SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM ________ TO ________
Commission File Number: 000-25887
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 36-3681151
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
TEN NORTH DEARBORN STREET
CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip Code)
(312) 683-7100
(Registrant's telephone number, including area code)
Indicate by checkmark 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. Yes [X] No [ ]
Indicate by checkmark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
===============================================================================
CLASS OUTSTANDING AS OF AUGUST 6, 2003
- -------------------------------------------------------------------------------
Common, no par value 9,761,534
===============================================================================
PRIVATEBANCORP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
Number
------
Selected Financial Data..........................................................................................2
Part I ........................................................................................................5
Item 1. Financial Statements...........................................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........20
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................41
Item 4. Controls and Procedures.......................................................................44
Part II .......................................................................................................45
Item 1. Legal Proceedings.............................................................................45
Item 2. Changes in Securities and Use of Proceeds.....................................................45
Item 3. Defaults upon Senior Securities...............................................................45
Item 4. Submission of Matters to a Vote of Security Holders...........................................45
Item 5. Other Information.............................................................................46
Item 6. Exhibits and Reports on Form 8-K..............................................................46
Signatures......................................................................................................48
SELECTED FINANCIAL DATA
The following table summarizes certain selected unaudited consolidated
financial information of PrivateBancorp, Inc. at or for the periods indicated.
This information should be read in conjunction with the unaudited consolidated
financial statements and related notes included pursuant to Item 1 of this
report.
QUARTER ENDED
-------------------------------------------------------------
06/30/03 03/31/03 12/31/02 09/30/02 06/30/02
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
INTEREST INCOME:
Loans, including fees..................... $ 15,208 $ 15,167 $ 14,043 $ 13,704 $ 12,665
Federal funds sold and interest-bearing
deposits.................................. 31 25 63 38 8
Securities................................ 5,148 5,379 5,507 4,557 4,886
-------- -------- -------- -------- --------
Total interest income.................. 20,387 20,571 19,613 18,299 17,559
-------- -------- -------- -------- --------
INTEREST EXPENSE:
Interest-bearing demand deposits.......... 148 128 129 168 168
Savings and money market deposit accounts. 1,644 1,709 1,923 1,923 1,763
Other time deposits....................... 4,348 3,940 4,037 3,976 3,810
Funds borrowed............................ 1,204 1,312 1,226 1,304 1,353
Trust preferred interest expense.......... 485 485 485 485 485
-------- -------- -------- -------- --------
Total interest expense................. 7,829 7,574 7,800 7,856 7,579
-------- -------- -------- -------- --------
Net interest income.................... 12,558 12,997 11,813 10,443 9,980
Provision for loan losses................. 730 956 914 828 1,609
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses........................ 11,828 12,041 10,899 9,615 8,371
NON-INTEREST INCOME:
Banking, wealth management services and
other income........................... 3,181 2,701 1,975 1,763 1,802
Securities gains (losses), net............ 2,310 (55) (313) 280 274
Trading losses on swap.................... (1,054) (230) (282) (662) --
-------- -------- -------- -------- --------
Total non-interest income.............. 4,437 2,416 1,380 1,381 2,076
-------- -------- -------- -------- --------
NON-INTEREST EXPENSE:
Salaries and employee benefits............ 5,070 4,778 3,903 3,393 3,469
Occupancy expense, net.................... 1,270 1,419 1,319 1,227 1,206
Data processing........................... 368 393 393 433 374
Marketing................................. 509 486 557 351 374
Amortization of other intangibles......... 42 42 -- -- --
Professional fees......................... 1,069 1,284 774 997 1,027
Insurance................................. 146 168 137 118 106
Other expense............................. 1,282 849 851 569 557
-------- -------- -------- -------- --------
Total non-interest expense............. 9,756 9,419 7,934 7,088 7,113
-------- -------- -------- -------- --------
Minority interest expense.................... 44 38 -- -- --
Income before income taxes................ 6,465 5,000 4,345 3,908 3,334
-------- -------- -------- -------- --------
Income tax provision......................... 1,852 1,397 1,125 875 724
-------- -------- -------- -------- --------
Net income................................ $ 4,613 $ 3,603 $ 3,220 $ 3,033 $ 2,610
======== ======== ======== ======== ========
PER SHARE DATA:
Basic earnings............................... $ 0.60 $ 0.47 $ 0.43 $ 0.41 $ 0.35
Diluted earnings............................. 0.56 0.44 0.41 0.39 0.33
Dividends.................................... 0.040 0.040 0.027 0.027 0.020
Book value (at end of period)................ 12.89 12.29 11.56 10.71 9.71
All previously reported share and per share data has
been restated to reflect the 3-for-2 stock split
which occurred on January 17, 2003.
QUARTER ENDED
-------------------------------------------------------------
06/30/03 03/31/03 12/31/02 09/30/02 06/30/02
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities(1).......................... $ 581,743 $ 505,877 $ 487,020 $ 403,192 $ 392,090
Total loans.................................. 1,066,919 1,018,196 965,641 913,197 865,778
Total assets................................. 1,759,676 1,628,995 1,543,414 1,404,326 1,332,008
Total deposits............................... 1,445,590 1,365,344 1,205,271 1,163,327 1,074,475
Funds borrowed............................... 170,433 124,933 209,954 125,422 154,499
Trust preferred securities................... 20,000 20,000 20,000 20,000 20,000
Total stockholders' equity................... 100,340 95,373 89,092 79,281 71,697
Wealth management assets under management.... 1,264,955 1,204,239 1,239,779 693,869 733,914
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(2)(8)................. 3.33% 3.68% 3.56% 3.46% 3.53%
Net interest spread(3).................... 3.16 3.53 3.37 3.27 3.34
Non-interest income to average assets..... 1.06 0.62 0.38 0.41 0.65
Non-interest expense to average assets.... 2.33 2.41 2.16 2.08 2.24
Net overhead ratio(4)..................... 1.27 1.80 1.78 1.68 1.59
Efficiency ratio(5)....................... 55.0 58.5 57.3 56.3 55.4
Return on average assets(6)............... 1.10 0.92 0.88 0.89 0.82
Return on average equity(7)............... 18.81 15.49 15.99 15.86 15.07
Dividend payout ratio..................... 6.75 8.62 6.14 6.51 5.66
Asset Quality Ratios:
Non-performing loans to total loans....... 0.26% 0.35% 0.14% 0.33% 0.37%
Allowance for loan losses to:
total loans............................ 1.22 1.22 1.20 1.17 1.14
non-performing loans................... 476 355 828 357 313
Net charge-offs (recoveries) to average
total loans............................ 0.07 0.03 (0.01) 0.04 0.24
Non-performing assets to total assets..... 0.16 0.22 0.09 0.21 0.24
Non-accrual loans to total loans.......... 0.08 0.15 0.08 0.05 0.07
Balance Sheet Ratios:
Loans to deposits......................... 73.8% 74.6% 80.1% 78.5% 80.6%
Average interest-earning assets to
average interest-bearing liabilities... 108.2 107.1 108.2 108.0 107.8
Capital Ratios:
Total equity to total assets.............. 5.70% 5.85% 5.77% 5.65% 5.38%
Total risk-based capital ratio............ 8.37 8.30 8.29 9.10 9.37
Tier 1 risk-based capital ratio........... 7.06 6.99 6.91 7.61 7.84
Leverage ratio............................ 5.23 5.27 5.91 5.91 6.07
- ---------------------------
(1) The entire securities portfolio was classified as "available-for-sale" for
the periods presented.
(2) Net interest income, on a tax-equivalent basis, divided by average
interest-earning assets.
(3) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(4) Non-interest expense less non-interest income divided by average total
assets.
(5) Non-interest expense divided by the sum of net interest income (tax
equivalent) plus non-interest income security gains.
(6) Net income divided by average total assets.
(7) Net income divided by average common equity.
(footnotes continued on next page)
3
(8) The company adjusts GAAP reported net interest income by the tax equivalent
adjustment amount to account for the tax attributes on federally tax exempt
municipal securities. For GAAP purposes, tax benefits associated with
federally tax exempt municipal securities are reflected in income tax
expense. The following table reconciles reported net interest income to net
interest income on a tax equivalent basis for the periods presented:
RECONCILIATION OF NET INTEREST INCOME TO NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2Q03 1Q03 4Q02 3Q02 2Q02
------- ------ ------ ------ ------
Net interest income.......................... $12,558 $12,997 $11,813 $10,443 $9,980
Tax equivalent adjustment to net interest
income.................................... 742 695 661 756 790
------- ------- ------- ------- -------
Net interest income, tax equivalent basis.... $13,300 $13,692 $12,474 $11,199 $10,770
======= ======= ======= ======= =======
4
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31, JUNE 30,
2003 2002 2002
------------ ------------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks.................................. $ 51,771 $ 34,529 $ 39,625
Federal funds sold and other short-term investments...... 9,145 258 75
---------- ---------- ----------
Total cash and cash equivalents....................... 60,916 34,787 39,700
---------- ---------- ----------
Loans held for sale...................................... 12,570 14,321 3,913
Available-for-sale securities, at fair value............. 581,743 487,020 392,090
Loans, net of unearned discount.......................... 1,066,919 965,641 865,778
Allowance for loan losses................................ (13,019) (11,585) (9,909)
---------- ---------- ----------
Net loans................................................ 1,053,900 954,056 855,869
---------- ---------- ----------
Goodwill................................................. 19,242 19,199 10,805
Premises and equipment, net.............................. 6,284 6,851 6,455
Accrued interest receivable.............................. 7,159 9,427 8,741
Other assets............................................. 17,862 17,753 14,435
---------- ---------- ----------
Total assets............................................. $1,759,676 $1,543,414 $1,332,008
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Non-interest-bearing.................................. $ 110,244 $ 88,986 $81,421
Interest-bearing...................................... 79,397 64,893 54,694
Savings and money market deposit accounts................ 497,437 488,941 412,570
Brokered deposits........................................ 438,652 279,806 309,240
Other time deposits...................................... 319,860 282,645 216,550
---------- ---------- ----------
Total deposits........................................ 1,445,590 1,205,271 1,074,475
Funds borrowed........................................... 170,433 209,954 154,499
Trust preferred securities............................... 20,000 20,000 20,000
Accrued interest payable................................. 4,892 4,986 4,077
Other liabilities........................................ 18,421 14,111 7,260
---------- ---------- ----------
Total liabilities........................................ 1,659,336 1,454,322 1,260,311
---------- ---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized............. -- -- --
Common stock, without par value, $1 stated value;
12,000,000 shares authorized; 7,787,034, 7,704,203, and
7,382,370 shares issued and outstanding as of June 30,
2003, December 31, 2002 and June 30, 2002, respectively. 7,787 7,704 7,382
Additional paid-in-capital............................... 45,717 45,367 39,839
Retained earnings........................................ 35,377 27,784 21,927
Accumulated other comprehensive income................... 11,861 8,826 4,231
Deferred compensation.................................... (402) (589) (732)
Loans to officers........................................ -- - (950)
---------- ---------- ----------
Total stockholders' equity............................... 100,340 89,092 71,697
---------- ---------- ----------
Total liabilities and stockholders' equity............... $1,759,676 $1,543,414 $1,332,008
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 3-for-2 stock split which
occurred on January 17, 2003.
5
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2003 2002 2003 2002
--------- -------- -------- --------
INTEREST INCOME
Loans, including fees........................................... $15,208 $12,665 $30,375 $24,813
Taxable securities.............................................. 3,451 3,340 7,243 6,203
Securities exempt from federal income taxes..................... 1,697 1,546 3,284 2,889
Federal funds sold and interest bearing deposits................ 31 8 56 25
------- ------- ------- -------
Total interest income........................................ 20,387 17,559 40,958 33,930
------- ------- ------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand...................................... 148 168 276 339
Savings and money market deposit accounts.................... 1,644 1,763 3,353 3,482
Brokered deposits and other time deposits.................... 4,348 3,810 8,288 8,133
Funds borrowed.................................................. 1,204 1,353 2,516 2,662
Trust preferred securities...................................... 485 485 970 970
------- ------- ------- -------
Total interest expense....................................... 7,829 7,579 15,403 15,586
------- ------- ------- -------
Net interest income.......................................... 12,558 9,980 25,555 18,344
------- ------- ------- -------
Provision for loan losses....................................... 730 1,609 1,686 2,120
------- ------- ------- -------
Net interest income after provision for loan losses.......... 11,828 8,371 23,869 16,224
------- ------- ------- -------
NON-INTEREST INCOME
Banking, wealth management services and other income........... 3,181 1,802 5,882 3,344
Securities gains, net.......................................... 2,310 274 2,255 44
Trading losses, net............................................ (1,054) -- (1,284) --
------- ------- ------- -------
Total non-interest income.................................... 4,437 2,076 6,853 3,388
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits.................................. 5,070 3,469 9,848 6,683
Occupancy expense, net.......................................... 1,270 1,206 2,689 2,345
Professional fees............................................... 1,069 1,027 2,353 1,918
Amortization of intangibles..................................... 42 -- 84 --
Other non-interest expense...................................... 2,305 1,411 4,201 2,639
------- ------- ------- -------
Total non-interest expense................................... 9,756 7,113 19,175 13,585
------- ------- ------- -------
Minority interest............................................... 44 -- 82 --
------- ------- ------- -------
Income before income taxes................................... 6,465 3,334 11,465 6,027
------- ------- ------- -------
Income tax provision............................................ 1,852 724 3,249 1,273
------- ------- ------- -------
Net income................................................... $ 4,613 $ 2,610 $ 8,216 $ 4,754
======= ======= ======= =======
Basic earnings per share........................................ $ 0.60 $ 0.35 $ 1.08 $ 0.65
Diluted earnings per share...................................... $ 0.56 $ 0.33 $ 1.01 $ 0.62
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 3-for-2 stock split
which occurred on January 17, 2003.
