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 SEPTEMBER 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
(State or other jurisdiction of 36-3681151
incorporation or organization) (I.R.S. Employer 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 NOVEMBER 7, 2003
- -------------------------------------------------------------------------------
Common, no par value 9,840,034
===============================================================================
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..................................19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................41
Item 4. Controls and Procedures....................................44
Part II ....................................................................46
Item 1. Legal Proceedings..........................................46
Item 2. Changes in Securities and Use of Proceeds..................46
Item 3. Defaults upon Senior Securities............................46
Item 4. Submission of Matters to a Vote of Security Holders........46
Item 5. Other Information..........................................46
Item 6. Exhibits and Reports on Form 8-K...........................46
Signatures...................................................................48
1
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
--------------------------------------------------------------
09/30/03 06/30/03 03/31/03 12/31/02 09/30/02
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
INTEREST INCOME:
Loans, including fees..................... $15,830 $15,208 $15,167 $14,043 $13,704
Federal funds sold and interest-bearing
deposits.............................. 6 31 25 63 38
Securities................................ 6,333 5,148 5,379 5,507 4,557
------ ------ ------ ------ ------
Total interest income.................. 22,169 20,387 20,571 19,613 18,299
------ ------ ------ ------ ------
INTEREST EXPENSE:
Interest-bearing demand deposits.......... 134 148 128 129 168
Savings and money market deposit accounts. 1,375 1,644 1,709 1,923 1,923
Other time deposits....................... 4,346 4,348 3,940 4,037 3,976
Funds borrowed............................ 1,016 1,204 1,312 1,226 1,304
Trust preferred interest expense.......... 485 485 485 485 485
------ ------ ------ ------ ------
Total interest expense................. 7,356 7,829 7,574 7,800 7,856
------ ------ ------ ------ ------
Net interest income.................... 14,813 12,558 12,997 11,813 10,443
Provision for loan losses................. 1,092 730 956 914 828
------ ------ ------ ------ ------
Net interest income after provision
for loan losses........................ 13,721 11,828 12,041 10,899 9,615
------ ------ ------ ------ ------
NON-INTEREST INCOME:
Banking, wealth management services and
other income........................... 3,657 3,181 2,701 1,975 1,763
Securities (losses), gains, net........... (333) 2,310 (55) (313) 280
Interest Rate Swap gains, (losses)........ 765 (1,054) (230) (282) (662)
------ ------ ------ ------ ------
Total non-interest income.............. 4,089 4,437 2,416 1,380 1,381
------ ------ ------ ------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits............ 5,338 5,070 4,778 3,903 3,393
Occupancy expense, net.................... 1,403 1,270 1,419 1,319 1,227
Data processing........................... 376 368 393 393 433
Marketing................................. 855 509 486 557 351
Amortization of intangibles............... 42 42 42 -- --
Professional fees......................... 1,130 1,069 1,284 774 997
Insurance................................. 186 146 168 137 118
Other expense............................. 1,273 1,282 849 851 569
------ ------ ------ ------ ------
Total non-interest expense............. 10,603 9,756 9,419 7,934 7,088
------ ------ ------ ------ ------
Minority interest expense.................... 59 44 38 -- --
Income before income taxes................ 7,148 6,465 5,000 4,345 3,908
------ ------ ------ ------ ------
Income tax provision......................... 2,018 1,852 1,397 1,125 875
------ ------ ------ ------ ------
Net income................................ $ 5,130 $ 4,613 $ 3,603 $ 3,220 $ 3,033
======= ======= ======= ======= =======
PER SHARE DATA:
Basic earnings............................... $ 0.57 $ 0.60 $ 0.47 $ 0.43 $ 0.41
Diluted earnings............................. 0.54 0.56 0.44 0.41 0.39
Dividends.................................... 0.040 0.040 0.040 0.027 0.027
Book value (at end of period)................ 16.37 12.89 12.29 11.56 10.71
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.
