market area, actual charge-offs and recoveries during the period, industry loss averages and historical loss experience. The determination of the level of the allowance also involves the exercise of judgment by management.
For a summary of the changes in the reserve for loan losses for the quarters and six months ended June 2009 and 2008, refer to Note 5 of “Notes to Consolidated Financial Statements.”
Table 9
Allowance for Loan Losses
(Dollars in thousands)
(Dollars in thousands)
2009 | 2008 | |||||||||||||||||||
June 30 | March 31 | December 31 | September 30 | June 30 | ||||||||||||||||
As of the period ended | ||||||||||||||||||||
Allowance for loan losses | $ | 140,088 | $ | 127,011 | $ | 112,672 | $ | 102,223 | $ | 79,021 | ||||||||||
Total loans | 8,728,926 | 8,483,641 | 8,036,807 | 7,441,137 | 6,417,026 | |||||||||||||||
Allowance for loan losses to loans | 1.60 | % | 1.50 | % | 1.40 | % | 1.37 | % | 1.23 | % | ||||||||||
Allowance for loan losses to nonperforming loans | 76 | % | 78 | % | 85 | % | 116 | % | 135 | % | ||||||||||
For the quarter ended | ||||||||||||||||||||
Provision for loan losses | $ | 21,521 | $ | 17,805 | $ | 119,250 | $ | 30,173 | $ | 23,023 | ||||||||||
Net loans charged off | 8,444 | 3,466 | 108,801 | 6,971 | 5,976 | |||||||||||||||
Net loans charged off to average loans, annualized | 0.39 | % | 0.17 | % | 5.49 | % | 0.40 | % | 0.42 | % |
We increased our allowance for loan losses to $140.1 million at June 30, 2009, up $27.4 million from $112.7 million at December 31, 2008. The ratio of the allowance for loan losses to total loans was 1.60% at June 30, 2009, up from 1.40% as of December 31, 2008. Given the comprehensive review of all underperforming and nonperforming loans completed at the end of the second quarter and the adequacy of loss factors used in our analysis, we believe that the allowance for loan losses is adequate to provide for probable and reasonably estimable credit losses inherent in our loan portfolio as of June 30, 2009. The loan loss allowance as a percentage of nonperforming loans was 76% at June 30, 2009 compared to 85% at December 31, 2008. Total loans charged off, net of recoveries, in the second quarter 2009 were 0.39% of average loans on an annualized basis compared to 0.42% at June 30, 2008.
During the second quarter 2009, net charge-offs totaled $8.4 million as compared to $6.0 million in the second quarter 2008. Charge-offs were modest and mainly in the personal category, representing a single relationship whose multiple asset holdings lost significant value and whose corresponding cash flow also deteriorated. The provision for loan losses for the second quarter 2009 totaled $21.5 million and exceeded net charge-offs by $13.1 million. For the six months ended June 30, 2009, net charge offs were $11.9 million, compared to $10.0 million in the prior year period and the provision for loan losses for the six months ended June 30, 2009 was $39.3 million, compared to $40.2 million in the prior year period.
Our loan loss allowance model is driven primarily by risk ratings, loan classifications and loan loss factors. The loan loss factors used in our analysis reflect the significant losses realized in the fourth quarter 2008, providing us current experience upon which to base our model’s results. The level of the allowance for loan losses is also a judgment and reflects our current view of market conditions and portfolio performance.
19
The following table shows our allocation of the allowance for loan losses by specific category at the dates shown.
Table 10
Allocation of Allowance for Loan Losses
(Dollars in thousands)
(Dollars in thousands)
As of | ||||||||||||||||
June 30, 2009 | December 31, 2008 | |||||||||||||||
% of | % of | |||||||||||||||
Total | Total | |||||||||||||||
Amount | Allowance | Amount | Allowance | |||||||||||||
General allocated reserve: | ||||||||||||||||
Commercial | $ | 46,449 | 33 | $ | 39,524 | 35 | ||||||||||
Commercial real estate | 36,880 | 26 | 31,625 | 28 | ||||||||||||
Construction | 34,710 | 25 | 27,231 | 24 | ||||||||||||
Residential real estate | 1,468 | 1 | 1,294 | 1 | ||||||||||||
Home equity | 1,224 | 1 | 1,000 | 1 | ||||||||||||
Personal | 1,810 | 1 | 1,527 | 2 | ||||||||||||
Total general allocated | 122,541 | 87 | 102,201 | 91 | ||||||||||||
Specific reserve | 16,847 | 13 | 330 | — | ||||||||||||
Unallocated reserve | 700 | — | 10,141 | 9 | ||||||||||||
Total | $ | 140,088 | 100 | $ | 112,672 | 100 | ||||||||||
During the second quarter of 2009, we identified additional banking relationships with loan impairments requiring the establishment of specific reserves.