6
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
ADDITIONAL COMPRE- DEFERRED LOANS TOTAL
COMMON PAID-IN- RETAINED HENSIVE COMPEN- TO STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME SATION OFFICERS EQUITY
-------- ------------ ---------- ------------ -------- --------- ------------
BALANCE, JANUARY 1, 2002.. $7,206 $39,114 $17,468 $ 323 $(857) $(950) $ 62,304
Net income................ -- -- 4,754 -- -- -- 4,754
Net decrease in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............ -- -- -- 3,908 -- -- 3,908
--------
Total comprehensive income 8,662
Cash dividends declared --------
($0.04 per share)...... -- -- (295) -- -- -- (295)
Issuance of common stock.. 176 725 -- -- -- -- 901
Awards granted............ -- -- -- -- (38) -- (38)
Amortization of deferred
compensation........... -- -- -- -- 163 -- 163
Repayment of loans to
officers............... -- -- -- -- -- -- --
------ ------- ------- ------- ----- ----- --------
BALANCE, JUNE 30, 2002.... $7,382 $39,839 $21,927 $ 4,231 $(732) $(950) $ 71,697
====== ======= ======= ======= ===== ===== ========
BALANCE, JANUARY 1, 2003.. $7,704 $45,367 $27,784 $ 8,826 $(589) $ -- $ 89,092
Net income................ -- -- 8,216 -- -- -- 8,216
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............ -- -- -- 3,035 -- -- 3,035
--------
Total comprehensive income 11,251
--------
Cash dividends declared
($0.08 per share)...... -- -- (623) -- -- -- (623)
Issuance of common stock.. 83 350 -- -- -- -- 433
Awards granted and
forfeited.............. -- -- -- -- 120 -- 120
Amortization of deferred
compensation........... -- -- -- -- 67 -- 67
------ ------- ------- ------- ----- ----- --------
BALANCE, JUNE 30, 2003.... $7,787 $45,717 $35,377 $11,861 $(402) $ -- $100,340
====== ======= ======= ======= ===== ===== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 3-for-2 stock split
which occurred on January 17, 2003.
7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2003 2002
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 8,216 $ 4,754
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization............................................... 738 598
Amortization of deferred compensation, net of forfeitures................... 67 163
Provision for loan losses................................................... 1,686 2,120
Net gain on sale of securities.............................................. (2,255) (44)
Trading losses on interest rate swap........................................ 1,284 --
Net proceeds on loans held for sale......................................... 1,750 7,422
(Decrease) increase in deferred loan fees................................... (378) 592
Decrease (increase) in accrued interest receivable.......................... 2,268 (1,479)
(Decrease) increase in accrued interest payable............................. (94) 1,965
(Increase) decrease in other assets......................................... (150) 536
Increase (decrease) in other liabilities.................................... 2,747 (4,133)
--------- ---------
Total adjustments........................................................... 7,663 7,740
--------- ---------
Net cash provided by operating activities................................... 15,879 12,494
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities.................... 40,390 78,091
Purchase of securities available-for-sale...................................... (129,544) (131,282)
Net loan principal advanced.................................................... (101,063) (86,072)
Premises and equipment expenditures............................................ (272) (3,290)
--------- ---------
Net cash used in investing activities....................................... (190,489) (142,553)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits................................................. 240,330 223,987
Proceeds from exercise of stock options........................................ 553 862
Dividends paid................................................................. (623) (295)
Net decrease in funds borrowed................................................. (39,521) (77,596)
--------- ---------
Net cash provided by financing activities................................... 200,739 146,958
--------- ---------
Net increase in cash and cash equivalents...................................... 26,129 16,899
Cash and cash equivalents at beginning of year................................. 34,787 22,801
--------- ---------
Cash and cash equivalents at end of period..................................... $ 60,916 $ 39,700
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 3-for-2 stock split
which occurred on January 17, 2003.
8
PRIVATEBANCORP, INC. AND SUBSIDIARIES
NOTE 1--BASIS OF PRESENTATION
The consolidated financial information of PRIVATEBANCORP, Inc. (the
"Company") and its subsidiaries, The PrivateBank and Trust Company (the "Bank"
or "The PrivateBank (Chicago)") and The PrivateBank (St. Louis), included herein
is unaudited; however, such information reflects all adjustments (consisting
only of normal recurring adjustments), which are, in the opinion of management,
necessary for a fair presentation for the interim periods. The financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X.
The annualized results of operations for the six months ended June 30, 2003
are not necessarily indicative of the results expected for the full year ending
December 31, 2003. The accompanying consolidated financial statements are
unaudited and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles. The June 30, 2003
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes for the year ended December 31, 2002
included in the Company's Annual Report on Form 10-K/A.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the reported
period. Actual results could differ from these estimates.
Certain reclassifications have been made to prior periods' consolidated
financial statements to place them on a basis comparable with the current
period's consolidated financial statements.
NOTE 2--ACCOUNTING FOR STOCK-BASED COMPENSATION
Pursuant to FAS No. 148, Accounting for Stock-Based Compensation (FAS No.
148), pro forma net income and pro forma earnings per share are presented in the
following table as if the fair value method of accounting for stock-based
compensation plans had been utilized.
SIX MONTHS ENDED
JUNE 30,
----------------------
2003 2002
-------- -------
(DOLLARS IN THOUSANDS)
Net income
As reported...................... $8,216 $4,754
Pro forma........................ 8,162 4,526
Basic earnings per share
As reported...................... $1.08 $ 0.65
Pro forma........................ 1.07 0.63
Diluted earnings per share
As reported...................... $1.01 $ 0.62
Pro forma........................ 1.00 0.59
9
THREE MONTHS ENDED
JUNE 30,
----------------------
2003 2002
-------- -------
(DOLLARS IN THOUSANDS)
Net income
As reported...................... $4,613 $2,610
Pro forma........................ 4,586 2,496
Basic earnings per share
As reported...................... $0.60 $ 0.35
Pro forma........................ 0.60 0.37
Diluted earnings per share
As reported...................... $0.56 $ 0.33
Pro forma........................ 0.56 0.31
Note: The pro forma results above may not be representative of the effect
reported in net income for future years.
In determining the fair value of each option grant for purposes of the
above pro forma disclosures, the Company used an option pricing model with the
following assumptions for grants made in 2002: dividend yield of 0.35%;
risk-free interest rate of 5.07%; expected lives of 10 years for the Stock
Incentive Plan options, for the compensation replacement options and for the
various director options; and expected volatility of approximately 50%. No stock
option grants have been made in 2003 as of the date of the filing of this
report.
NOTE 3--EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per
share (in thousands except per share data):
SIX MONTHS ENDED
JUNE 30,
--------------------
2003 2002
-------- -------
Net Income...................................... $8,216 $4,754
Average common shares outstanding............... 7,625 7,333
Average common shares equivalent(1)............. 520 377
------ ------
Weighted average common shares and common share
equivalents.................................. 8,145 7,710
====== ======
Net income per average common share - basic..... $ 1.08 $ 0.65
Net income per average common share - diluted... $ 1.01 $ 0.62
- ---------------------------
(1) Common shares equivalent result from stock options being treated as if they
had been exercised and are computed by application of the treasury stock
method.
NOTE 4--NEW ACCOUNTING STANDARDS
In May 2003, Statement of Financial Accounting Standards (FAS No. 150),
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" was issued, establishing standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This statement requires that an issuer classify
certain financial instruments, which may previously have been classified as
equity, as a liability. This generally includes financial instruments which
either 1) require mandatory redemption at a specified time other than upon
liquidation or termination of the entity, 2) include an obligation to either
repurchase the issuer's equity shares or is indexed to such an obligation and
which may require settlement in cash or 3) require the issuance of a
10
variable number of the issuer's shares based on a monetary amount which is
generally unrelated to the value of those shares. The Statement was effective as
of July 1, 2003 and is not expected to have a material impact on the Company's
accounting and reporting.
In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" was issued, amending and clarifying
financial accounting and reporting for certain derivative instruments. This
statement is generally effective for contracts entered into or modified after
June 30, 2003. The Statement is not expected to have a material impact on the
Company's accounting and reporting for derivatives.
In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (FAS No. 148), which provides guidance
on how to transition from the intrinsic value method of accounting for
stock-based employee compensation under APB No. 25 to FAS No. 123's fair value
method of accounting, if a company so elects. The statement also amends the
disclosure provisions of FAS No. 123 and APB No. 25 to require disclosure in the
summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While FAS No. 148 does not amend FAS No. 123 to require companies to account for
employee stock options using the fair value method, the disclosure provisions of
FAS No. 148 are applicable to all companies with stock-based employee
compensation, regardless of whether they account for that compensation using the
fair value method of FAS No. 123 or the intrinsic value method of APB No. 25.
Although the recognition provisions of FAS No. 148 are not applicable to the
Company at this time, as it continues to account for stock-based compensation
using the intrinsic value method, the Company has provided the required
disclosures in Note 1 to these consolidated financial statements.
NOTE 5--OPERATING SEGMENTS
For purposes of making operating decisions and assessing performance,
management regards The PrivateBank (Chicago), The PrivateBank (St. Louis),
Wealth Management and the Holding Company as four operating segments. The
Company's investment portfolios are included in total assets and reported in the
results of The PrivateBank (Chicago) and The PrivateBank (St. Louis). The
results for each business segment are summarized in the paragraphs below and
included in the following segment tables. We apply the accrual basis of
accounting for each reportable segment and for transactions between reportable
segments. During the first six months of 2003, there were no changes in the
measurement methods used to determine reported segment profit or loss as
compared to the same period in 2002. For the periods presented, there are no
asymmetrical allocations to segments requiring disclosure.
We apply the accrual basis of accounting for each reportable segment and
for transactions between reportable segments. During the first six months of
2003, there were no changes in the measurement methods used to determine
reported segment profit or loss as compared to the same period in 2002. There
are no asymmetrical allocations to segments requiring disclosure.
The accounting policies of the segments are generally the same as those
described in Note 1 -- Basis of Presentation to the consolidated financial
statements included in this report.
THE PRIVATEBANK (CHICAGO)
The PrivateBank (Chicago), through its main office located in downtown
Chicago as well as six full-service Chicago suburban locations, provides
personal and commercial banking services primarily to affluent individuals,
professionals, entrepreneurs and their business interests.
The PrivateBank (Chicago)'s commercial lending products include lines of
credit for working capital, term loans for equipment and letters of credit to
support the commitments made by its clients. Non-credit products include
lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, other cash management products and insurance. The
PrivateBank (Chicago) offers a full range of real estate lending products
including fixed and floating rate permanent and mini-
11
permanent mortgages, construction and commercial real estate loans. Personal
loans include installment loans and lines of credit, home equity loans and a
wide variety of home mortgage loans.
Individual banking services include interest-bearing checking, money market
accounts, certificates of deposit, ATM/debit cards and investment brokerage
accounts. Additionally, The PrivateBank (Chicago) offers secured and unsecured
personal loans and lines of credit. Through The PrivateBank (Chicago)'s
affiliations with Mesirow Financial, Inc. and Sterling Investment Services,
Inc., clients have access to insurance products and securities brokerage
services. The PrivateBank (Chicago) also offers domestic and international wire
transfers and foreign currency exchange. During the second quarter of 2002, the
PrivateBank (Chicago) introduced an Index Powered Certificate of Deposit product
("IPCD") with a five-year term. This non-fee-based, FDIC-insured product is a
five-year certificate of deposit with a yield based on the performance of the
S&P 500. The PrivateBank (Chicago) balance sheet reflects goodwill of $19.2
million and intangibles of $2.5 million at June 30, 2003, which remained
relatively unchanged compared to December 31, 2002 balances.
THE PRIVATEBANK (CHICAGO)
JUNE 30,
-----------------------------
2003 2002
----------- -----------
(IN THOUSANDS)
Total loans....................... $ 942,704 $ 768,426
Total assets...................... 1,577,124 1,211,006
Total deposits.................... 1,303,753 991,147
Total borrowings.................. 119,910 110,999
Total capital..................... 136,157 97,604
Net interest income............... 22,613 17,670
Non-interest income............... 4,063 2,518
Non-interest expense.............. 12,059 9,967
Net income........................ 9,096 5,986
THE PRIVATEBANK (ST. LOUIS)
The PrivateBank (St. Louis), through its main office located in St. Louis,
Missouri, provides personal and commercial banking services primarily to
affluent individuals, professionals, entrepreneurs and their business interests.
The PrivateBank (St. Louis) offers a full range real estate lending
products including fixed and floating rate permanent and mini-permanent
mortgages and construction loans. Personal loans include installment loans and
lines of credit, home equity loans and a wide variety of home mortgage loans.
Commercial lending products provided by The PrivateBank (St. Louis) include
lines of credit for working capital, term loans for equipment and letters of
credit to support the commitments made by its clients. Non-credit products
include lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, other cash management products and insurance.
Individual banking services include interest-bearing checking, money market
deposit accounts, certificates of deposit, ATM/debit cards and investment
brokerage accounts. The PrivateBank (St. Louis) also offers domestic and
international wire transfers and foreign currency exchange.
12
THE PRIVATEBANK (ST. LOUIS)
-----------------------------
JUNE 30,
-----------------------------
2003 2002
----------- -----------
(IN THOUSANDS)
Total loans.................. $125,926 $ 98,968
Total assets................. 177,068 118,519
Total deposits............... 143,767 83,670
Total borrowings............. 15,522 23,500
Total capital................ 14,965 10,554
Net interest income.......... 2,506 1,857
Non-interest income.......... 1,816 770
Non-interest expense......... 2,686 1,795
Net income................... 826 278
WEALTH MANAGEMENT
Wealth Management includes investment management, personal trust and estate
services, custodial services, retirement accounts and brokerage and investment
services. Investment management professionals work with wealth management
clients to define objectives, goals and strategies of the clients' investment
portfolios. Wealth Management personnel assist some trust clients with the
selection of an outside portfolio manager to direct account investments. Trust
and estate account administrators work with clients and their attorneys to
establish estate plans. Consistent with the Company's philosophy, Wealth
Management emphasizes a high level of personal service, including prompt
collection and reinvestment of interest and dividend income, weekly valuation,
tracking of tax information, customized reporting and ease of security
settlement.
A significant portion of the Company's wealth management business is
conducted through its subsidiary, Lodestar Investment Counsel, LLC. The
PrivateBank (Chicago) acquired an 80% controlling interest in Lodestar
Investment Counsel, LLC on December 30, 2002. Lodestar manages equity, balanced,
and fixed income accounts primarily for high net-worth individuals, retirement
plans and charitable organizations with investable assets generally in excess of
$1.0 million, and emphasizes highly personalized client service. Assets under
management at Lodestar are included in Wealth management assets under
management. The minority interest expense included in this segment relates to
the 20% interest in Lodestar that is owned by Lodestar management.