2
QUARTER ENDED
--------------------------------------------------------------
09/30/03 06/30/03 03/31/03 12/31/02 09/30/02
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities(1).......................... $ 647,433 $ 581,743 $ 505,877 $ 487,020 $ 403,192
Total loans.................................. 1,131,706 1,066,919 1,018,196 965,641 913,197
Total assets................................. 1,857,103 1,759,676 1,628,995 1,543,414 1,404,326
Total deposits............................... 1,476,047 1,445,590 1,365,344 1,205,271 1,163,327
Funds borrowed............................... 164,491 170,433 124,933 209,954 125,422
Trust preferred securities................... 20,000 20,000 20,000 20,000 20,000
Total stockholders' equity................... 161,105 100,340 95,373 89,092 79,281
Wealth management assets under management.... 1,320,175 1,264,955 1,204,239 1,239,779 693,869
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(2)(8)................. 3.64% 3.33% 3.68% 3.56% 3.46%
Net interest spread(3).................... 3.43 3.16 3.53 3.37 3.27
Non-interest income to average assets..... 0.92 1.06 0.62 0.38 0.41
Non-interest expense to average assets.... 2.38 2.33 2.41 2.16 2.08
Net overhead ratio(4)..................... 1.46 1.27 1.80 1.78 1.68
Efficiency ratio(5)....................... 53.9 55.0 58.5 57.3 56.3
Return on average assets(6)............... 1.15 1.10 0.92 0.88 0.89
Return on average equity(7)............... 14.57 18.81 15.49 15.99 15.86
Dividend payout ratio..................... 7.67 6.75 8.62 6.14 6.51
Asset Quality Ratios:
Non-performing loans to total loans....... 0.17% 0.26% 0.35% 0.14% 0.33%
Allowance for loan losses to:
total loans............................ 1.23 1.22 1.22 1.20 1.17
non-performing loans................... 676 476 355 828 357
Net charge-offs (recoveries) to average
total loans............................ 0.09 0.07 0.03 (0.01) 0.04
Non-performing assets to total assets..... 0.10 0.16 0.22 0.09 0.21
Non-accrual loans to total loans.......... 0.05 0.08 0.15 0.08 0.05
Balance Sheet Ratios:
Loans to deposits......................... 76.7% 73.8% 74.6% 80.1% 78.5%
Average interest-earning assets to
average interest-bearing liabilities... 112.4 108.2 107.1 108.2 108.0
Capital Ratios:
Total equity to total assets.............. 8.68% 5.70% 5.85% 5.77% 5.65%
Total risk-based capital ratio............ 12.88 8.37 8.30 8.29 9.10
Tier 1 risk-based capital ratio........... 11.79 7.06 6.99 6.91 7.61
Leverage ratio............................ 8.52 5.23 5.27 5.91 5.91
- ------------------
(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.
(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
3Q03 2Q03 1Q03 4Q02 3Q02
---- ---- ---- ---- ----
Net interest income.................................. $14,813 $12,558 $12,997 $11,813 $10,443
Tax equivalent adjustment to net interest income..... 772 742 695 661 756
--- --- --- --- ---
Net interest income, tax equivalent basis............ $15,585 $13,300 $13,692 $12,474 $11,199
======= ======= ======= ======= =======
4
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2003 2002 2002
---- ---- ----
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks................................. $ 33,551 $ 34,529 $ 44,561
Federal funds sold and other short-term investments..... 1,999 258 3,848
--------- --------- ---------
Total cash and cash equivalents...................... 35,550 34,787 48,409
--------- --------- ---------
Loans held for sale..................................... 5,554 14,321 9,062
Available-for-sale securities, at fair value............ 647,433 487,020 403,192
Loans, net of unearned discount......................... 1,131,706 965,641 913,197
Allowance for loan losses............................... (13,865) (11,585) (10,642)
--------- --------- ---------
Net loans............................................... 1,117,841 954,056 902,555
--------- --------- ---------
Goodwill................................................ 19,242 19,199 10,805
Premises and equipment, net............................. 6,334 6,851 6,378
Accrued interest receivable............................. 7,280 9,427 8,597
Other assets............................................ 17,869 17,753 15,328
--------- --------- ---------
Total assets............................................ $1,857,103 $1,543,414 $1,404,326
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Non-interest-bearing................................. $ 125,505 $ 88,986 $ 80,994
Interest-bearing..................................... 71,958 64,893 57,575
Savings and money market deposit accounts............... 484,662 488,941 431,455
Brokered deposits....................................... 454,264 279,806 324,977
Other time deposits..................................... 339,658 282,645 268,326
--------- --------- ---------
Total deposits....................................... 1,476,047 1,205,271 1,163,327
Funds borrowed.......................................... 164,491 209,954 125,422
Trust preferred securities.............................. 20,000 20,000 20,000
Accrued interest payable................................ 4,376 4,986 4,997
Other liabilities....................................... 31,084 14,111 11,299
--------- --------- ---------
