Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. PRIVATEBANCORP, INC (889936) 10-Q published on May 10, 2017 at 5:30 pm
Reporting Period: Mar 30, 2017
Clarifying the Definition of a Business - In January 2017, the FASB issued guidance that clarifies when a set of transferred assets and activities is a business. Under the new guidance, an entity will determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of identifiable assets. If this threshold is met, the set of assets and activities is not a business. If the threshold is not met, the entity then evaluates whether the set of assets and activities meets the requirement that a business include an input and a substantive process. The guidance is effective for the Company’s financial statements that include periods beginning January 1, 2018. Early adoption is permitted. The amendments will be applied prospectively. The Company is in the process of determining the effect of the new guidance on our financial position and consolidated results of operations.
The plaintiffs in the action agreed in principle not to pursue the action as a result of the inclusion of certain additional disclosures (the "Supplemental Disclosures") in the proxy statement/prospectus contained in the registration statement filed by CIBC on October 31, 2016. On March 6, 2017, the parties executed a stipulation of settlement (the "Settlement Agreement"), and on March 7, 2017 the plaintiffs dismissed the action. Pursuant to the Settlement Agreement, the three plaintiffs agreed to voluntarily dismiss the Action, without affecting the claims of the putative class, with leave to reinstate the action if the merger is not consummated on or before June 29, 2017. Defendants in turn agreed to settle plaintiffs' demand for a mootness fee for $185,000, but only upon consummation of the merger. If the merger is not consummated on or before June 29, 2017 and the action is reinstated, the Settlement Agreement will be null and void, and plaintiffs may apply to the court for a mootness fee award, which defendants may oppose, in whole or in part. The Company continues to believe the complaints are without merit, there are substantial legal and factual defenses to the claims asserted, and that proxy statement/prospectus contained in the registration statement first filed by CIBC on August 15, 2016 disclosed all material information prior to the inclusion of the Supplemental Disclosures.
The impact of increases in short-term interest rates on deposit costs for our indexed deposits has greater predictability than our non-indexed deposits. During first quarter 2017, indexed deposits added four basis points to our deposit costs, while the residual four basis points increase in first quarter 2017 deposit costs related primarily to customized pricing arrangements for rate-sensitive non-indexed accounts. Deposit costs will depend on various factors including client behavior, competitive pricing pressure within the bank marketplace and from non-bank alternatives, the mix of our funding sources, and prices for wholesale sources of funding. Our deposit accounts are more concentrated in corporate and commercial clients with potential access to alternative deposit investment options that could place added pricing pressure on non-indexed deposits. The impact on our deposit costs from a rise in interest rates will be dependent on not only the pace, but the timing of such rate increases. The full impact on interest expense may be subject to a lag when rate rises occur close to period ends. For example, during 2016 deposit costs increased six basis points from first quarter 2016 through the fourth quarter with no corresponding increase in relevant indices. As the velocity of rate rises increases, the potential for deposit costs to rise faster also increases.
Compensation expense, which is comprised of salary and wages, share-based costs, incentive compensation and payroll taxes, insurance and retirement costs, increased $14.8 million, or 25%, from first quarter 2016 primarily due to the required accelerated expense recognition related to a portion of the annual time-vested equity awards granted in the first quarter 2017. The terms of these awards differed from prior year annual equity grants as contemplated by the terms of the CIBC merger agreement, which resulted in a greater portion of the share-based expense being recognized at the time of grant rather than over the vesting period. Salary and wages were up $2.9 million, or 10%, primarily reflecting additional hires over the last year and annual salary adjustments made during the first quarter 2017. Approximately $17 million of compensation expense recorded in the first quarter will not recur for the remainder of 2017. Second quarter 2017 compensation will also be influenced by incentive compensation plans tied to company performance and merit increases made in March.
Our provision for income taxes includes federal, state and local income tax expense. For the quarter ended March 31, 2017, we recorded an income tax provision of $21.5 million on pre-tax income of $79.5 million (equal to a 27.1% effective tax rate) compared to an income tax provision of $33.4 million on pre-tax income of $92.9 million for the three months ended December 31, 2016 (equal to a 35.9% effective tax rate), and an income tax provision of $26.7 million on pre-tax income of $76.2 million for the three months ended March 31, 2016 (equal to a 35.0% effective tax rate). The lower tax rate in the first quarter 2017 was primarily attributable to net tax benefits from the exercise and vesting of share-based compensation. Such tax benefits totaled $4.9 million, compared to $2.1 million in the first quarter 2016 and $854,000 in the fourth quarter 2016. Most of the Company’s restricted stock awards vest annually in the first quarter. Additionally, the effective tax rate in the first quarter 2017 was impacted by the completion of tax examinations, which added tax benefits of $2.7 million to the current quarter’s results and is expected not to recur.