WEALTH MANAGEMENT
------------------------
JUNE 30,
------------------------
2003 2002
---------- ---------
(IN THOUSANDS)
Wealth management assets under
management....................... $1,264,955 $733,914
Net interest income................. 618 655
Non-interest income................. 3,065 1,502
Non-interest expense................ 3,222 1,803
Minority interest expense........... 82 --
Net income.......................... 242 236
The following table indicates the breakdown of our wealth management assets
under management at June 30, 2003 by account classification and related gross
revenue for the six months ended June 30, 2003 and June 30, 2002:
13
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, 2003
---------------------------
ACCOUNT TYPE MARKET VALUE REVENUE
------------------------------------- ------------ -------
(IN THOUSANDS)
Lodestar............................. $ 538,370 $1,482
Agency--managed...................... 218,930 671
Custody.............................. 377,115 539
Personal trust--managed.............. 55,012 266
Employee benefits--managed........... 75,528 107
---------- ------
Total............................. $1,264,955 $3,065
========== ======
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, 2002
---------------------------
ACCOUNT TYPE MARKET VALUE REVENUE
------------------------------------- ------------ -------
(IN THOUSANDS)
Personal trust--managed......... $243,183 $ 740
Agency--managed................. 148,552 449
Custody......................... 287,608 272
Employee benefits--managed...... 54,571 41
-------- ------
Total........................ $733,914 $1,502
======== ======
HOLDING COMPANY ACTIVITIES
Holding Company Activities consist of parent company only matters. The
Holding Company's most significant assets are its net investments in its two
banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis).
During the first quarter 2001, in connection with the issuance of $20.0 million
of 9.50% trust preferred securities, the Holding Company issued $20.0 million of
subordinated debentures which are accounted for as long-term debt and also
qualify as Tier 1 and Tier 2 capital (see note 9). The Tier 1 qualifying amount
is limited to 25% of Tier 1 capital under Federal Reserve regulations. The
excess amount qualifies as Tier 2 capital. Holding Company Activities are
reflected primarily by interest expense on borrowings and operating expenses.
Recurring holding company operating expenses consist of compensation
(amortization of restricted stock awards, other salary expense) and
miscellaneous professional fees. In May of 2002, PrivateBancorp, Inc. acquired
an office building located in St. Charles, Illinois, for $1.8 million from Towne
Square Realty. The St. Charles location of The PrivateBank (Chicago) continues
to lease space in the building and pays rent to the Holding Company at the same
terms and conditions as was paid to the prior owner.
14
HOLDING COMPANY
ACTIVITIES
------------------------
JUNE 30,
------------------------
2003 2002
--------- ----------
(IN THOUSANDS)
Total assets....................... $156,196 $111,759
Total borrowings................... 35,000 20,000
Long-term debt - trust preferred
securities...................... 20,000 20,000
Interest expense................... 1,539 1,189
Non-interest income................ 101 20
Non-interest expense............... 1,429 1,435
Total capital...................... 100,339 71,697
Net loss........................... (1,949) (1,747)
The following is a summary of certain operating information for reportable
segments at or for the periods presented and the reported consolidated balances
(in millions):
AT OR FOR THE THE HOLDING
THE SIX MONTHS PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
ENDED JUNE 2003 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
- ----------------------- ------------- --------------- ------------- ----------- -------------- ------------
Total loans.......... $ 942.7 $125.9 $ - $ - $ (1.7) $1,066.9
Total assets......... 1,577.1 177.1 - 156.2 (150.7) 1,759.7
Total deposits....... 1,303.8 143.8 - - (2.0) 1,445.6
Total borrowings(1).. 119.9 15.5 - 55.0 - 190.4
Total capital........ 136.2 15.0 - 100.3 (151.2) 100.3
Net interest income.. 22.6 2.5 0.6 (1.5) 1.4 25.6
Non-interest income.. 4.1 1.8 3.1 0.1 (2.2) 6.9
Non-interest expense. 12.1 2.7 3.2 1.4 (0.2) 19.2
Minority interest
expense.......... - - 0.1 - - 0.1
Net Income........... 9.1 0.8 0.2 (1.9) - 8.2
Wealth Management
assets under
management........ - - 1,265.0 - - 1,265.0
AT OR FOR THE THE THE HOLDING
SIX MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
JUNE 2002 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
- ----------------------- ------------- --------------- ------------- ----------- -------------- ------------
Total loans.......... $ 768.4 $ 99.0 $ - $ - $ (1.6) $ 865.8
Total assets......... 1,211.0 118.5 - 111.8 (109.3) 1,332.0
Total deposits....... 991.1 83.7 - - (0.3) 1,074.5
Total borrowings(1).. 111.0 23.5 - 40.0 - 174.5
Total capital........ 97.6 10.6 - 71.7 (108.2) 71.7
Net interest income.. 17.7 1.9 0.7 (1.2) (0.8) 18.3
Non-interest income.. 2.5 0.8 1.5 - (1.4) 3.4
Non-interest expense. 10.0 1.8 1.8 1.4 (1.4) 13.6
Net income........... 6.0 0.3 0.2 (1.7) - 4.8
Wealth Management
assets under
management........ - - 733.9 - - 733.9
- ---------------------------
(1) Includes long-term debt-trust preferred securities for the Holding Company
Activities segment.
(2) The intersegment elimination for gross loans reflects the exclusion of
unearned income for management reporting purposes. The intersegment
elimination for total capital reflects the elimination of the net
investment in The PrivateBank (Chicago) and The PrivateBank (St. Louis) in
consolidation. The intersegment eliminations include adjustments necessary
for each category to agree with the related consolidated financial
statements.
The adjustments to total assets presented in the table above represent the
elimination of the net investment in banking subsidiaries in consolidation, the
elimination of the Company's cash that is maintained in a subsidiary bank
account, the elimination of fed funds purchased and sold between
15
Chicago and St. Louis, the reclassification of the unearned discount on loans,
the reclassification related to current and deferred taxes and the
reclassification of loan fee income which is included in noninterest income for
segment reporting purposes as compared to interest income for consolidated
reporting purposes.
NOTE 6--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments as
of June 30, 2003 have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 2002.
NOTE 7--OTHER COMPREHENSIVE INCOME
Change in the fair value of securities available-for-sale is presented on a
net basis on the Consolidated Statement of Changes in Stockholders' Equity. The
following table discloses the changes in the components of other accumulated
comprehensive income for the six months ended June 30, 2003 and 2002 (in
thousands):
JUNE 30, 2003
----------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX BENEFIT AMOUNT
----------- ------------ ----------
Unrealized gains on securities available-for-sale
Unrealized holding gains, net..................... $6,853 $2,330 $4,523
Less: reclassification adjustment for net
gains, included in net income................. 2,255 767 1,488
------ ------ ------
Unrealized gains, net............................. $4,598 $1,563 $3,035
====== ====== ======
JUNE 30, 2002
----------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX BENEFIT AMOUNT
----------- ------------ ----------
Unrealized gains on securities available-for-sale
Unrealized holding gains, net.................... $4,998 $1,055 $3,943
Less: reclassification adjustment for net gains
included in net income........................ 44 9 35
------ ------ ------
Unrealized gains, net............................ $4,954 $1,046 $3,908
====== ====== ======
16
NOTE 8-FUNDS BORROWED
A summary of all funds borrowed and outstanding at June 30, 2003,
December 31, 2002 and June 30, 2002 is presented in the table below:
LONG TERM FUNDS BORROWED: CURRENT RATE MATURITY 6/30/2003 12/31/2002 6/30/2002
Subordinated note 3.31% 02/11/07 $ 5,000 $ 5,000 $ 5,000
FHLB fixed advance (1) 6.50% 10/23/05 26,752 26,616 25,493
-------- -------- --------
Total long-term funds borrowed $ 31,752 $ 31,616 $ 30,493
======== ======== ========
SHORT TERM FUNDS BORROWED:
FHLB fixed advance 1.61% 01/16/04 $ 1,000 $ -- $ --
FHLB fixed advance 6.21% 12/05/03 30,000 30,000 30,000
Borrowing under revolving line of
credit facility 3.50% 12/01/03 30,000 25,000 15,000
FHLB fixed advance 1.73% 11/07/03 6,000 6,000 --
FHLB fixed advance 2.21% 07/17/03 1,000 1,000 --
FHLB fixed advance 2.74% 07/17/03 1,000 1,000 1,000
FHLB fixed advance 2.46% 06/16/03 -- 500 500
FHLB fixed advance 2.70% 05/08/03 -- 1,000 1,000
FHLB fixed advance 2.98% 03/10/03 -- 1,000 1,000
FHLB fixed advance 2.38% 01/13/03 -- 1,000 1,000
FHLB fixed advance 5.89% 12/20/02 -- -- 1,000
FHLB fixed advance 2.39% 11/12/02 -- -- 5,000
FHLB fixed advance 5.33% 07/22/02 -- -- 1,000
Fed funds purchased 1.40% daily 52,000 98,000 65,000
FHLB open line advance 1.48% daily -- 9,700 --
Demand repurchase agreements (2) 1.00% daily 17,681 4,138 2,506
-------- -------- --------
Total short-term funds borrowed 138,681 178,338 124,006
-------- -------- --------
Total funds borrowed $170,433 $209,954 $154,499
======== ======== ========
- ---------------------------
(1) This FHLB advance is subject to a fair value hedge utilizing an interest
rate swap with a fair value of $2.8 million at June 30, 2003. The
contractual par amount on the advance is $25.0 million.
(2) Demand repurchase agreements are a form of retail repurchase agreement
offered to certain clients of The PrivateBank. Funds are swept each
business day from the client's demand deposit account. These amounts are
not deposits and are not insured, but are secured by a pool of securities
pledged specifically for this purpose.
In February 2002, the Company renewed the term on an $18.0 million
revolving credit facility with a commercial bank originally entered into in
February 2000. On April 11, 2002, the loan agreement was amended and the
revolving line was increased to $25.0 million. On December 24, 2002, the loan
agreement was amended to increase the revolving line to $35.0 million and to
extend the maturity to December 1, 2003. The interest rate on borrowings under
this revolving line resets quarterly, and is based on, at our option, either the
lender's prime rate or three-month LIBOR plus 120 basis points with a floor of
3.50%. The Company has elected to pay interest based on the three-month LIBOR
rate plus 120 basis points. The initial rate of interest on the revolver was
7.20%, and most recently reset to 3.50% on June 30, 2003. The collateral for
this borrowing consists of the common stock of The PrivateBank (Chicago) and The
PrivateBank (St. Louis), which is held in custody by the lender. As of June 30,
2003, the outstanding balance on the revolving credit facility was $30.0
million. On July 30, 2003, the
17
outstanding balance on the line of credit was paid in full using proceeds from
the common stock offering completed on July 30, 2003 (see Note 10).
In February 2000, the Company issued a subordinated note, in the principal
amount of $5.0 million as part of the purchase price for its acquisition of
Johnson Bank Illinois. The interest on the subordinated note is reset each
quarter based on the three-month LIBOR rate. The note is payable in full on or
before February 11, 2007, and provides for certain rate escalation beginning
after February 11, 2002. On February 11, 2002, the interest rate increased from
LIBOR +50 basis points to LIBOR +200 basis points. This pricing is in effect
until February 11, 2004, at which point the pricing increases to LIBOR +350
until maturity on February 11, 2007. The average rate of interest on the
subordinated note was 3.32% during the second quarter of 2003 compared to 3.89%
during 2002 and most recently reset to 3.31% on May 31, 2003. The Company has
the right to repay the subordinated note at any time after giving at least 30
days, but not more than 60 days advance notice.
NOTE 9--LONG TERM DEBT -- TRUST PREFERRED SECURITIES
Effective February 8, 2001, PrivateBancorp Capital Trust I, a newly created
Delaware business trust and wholly-owned finance subsidiary of the Company,
issued 2,000,000 shares (including the underwriters' over-allotment) of 9.50%
trust preferred securities, which represent preferred undivided interests in the
assets of the trust. The sole assets of the trust are 9.50% junior subordinated
debentures issued by the Company with a maturity date of December 31, 2030.
Subject to certain limitations, the Company has the right to defer payment
of interest on the debentures at any time, or from time to time, for a period
not to exceed 20 consecutive quarters. The trust preferred securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
debentures at maturity or their earlier redemption. At the option of the
Company, the debentures may be redeemed in whole or in part prior to maturity on
or after December 31, 2005, if certain conditions are met, and only after the
Company has obtained Federal Reserve approval, if then required under applicable
guidelines or regulations.
The Company has guaranteed the payment of distributions and payments upon
liquidation or redemption of the trust preferred securities, in each case to the
extent of funds held by the trust. The Company and the trust believe that, taken
together, the obligations of the Company under the guarantee, the debentures and
other related agreements provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of all of the obligations of
the trust under the trust preferred securities.
The trust preferred securities are recorded as a liability of the Company.
The aggregate principal amount of the trust preferred securities outstanding is
$20 million. As of June 30, 2003, the entire amount of the preferred securities
is eligible for treatment as Tier I capital as allowed by the Federal Reserve.
At June 30, 2003, the unamortized balance of the underwriting commissions paid
and offering expenses was $1.1 million and is classified as part of other assets
on the balance sheet. This amount is being amortized on a straight-line basis
until maturity at $9,764 per quarter. The amortization is recognized as interest
expense on the income statement. In the event the Company exercises its right to
redeem the securities prior to maturity, any unamortized commissions would be
expensed upon redemption.
NOTE 10--SUBSEQUENT EVENT
On July 30, 2003, the Company completed its sale of 1.955 million shares of
common stock in an underwritten public offering. The public offering price was
$31.25. Net proceeds to the Company totaled approximately $57.2 million. As a
result of the offering, the Company had 9,742,034 shares outstanding at July 30,
2003. The Company used a portion of the net proceeds from the offering to repay
the amount
18
outstanding under its revolving credit facility totaling $30.0 million. The
remainder of the net proceeds will be used for general corporate purposes and to
support growth at the subsidiary banks.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PrivateBancorp, Inc. ("the Company") was organized as a Delaware
corporation in 1989 to serve as the holding company for a Chicago-based de novo
bank designed to provide highly personalized financial services primarily to
affluent individuals, professionals, entrepreneurs and their business interests.
Through the Company's banking subsidiaries, The PrivateBank and Trust Company
("The PrivateBank (Chicago)") and The PrivateBank (St. Louis), the Company
provides its clients with traditional personal and commercial banking services,
lending programs, and wealth management services. Using the European tradition
of "private banking" as the model, the Company strives to develop a unique
relationship with clients, utilizing a team of managing directors to serve the
clients' individual and corporate banking needs, and tailoring products and
services to meet such needs. Currently, the Company has seven Chicago-area
offices: Downtown Chicago, Wilmette, Oak Brook, St. Charles, Lake Forest,
Winnetka, and Geneva, Illinois. During 2000, the Company expanded to the St.
Louis market, where it opened a new federal savings bank, The PrivateBank (St.
Louis). Currently, the Company operates one location in the St. Louis market.