Total liabilities....................................... 1,695,998 1,454,322 1,325,045
--------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized............ -- -- --
Common stock, without par value, $1 stated value;
24,000,000 shares authorized; 9,840,034, 7,704,203,
and 7,404,234 shares issued and outstanding as of
September 30, 2003, December 31, 2002 and
September 30, 2002, respectively..................... 9,840 7,704 7,404
Additional paid-in-capital.............................. 103,672 45,367 40,007
Retained earnings....................................... 40,114 27,784 24,760
Accumulated other comprehensive income.................. 10,420 8,826 8,721
Deferred compensation................................... (2,941) (589) (661)
Loans to officers....................................... - - (950)
---------- ---------- ----------
Total stockholders' equity.............................. 161,105 89,092 79,281
---------- ---------- ----------
Total liabilities and stockholders' equity.............. $1,857,103 $1,543,414 $1,404,326
========== ========== ==========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Loans, including fees........................................... $15,830 $13,704 $46,205 $38,517
Taxable securities.............................................. 4,564 3,079 11,808 9,282
Securities exempt from federal income taxes..................... 1,769 1,478 5,052 4,367
Federal funds sold and interest-bearing deposits................ 6 38 62 63
------- ------- ------- -------
Total interest income........................................ 22,169 18,299 63,127 52,229
------- ------- ------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand...................................... 134 168 410 507
Savings and money market deposit accounts.................... 1,375 1,923 4,728 5,405
Brokered deposits and other time deposits.................... 4,346 3,976 12,634 12,109
Funds borrowed.................................................. 1,016 1,304 3,532 3,967
Trust preferred securities...................................... 485 485 1,455 1,454
------- ------- ------- -------
Total interest expense....................................... 7,356 7,856 22,759 23,442
------- ------- ------- -------
Net interest income.......................................... 14,813 10,443 40,368 28,787
------- ------- ------- -------
Provision for loan losses....................................... 1,092 828 2,778 2,948
------- ------- ------- -------
Net interest income after provision for loan losses.......... 13,721 9,615 37,590 25,839
------- ------- ------- -------
NON-INTEREST INCOME
Banking, wealth management services and other income........... 3,657 1,763 9,539 5,107
Securities (losses), gains, net................................ (333) 280 1,922 324
Interest Rate Swap gains,(losses) ............................. 765 (662) (519) (662)
------- ------- ------- -------
Total non-interest income.................................... 4,089 1,381 10,942 4,769
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits.................................. 5,338 3,393 15,186 10,076
Occupancy expense, net.......................................... 1,403 1,227 4,092 3,572
Professional fees............................................... 1,130 997 3,483 2,915
Amortization of intangibles..................................... 42 -- 126 --
Other non-interest expense...................................... 2,690 1,471 6,891 4,110
------- ------- ------- -------
Total non-interest expense................................... 10,603 7,088 29,778 20,673
------- ------- ------- -------
Minority interest expense....................................... 59 -- 141 --
Income before income taxes................................... 7,148 3,908 18,613 9,935
------- ------- ------- -------
Income tax provision............................................ 2,018 875 5,267 2,148
------- ------- ------- -------
Net income................................................... $ 5,130 $ 3,033 $13,346 $ 7,787
======= ======= ======= =======
Basic earnings per share........................................ $ 0.57 $ 0.41 $ 1.65 $ 1.06
Diluted earnings per share...................................... $ 0.54 $ 0.39 $ 1.55 1.01
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
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER LOANS TOTAL
COMMON PAID-IN- RETAINED COMPREHENSIVE DEFERRED TO STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME COMPENSATION OFFICERS EQUITY
----- ------- -------- ------ ------------ -------- ------
BALANCE, JANUARY 1, 2002.. $7,206 $39,114 $17,468 $ 323 $ (857) $(950) $ 62,304
Net income................ -- -- 7,787 -- -- -- 7,787
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............ -- -- -- 8,398 -- -- 8,398
----- ------
Total comprehensive income 16,185
------
Cash dividends declared
($0.07 per share)...... -- -- (495) -- -- -- (495)
Issuance of common stock.. 198 893 -- -- -- -- 1,091
Awards granted............ -- -- -- -- (38) -- (38)
Amortization of deferred
compensation........... -- -- -- -- 234 -- 234
------ ------- ------- ------- ------- ----- --------
BALANCE, SEPTEMBER 30,
2002................... $7,404 $40,007 $24,760 $ 8,721 $ (661) $(950) $ 79,281
====== ======= ======= ======= ======= ===== ========