The accounting policies underlying the establishment and maintenance of the allowance for loan losses are discussed in Notes 1 and 5 to the Consolidated Financial Statements of our 2008 Annual Report on Form 10-K.
In addition to the allowance for loan losses, we maintain a reserve for unfunded commitments at a level we believe to be sufficient to absorb estimated probable losses related to unfunded credit facilities. At June 30, 2009, our reserve for unfunded commitments was $939,000, a 12% increase over $840,000 at December 31, 2008. The reserve is computed using a methodology similar to that used to determine the general allocated component of the allowance for loan losses. Net adjustments to the reserve for unfunded commitments are included in other non-interest expense in the Consolidated Statements of Income.
Nonperforming Assets and Delinquent Loans
Nonperforming loans include loans past due 90 days and still accruing interest, loans for which the accrual of interest has been discontinued and loans for which the terms have been renegotiated to provide for a reduction or deferral of interest and principal due to a weakening of the borrower’s financial condition. Nonperforming assets include nonperforming loans and real estate that has been acquired primarily through foreclosure and is awaiting disposition. For a detailed discussion of our policy on accrual of interest on loans, see Note 1 to the Consolidated Financial Statements of our 2008 Annual Report on Form 10-K. At June 30, 2009, we had no loans past due 90 days and still accruing interest.
20
Table 11
Nonperforming Assets and Past Due Loans
(Dollars in thousands)
Nonperforming Assets and Past Due Loans
(Dollars in thousands)
% of | ||||||||||||||||||||||||
2009 | Loan | 2009 | 2008 | |||||||||||||||||||||
June 30 | Category | March 31 | December 31 | September 30 | June 30 | |||||||||||||||||||
Nonaccrual loans: | ||||||||||||||||||||||||
Commercial and industrial | $ | 25,442 | 0.6 | % | $ | 19,017 | $ | 11,735 | $ | 14,454 | $ | 9,847 | ||||||||||||
Commercial real estate (“CRE”) | 72,621 | 3.0 | % | 55,238 | 48,143 | 33,136 | 20,822 | |||||||||||||||||
Construction | 64,849 | 7.5 | % | 66,067 | 63,305 | 35,130 | 22,583 | |||||||||||||||||
Residential real estate | 8,913 | 2.8 | % | 8,138 | 6,829 | 3,210 | 2,118 | |||||||||||||||||
Personal and home equity | 11,701 | 2.3 | % | 14,436 | 1,907 | 2,127 | 1,978 | |||||||||||||||||
Total nonaccrual loans | 183,526 | 162,896 | 131,919 | 88,057 | 57,348 | |||||||||||||||||||
90 days past due loans (still accruing interest) | — | — | — | — | 1,180 | |||||||||||||||||||
Total nonperforming loans | 183,526 | 162,896 | 131,919 | 88,057 | 58,528 | |||||||||||||||||||
Foreclosed real estate (“OREO”) | 29,236 | 28,703 | 23,823 | 18,465 | 14,579 | |||||||||||||||||||
Total nonperforming assets | $ | 212,762 | $ | 191,599 | $ | 155,742 | $ | 106,522 | $ | 73,107 | ||||||||||||||
30-89 days past due loans: | ||||||||||||||||||||||||
Commercial and industrial | $ | 4,250 | 0.1 | % | $ | 23,953 | $ | 12,060 | $ | 5,867 | $ | 5,983 | ||||||||||||
Commercial real estate | 35,541 | 1.5 | % | 55,881 | 9,113 | 18,473 | 8,282 | |||||||||||||||||
Construction | 11,012 | 1.3 | % | 7,196 | 9,166 | 19,113 | 7,062 | |||||||||||||||||
Residential real estate | 2,888 | 0.9 | % | 5,606 | 3,485 | 3,104 | 1,121 | |||||||||||||||||
Personal and home equity | 5,705 | 1.1 | % | 7,804 | 1,580 | 3,400 | 7,631 | |||||||||||||||||
Total 30-89 days past due loans | $ | 59,396 | $ | 100,440 | $ | 35,404 | $ | 49,957 | $ | 30,079 | ||||||||||||||
Nonaccrual loans to total loans | 2.10 | % | 1.92 | % | 1.64 | % | 1.18 | % | 0.89 | % | ||||||||||||||
Nonaccrual loans to total assets | 1.67 | % | 1.57 | % | 1.31 | % | 0.98 | % | 0.77 | % | ||||||||||||||
Nonperforming loans to total loans | 2.10 | % | 1.92 | % | 1.64 | % | 1.18 | % | 0.91 | % | ||||||||||||||