Managing directors are strategically located at all of these locations. On
December 30, 2002, The PrivateBank (Chicago) acquired an 80% controlling
interest in Lodestar Investment Counsel, LLC, ("Lodestar") a Chicago-based
investment adviser with $538.4 million of assets under management at June 30,
2003. Lodestar manages equity, balanced, and fixed income accounts primarily for
high net-worth individuals, retirement plans and charitable organizations with
investable assets generally in excess of $1.0 million, and shares a similar
focus on highly personalized client service.
For financial information regarding the Company's four separate lines of
business, The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth
Management and Holding Company Activities, see "Operating Segments Results"
beginning on page 29 and "Note 5 -- Operating Segments" to the unaudited
consolidated financial statements of the Company included on page 11.
The profitability of our operations depends on our net interest income,
provision for loan losses, non-interest income, and non-interest expense. Net
interest income is dependent on the amounts and yields of interest-earning
assets as compared to the amounts and rates on interest-bearing liabilities. Net
interest income is sensitive to changes in market rates of interest as well as
to the execution of our asset/liability management strategy. The provision for
loan losses reflects the cost of credit risk in the loan portfolio and is
affected by changes in the loan portfolio, management's assessment of the
collectability of the loan portfolio, loss experience, as well as economic and
market factors.
Non-interest income consists primarily of net security gains (losses) and
wealth management fee income, and to a lesser extent, fees for ancillary banking
services. Non-interest income from fees and deposit service charges are below
peer group levels. This is largely the result of the profile of our typical
client. Our clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, we do not earn
the high service charge income typical of many retail banks.
Non-interest expense includes salaries and employee benefits as well as
occupancy, data processing, marketing, professional fees, insurance and other
expenses. Non-interest expenses are influenced by the growth of operations. Our
growth directly affects the majority of our expense categories.
20
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require management
to apply significant judgment to various accounting, reporting and disclosure
matters. Management must use assumptions and estimates to apply these principles
where actual measurements are not possible or practical. The Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with our unaudited consolidated financial statements
included herein. For a complete discussion of our significant accounting
policies, see the footnotes to our Consolidated Financial Statements included on
pages F-8 through F-14 in our Form 10-K/A for the fiscal year ended December 31,
2002. Below is a discussion of our critical accounting policies. These policies
are critical because they are highly dependent upon subjective or complex
judgments, assumptions and estimates. Changes in such estimates may have a
significant impact on the financial statements. Actual results could differ from
those estimates. Management has reviewed the application of these policies with
the Audit Committee of the Company's Board of Directors.
For PrivateBancorp, Inc., accounting policies that are viewed as critical
to us are those relating to estimates and judgments regarding the determination
of the adequacy of the allowance for loan losses and the estimation of the
valuation of goodwill and the useful lives applied to intangible assets.
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 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 not specifically identified that are inherent in our loan portfolio. Our
allowance for loan losses is reassessed monthly to determine the appropriate
level of the reserve. The amount of the allowance for loan losses is determined
based on a variety of factors, including assessment of the credit risk of the
loans in the portfolio, volume of loans and commitments in the portfolio,
delinquent loans, evaluation of current economic conditions in the market area,
actual charge-offs during the period and historical loss experience. The
unallocated portion of the reserve involves the exercise of judgment by
management and reflects various considerations, including management's view that
the reserve should have a margin that recognizes the imprecision inherent in the
process of estimating credit losses.
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. We believe that the allowance for loan losses is adequate to provide
for estimated probable credit losses inherent in our loan portfolio. The
allowance for loan losses as a percentage of total loans was 1.22% as of June
30, 2003 compared to 1.20% as of December 31, 2002.
GOODWILL AND INTANGIBLE ASSETS
During 2001, the PrivateBank (Chicago) recorded approximately $12.2 million
in goodwill in connection with the Johnson Bank Illinois acquisition. During
2002, the Company recorded $8.4 million of goodwill and $2.5 million in customer
intangibles in connection with the Lodestar Investment Counsel, LLC acquisition.
Intangible assets are amortized over an estimated useful life of 15 years.
Effective January 1, 2002, the Company adopted FAS No. 142, which requires that
goodwill and intangible assets that have indefinite lives no longer be amortized
but be reviewed for impairment annually, or more frequently if certain
indicators arise. Prior to the adoption of FAS No. 142, goodwill was being
amortized using the straight-line method over a period of 15 years. The Company
did not incur any goodwill impairment in 2002 in adopting FAS 142. The Company
performs an annual impairment test of goodwill each year. Impairment losses on
recorded goodwill will be recorded as operating expenses.
21
Goodwill at June 30, 2003 was $19.2 million compared to a similar amount of
$19.2 million at December 31, 2002, excluding the Lodestar customer intangible
assets of $2.5 million. The acquisition of Lodestar on December 30, 2002,
increased goodwill by $8.4 million and Lodestar customer intangible assets by
$2.5 million. Amortization expense related to the Lodestar customer intangible
assets is expected to be recorded in the amount of $167,000 each year for 15
years.
RESULTS OF OPERATIONS -THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
NET INCOME
Net income for the second quarter ended June 30, 2003, was $4.6 million, up
77% compared to second quarter 2002 net income of $2.6 million. Earnings per
diluted share increased 70% to $0.56 per diluted share in the second quarter
2003 compared to $0.33 per diluted share in the second quarter 2002. Net income
for the six months ended June 30, 2003, increased to $8.2 million, or $1.01 per
diluted share, compared to $4.8 million, or $0.62 per diluted share, for the
same period last year, reflecting diluted earnings per share improvement of 63%.
The improvement in earnings per diluted share for the three and six
months ended June 30, 2003 as compared to the prior year periods reflects a
significant increase in noninterest income primarily due to increased gains on
the sale of securities and increased net interest income primarily due to growth
in earning assets at both of the bank subsidiaries. The increases in net
interest income and non-interest income have outpaced the increases in
non-interest expenses for the 2003 periods as compared to the prior year
periods. The acquisition of Lodestar in December 2002 contributed to higher
non-interest income and non-interest expense during 2003.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowings. Net interest
margin represents net interest income on a tax equivalent basis as a percentage
of average earning assets during the period. Net interest margin reflects the
spread between average yields earned on interest earning assets and the average
rates paid on interest bearing deposits and borrowings. Interest income includes
amortization of loan origination fees recorded from loans. Interest expense
includes amortization of prepaid fees on brokered deposits and issuance costs of
trust preferred securities. The volume of non-interest bearing funds, largely
comprised of demand deposits and capital, also affects the net interest margin.
Net interest income was $12.6 million during the three months ended June
30, 2003 compared to $10.0 million for the second quarter 2002, an increase of
26%, and a decrease of 3% compared to the first quarter 2003. Average earning
assets during the second quarter 2003 were $1.6 billion, compared to $1.2
billion in the prior year quarter, an increase of 31%. Net interest margin (on a
tax equivalent basis) was 3.33% in the second quarter 2003, down from 3.53% in
the prior year second quarter and down from 3.68% in the first quarter of 2003.
Approximately half of the sequential quarter margin compression was due to an
additional $45.0 million investment in Federal Home Loan Bank ("FHLB") stock
that was made in May 2003. Recognition of dividends on the recently acquired
FHLB stock lag the purchase date due to the timing of the FHLB dividend
declaration. The dividend earned on this stock is paid in the subsequent
quarter, negatively impacting net interest margin in the current quarter due to
the larger average outstanding balance with no interest component seemingly
earned, and positively affecting margin in the following quarter. In the second
quarter 2003, the addition of FHLB stock with no corresponding income impact
reduced margin by 11 basis points. The remaining margin compression was due to
the combined impact of accelerated amortization on our mortgage-backed and
collateralized mortgage obligation securities ("CMO"), lower loan yields and the
sale of a higher yielding security in our investment portfolio, resulting in
lower overall yields on investment securities.
22
Net interest income on a tax equivalent basis was $27.0 million during the
six months ended June 30, 2003 compared to $19.8 million for the same period in
2002, an increase of 36%. Net interest margin (on a tax equivalent basis) was
3.49% for the six months ended June 30, 2003, up from 3.36% in the prior year
period. The improvement in net interest margin during the six months ended June
30, 2003 as compared to the same period in 2002 was primarily attributable to
reductions in the rates paid on our interest bearing liabilities, which more
than offset the declines in the rates earned on interest yielding assets. During
2003, continued declines in market rates of interest have negatively impacted
yields on investment securities. However, our loan portfolio has benefited from
the utilization of interest rate floors that have been incorporated into a large
percentage of our lending arrangements and have protected our loan yields in
this low interest rate environment. The continued declines in market interest
rates have allowed us to continue to reduce deposit rates and have resulted in
lower rates paid on our borrowed funds for the six months ended June 30, 2003 as
compared to the same period in 2002.
A changing interest rate environment has an effect on our net interest
margin. A large portion of our loan portfolio is based on floating interest
rates and will likely reprice faster than our deposits and floating rate
borrowings. For the remainder of 2003, we expect our net interest margin to
improve if market interest rates increase relative to 2002 levels.
Alternatively, if market interest rates decrease, we expect our net interest
margin to continue to experience pressure.
The following tables present a summary of our net interest income and
related net interest margin, calculated on a tax equivalent basis (dollars in
thousands):
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
2003 2002
------------------------------------ -----------------------------------
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- ------- ------ ----------- -------- -------
Fed funds sold and other
short-term investments......... $ 9,765 $ 31 1.04% $ 1,964 $ 8 1.76%
Investment securities (taxable)... 387,942 3,451 3.53% 268,131 3,340 4.99%
Investment securities
(non-taxable)(2)............... 140,002 2,439 6.97% 125,785 2,336 7.43%
Loans, net of unearned
discount(3).................... 1,047,043 15,208 5.78% 817,370 12,665 6.16%
---------- ------- ---------- -------
Total earning assets.............. $1,584,752 $21,129 5.30% $1,213,250 $18,349 6.03%
========== ======= ========== =======
Interest-bearing deposits......... $1,287,331 $ 6,140 1.91% $ 960,628 $ 5,741 2.40%
Funds borrowed.................... 157,485 1,204 3.02% 144,576 1,353 3.70%
Trust preferred securities........ 20,000 485 9.70% 20,000 485 9.70%
---------- ------- ---------- -------
Total interest-bearing liabilities $1,464,816 7,829 2.14% $1,125,204 7,579 2.69%
========== ------- ========== -------
Tax equivalent net interest income $13,300 $10,770
======= =======
Net interest spread(4)............ 3.16% 3.34%
Net interest margin(5)(6)......... 3.33% 3.53%
23
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
2003 2002
------------------------------------ -----------------------------------
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- ------- ------ ----------- -------- -------
Fed funds sold and other
short-term investments......... $ 10,794 $ 56 1.03% $ 2,846 $ 25 1.78%
Investment securities (taxable)... 369,815 7,243 3.90% 256,023 6,203 4.85%
Investment securities
(non-taxable)(2)............... 134,502 4,721 7.02% 117,852 4,367 7.41%
Loans, net of unearned
discount(3).................... 1,023,807 30,375 5.93% 799,314 24,813 6.21%
---------- ------- ---------- -------
Total earning assets.............. $1,538,918 $42,395 5.51% $1,176,036 $35,408 6.03%
========== ======= ========== =======
Interest-bearing deposits......... $1,234,814 $11,917 1.95% $ 931,931 $11,954 2.59%
Funds borrowed.................... 174,780 2,516 2.86% 140,302 2,662 3.77%
Trust preferred securities........ 20,000 970 9.70% 20,000 970 9.70%
---------- ------- ---------- -------
Total interest-bearing liabilities $1,429,594 $15,403 2.17% $1,092,233 $15,586 2.87%
========== ------- ========== =======
Tax equivalent net interest income $26,992 $19,822
======= =======
Net interest spread(4)............ 3.34% 3.16%
Net interest margin(5)(6)......... 3.49% 3.36%
- ---------------------------
(1) Average balances were generally computed using daily balances.
(2) Interest income on tax-advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
approximately $742,000 and $790,000 in the second quarters of 2003 and
2002, respectively, and $1.4 million and $1.5 million for the six months
ended June 30, 2003 and 2002, respectively.
(3) Nonaccrual loans are included in the average balances and do not have a
material effect on the average yield. Interest due on non-accruing loans
was not material for the periods presented.
(4) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(5) Net interest income, on a tax-equivalent basis, divided by average
interest-earning assets.
(6) The company adjusts GAAP reported net interest income by the tax equivalent
adjustment amount to account for the tax attributes on federally tax exempt
municipal securities. For GAAP purposes, tax benefits associated with
federally tax-exempt municipal securities are reflected in income tax
expense. The following table reconciles reported net interest income to net
interest income on a tax equivalent basis for the periods presented:
RECONCILIATION OF QUARTER NET INTEREST INCOME TO QUARTER NET INTEREST INCOME ON A
TAX EQUIVALENT BASIS
2Q03 2Q02
------- -------
Net interest income............................. $12,558 $ 9,980
Tax equivalent adjustment to net interest income 742 790
------- -------
Net interest income, tax equivalent basis....... $13,300 $10,770
======= =======
RECONCILIATION OF YEAR TO DATE NET INTEREST INCOME TO YEAR TO DATE NET INTEREST
INCOME ON A TAX EQUIVALENT BASIS
6/30/03 6/30/02
------- -------
Net interest income............................. $25,555 $18,344
Tax equivalent adjustment to net interest income 1,437 1,478
------- -------
Net interest income, tax equivalent basis....... $26,992 $19,822
======= =======
The following table shows the dollar amount of changes in interest income
(tax-equivalent) and interest expense by major categories of interest-earning
assets and interest-bearing liabilities attributable to changes in volume or
rate, or a mix of both, for the periods indicated. Volume variances are computed
using the change in volume multiplied by the previous period's rate. Rate
variances are computed using the changes in rate multiplied by the previous
period's volume.