BALANCE, JANUARY 1, 2003.. $7,704 $45,367 $27,784 $ 8,826 $ (589) $ -- $ 89,092
Net income................ -- -- 13,346 -- -- -- 13,346
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............ -- -- -- 1,594 -- -- 1,594
-------
Total comprehensive income 14,940
Cash dividends declared -------
($0.12 per share)...... -- -- (1,016) -- -- -- (1,016)
Issuance of common stock.. 2,136 58,305 -- -- -- -- 60,441
Awards granted and
forfeited.............. -- -- -- -- (2,538) -- (2,538)
Amortization of deferred
compensation........... -- -- -- -- 186 -- 186
------ ------- ------- ------- ------- ----- --------
BALANCE, SEPTEMBER 30,
2003................... $9,840 $103,672 $40,114 $10,420 $(2,941) $ -- $161,105
====== ======== ======= ======= ======= ===== ========
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
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 13,346 $ 7,787
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 1,225 999
Amortization of deferred compensation, net of forfeitures................... 186 234
Provision for loan losses................................................... 2,778 2,948
Net gain on sale of securities.............................................. (1,922) (324)
Trading losses on interest rate swap........................................ 519 662
Net proceeds on loans held for sale......................................... 8,767 2,273
(Decrease) increase in deferred loan fees................................... (552) 553
Decrease (increase) in accrued interest receivable.......................... 2,147 (1,335)
(Decrease) increase in accrued interest payable............................. (609) 2,885
(Increase) decrease in other assets......................................... (248) 689
Increase (decrease) in other liabilities.................................... 16,151 (2,451)
-------- --------
Total adjustments........................................................... 28,442 7,133
-------- --------
Net cash provided by operating activities................................... 41,788 14,920
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities.................... 80,380 102,890
Purchase of securities available-for-sale...................................... (236,976) (160,763)
Net loan principal advanced.................................................... (165,921) (133,547)
Premises and equipment expenditures............................................ (720) (3,569)
-------- --------
Net cash used in investing activities....................................... (323,237) (194,989)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits................................................. 270,788 312,839
Proceeds from exercise of stock options........................................ 704 1,053
Proceeds from common stock offering............................................ 57,199 --
Dividends paid................................................................. (1,016) (495)
Net decrease in funds borrowed................................................. (45,463) (107,720)
-------- --------
Net cash provided by financing activities................................... 282,212 205,677
-------- --------
Net increase in cash and cash equivalents...................................... 763 25,608
Cash and cash equivalents at beginning of year................................. 34,787 22,801
-------- --------
Cash and cash equivalents at end of period..................................... $ 35,550 $ 48,409
========= ==========
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 nine months ended
September 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
September 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 SFAS No. 148, Accounting for Stock-Based Compensation (SFAS
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.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
(DOLLARS IN THOUSANDS)
Net income
As reported...................... $13,346 $7,787
Pro forma........................ 12,368 7,445
Basic earnings per share
As reported...................... $ 1.65 $ 1.06
Pro forma........................ 1.61 1.04
Diluted earnings per share
As reported...................... $ 1.55 $ 1.01
Pro forma........................ 1.51 1.00
9
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
(DOLLARS IN THOUSANDS)
Net income
As reported...................... $5,130 $3,033
Pro forma........................ 4,803 2,919
Basic earnings per share
As reported...................... $ 0.57 $ 0.41
Pro forma........................ 0.57 0.41
Diluted earnings per share
As reported...................... $ 0.54 $ 0.39
Pro forma........................ 0.54 0.39
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 2003: dividend yield of 0.40%;
risk-free interest rate of 4.55%; 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 46%, based on
the Company's historical stock price experience. On August 28, 2003, the Company
granted 163,200 stock options with an exercise price of $34.46 to certain
members of management that vest over 4 years. Additionally, on August 28, 2003,
the Company granted 23,000 stock options with an exercise price of $34.46 to the
Board of Directors of each of the Company, The PrivateBank (Chicago) and The
PrivateBank (St. Louis) that vest on December 31, 2003.