Nonperforming assets to total assets | 1.94 | % | 1.85 | % | 1.55 | % | 1.18 | % | 0.98 | % | ||||||||||||||
Allowance for loan losses as a percent of nonperforming loans | 76 | % | 78 | % | 85 | % | 116 | % | 135 | % |
During the second quarter 2009, we continued to see weakness and strained liquidity of borrowers across many of our sectors, consistent with the last twelve months. Given continuing weak economic conditions, we expect to continue to experience a weak credit quality environment. Nonperforming assets were 1.94% of total assets at June 30, 2009 compared to 1.55% at December 31, 2008, primarily consisting of nonperforming residential development loans identified in late 2008 and loans which became nonperforming during the first half of 2009. The new nonperforming loans include credit extended directly for CRE property investment and to individuals who have invested in commercial real estate projects. New non-performing loans are primarily development related loans to borrowers and/or projects that have been negatively impacted by the economy. Our commercial construction or development portfolio continues to experience stress as the collateral values and the absorption of projects available for lease remains soft. We continue to closely monitor our CRE portfolio as part of our regular loan portfolio review.
The ratio of nonperforming loans to total loans was 2.10% at June 30, 2009 compared to 1.64% at year-end, driven mainly by weakness in the CRE sector, particularly evidenced in land development and speculative construction projects. The increase in non-performing loans is predominately in the Chicago market, where we have our largest geographic presence, and the Michigan market, our second largest geographic market and an area undergoing continued severe economic stress.
During the fourth quarter 2008, we completed a portfolio review which resulted in a substantial increase in our level of nonaccrual loans at year end 2008. We also took substantial charge-offs during the fourth quarter 2008 as we identified inherent losses where cash flow and guarantor support indicated likely non-performance and where losses from deteriorating assets values were evident. We believe that these loan assets are fairly valued at June 30, 2009 and we continuously monitor these loans. As project and guarantor cash flow support dissipates and collateral protection weakens, we undertake a diligent and comprehensive review of all underperforming loans. These reviews identify loans considered to be nonperforming, and where warranted, we establish specific reserves and recognize inherent losses.
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Loans 30-89 days totaled $59.4 million at June 30, 2009 compared to $35.4 million at December 31, 2008. These loans are strictly administered in accordance with our credit management practices. Of the $59.4 million in past due loans at June 30, 2009, approximately 35% were payment past dues and 65% were past due for renewal reasons. Based on where we are in the current economic cycle, we are applying more stringent underwriting standards and financial analysis on all loan renewals. The necessary financial analysis, customer communication, obtaining greater financial detail and current collateral valuations, requires increased processing time in order to implement the higher standards. Therefore, a portion of the loans may go past maturity and become technically past due during this lengthened renewal process. We anticipate that a portion of those loans past due for renewal reasons will move out of the past due category in the third quarter 2009. Nevertheless, the pattern of past dues for renewal reasons is likely to continue for the foreseeable future as it is an inherent element of our credit process.
Our disclosure with respect to impaired loans is contained in Note 5 of “Notes to Consolidated Financial Statements”.