24
THREE MONTHS ENDED JUNE 30, 2003
COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
CHANGE CHANGE
CHANGE DUE DUE TO DUE TO TOTAL
TO RATE VOLUME MIX CHANGE
---------- -------- ------- ------
(DOLLARS IN THOUSANDS)
Interest Income/ Expense from:
Fed funds sold and other short-term investments............. $ (2) $ 34 $ (9) $ 23
Investment securities (taxable)............................. (976) 1,491 (404) 111
Investment securities (non-taxable)(1)...................... (145) 263 (15) 103
Loans, net of unearned discount............................. (776) 3,527 (208) 2,543
------- ------- ------ -------
Total tax equivalent interest income(1).................. $(1,899) $ 5,315 $ (637) $ 2,780
------- ------- ------ -------
Interest-bearing deposits................................... $(1,166) $ 1,955 $ (390) $ 399
Funds borrowed.............................................. (244) 119 (24) (149)
Trust Preferred Securities.................................. -- -- -- --
------- ------- ------ -------
Total interest expense................................... $(1,410) $ 2,074 $ (415) $ 250
------- ------- ------ -------
Net tax equivalent interest income(1)....................... $ (489) $ 3,241 $ (222) $ 2,530
======= ======= ====== =======
SIX MONTHS ENDED JUNE 30, 2003
COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
CHANGE CHANGE
CHANGE DUE DUE TO DUE TO TOTAL
TO RATE VOLUME MIX CHANGE
---------- -------- ------- ------
(DOLLARS IN THOUSANDS)
Interest Income/ Expense from:
Fed funds sold and other short-term investments............. $ (11) $ 70 $ (28) $ 31
Investment securities (taxable)............................. (1,201) 2,737 (496) 1,040
Investment securities (non-taxable)(1)...................... (227) 612 (31) 354
Loans, net of unearned discount............................. (1,095) 6,913 (256) 5,562
------- ------- ------- -------
Total tax equivalent interest income(1).................. $(2,534) $10,332 $ (811) $ 6,987
------- ------- ------- -------
Interest-bearing deposits................................... $(2,975) $ 3,890 $ (952) $ (37)
Funds borrowed.............................................. (631) 645 (160) (146)
Trust Preferred Securities.................................. -- -- -- --
------- ------- ------- -------
Total interest expense................................... $(3,606) $ 4,535 $(1,112) $ (183)
------- ------- ------- -------
Net tax equivalent interest income(1)....................... $ 1,072 $ 5,797 $ 301 $ 7,170
======= ======= ======= =======
- ---------------------------
(1) Interest income on tax-advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
approximately $742,000 and $790,000 in the second quarters of 2003 and
2002, respectively, and $1.4 million and $1.5 million for the six months
ended June 30, 2003 and 2002, respectively.
PROVISION FOR LOAN LOSSES
The changes recorded in the components of the allowance for loan losses
resulted in a provision for loan losses of $730,212 for the three months ended
June 30, 2003 compared to $1.6 million for the comparable period in 2002. Net
charge-offs totaled $182,000 for the quarter ended June 30, 2003 versus net
charge-offs of $490,000 for the second quarter of 2002 and net charge offs of
$70,000 for the quarter ended March 31, 2003.
25
For the six months ended June 30, 2003, the provision for loan losses was
$1.7 million compared to $2.1 million for the year earlier period. For the six
months ended June 30, 2003, net charge-offs totaled $252,000 versus net
charge-offs of $517,000 in the year earlier period.
The decrease in the provision for loan losses during the six months
ended June 30, 2003 as compared to the prior year period reflects the impact of
lower charge offs that have been recognized in 2003 as compared to the same
period in 2002. Additionally, during 2002 larger provisions were recorded to
reflect the credit outlook in that period based on a review of economic
developments and the weakening of credit quality of certain borrowers as
reflected by risk rating downgrades. During 2002 loss factors for residential
real estate and personal loans were adjusted downward while loss factors for
commercial real estate and construction loans were increased to reflect
management's evaluation of the current economic conditions and its impact on the
various sectors of the loan portfolio.
A discussion of the allowance for loan losses and the factors management
considers in assessing the adequacy of the allowance begins on page 32.
NON-INTEREST INCOME
Non-interest income was $4.4 million in the second quarter of 2003,
reflecting an increase of approximately $2.4 million or 114% from the second
quarter of 2002. Non-interest income was $6.9 million for the six months ended
June 30, 2003, reflecting an increase of $3.5 million or 102% as compared to
non-interest income of $3.4 million for the same period in 2002.
The increase in non-interest income for the six months ended June 30, 2003
was attributable primarily to net securities gains of $2.3 million, reduced by a
trading loss on an interest rate swap of $1.3 million, the inclusion of $1.5
million of Lodestar revenue as well as increases in fee income resulting from
the sale of residential mortgages in the secondary market.
The following table presents the breakdown of fee income for the periods
presented:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- -----------------------
JUNE 30, JUNE 30,
---------------------- -----------------------
2003 2002 2003 2002
-------- ------- -------- --------
Residential real estate secondary
market fees......................... $1,037 $ 503 $1,818 $ 905
Trust fee revenue...................... 824 777 1,583 1,502
Lodestar asset management revenue...... 756 -- 1,482 --
Banking and other services............. 415 374 723 647
Bank owned life insurance.............. 149 148 276 290
------ ------ ------ ------
Total banking, wealth management
services and other income........ $3,181 $1,802 $5,882 $3,344
====== ====== ====== ======
Sales of residential real estate loans generated $1.0 million of income
during the second quarter 2003 compared to $503,000 during the prior year
quarter primarily due to increased volume of loans sold as a result of continued
strong demand for residential real estate loans. For the six months ended June
30, 2003, sales of newly originated residential real estate loans generated $1.8
million of income as compared to $905,000 in the year earlier period, an
increase of 101%.
Trust fee revenue increased by 6% to $824,000 during the second quarter
2003 as compared to $777,000 in the prior year quarter. Of this amount,
approximately $477,000 was revenue generated from wealth management services
provided to those clients where a third-party investment manager is utilized.
For the three months ended June 30, 2003, we paid $195,000 to third-party
investment managers. These fees are included in the professional fees category
of non-interest expense. Trust fee
26
revenue for the six months ended June 30, 2003 was $1.6 million compared to $1.5
million in the year earlier period. Of this amount, approximately $871,000
represents revenue generated from the wealth management services provided to
those clients where a third-party investment manager is utilized. A portion of
these fees are used to pay third-party investment managers, the remaining amount
of the fee is utilized to cover costs associated with administering other
aspects of the wealth management services that we provide to these clients. For
the six months ended June 30, 2003, we paid approximately $322,000 to
third-party investment managers. The increase in trust fees over the prior year
period reflects a favorable shift in the mix of accounts towards higher fee
structures as the addition of new business largely offset reductions in existing
assets under management due to equity market declines experienced over the past
year.
Lodestar asset management revenue totaled approximately $756,000 for
the second quarter ended June 30, 2003. For the six months ended June 30, 2003,
Lodestar asset management revenue totaled approximately $1.5 million. Wealth
management assets under management were $1.3 billion at June 30, 2003 compared
to $733.9 million at June 30, 2002 and $1.2 billion at December 31, 2002. Of
this amount, Lodestar had $538.4 million of assets under management at June 30,
2003 and $481.9 at December 31, 2002.
During the second quarter of 2003, we recognized income of $149,000 related
to the increased cash surrender value of a bank owned life insurance (BOLI)
policy that was entered into in the fourth quarter of 2001 as compared to
relatively similar levels of income in the second quarter 2002. This policy
covers certain higher-level employees who are deemed to be significant
contributors to the company. All employees included in this policy are aware and
have consented to the coverage. The cash surrender value of BOLI at June 30,
2003 was $11.0 million and is included in other assets on the balance sheet.
During the second quarter 2003, we recognized a gain of $2.4 million on the
sale of a single $10.0 million corporate bond from our available-for-sale
investment security portfolio. The value of the security increased as a result
of declines in interest rates during the quarter. The proceeds from the sale
have been invested in assets that management believes will be impacted to a
lesser degree by rising interest rates. Securities gains and losses for the
second quarter 2003 also include a permanent impairment write-down of $210,000
on the Company's interest-only CMO investments. Continued low levels of market
interest rates during the second quarter 2003 resulted in accelerated mortgage
prepayments, which further impaired the fair value of our interest-only CMO
securities. Our remaining investment in interest-only CMO securities was
approximately $120,000 as of June 30, 2003.
Included in non-interest income for the 2003 period are trading losses
recorded to reflect the fair market value adjustment on an interest rate swap.
This interest rate swap was entered into during the third quarter of 2002 in
order to hedge a portion of the Company's investment in long-term municipal
bonds. The change in the fair market value of the swap is recognized in earnings
and results in a loss because of continued declines in market rates of interest
during the period. For the three months ended June 30, 2003, the trading loss
totaled $1.1 million and for the six months ended June 30, 2003, the trading
loss totaled $1.3 million.
27
NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 30, JUNE 30,
-------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
(IN THOUSANDS) (IN THOUSANDS)
Salaries and employee benefits.......... $5,070 $ 3,469 $ 9,848 $ 6,683
Occupancy............................... 1,270 1,206 2,689 2,345
Professional fees....................... 1,069 1,027 2,353 1,918
Marketing............................... 509 374 995 739
Data processing......................... 368 374 761 682
Postage, telephone and delivery......... 212 163 424 321
Office supplies and printing............ 137 61 297 114
Insurance............................... 146 106 314 199
Amortization of intangible.............. 42 - 84 -
Other expense........................... 933 333 1,410 584
------ ------- ------- --------
Total non-interest expense.............. $9,756 $ 7,113 $19,175 $ 13,585
====== ======= ======= ========
Non-interest expense increased to $9.8 million in the second quarter of
2003 from $7.1 million in the second quarter of 2002, an increase of 37%. For
the six months ended June 30, 2003, non-interest expense increased 41% to $19.2
million from $13.6 million in the prior period.
The increase in non-interest expense between the periods is attributable
primarily to increased costs associated with continued growth of the
organization and the operations of Lodestar as well as the recognition in the
second quarter of a fraud loss of $400,000 in connection with a check fraud
scheme involving a new account deposit. Our efficiency ratio remained relatively
unchanged at 55.0% for the second quarter 2003 as compared to 55.4% for the
second quarter 2002. On a tax-equivalent basis, this ratio indicates that in the
second quarter of 2003, we spent 55.0 cents to generate each dollar of revenue,
compared to 55.4 cents in the second quarter of 2002. Our efficiency ratio
declined to 56.7% for the six months ended June 30, 2003 as compared to 58.5%
for the same period in 2002. During the remainder of 2003, we expect to maintain
a range of 55% to 60% for our level of operating efficiency. The efficiency
ratio is equal to non-interest expense divided by the sum of net interest income
on a tax equivalent basis plus non-interest income. Please refer to footnote 6
on page 24 for a reconciliation of net interest income to net interest income on
a tax equivalent basis.
Salaries and benefits increased to $5.1 million, or 46% during the second
quarter 2003 as compared to the year ago quarter, reflecting the increased level
of full-time equivalent employees to 194 people at June 30, 2003 from 181 people
at June 30, 2002. Salaries and benefits increased to $9.8 million, or 47% during
the six months ended June 30, 2003 as compared to the year ago period. The
increase is due primarily to overall growth in the organization and the addition
of six Lodestar employees in the fourth quarter of 2002.
Occupancy expense increased to $1.3 million during the second quarter 2003,
reflecting an increase of 5% over the prior year quarter. Occupancy expense
increased to $2.7 million during the six months ended June 30, 2003, reflecting
an increase of 15% over the prior year period. The increase in occupancy
expense compared to prior year periods reflects the increase of additional floor
space that is being leased in our downtown Chicago location as well as the
Lodestar office space.
Professional fees, which include legal, accounting, consulting services and
investment management fees, increased to $1.1 million during the second quarter
of 2003, reflecting a slight increase of 4% over the prior year quarter.
Professional fees increased to $2.4 million, or 23%, during the six months ended
June 30, 2003, compared to the prior year period. The increase in professional
fees is primarily attributable to higher legal, accounting and information
systems consultation services as well as consulting fees paid for the management
of our investment portfolio from February to May 2003.
28
Insurance expense increased 38% during the second quarter 2003 over the
prior year quarter and 58% for the six months ended June 30, 2003 due to the
increased cost of insurance in the marketplace, and the renewal of our annual
insurance coverage, which was previously under a three-year contract that
expired in June 2002.
In April 2003, The PrivateBank (Chicago) suffered a potential loss of
$400,000 in a check fraud scheme involving a new account deposit. On June 27,
2003, the Company received a letter from its insurance carrier declining
coverage for the loss. As a result, the Company recorded a second quarter 2003
charge of $400,000, which accounts for a significant portion of the increase in
other expense of non-interest expense. The Company is continuing to pursue
recovery of the fraud loss in excess of the $150,000 deductible from its
insurance carrier.
During the first six months of 2003, we amortized $82,000 in intangible
assets related to our acquisition of a controlling interest in Lodestar.
INCOME TAXES
The following table shows our income before income taxes, applicable income
taxes and effective tax rate for the six months ended June 30, 2003 and 2002,
respectively (in thousands):
SIX MONTHS ENDED
JUNE 30,
-----------------------
2003 2002
------- ------
Income before taxes.......... $11,465 $6,027
------- ------
Income tax provision......... 3,249 1,273
Effective tax rate........... 28.3% 21.1%
The effective income tax rate varies from statutory rates principally due
to certain interest income, which is tax-exempt for federal or state purposes,
and certain expenses, which are disallowed for tax purposes. The higher
effective tax rate for the six months ended June 30, 2003 as compared to the
prior year period reflects growth in pretax income of 90% that has outpaced the
growth on our federally tax-exempt municipal bonds income. Federally tax-exempt
municipal bonds increased to $156.2 million as of June 30, 2003, a 22% increase
from $128.0 million at June 30, 2002. In addition, the higher effective tax rate
for the six months ended June 30, 2003 as compared to the prior year period is
also attributable to the increased profitability of The PrivateBank St. Louis
for 2003 relative to 2002 and has resulted in increased Missouri state tax
expense requirements.
OPERATING SEGMENTS RESULTS
As described in Note 5 to the consolidated financial statements included in
this report, the Company's operations consist of four primary business segments:
The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management and
Holding Company Activities.
The profitability of The PrivateBank (Chicago) is primarily dependent
on the net interest income, provision for loan losses, non-interest income and
non-interest expense. Net income for The PrivateBank (Chicago) for the six
months ended June 30, 2003 increased 50% to $9.1 million from $6.0 million for
the six months ended June 30, 2002. The growth in net income for the period
resulted from improvements in net interest income, which was driven by increases
in loans and investments. The improvement in net interest income and
non-interest income for the six months ended June 30, 2003 more than offset
increases in operating expenses associated with continued growth of The
PrivateBank (Chicago). Net interest income for The PrivateBank (Chicago) for the
six months ended June 30, 2003 increased to $22.6 million from $17.7 million, or
28%, primarily due to growth in earning assets.
29
The PrivateBank (Chicago)'s investment in FHLB stock increased by approximately
$51.9 million during 2003 and continues to have a positive impact on the yield
on earning assets during 2003.
Total loans increased by 23%, or $174.3 million, to $942.7 million at June
30, 2003 as compared to total loans of $768.4 million at June 30, 2002. The
majority of the loan growth for the six months ended June 30, 2003 occurred in
the commercial real estate and construction loan categories. Total deposits
increased by 32% to $1.3 billion at June 30, 2003, from $991.1 at June 30, 2002.