NOTE 3--EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings
per share (in thousands except per share data) for the three and nine months
ended September 30, 2003:
THREE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
Net income................................................ $5,130 $3,033
Weighted average common shares outstanding................ 9,009 7,393
Weighted average common shares equivalent(1).............. 566 417
------ ------
Weighted average common shares and common share
equivalents............................................ 9,575 7,810
====== ======
Net income per average common share - basic............... $ 0.57 $ 0.41
Net income per average common share - diluted............. $ 0.54 $ 0.39
- ------------------
(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.
10
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
Net income................................................ $13,346 $7,787
Weighted average common shares outstanding................ 8,092 7,353
Weighted average common shares equivalent(1).............. 522 386
------- ------
Weighted average common shares and common share
equivalents............................................ 8,614 7,739
======= =======
Net income per average common share - basic............... $ 1.65 $ 1.06
Net income per average common share - diluted............. $ 1.55 $ 1.01
- ------------------
(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 (SFAS 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 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
September 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 SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", which provides guidance
on how to transition from the intrinsic value method of accounting for
stock-based employee compensation under APB No. 25 to SFAS No. 123's fair value
method of accounting, if a company so elects. The statement also amends the
disclosure provisions of SFAS 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 SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS 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 SFAS No. 123 or the intrinsic value method of APB
No. 25. Although the recognition provisions of SFAS 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.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable
11
interest entity (VIE) and determine when the assets, liabilities, noncontrolling
interest, and results of operations of a VIE need to be included in a company's
consolidated financial statements. The Company does not expect the adoption of
FIN 46 to have a material impact on its results of operations, financial
position, or liquidity.
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 securities portfolio is comprised of the two banks'
portfolios and accordingly each portfolio is included in total assets and
reported in the results of The PrivateBank (Chicago) and The PrivateBank (St.
Louis). Compensation expense related to the management of the investment
portfolios is allocated solely to The PrivateBank (Chicago). Insurance expense
for the Company is allocated to The PrivateBank (Chicago), the Holding Company
and the Wealth Management segments. 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 nine 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.
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-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. The PrivateBank
(Chicago) balance sheet reflects goodwill of $19.2 million and intangibles of
$2.4 million at September 30, 2003, which remained relatively unchanged compared
to December 31, 2002 balances.
12
THE PRIVATEBANK (CHICAGO)
SEPTEMBER 30,
-------------
2003 2002
---- ----
(IN THOUSANDS)
Total loans........................ $ 992,003 $ 815,230
Total assets....................... 1,674,797 1,265,061
Total deposits..................... 1,371,706 1,055,224
Total borrowings................... 129,620 91,672
Total capital...................... 140,365 105,540
Net interest income................ 34,684 26,667
Non-interest income................ 6,349 3,684
Non-interest expense............... 18,465 15,146
Net income......................... 14,551 9,697
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 of 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 and other cash management products. 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.
13
THE PRIVATEBANK
(ST. LOUIS)
-----------
SEPTEMBER 30,
-------------
2003 2002
---- ----
(IN THOUSANDS)
Total loans........................ $139,942 $ 99,538
Total assets....................... 179,665 132,986
Total deposits..................... 128,005 108,103
Total borrowings................... 34,872 11,500
Total capital...................... 15,515 12,068
Net interest income................ 3,882 2,397
Non-interest income................ 2,935 1,253
Non-interest expense............... 4,153 2,813
Net income......................... 1,419 527
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. The minority
interest expense included in this segment relates to the 20% interest in
Lodestar that is owned by Lodestar management.