FUNDING AND LIQUIDITY MANAGEMENT
Deposits
Our deposit gathering activities are strategic. We knew from the time we launched the Plan in November 2007 that deposit growth would lag loan growth and we would have to rely heavily on wholesale funding sources until we were able, over time, to close the gap between the volume of new loans we recorded on our balance sheet and the client deposits we captured. We have built and continue to build a suite of deposit and cash management products and services that have and, we believe, will continue to generate client deposits for us. We also have personnel devoted solely to our deposit generation efforts. Moreover, our relationship-based banking model means we are focused on delivering the “whole Bank” to our clients including our deposit and cash management services. In the fourth quarter of 2008 and throughout 2009 our client deposit growth has exceeded our loan growth and created greater balance between loan and deposit growth since the launch of our Plan, enabling us to rely less on more expensive wholesale funding sources. Nevertheless, we have a number of wholesale funding sources available to us, and as a matter of prudent asset/liability management, we utilize a variety of funding sources to find the optimal balance among duration risk, cost, liquidity risk and contingency planning.
Table 12
Deposits
(Dollars in thousands)
Deposits
(Dollars in thousands)
As of | ||||||||||||||||||||
June 30, | % | December 31, | % | |||||||||||||||||
2009 | of Total | 2008 | of Total | % Change | ||||||||||||||||
Non-interest bearing deposits | $ | 1,243,453 | 15.0 | $ | 711,693 | 8.9 | 74.7 | |||||||||||||
Interest-bearing deposits | 535,374 | 6.5 | 232,099 | 2.9 | 130.7 | |||||||||||||||
Savings deposits | 19,852 | 0.2 | 15,644 | 0.2 | 26.9 | |||||||||||||||
Money market accounts | 3,109,532 | 37.6 | 2,783,238 | 34.8 | 11.7 | |||||||||||||||
Brokered deposits: | ||||||||||||||||||||
Traditional | 708,802 | 8.6 | 1,481,762 | 18.5 | (52.2 | ) | ||||||||||||||
Client CDARS® | 1,047,082 | 12.6 | 678,958 | 8.5 | 54.2 | |||||||||||||||
Non-client CDARS® | 187,181 | 2.3 | 494,048 | 6.2 | (62.1 | ) | ||||||||||||||
Total brokered deposits | 1,943,065 | 23.5 | 2,654,768 | 33.2 | (26.8 | ) | ||||||||||||||
Other time deposits | 1,426,874 | 17.2 | 1,599,014 | 20.0 | (10.8 | ) | ||||||||||||||
Total deposits | $ | 8,278,150 | 100.0 | $ | 7,996,456 | 100.0 | 3.5 | |||||||||||||
Client deposits(1) | $ | 7,382,167 | $ | 6,020,646 | 22.6 | |||||||||||||||
(1) | Total deposits, net of traditional brokered deposits and non-client CDARS®. |
Total deposits at June 30, 2009 increased 4% from year-end 2008 primarily due to an increase in client CDARS®, non-interest bearing deposits, and interest-bearing deposits. Client deposits increased by $1.4 billion, or 23%, to $7.4 billion at June 30, 2009 compared to $6.0 billion at December 31, 2008. During 2009, we have continued to facilitate our deposit growth by pursuing deposits from existing and new clients, increasing institutional and municipal deposits, attracting additional business DDA account balances through our enhanced treasury management services, and increasing use of our CDARS® deposit program. Total non-interest bearing deposits increased $531.8 million or 75% at June 30, 2009 from December 31, 2008.
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Brokered deposits totaled $1.9 billion at June 30, 2009, down 27% from $2.7 billion at December 31, 2008 due to a reduction in traditional brokered deposits and non-client CDARS® deposits. During second quarter 2009, we reduced our reliance on brokered deposits as a source of funding for the growth in our loan portfolio and utilized client deposits and lower costing funds through the Federal Reserve Bank discount window program to support our funding needs. We have issued certain brokered deposits with call option provisions, which provide us with the opportunity to redeem the certificates of deposits on a specified date prior to the contractual maturity date. Our brokered deposits to total deposits ratio was 24% at June 30, 2009 and 33% at December 31, 2008. Brokered deposits at June 30, 2009 include $1.2 billion in CDARS® deposits, of which we consider $1.0 billion to be client related CDARS®.