Growth in money market deposits, jumbo certificates of deposits, non-interest
bearing deposits and increased utilization of brokered deposits accounted for
the majority of the deposit growth.
Net income for The PrivateBank (St. Louis) for the six months ended
June 30, 2003 increased by $548,000 to $826,000 as compared to $278,000 in the
prior year period. This growth in net income resulted from increases in net
interest income and non-interest income, which more than offset increases in
operating expenses. Increased fee income from the sale of residential real
estate loans continues to have a significant positive impact on The PrivateBank
(St. Louis). Net interest income for The PrivateBank (St. Louis) for the six
months ended June 30, 2003 increased to $2.5 million from $1.9 million in the
prior year period, an increase of 35%, primarily due to growth in earning
assets.
Total loans increased 27% to $125.9 million at June 30, 2003 from $99.0
million at June 30, 2002, due primarily to growth in commercial real estate and
residential real estate loans categories. Commercial and personal loans also
contributed to the increase in loans but to a lesser extent as compared to the
growth in the commercial and residential real estate categories. Total deposits
increased by $60.1 million to $143.8 million at June 30, 2003 from $83.7 million
at June 30, 2002. The majority of the deposit growth at The PrivateBank (St.
Louis) was due to increased money market deposits and the continued growth of
brokered deposits during six months ended June 30, 2003 as compared to the prior
year period.
Wealth management includes investment management, personal trust and estate
services, custodial services, retirement accounts and brokerage and investment
services. Wealth management assets under management increased by $531.0 million
to $1.3 billion at June 30, 2003, as compared to $733.9 million at June 30,
2002, due primarily to our acquisition of Lodestar. Excluding Lodestar, trust
assets under administration for the Wealth Management segment were $726.6
million at June 30, 2003, compared to $733.9 million as of June 30, 2002.
Lodestar assets under management were $538.4 million as of June 30, 2003.
Excluding Lodestar, trust fee revenue generated by the Wealth Management Segment
was $1.6 million compared to $1.5 million for the six months ended June 30,
2002. Revenue generated by Lodestar for six months ended June 30, 2003 added
$1.5 million for a total of $3.1 million in wealth management revenue generated
in the six months ended June 30, 2003. Net income for six months ended June 30,
2003 for our Wealth Management segment was $242,000 as compared to $236,000 for
the six months ended June 30, 2002. Lodestar contributed net income of
approximately $216,000 (net of taxes) to the Wealth Management segment during
the six months ended June 30, 2003. The decrease in the net income contribution
of the trust area for the six months ended June 30, 2003 compared to prior year
period is attributable primarily to investments in trust personnel which have
been made to support planned growth in the trust area of our Wealth Management
segment.
Holding Company Activities consist of parent company only matters. The
Holding Company's most significant assets are its net investments in its two
banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis).
Holding Company Activities are reflected primarily by interest expense
30
on borrowings and operating expenses of the parent company. Recurring holding
company operating expenses consist primarily of compensation (amortization of
restricted stock awards, other salary expense) and miscellaneous professional
fees.
The Holding Company Activities segment reported a net loss of $2.0 million
for the six months ended June 30, 2003 as compared to $1.7 million for the six
months ended June 30, 2002. The increase in the amount of the net loss reported
for 2003 as compared to prior year period reflects the increased amount of
borrowings recorded at the Holding Company Activities segment. Total borrowings
including trust preferred securities at the Holding Company were $55.0 million
at June 30, 2003, compared to $40.0 million at June 30, 2002.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets increased to $1.8 billion at June 30, 2003, an increase of
$216.3 million, or 14% over total assets of $1.5 billion at December 31, 2002,
and an increase of $427.7 million, or 32% over $1.3 billion of total assets at
June 30, 2002. The balance sheet growth during the six months ended June 30,
2003 was accomplished mainly through loan growth throughout the Company and
growth in the investment securities portfolio. The growth in assets was funded
primarily through increases in brokered deposits and to a lesser extent, from
growth in core deposits.
LOANS
Total loans increased to $1.1 billion, an increase of $101.3 million, or
10%, from $965.6 million at December 31, 2002 and an increase of $201.1 million,
or 23%, from $865.8 million at June 30, 2002.
Loan growth since June 30, 2002 has occurred primarily in the commercial
real estate and construction loan categories. The PrivateBank (St. Louis) had
loans outstanding of $125.9 million as of June 30, 2003, which reflects growth
of $21.2 million, or 20%, since December 31, 2002. The remaining loan growth of
$80.1 million during the first six months of 2003 was generated by The
PrivateBank (Chicago). Loan volume at The PrivateBank (Chicago) offices
increased 9% at June 30, 2003 as compared to December 31, 2002 loan levels.
The following table sets forth the composition of our loan portfolio net of
unearned discount by category (in thousands) at the following dates:
JUNE 30, DECEMBER 31, JUNE 30,
2003 2002 2002
----------- ---------- --------
LOANS
Commercial real estate............................ $ 524,208 $452,703 $382,581
Residential real estate........................... 70,858 72,289 90,478
Commercial........................................ 162,235 165,993 156,404
Personal(1)....................................... 152,504 151,452 135,178
Construction...................................... 157,114 123,204 101,137
---------- -------- --------
Total loans, net of unearned discount.......... $1,066,919 $965,641 $865,778
========== ======== ========
- ---------------------------
(1) Includes home equity loans and overdraft lines.
ALLOWANCE FOR LOAN LOSSES
Loan quality is continually monitored by management and reviewed by the
loan/investment committees of the boards of directors of the banks on a monthly
basis. In determining the adequacy of
31
the allowance for loan losses, management considers a variety of factors,
including assessment of the credit risk of the portfolio, delinquent loans,
evaluation of current economic conditions in the market area, actual charge-offs
during the year and historical loss experience. The unallocated portion of the
reserve involves the exercise of judgment by management and reflects various
considerations, including management's view that the reserve should have a
margin that recognizes the imprecision inherent in the process of estimating
credit 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 based on review of available and relevant information,
including probable losses that have been identified relating to specific
borrowing relationships, as well as probable losses inherent in the loan
portfolio and credit undertakings that are not specifically identified.
Management's application of the methodology for determining the allowance for
loan losses resulted in an allowance for loan losses of $13.0 million at June
30, 2003 compared with $9.9 million at June 30, 2002. We believe that the
allowance for loan losses is adequate to provide for estimated probable credit
losses inherent in our loan portfolio.
The allowance for loan losses as a percentage of total loans was 1.22% at
June 30, 2003, 1.20% at December 31, 2002 and 1.14% at June 30, 2002. Net
charge-offs totaled $252,000 for the six months ended June 30, 2003 versus net
charge-offs of $517,000 in the year earlier period. The provision for loan
losses was $1.7 million for the six months ended June 30, 2003, versus $2.1
million for the six months ended June 30, 2002.
32
Following is a summary of changes in the allowance for loan losses for the
six months ended June 30, 2003 and 2002 (in thousands):
2003 2002
---------- ----------
Balance, January 1.............................. $11,585 $8,306
Provisions charged to earnings.................. 1,686 2,120
Loans charged-off, net of recoveries............ (252) (517)
------- ------
Balance, June 30................................ $13,019 $9,909
======= ======
Under our methodology, the allowance for loan losses is comprised of the
following components:
SPECIFIC COMPONENT OF THE RESERVE
The specific component of the reserve is determined on a loan-by-loan basis
as part of a regular review of our loan portfolio. The Company utilizes a loan
rating system to assist in developing an internal problem loan identification
system ("Watch List") as a means for identifying and reporting non-performing
and potential problem loans. These loans are allocated specifically identified
reserves based on the loan ratings assigned to individual loans. The specific
reserve is based on a loan's current book value compared to the present value of
its projected future cash flows, collateral value or market value, as is
relevant for the particular loan.
The portion of the provision related to the specific component of the
reserve was approximately $457,000 during the first six months of 2003 resulting
in an increase in this component of $205,000 after giving effect to $252,000 in
charge offs during the period. The specific component of the reserve consists of
individual credit relationships that have been allocated specifically identified
reserves based on the loan ratings assigned to individual loans and other
extensions of credit.
ALLOCATED INHERENT COMPONENT OF THE RESERVE
The allocated portion of the inherent component of the reserve is based on
management's review of historical and industry charge-off experience as well as
its judgment regarding loans in each loan category over a period of time that
management determines is adequate to reflect longer-term economic trends. Loss
factors are evaluated by management and adjusted based on current facts and
circumstances. Loss factor adjustments reflect management's assessment of the
credit risk inherent in each loan category.
The portion of the provision related to the allocated inherent component of
the reserve was $865,000 during the first six months of 2003. This reserve
primarily reflects the increase in volume in our commercial real estate loan
portfolio and construction loan portfolio. During 2003, loss factors applied to
the allocated inherent component of the reserve have not changed from December
31, 2002 levels.
33
UNALLOCATED INHERENT COMPONENTS OF THE RESERVE
The unallocated portion of the inherent component of the reserve is based
on management's review of other factors affecting the determination of probable
losses inherent in the portfolio, which are not necessarily captured by the
application of loss factors. This portion of the reserve analysis involves the
exercise of judgment and reflects consideration such as management's view that
the reserve should have a margin that recognizes the imprecision inherent in the
process of estimating credit losses. The unallocated inherent component of the
reserve takes into account an increasingly more complex loan portfolio and
growth in the dollar amount of individual credit exposures. The growth and
complexity of the loan portfolio exposes us to larger individual charge-offs.
The measure of imprecision has increased with this growth and poses greater risk
to the Company that losses could exceed our estimates. As a result, management
has elected to increase the unallocated inherent component of the reserve. The
portion of the provision related to the unallocated inherent component of the
reserve was $363,000 for the first six months of 2003
NONPERFORMING LOANS
The following table classifies our non-performing loans as of the dates
shown:
6/30/03 3/31/03 12/31/02 9/30/02 6/30/02
--------- -------- ---------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans...................... $ 889 $1,483 $ 749 $ 430 $ 649
Loans past due 90 days or more........ 1,849 2,032 650 2,549 2,518
------ ------ ------ ------ ------
Total nonperforming loans............. 2,738 3,515 1,399 2,979 3,167
------ ------ ------ ------ ------
Total nonperforming assets............ $2,738 $3,515 $1,399 $2,979 $3,167
====== ====== ====== ====== ======
Total nonaccrual loans to total loans. 0.080% 0.146% 0.078% 0.047% 0.075%
Total nonperforming loans to total
loans.............................. 0.26% 0.35% 0.14% 0.33% 0.37%
Total nonperforming assets to total
assets............................. 0.16% 0.22% 0.09% 0.21% 0.24%
Nonperforming loans include nonaccrual loans and accruing loans, which are
90 days or more delinquent. Loans in this category include those with
characteristics such as past maturity more than 90 days, those that have recent
adverse operating cash flow or balance sheet trends, or loans that have general
risk characteristics that management believes might jeopardize the future timely
collection of principal and interest payments. The balance in this category at
any reporting period can fluctuate widely based on the timing of cash
collections, renegotiations and renewals.
Nonaccrual loans were $889,000 at June 30, 2003 as compared to $749,000 at
December 31, 2002 and $649,000 at June 30, 2002. Nonaccrual loans increased by
$140,000 since December 31, 2002. Loans delinquent over 90 days increased by
$1.2 million since December 31, 2002.
34
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities at June 30,
2003 and December 31, 2002, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
-------------------------------------------------------------
JUNE 30, 2003
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ---------
U.S. government agency mortgage
backed securities and collateralized
mortgage obligations.................. $196,008 $ 3,412 $ (436) $198,984
Corporate collateralized mortgage
obligations........................... 10,867 308 -- 11,175
Tax exempt municipal securities.......... 141,873 14,389 (42) 156,220
Taxable municipal securities............. 3,865 40 -- 3,905
Federal Home Loan Bank stock............. 207,512 -- -- 207,512
Other.................................... 3,648 299 -- 3,947
-------- ------- ------- --------
Total.................................... $563,773 $18,448 $ (478) $581,743
======== ======= ======= ========
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
-------------------------------------------------------------
DECEMBER 31, 2002
-------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------------------
U.S. government agency mortgage
backed securities and collateralized
mortgage obligations.................. $155,510 $ 3,132 $(248) $158,394
Corporate collateralized mortgage
obligations........................... 18,166 509 -- 18,675
Tax exempt municipal securities.......... 126,504 8,332 -- 134,836
Taxable municipal securities............. 4,583 114 -- 4,697
Federal Home Loan Bank stock............. 155,606 -- -- 155,606
Other.................................... 13,279 1,533 -- 14,812
-------- ------- ------- --------
Total.................................... $473,648 $13,620 $(248) $487,020
======== ======= ======= ========
All securities are classified as available-for-sale and may be sold as part
of our asset/liability management strategy in response to changes in interest
rates, liquidity needs or significant prepayment risk. Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital. At June 30, 2003, net unrealized gains of $18.0 million resulted in an
increase of $11.9 million in reported stockholders' equity. This was an increase
of $3.1 million from net unrealized gains of $8.8 million recorded as part of
equity at December 31, 2002. The increase in unrealized gains during the first
six months of 2003 is attributable primarily to gains in tax-exempt municipal
securities. These municipal securities generally have long-term maturities and
are not callable by the issuer or have long-term call dates. Thus, the fair
value of these securities has increased during the first six months of 2003 as
rates on tax-free municipal bonds have fallen. The credit quality of the
investment portfolio remains strong. The vast majority of investments are rated
"AAA" by bond rating agencies. It is our policy not to take any undue credit
risk with the investment portfolio.
35
Securities available for sale increased to $581.7 million at June 30, 2003,
up 19% from $487.0 million at December 31, 2002. The growth in the investment
security portfolio since December 31, 2002 resulted from the continued
implementation of our asset/liability management strategy. Tax exempt municipal
securities increased by $21.4 million. These securities provide net interest
margin protection in a falling interest-rate environment. Investments in Federal
Home Loan Bank stock increased by $51.9 million due to the purchase of $45.0
million of stock in May 2003 and stock dividends received in the first six
months of 2003.
DEPOSITS AND FUNDS BORROWED
The following table presents the balances of deposits by category and each
category as a percentage of total deposits at June 30, 2003 and December 31,
2002:
JUNE 30, DECEMBER 31,
2003 2002
------------------------- ---------------------------
PERCENT OF PERCENT OF
BALANCE TOTAL BALANCE TOTAL
--------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
Demand............................ $ 110,244 8% $ 88,986 7%
Savings........................... 8,311 1% 6,344 1%
Interest-bearing demand........... 79,397 5% 64,893 5%
Money market...................... 489,126 34% 482,597 40%
Brokered deposits................. 438,652 30% 279,806 23%
Other time deposits............... 319,860 22% 282,645 24%
---------- --- ---------- ---
Total deposits................. $1,445,590 100% $1,205,271 100%
========== === ========== ===
Total deposits of $1.4 billion at June 30, 2003 represent an increase of
$240.3 million or 20% as compared to total deposits of $1.2 billion as of
December 31, 2002. Non-interest-bearing deposits increased by 24% to $110.2
million at June 30, 2003 as compared to $89.0 million at December 31, 2002.
