PrivateBancorp in Chicago is refusing to let low interest rates dampen its financial results.
The $15.6 billion-asset company is one of the most rate-sensitive banks in the country, with a portfolio consisting almost entirely of floating-rate loans. Still, management has been able to boost earnings in the past few years.
Larry Richman, PrivateBancorp's president and chief executive, has a simple strategy for generating profit. The company will "do our own thing," he said, without waiting for the Federal Reserve Board to start raising rates.
At PrivateBancorp, that means diversifying revenue, deepening commercial relationships and building specialty businesses from private banking to industry-specific commercial loan groups that can keep earnings humming in a low-rate environment.
Richman took the helm at PrivateBancorp in 2007, after Bank of America bought LaSalle Bank, which he had led. He then remade his new employer in LaSalle's image, hiring dozens of former colleagues and shifting the loan book from commercial real estate to commercial-and-industrial loans. The new focus helped boost the loan book to about $11 billion, compared to $4 billion when Richman arrived, almost entirely through organic growth.
The company is now garnering praise from analysts for its combination of earnings growth and the potential for higher profit when rates rise. Earnings increased 25% in 2014, with fees accounting for 21% of revenue. Fee income offset the drag of an 11-basis-point compression in net interest margin over the course of the year.
Fortunately, 97% of PrivateBancorp's loans have variable rates, leaving the company well-positioned when the Fed bumps rates up.
Richman and Chief Financial Officer Kevin Killips spoke with American Banker about their growth strategy, how they tackle margin compression and how they hope to keep depositors when rates creep up. The interview, edited and condensed, is below.
You've posted strong earnings despite being one of the most asset-sensitive banks. What's the strategy?
LARRY RICHMAN: We're doing it the old-fashioned way. We're building a high-touch, sophisticated middle-market commercial bank in Chicago and the Midwest by doing two things: Continuing to capture quality market share and building more and deeper relationships with our existing clients.
How do you differentiate yourself in a very commoditized banking industry? You do that by providing relationship bankers that have the expertise to understand the client's needs. Most of our companies are middle-market, privately owned and operated businesses with $20 million to $2 billion in sales. We do business with the company, and then we do private banking for executives of those companies.
Have clients' demands changes in the last year or so?
RICHMAN: Clients have noticeably been doing better, so now they're considering ways to grow revenue, and that creates opportunities to do more business with them. We have also built a number of industry verticals, where we have added specialized banker knowledge. We have done a lot of business in our health care, engineering and construction, and insurance businesses. We just recently built a technology-banking group.
About two-thirds of our client base is C&I, one-third is CRE and private banking. Our clients' need for borrowing is primarily variable-priced, Libor-based financing. It's not as if we said we want to be asset-sensitive.
Now we're in a very low rate environment, building operating leverage that will clearly be helpful when rates rise. It's a marathon, not a sprint, and we're doing it with a strong-and-steady approach.
A year ago you said PrivateBancorp was looking for deposit-driven Chicago deals. Is that still the plan?
RICHMAN: We're going to continue to do our own thing, to grow organically by capturing middle-market business and relationships. We know it's a big market and there will probably be more M&A opportunities, but we've shown great success in growing our bank organically.
I've been at this for 30 years and we've always talked about Chicago being very overbanked. I'm not convinced yet that it will consolidate at the rate that it probably should. It's a somewhat parochial market, and there are just so many banks that it's hard to see it consolidate the way other markets have.
Where have you been seeing the most growth in noninterest income?
RICHMAN:. We're building much greater fee income from treasury management. It's somewhat difficult in a low rate environment, but capital markets, our interest-rate derivatives business and our foreign-exchange business has been a very important part of the bank's fee income.
We think there's more upside in our private-banking and private-wealth business. Over the last three to four years, we have redesigned that business to meet the needs of our commercial middle-market owners and executives. We have rebuilt our product offerings and our team in wealth management, and our commercial bankers trust them.
How do you try to offset margin shrinkage?
KEVIN KILLIPS: We have to take Libor as we find it. About 97% of our loan book is variable priced, and about 72% is tied to 30-day Libor. So as goes 30-day Libor, so goes our NIM.
At the same time, we've been able to manage deposit costs down. Structurally, we do some balance-sheet hedging, about $800 million notionally, whereby we take some of that variable inflow and swap it for fixed. Over the last couple of years that has added $1 million to $2 million a quarter to net interest income.
Broadly speaking, when you take all these structural elements out of it, we still anticipate NIM compression until we see rates rise.
When do you anticipate a rate increase?
KILLIPS: Like everyone else, we're waiting for the Fed to decide when the time is right, and we'll monitor it and hope for the best. But there's not much we can do about the Fed funds rate and Libor. Given that it is out of our control, to be facetious, we'll continue to do our thing. We have to take what we're dealt and do the best job we can, by serving and building our client base.
How do you make sure deposits stay when rates rise?
KILLIPS: We fully expect funding costs to move up, and in our simulations on asset sensitivity, our model does contemplate a waterfall, so to speak. Some of the noninterest-bearing deposits will waterfall down to money-market accounts and become more expensive, and some of the money markets probably will revert to CDs at higher rates. Then, quite frankly, we know that some deposits will leave the system, because clients will have other things to do with excess funds.
If a client who has excess liquidity with us can use that to build a new warehouse with an internal rate of return of 50%, no matter what we pay him, we're not going to keep him. So we understand that, we model that in, and we replace that with market funding.
RICHMAN: About 75% of our clients have their treasury-management with us. This creates a stickiness that means they won't necessarily go to where the highest price is.
Many of your bankers joined from LaSalle, but a number are new. What do you do to pass on the company culture as you grow?
RICHMAN: We came over together with the concept of building something special a commercial bank headquartered in Chicago and serving Midwest businesses. We were fortunate to have of bankers who already knew each other. We have since built a commercial banker training program, and we have selectively added some industry specialists.
Our culture is all about serving the needs of our clients, and there are a number of traits that are really important, basic things like caring, serving, energy, teamwork, finding ways to do business rather than not do business. Those are characteristics that clients tell us are important to them. You have to be responsive. Consistency, delivery and execution are key attributes that we reinforce day in and day out.