Table 13
Scheduled Maturities of Brokered and Other Time Deposits
(Dollars in thousands)
Scheduled Maturities of Brokered and Other Time Deposits
(Dollars in thousands)
Brokered | Other Time | Total | ||||||||||
Year ending December 31, 2009: | ||||||||||||
Third quarter | $ | 896,786 | $ | 677,960 | $ | 1,574,746 | ||||||
Fourth quarter | 381,725 | 360,161 | 741,886 | |||||||||
2010 | 500,011 | 323,748 | 823,759 | |||||||||
2011 | 37,975 | 42,333 | 80,308 | |||||||||
2012 | 45,606 | 15,132 | 60,738 | |||||||||
2013 | 9,477 | 5,796 | 15,273 | |||||||||
2014 and thereafter | 71,485 | 1,744 | 73,229 | |||||||||
Total | $ | 1,943,065 | $ | 1,426,874 | $ | 3,369,939 | ||||||
Short-term Borrowings
Short-term borrowings which includes securities sold under agreements to repurchase, federal funds purchased, term auction facilities issued by the Federal Reserve Bank, borrowings under the Company’s credit facility and FHLB advances that mature in one year or less, increased $237.9 million to $892.7 million from $654.8 million at December 31, 2008 primarily due to $700.0 million outstanding through the Federal Reserve Bank discount window’s primary credit program, offset by a decrease in federal funds purchased, FHLB advances, redemption of $97.0 million repurchase agreement in the second quarter 2009 and the payoff in full of our $20.0 million credit facility during the first quarter 2009. Additionally, during the first six months of 2009, we redeemed the entire $115.0 million aggregate outstanding principal amount of our contingent convertible senior notes at a redemption price in cash equal to 100% of the principal amount, plus accrued and unpaid interest.
MANAGEMENT OF CAPITAL
Stockholders’ equity was $1.1 billion at June 30, 2009, an increase of $473.8 million from $605.6 million at December 31, 2008, due primarily to an additional $217.0 million in capital as a result of the issuance of common stock during the second quarter 2009 and the issuance of $243.8 preferred stock to the U.S. Treasury under the TARP CPP during the first quarter 2009.
On May 19, 2009, we closed an underwritten public offering of 11.6 million shares of newly issued common stock at a public offering price of $19.25 per share. The underwriters of the offering partially exercised their over-allotment option and purchased an additional 266,673 shares on May 19, 2009. The Company had granted the underwriters an over-allotment option to purchase an additional 1.74 million shares. The net proceeds from the offering, including the partial exercise of the over-allotment option, were approximately $217.0 million after deducting underwriting commissions but before offering expenses. The net proceeds from the offering qualify as tangible common equity and Tier 1 capital and will be used for working capital and general corporate purposes.
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On June 17, 2009, we amended our amended and restated certificate of incorporation to (1) create a new class of non-voting common stock (the “Non-voting Common Stock”), and (2) amend and restate the Certificate of Designations of the Company’s Series A Junior Nonvoting Preferred Stock (the “Series A Preferred Stock”) to provide, among other things, that the shares of Series A Preferred Stock are convertible only into shares of Non-voting Common Stock. Under the amended terms of the Series A Preferred Stock, each share of Series A Preferred Stock is convertible into one share of Non-voting Common Stock. On June 17, 2009, we issued 1,951,037 shares of Non-voting Common Stock to GTCR upon notice of conversion by GTCR of all of its 1,951.037 shares of Series A Preferred Stock. This transaction resulted in a reclassification of preferred stock capital to common stock capital and did not increase total stockholders equity. The shares of Series A Preferred Stock held and converted by GTCR represented all of the authorized, issued and outstanding shares of Series A Preferred Stock on such date. We also entered into an amendment to our existing Preemptive and Registration Rights Agreement with GTCR pursuant to which we agree, among other things, to register the shares of common stock issuable upon conversion of the newly issued shares of Non-voting Common Stock for resale under the Securities Act of 1933.
Issuance of Preferred Stock
On January 30, 2009, we sold 243,815 shares of a newly created class of fixed rate cumulative perpetual preferred stock, Series B to the Treasury as part of the TARP CPP Program. We also issued to the Treasury a ten-year warrant to purchase up to 1.3 million shares of our common stock, or 15% of the aggregate dollar amount of Series B preferred shares purchased by the Treasury, at an exercise price of $28.35 per share. The Series B preferred stock and warrants qualify for regulatory Tier 1 capital and the preferred stock may be redeemed at any time subject to regulatory approval. Following a redemption of the preferred stock, the warrants are to be liquidated by the U.S. Treasury, through either a redemption at market prices or through a sale by the U.S. Treasury to a third party. The preferred stock has a dividend rate of 5% for the first five years, increasing to 9% thereafter. Among other things, we are subject to restrictions and conditions including those related to the payment of dividends on our common stock, share repurchases, executive compensation, and corporate governance. We have deployed this new capital mainly to support prudent new lending in the markets we serve.