Interest-bearing demand deposits increased by 22% to $79.4 million as compared
to $64.9 million at December 31, 2002. Money market accounts increased by $6.5
million to $489.1 million at June 30, 2003 as compared to $482.6 million at
December 31, 2002. Brokered deposits increased by 57% or $158.8 million to
$438.7 million at June 30, 2003 as compared to $279.8 million at December 31,
2002. Other time deposits increased by approximately $37.2 million to $319.9
million as compared to $282.6 million at year-end 2002.
We continued to utilize brokered deposits as a source of funding for growth
in the loan and investment portfolios. Certain brokered deposits may include
call option provisions, which can provide us with the opportunity to repay the
certificates of deposit on a specified date prior to the contractual maturity
date. As of June 30, 2003, there were no outstanding brokered deposits
containing call provisions. The following table presents the maturity and rate
of our brokered deposits, net of unamortized prepaid broker commissions as of
June 30, 2003.
36
BROKERED DEPOSITS NET OF UNAMORTIZED PREPAID BROKER COMMISSIONS
AT JUNE 30, 2003 (IN THOUSANDS)
MATURITY DATE RATE(1) AMOUNT
------------- ------ --------
11/13/07 3.400% $ 7,000
05/23/06 2.400% 20,000
05/22/06 2.200% 10,000
11/23/05 2.100% 15,000
11/09/05 2.050% 2,000
05/09/05 1.850% 2,000
02/28/05 2.050% 7,233
01/31/05 2.150% 15,000
01/24/05 2.250% 10,000
11/29/04 1.750% 10,000
10/18/04 2.300% 7,668
09/27/04 1.750% 11,448
08/30/04 2.500% 25,000
08/04/04 1.750% 10,000
07/09/04 1.950% 5,000
05/28/04 1.500% 21,000
04/21/04 2.100% 10,000
04/19/04 2.250% 5,000
03/26/04 1.500% 10,549
02/26/04 1.800% 30,000
02/19/04 1.600% 25,000
01/30/04 1.850% 11,872
01/22/04 1.700% 10,000
01/22/04 1.900% 12,000
01/15/04 1.700% 28,000
01/15/04 1.850% 18,448
01/09/04 1.850% 10,000
12/31/03 1.800% 953
10/29/03 1.750% 20,000
10/17/03 2.050% 5,000
10/17/03 1.850% 6,699
10/17/03 2.050% 3,000
09/05/03 3.800% 2,394
07/24/03 2.400% 17,425
07/21/03 2.450% 15,312
07/17/03 2.250% 20,000
--------
Total brokered deposits........................440,001
Unamortized prepaid broker commissions..........(1,349)
--------
Total brokered deposits, net of
unamortized prepaid broker commissions......$438,652
========
- -----------------
(1) Represents the coupon rate of each brokered deposit.
Membership in the Federal Home Loan Bank System gives us the ability to
borrow funds from the Federal Home Loan Bank of Chicago (FHLB) and from the
Federal Home Loan Bank of Des Moines (FHLB) for short- or long-term purposes
under a variety of programs. We have periodically used the services of the FHLB
for short-term funding needs and other correspondent services.
During 2003, our utilization of Federal Home Loan Bank advances to fund
loan growth slightly decreased as advances matured. Management anticipates that
our reliance on Federal Home Loan Bank borrowings as a funding source will
likely remain at current levels or increase slightly for the remainder of 2003
to the extent that rates on Federal Home Loan Bank advances continue to be more
attractive than
37
deposit pricing. Federal Home Loan Bank borrowings totaled $65.8 million at June
30, 2003 compared to $77.8 million at December 31, 2002.
A summary of all funds borrowed and outstanding at June 30, 2003, December
31, 2002 and June 30, 2002 is presented in the table below:
LONG TERM FUNDS BORROWED: CURRENT RATE MATURITY 6/30/2003 12/31/2002 6/30/2002
------------------------- ------------ -------- --------- ---------- ---------
Subordinated note 3.31% 02/11/07 $ 5,000 $ 5,000 $ 5,000
FHLB fixed advance (1) 6.50% 10/23/05 26,752 26,616 25,493
-------- -------- --------
Total long-term funds borrowed $ 31,752 $ 31,616 $ 30,493
======== ======== ========
SHORT TERM FUNDS BORROWED:
--------------------------
FHLB fixed advance 1.61% 01/16/04 $ 1,000 $ -- $ --
FHLB fixed advance 6.21% 12/05/03 30,000 30,000 30,000
Borrowing under revolving line
of credit facility 3.50% 12/01/03 30,000 25,000 15,000
FHLB fixed advance 1.73% 11/07/03 6,000 6,000 --
FHLB fixed advance 2.21% 07/17/03 1,000 1,000 --
FHLB fixed advance 2.74% 07/17/03 1,000 1,000 1,000
FHLB fixed advance 2.46% 06/16/03 -- 500 500
FHLB fixed advance 2.70% 05/08/03 -- 1,000 1,000
FHLB fixed advance 2.98% 03/10/03 -- 1,000 1,000
FHLB fixed advance 2.38% 01/13/03 -- 1,000 1,000
FHLB fixed advance 5.89% 12/20/02 -- -- 1,000
FHLB fixed advance 2.39% 11/12/02 -- -- 5,000
FHLB fixed advance 5.33% 07/22/02 -- -- 1,000
Fed funds purchased 1.40% daily 52,000 98,000 65,000
FHLB open line advance 1.48% daily -- 9,700 --
Demand repurchase agreements (2) 1.00% daily 17,681 4,138 2,506
-------- -------- --------
Total short-term funds borrowed 138,681 178,338 124,006
-------- -------- --------
Total funds borrowed $170,433 $209,954 $154,499
======== ======== ========
- ---------------------------
(1) This FHLB advance is subject to a fair value hedge utilizing an interest
rate swap with a fair value of $2.8 million at June 30, 2003. The
contractual par amount on the advance is $25.0 million.
(2) Demand repurchase agreements are a form of retail repurchase agreement
offered to certain clients of The PrivateBank. Funds are swept each
business day from the client's demand deposit account. These amounts are
not deposits and are not insured, but are secured by a pool of securities
pledged specifically for this purpose.
The decrease in funds borrowed as of June 30, 2003 as compared to December
31, 2002, reflects a decrease in our federal funds purchased position and
decreases in FHLB fixed advances, offset by an increase of $5.0 million in
borrowings under our revolving line of credit.
In February 2002, the Company renewed the term on an $18.0 million
revolving credit facility with a commercial bank originally entered into in
February 2000. On April 11, 2002, the loan agreement was amended and the
revolving line was increased to $25.0 million. On December 24, 2002, the loan
agreement was amended to increase the revolving line to $35.0 million and to
extend the maturity to December 1, 2003. The interest rate on borrowings under
this revolving line resets quarterly, and is based on, at our option, either the
lender's prime rate or three-month LIBOR plus 120 basis points with a floor of
3.50%. The Company has elected to pay interest based on the three-month LIBOR
rate plus 120 basis points. The initial rate of interest on the revolver was
7.20%, and most recently reset to 3.50% on June 30, 2003. The collateral for
this borrowing consists of the common stock of The PrivateBank
38
(Chicago) and The PrivateBank (St. Louis), which is held in custody by the
lender. As of June 30, 2003, the outstanding balance was $30.0 million. On July
30, 2003, the amount outstanding under the line of credit was paid in full using
proceeds from the common stock offering, which closed on July 30, 2003.
In February 2000, the Company issued a subordinated note, in the principal
amount of $5.0 million as part of the purchase price for its acquisition of
Johnson Bank Illinois. The interest on the subordinated note is reset each
quarter based on the three-month LIBOR rate. The note is payable in full on or
before February 11, 2007, and provides for certain rate escalation beginning
after February 11, 2002. On February 11, 2002, the interest rate increased from
LIBOR +50 basis points to LIBOR +200 basis points. This pricing is in effect
until February 11, 2004, at which point the pricing increases to LIBOR +350
until maturity on February 11, 2007. The average rate of interest on the
subordinated note was 3.32% during the second quarter of 2003 compared to 3.89%
during 2002 and most recently reset to 3.31% on May 31, 2003. The Company has
the right to repay the subordinated note at any time after giving at least 30
days, but not more than 60 days advance notice.
CAPITAL RESOURCES
At June 30, 2003, $20.0 million of the trust preferred securities was
treated as Tier 1 capital. Stockholders' equity rose to $100.3 million at June
30, 2003, an increase of $11.2 million from the 2002 year-end level, due to
year-to-date 2003 net income of $8.2 million and an increase of $3.0 million for
the fair value of securities classified as available-for-sale, net of income
taxes.
Effective July 30, 2003, the Company completed its sale of 1.955 million
shares of common stock in an underwritten public offering. The public offering
price was $31.25. Net proceeds to the Company totaled approximately $57.2
million. As a result of the offering, the Company had 9,742,034 shares
outstanding at July 30, 2003. The Company used a portion of the net proceeds
from the offering to repay the amount outstanding under its revolving credit
facility totaling $30.0 million. The remainder of the net proceeds will be used
for general corporate purposes and to support growth at the subsidiary banks.
The Company and its banking subsidiaries are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings and other factors, and the regulators can lower classifications in
certain areas. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
The prompt corrective action regulations provide five classifications,
including well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If a banking
subsidiary is not "well capitalized," regulatory approval is required to accept
brokered deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion and plans for capital restoration are required.
The following table sets forth our consolidated regulatory capital amounts
and ratios as of June 30, 2003 and 2002, and December 31, 2002:
39
JUNE 30, DECEMBER 31,
------------------------------------------------------------- -----------------------------
2003 2002 2002
------------------------------ ----------------------------- -----------------------------
"WELL- "WELL- "WELL-
CAPITAL- EXCESS/ CAPITAL- EXCESS/ CAPITAL- EXCESS/
IZED" (DEFICIT) IZED" (DEFICIT) IZED" (DEFICIT)
CAPITAL STANDARD CAPITAL CAPITAL STANDARD CAPITAL CAPITAL STANDARD CAPITAL
------- -------- ------- ------- -------- ------- ------- -------- -------
DOLLAR BASIS:
Tier 1 leverage
capital......... $ 86,777 $ 82,959 $ 3,818 $76,660 $66,600 $10,060 $78,524 $ 71,818 $ 6,706
Tier 1 risk-based
capital......... 86,777 73,728 13,049 76,660 58,636 18,024 78,524 68,134 10,390
Total risk-based
capital......... 102,796 122,881 (20,085) 91,569 97,726 (6,157) 94,109 113,556 (19,447)
PERCENTAGE BASIS:
Leverage ratio..... 5.23% 5.00% 6.07% 5.00% 5.47% 5.00%
Tier 1 risk-based
capital ratio... 7.06 6.00 7.84 6.00 6.91 6.00
Total risk-based
capital ratio... 8.37 10.00 9.37 10.00 8.29 10.00
Total equity to
total assets.... 5.70 -- -- 5.38 -- -- 5.77 -- --
To be considered "well-capitalized," an entity must maintain a leverage
ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and
a total risk-based capital ratio of at least 10.0%. To be "adequately
capitalized," a bank must maintain a leverage ratio of at least 4.0%, a Tier 1
risk-based capital ratio of at least 4.0%, and a total risk-based capital ratio
of at least 8.0%.
At June 30, 2003, the Company and each of the banking subsidiaries
continued to exceed the minimum levels of all regulatory capital requirements,
and each banking subsidiary was considered "well capitalized" under all
regulatory standards. The Company's issuance of additional common stock to raise
additional equity capital during the third quarter 2003 will result in the
Company being considered "well-capitalized" as of the end of third quarter 2003.
LIQUIDITY
Liquidity measures our ability to meet maturing obligations and its
existing commitments, to withstand fluctuations in deposit levels, to fund our
operations and to provide for clients' credit needs. Our liquidity principally
depends on cash flows from operating activities, investment in and maturity of
assets, changes in balances of deposits and borrowings and our ability to borrow
funds in the money or capital markets.
Net cash provided by operations was $13.4 million in the six months ended
June 30, 2003 compared to net cash inflows of $12.5 million in the prior year
period. The net cash provided during the six months ended June 30, 2003 was
impacted by the growth and timing of receipts of interest and cash settlement
payments. Net cash outflows from investing activities were $188.0 million in the
first six months of 2003 compared to a net cash outflow of $142.6 million in the
prior year period. Cash inflows from financing activities in the first six
months of 2003 were $200.7 million compared to a net inflow of $147.0 million in
the first six months of 2002.
In the event of short-term liquidity needs, our banking subsidiaries may
purchase federal funds from correspondent banks. Membership in the Federal Home
Loan Bank System gives the banking subsidiaries the ability to borrow funds from
the FHLB for short- or long-term purposes under a variety of programs.
Subject to the waiver of the required notice period, our investment in
Federal Home Loan Bank (FHLB) stock is a source of liquidity for the Company. On
May 6, 2003, we purchased $45.0 million of
40
additional FHLB stock to take advantage of the favorable dividend yield in
addition to the liquid nature of the investment. At June 30, 2003, we owned
$207.5 million of FHLB stock. The Company can elect at any time to sell FHLB
stock at par back to the FHLB, excluding the required FHLB stock minimum that
needs to be maintained in order to support existing FHLB advances. FHLB has
communicated to the Company that generally the stock will be redeemed
immediately upon a request by the Company; however, FHLB can legally require six
months advance notice of the stock sale before the stock is actually liquidated
for cash at its par value. Alternatively, FHLB can redeem, at any time any FHLB
stock we own, in excess of the required minimum FHLB stock that needs to be
maintained in order to support existing advances. During the six months ended
June 30, 2003, our utilization of FHLB advances decreased slightly due to
scheduled maturities of advances. For the remainder of 2003, we expect to
continue to utilize FHLB advances as a funding source to the extent that rates
on FHLB advances are more attractive than other sources of liquidity.