Capital Measurements
A strong capital position relative to the capital adequacy rules that apply to us is crucial in maintaining investor confidence, accessing capital markets, and enabling us to take advantage of future profitable growth opportunities. Our Capital and Dividend Policy requires that we maintain capital ratios in excess of the minimum regulatory guidelines. It serves as an internal discipline in analyzing business risks and internal growth opportunities and sets targeted levels of return on equity. Under applicable regulatory capital adequacy guidelines, we are subject to various capital requirements set and administered by the federal banking agencies. These requirements specify minimum capital ratios, defined as Tier 1 and total capital as a percentage of assets and off-balance sheet items that have been weighted according to broad risk categories and a leverage ratio calculated as Tier 1 capital as a percentage of adjusted average assets. We have managed our capital ratios to consistently maintain such measurements in excess of the Board of Governors of the Federal Reserve System (“FRB”) minimum levels considered to be “well capitalized,” which is the highest capital category established.
The following table presents our consolidated measures of capital as of the dates presented and the capital guidelines established by the FRB to be categorized as “well capitalized.”
Table 14
Capital Measurements
(Dollar amounts in thousands)
Capital Measurements
(Dollar amounts in thousands)
Regulatory | Excess Over | |||||||||||||||
Minimum For | Required | |||||||||||||||
June 30, | December 31, | “Well | Minimums | |||||||||||||
2009 | 2008 | Capitalized” | at 6/30/09 | |||||||||||||
Regulatory capital ratios: | ||||||||||||||||
Total capital to risk-weighted assets | 14.40 | % | 10.32 | % | 10.00 | % | $ | 441,377 | ||||||||
Tier 1 capital to risk-weighted assets | 11.95 | % | 7.24 | % | 6.00 | % | 597,110 | |||||||||
Tier 1 leverage to average assets | 11.67 | % | 7.17 | % | 5.00 | % | 685,267 | |||||||||
Other capital ratios: | ||||||||||||||||
Tangible common equity to tangible assets(1) | 6.81 | % | 4.49 | % | ||||||||||||
Tangible equity to tangible assets(2) | 8.99 | % | 5.07 | % | ||||||||||||
Tangible equity to risk-weighted assets(2) | 9.75 | % | 5.45 | % | ||||||||||||
Total equity to total assets(3) | 9.82 | % | 6.03 | % |
(1) | Ratio is not subject to formal FRB regulatory guidance and is a non-GAAP financial measure. Computed as tangible common equity divided by tangible assets, where tangible common equity equals total equity less preferred stock, goodwill and other intangible assets and tangible assets equals total assets less goodwill and other intangible assets. | |
(2) | Ratio is not subject to formal FRB regulatory guidance and is a non-GAAP financial measure. Tangible equity equals total equity less goodwill and other intangible assets, and tangible assets equals total assets less goodwill and other intangible assets. | |
(3) | Ratio is not subject to formal FRB regulatory guidance. |
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Tangible equity, including preferred stock, was $978.4 million at June 30, 2009 and $504.0 million at the end of 2008. Tangible common equity was $741.6 million at June 30, 2009, an increase of 66% from $445.9 million at year-end 2008. Our tangible equity to tangible assets ratio was 8.99% as of June 30, 2009, up from 5.07% as of December 31, 2008 and our tangible common equity to tangible assets ratio was 6.81% at June 30, 2009, up from 4.49% at December 31, 2008.
For further details of the regulatory capital requirements and ratios as of December 31, 2008 for the Company and our subsidiary banks, refer to Note 18 of “Notes to Consolidated Financial Statements” in our 2008 Annual Report on Form 10-K.
Stock Repurchase Programs
Our ability to repurchase shares of our common stock is subject to the applicable restrictions of the CPP following the January 30, 2009 sale of the Series B preferred stock to the Treasury under the CPP. In connection with restrictions on stock repurchases as part of the CPP, we terminated our existing stock repurchase program on February 26, 2009. The restrictions on repurchases will not affect our ability to repurchase shares in connection with the administration of our employee benefit plans as such transactions are in the ordinary course and consistent with our past practice.
Dividends
We declared dividends of $0.01 per common share in second quarter 2009, down 87% from the quarterly dividend per share declared in second quarter 2008 of $0.075. The Company intends to use the retained capital and liquidity to continue the execution of the Strategic Growth Plan.
As a result of our participation in the CPP, we are subject to various restrictions on our ability to increase the cash dividends we pay on our common stock.
LIQUIDITY
The objectives of liquidity risk management are to ensure that we can meet our cash flow requirements, capitalize on business opportunities in a timely and cost effective manner and satisfy regulatory guidelines for liquidity imposed by bank regulators. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet our clients’ needs and accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events. Liquidity is secured by managing the mix of financial instruments on the balance sheet and expanding potential sources of liquidity.
We manage liquidity at two levels: at the holding company level and at the bank subsidiary level. The management of liquidity at both levels is essential because the holding company and banking subsidiaries each have different funding needs and sources. Liquidity management is guided by policies formulated and monitored by our senior management and the banks’ asset/liability committees, which take into account the marketability of assets, the sources and stability of funding market conditions, the level of unfunded commitments and potential future loan growth.
We also develop and maintain contingency funding plans, which evaluate our liquidity position under various operating circumstances and allow us to ensure that we would be able to operate through a period of stress when access to normal sources of funding is constrained. The plans project funding requirements during a potential period of stress, specify and quantify sources of liquidity, outline actions and procedures for effectively managing through the problem period, and define roles and responsibilities. The plans are reviewed and approved annually by the Asset and Liability Committee of each subsidiary bank.
Our bank subsidiaries’ principal sources of funds are client deposits, including large institutional deposits, wholesale market-based borrowings, capital contributions by the parent company, and cash from operations. Our bank subsidiaries’ principal uses of funds include funding growth in the core asset portfolios, including loans, and to a lesser extent, our investment portfolio, which is used primarily to manage interest rate and liquidity risk. The primary sources of funding for the holding company include dividends received from its bank subsidiaries, and proceeds from the issuance of senior, subordinated and convertible debt, as well as equity. Primary uses of funds for the parent company include repayment of maturing debt, share repurchases, dividends paid to stockholders, interest paid to our debt holders and subsidiary funding through capital.
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Our client deposits, the most stable source of liquidity due to the nature of long-term relationships generally established with our clients, are available to provide long-term liquidity for our bank subsidiaries. At June 30, 2009, 67% of our total assets were funded by client deposits, compared to 60% at December 31, 2008. Client deposits for purposes of this ratio are defined to include all deposits less traditional brokered deposits and non-client CDARS®. Time deposits are included as client deposits since these deposits have historically not been volatile deposits for us.
While we first look toward internally generated deposits as a funding source, we continue to utilize wholesale funding sources, including brokered deposits, in order to enhance liquidity and to fund our loan growth. Brokered deposits, excluding client CDARS®, decreased to 11% of total deposits at June 30, 2009, compared to 25% of total deposits at December 31, 2008. During 2009, we expect to continue relying on brokered deposits as an alternative method of funding growth and expect brokered deposit levels to fluctuate depending upon factors including the timing and amount of loan growth, client deposit growth and our decisions to utilize other borrowing sources. Our asset/liability management policy currently limits our use of brokered deposits excluding reciprocal CDARS® to levels no more than 40% of total deposits, and brokered deposits to levels no more than 50% of total deposits. We do not expect these threshold limitations to limit our ability to implement our Plan.
Net cash provided by operations totaled $44.7 million for the six months ended June 30, 2009 compared to net cash used in operations of $11.3 million in the prior year period. Net cash outflows from investing activities totaled $744.6 million in the first six months of 2009 compared to a net cash outflow of $2.4 billion in the prior year period primarily due to greater loan growth in the prior year period. Cash inflows from financing activities in the first six months of 2009 totaled $962.7 million compared to a net inflow of $2.5 billion in the first six months of 2008.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit | ||
Number | Description of Documents | |
31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
PrivateBancorp, Inc. | ||||
/s/ Larry D. Richman | ||||
President and Chief Executive Officer | ||||
/s/ Kevin M. Killips | ||||
Chief Financial Officer and Principal Financial Officer |
Date: October 26, 2009
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EXHIBIT INDEX
Exhibit | ||
Number | Description of Documents | |
31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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