During the six months ended June 30, 2003, we continued to rely on brokered
deposits to fund growth in loans and investment securities as well as liquidity
at our banks. For the remainder of 2003, we expect to continue to rely on
brokered deposits for liquidity purposes if brokered rates continue to compare
favorably to other sources of liquidity, and may increase the level of these
deposits. Our asset liability policy currently limits our use of brokered
deposits to levels no more than 40% of total deposits. Consistent with this
policy, brokered deposits represented 30% of total deposits at June 30, 2003
compared to 23% of total deposits at December 31, 2002. We do not expect our 40%
threshold limitation to limit our ability to implement our growth plan.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK MANAGEMENT
We are exposed to market risk from changes in interest rates that could
affect our results of operations and financial condition. We manage our exposure
to these market risks through our regular operating and financing activities. We
hedge our interest rate risk through the use of derivative financial
instruments. We use derivative financial instruments as risk management tools.
One of two interest rate swaps we have entered into is designated as a
fair value hedge of a fixed-rate $25.0 million advance from the Federal Home
Loan Bank of Chicago (FHLB). We entered into this interest rate swap transaction
in 2001 and we agreed to receive a fixed rate in exchange for payment of a
floating rate based on an agreed-upon notional amount of $25.0 million. The fair
value of the interest rate swap was $2.8 million as of June 30, 2003, a decrease
of $108,904 as compared to December 31, 2002.
The Company entered into a $25 million interest rate swap during the
third quarter of 2002, swapping the 10-year treasury rate for 3-month LIBOR to
serve as an economic hedge of a portion of the Company's available-for-sale
municipal bond securities portfolio. The June 30, 2003 fair market value
adjustment on this swap resulted in the trading loss of $1.3 million for the six
months ended June 30, 2003, with a corresponding derivative liability of the
same amount. This swap does not qualify for hedge accounting treatment and the
mark-to-market adjustment on the swap is recognized in earnings. At June 30,
2003, the carrying value of the trading swap was a liability of $1.9 million.
ASSET/LIABILITY MANAGEMENT POLICY
As a continuing part of our financial strategy, we attempt to manage
the impact of fluctuations in market interest rates on our net interest income.
This effort entails providing a reasonable balance between interest rate risk,
credit risk, liquidity risk and maintenance of yield. Asset/liability management
policy is established by our Board of Directors and is monitored by management.
Our asset/liability policy sets standards within which we are expected to
operate. These standards include guidelines for exposure to interest rate
fluctuations, liquidity, loan limits as a percentage of funding sources,
exposure to correspondent banks and brokers, and reliance on non-core deposits.
The policy also states the reporting requirements to the Board of Directors. The
investment policy complements the asset/liability management policy by
establishing criteria by which we may purchase securities. These criteria
include approved types of securities, brokerage sources, terms of investment,
quality standards, and diversification.
We measure the impact of interest rate changes on our income statement
through the use of gap analysis. The gap represents the net position of assets
and liabilities subject to repricing in specified time periods. During any given
time period, if the amount of rate sensitive liabilities exceeds the amount of
rate sensitive assets, a company would generally be considered negatively gapped
and would benefit from falling rates over that period of time. Conversely, a
positively gapped company would generally benefit from rising rates. The
following tables illustrate the estimated interest rate sensitivity and periodic
and cumulative gap positions calculated as of June 30, 2003 and December 31,
2002:
42
JUNE 30, 2003
-----------------------------------------------------------------
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
---- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Total Net Loans...................... $ 763,440 $ 84,211 $ 196,863 $ 10,821 $1,055,335
Investments.......................... 48,712 85,232 64,952 157,364 356,260
Total FHLB Stock..................... 207,512 -- -- -- 207,512
Total Fed Funds Sold................. 9,145 -- -- -- 9,145
---------- ---------- ---------- ---------- ----------
Total Interest-Earning Assets........ $1,028,809 $ 169,443 $ 261,815 $ 168,185 $1,628,252
========== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES
PrivateBank Deposit Accounts......... $ -- $ -- $ -- $ 79,397 $79,397
Savings Deposits..................... 8,311 -- -- -- 8,311
Money Market Deposits................ 489,126 -- -- -- 489,126
Total Time Deposits.................. 154,590 117,532 45,987 -- 318,109
Total Brokered Deposits.............. 55,090 227,521 156,041 -- 438,652
Total Borrowings..................... 103,433 37,000 30,000 20,000 190,433
---------- ---------- ---------- ---------- ----------
Total Interest-Bearing Liabilities... $ 810,550 $ 382,053 $232,028 $ 99,397 $1,524,028
========== ========== ========== ========== ==========
CUMULATIVE
Rate sensitive assets (RSA)......... $1,028,809 $1,198,252 $1,460,067 $1,628,252
Rate sensitive liabilities (RSL).... 810,550 1,192,603 1,424,631 1,524,028
GAP (GAP=RSA-RSL).................... 218,259 5,649 35,436 104,225
RSA/RSL.............................. 126.93% 100.47% 102.49% 106.84%
RSA/Total assets..................... 58.47% 68.10% 82.97% 92.53%
RSL/Total assets..................... 46.06% 67.77% 80.96% 86.61%
GAP/Total assets..................... 12.40% 0.32% 2.01% 5.92%
GAP/Total RSA........................ 21.21% 0.47% 2.43% 6.40%
43
DECEMBER 31, 2002
------------------------------------------------------------------
TIME TO MATURITY OR REPRICING
------------------------------------------------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
---- ------ ----- ------- -----
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Loans................................ $635,664 $ 77,465 $ 175,066 $ 79,197 $ 967,392
Investments.......................... 163,621 21,138 26,576 261,208 472,543
Short-term investments............... 258 -- -- -- 258
-------- ----------- ---------- ---------- ----------
Total interest-earning assets........ $799,543 $ 98,603 $ 201,642 $ 340,405 $1,440,193
======== =========== ========== ========== ==========
INTEREST-BEARING LIABILITIES
Interest-bearing demand.............. $ -- $ -- $ -- $ 64,892 $64,892
Savings and money market............. 486,819 1,262 -- 859 488,940
Time deposits........................ 191,238 205,474 91,872 73,868 562,452
Funds borrowed....................... 143,838 31,500 53,000 -- 228,338
-------- ----------- ---------- ---------- ----------
Total interest-bearing liabilities... $821,895 $ 238,236 $ 144,872 $ 139,619 $1,344,622
======== =========== ========== ========== ==========
CUMULATIVE
Rate sensitive assets (RSA).......... $799,543 $ 898,146 $1,099,788 $1,440,193
Rate sensitive liabilities (RSL)..... 821,895 1,060,131 1,205,003 1,344,622
GAP (GAP=RSA-RSL).................... (22,352) (161,985) (105,215) 95,571
RSA/RSL.............................. 97.28% 84.72% 91.27% 107.11%
RSA/Total assets..................... 51.80% 58.19% 71.26% 93.31%
RSL/Total assets..................... 53.25% 68.69% 78.07% 87.12%
GAP/Total assets..................... (1.45)% (10.50)% (6.82)% 6.19%
GAP/Total RSA........................ (2.80)% (18.04)% (9.57)% 6.64%
The following table shows the impact of an immediate 200 basis point
change in interest rates as of June 30, 2003 and December 31, 2002. The effects
are determined through the use of a simulation model based on our earning asset
and interest-bearing liability portfolios, assuming the size of these portfolios
remains constant from the balance sheet date throughout the one-year measurement
period. The simulation assumes that assets and liabilities accrue interest on
their current pricing basis. Assets and liabilities then reprice based on their
terms and remain at that interest rate through the end of the measurement
period. The model attempts to illustrate the potential change in net interest
income if the foregoing occurred.
JUNE 30, 2003 DECEMBER 31, 2002
-------------------- ---------------------
+200 -100 +200 -200
BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS
------ ------ ------ ------
Percentage change in net interest income due to
an immediate 200 basis point change in
interest rates over a one-year time horizon.... 4.9% (0.57)% 2.9% (10.5)%
This table shows that if there had been an instantaneous parallel shift
in the yield curve of -100 basis points on June 30, 2003, we would suffer a
decline in net interest income of 0.57% over a one-year period. Due to recent
decreases in market interest rates, an -100 basis point shift is presented for
June 30, 2003 as a more reasonable illustration of possible rate changes. The
measurement of -200 basis point instantaneous parallel shift in the yield-curve
at June 30, 2003 would result in a decline in net interest income of 15.3% over
a one-year period. At December 31, 2002, if there had been an instantaneous
parallel shift in the yield curve of -200 we would have suffered a decline in
net interest income of 10.5%. Conversely, a shift of +200 basis points would
increase net interest income 4.9% over a one-year horizon based on June 30, 2003
balances, as compared to an increase of net interest income of 2.9% measured on
the basis of the December 31, 2002 portfolio.
44
Changes in the effect on net interest income from the presented basis
point movements at June 30, 2003, compared to December 31, 2002 are due to the
timing and nature of the repricing of rate sensitive assets to rate sensitive
liabilities within the one year time frame. The difference in the effect on net
interest income at June 30, 2003 as compared to December 31, 2002 is due to the
differences in the timing, balances, and current rates versus simulated rates of
repricing assets and liabilities.
Management's likely reaction to changes in interest rates is
incorporated in assumptions made in these calculations. Differences in these
assumptions between the reporting periods have also had the effect of reducing
the impact of a changing interest rate environment.
The preceding sensitivity analysis is based on numerous assumptions
including the nature and timing of interest rate levels including the shape of
the yield curve, prepayments on loans and securities, changes in deposit levels,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows and others. While assumptions are developed based upon
current economic and local market conditions, we cannot make any assurances as
to the predictive nature of these assumptions including how client preferences
or competitor influences might change.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's Chief
Executive Officer and Chief Financial Officer carried out an evaluation under
their supervision, with the participation of other members of management as they
deemed appropriate, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as contemplated by Exchange Act
Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, in all material respects, in
timely alerting them to material information relating to the Company (and its
consolidated subsidiaries) required to be included in the periodic reports the
Company is required to file and submit to the SEC under the Exchange Act.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and we are including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe our future plans, strategies and expectations, can generally be
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. Our ability to predict results or
the actual effect of future plans or strategies is inherently uncertain and
actual results may differ materially from the results discussed in
forward-looking statements. Factors which might cause such a difference include,
but are not limited to, fluctuations in market rates of interest and loan and
deposit pricing; a deterioration of general economic conditions in our market
areas; legislative or regulatory changes; adverse developments in our loan or
investment portfolios; significant increases in competition; difficulties in
identifying attractive acquisition opportunities or strategic partners to
complement our private banking approach and the products and services we offer;
and the possible dilutive effect of potential acquisitions or expansion. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. We
undertake no obligation to update publicly any of these statements in light of
future events except as required in subsequent periodic reports we file with the
SEC.
45
PART II
ITEM 1. LEGAL PROCEEDINGS
Although our subsidiaries may be involved from time to time in routine
litigation incidental to their respective businesses, currently neither the
Company nor any of its subsidiaries is a party to any pending material legal
proceedings that the Company believes will have a material adverse effect on its
business, results of operations, financial condition or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company held on
April 24, 2003, the following matters were submitted to and
approved by a vote of Stockholders:
(1) The election of five Class II directors for a three-year term
ending at the Annual Meeting of Stockholders to be held in
2006:
Directors Votes For Votes Withheld
--------- --------- --------------
Donald L. Beal 7,090,084 38,859
William A. Goldstein 7,066,484 62,459
John E. Gorman 7,077,190 51,753
Richard C. Jensen 7,079,440 49,503
Michael B. Susman 6,831,633 297,310
(2) All director nominees were re-elected at the Annual Meeting.
The following directors continue to serve after the Annual
Meeting:
Continuing Director Term Expires
------------------- ------------
Ralph B. Mandell 2005
Naomi T. Borwell 2005
William A. Castellano 2005
Alvin J. Gottlieb 2005
William R. Langley 2005
Robert F. Coleman 2004
James M. Guyette 2004
Philip M. Kayman 2004
Thomas F. Meagher 2004
William J. Podl 2004
46
(3) Amendment of the Company's Amended and Restated
Certificate of Incorporation increasing the number of
authorized shares of common stock from 12,000,000 to
24,000,000:
Total votes for: 6,961,150
Total votes against: 163,958
Total votes abstaining: 3,835
(4) Amendment of the Company's Amended and Restated
By-laws to provide the Board of Directors authority
to determine the size of the Board:
Total votes for: 5,385,060
Total votes against: 764,068
Total votes abstaining: 9,135
(5) Approval of the PrivateBancorp, Inc. Incentive
Compensation Plan:
Total votes for: 5,798,498
Total votes against: 345,073
Total votes abstaining: 14,692
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc., as amended. (filed as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 2003, and
incorporated herein by reference).
3.2 Amended and Restated By-laws of PrivateBancorp, Inc. (filed as an
exhibit to the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 2003, and incorporated herein by reference).
4.1 Subordinated Note of PrivateBancorp, Inc., dated February 11, 2000,
principal amount of $5 million due February 11, 2007, issued to Johnson
International, Inc. (filed as an exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 and
incorporated herein by reference).
4.2 Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the total
assets of the Company and its subsidiaries on a consolidated basis,
have not been filed as exhibits. The Company hereby agrees to furnish a
copy of any of these agreements to the SEC upon request.
15.0 Acknowledgment of Independent Auditors.
47
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.0 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Independent Accountants' Review Report.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K dated April 7, 2003, filed with the
SEC on April 7, 2003.
(2) Current Report on Form 8-K dated April 21, 2003, filed with
the SEC on April 21, 2003.
(3) Current Report on Form 8-K dated May 23, 2003, filed with the
SEC on May 23, 2003.
48
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.
(Registrant)
By: /s/ Ralph B. Mandell
-----------------------------------
Ralph B. Mandell,
Chairman, President and
Chief Executive Officer
By: /s/ Dennis L. Klaeser
-----------------------------------
Dennis L. Klaeser,
Chief Financial Officer
(principal financial officer)
By: /s/ Lisa M. O'Neill
-----------------------------------
Lisa M. O'Neill,
Controller
(principal accounting officer)
Date: August 13, 2003
49
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc., as amended (filed as an exhibit to the Company's quarterly report
on Form 10-Q for the quarter ended March 31, 2003, and incorporated
herein by reference).
3.3 Amended and Restated By-laws of PrivateBancorp, Inc. (filed as an
exhibit to the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 2003, and incorporated herein by reference).
4.1 Subordinated Note of PrivateBancorp, Inc., dated February 11, 2000,
principal amount of $5 million due February 11, 2007, issued to Johnson
International, Inc. (filed as an exhibit to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 and
incorporated herein by reference).
4.2 Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the total
assets of the Company and its subsidiaries on a consolidated basis,
have not been filed as Exhibits. The Company hereby agrees to furnish a
copy of any of these agreements to the SEC upon request.
15.0 Acknowledgment of Independent Auditors.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.0 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.1 Independent Accountants' Review Report.
50