WEALTH MANAGEMENT
-----------------
SEPTEMBER 30,
-------------
2003 2002
---- ----
(IN THOUSANDS)
Wealth Management assets under
management.......................... $1,320,175 $693,869
Net interest income.................... 876 1,004
Non-interest income.................... 4,775 2,187
Non-interest expense................... 4,914 2,833
Minority interest expense.............. 141 --
Net income............................. 393 240
The following table indicates the breakdown of our wealth management
assets under management at September 30, 2003 by account classification and
related gross revenue for the nine months ended September 30, 2003 and September
30, 2002:
14
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2003
------------------------
MARKET VALUE REVENUE
------------ -------
ACCOUNT TYPE (IN THOUSANDS)
------------
Lodestar............................ $ 543,405 $2,292
Agency--managed...................... 168,056 849
Custody............................. 327,178 491
Personal trust--managed.............. 270,627 1,081
Employee benefits--managed........... 57,601 62
---------- ------
Less trust assets managed by
Lodestar(1)...................... (46,692)
==========
Total............................ $1,320,175 $4,775
========== ======
(1) These assets are included in personal trust - managed balances. The revenue
related to these assets are presented in personal trust managed and Lodestar
based on the services provided.
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2002
------------------------
MARKET VALUE REVENUE
------------ -------
ACCOUNT TYPE (IN THOUSANDS)
------------
Personal trust--managed.............. $231,715 $1,016
Agency--managed...................... 139,763 667
Custody............................. 270,498 441
Employee benefits--managed........... 51,893 63
-------- ------
Total............................ $693,869 $2,187
======== ======
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.
15
HOLDING COMPANY ACTIVITIES
--------------------------
SEPTEMBER 30,
-------------
2003 2002
---- ----
(IN THOUSANDS)
Total assets....................... $182,657 $ 121,619
Total borrowings................... -- 22,250
Long-term debt - trust preferred
securities...................... 20,000 20,000
Interest expense................... 2,131 1,857
Non-interest income................ 152 65
Non-interest expense............... 2,482 2,178
Total capital...................... 161,105 79,281
Net loss........................... (3,017) (2,677)
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 NINE THE THE
MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH HOLDING INTERSEGMENT
SEPTEMBER 30, 2003 (CHICAGO) (ST. LOUIS) MANAGEMENT COMPANY ELIMINATIONS(2) CONSOLIDATED
------------------ --------- --------- ---------- ------- --------------- ------------
Total loans.......... $ 992.0 $139.9 $ - $ - $ (0.2) $1,131.7
Total assets......... 1,674.8 179.7 - 182.7 (179.9) 1,857.1
Total deposits....... 1,371.7 128.0 - - (23.7) 1,476.0
Total borrowings(1).. 129.6 34.9 - 20.0 - 184.5
Total capital........ 140.4 15.5 - 161.1 (155.9) 161.1
Net interest income.. 34.7 3.9 0.9 (2.1) 3.0 40.4
Non-interest income.. 6.3 2.9 4.8 0.2 (3.3) 10.9
Non-interest expense. 18.5 4.2 4.9 2.5 (0.3) 29.8
Minority interest
expense........... - - 0.1 - - 0.1
Net income........... 14.6 1.4 0.4 (3.0) (0.1) 13.3
Wealth Management
assets under
management........ - - 1,320.2 - - 1,320.2
AT OR FOR THE NINE THE THE
MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH HOLDING INTERSEGMENT
SEPTEMBER 30, 2003 (CHICAGO) (ST. LOUIS) MANAGEMENT COMPANY ELIMINATIONS(2) CONSOLIDATED
------------------ --------- --------- ---------- ------- --------------- ------------
Total loans.......... $ 815.2 $ 99.5 $ - $ - $ (1.5) $ 913.2
Total assets......... 1,265.1 133.0 - 121.6 (115.4) 1,404.3
Total deposits....... 1,055.2 108.1 - - - 1,163.3
Total borrowings(1).. 91.7 11.5 - 42.3 (0.1) 145.4
Total capital........ 105.5 12.1 - 79.3 (117.6) 79.3
Net interest income.. 26.7 2.4 1.0 (1.9) 0.6 28.8
Non-interest income.. 3.7 1.3 2.2 0.1 (2.5) 4.8
Non-interest expense. 15.1 2.8 2.8 2.2 (2.2) 20.7
Minority interest
expense........... - - - - - -
Net income........... 9.7 0.5 0.2 (2.7) 0.1 7.8
Wealth Management
assets under
management........ - - 693.9 - - 693.9
- ------------------
(1) Includes long-term debt-trust preferred securities for the Holding
Company Activities segment.
(2) The intersegment elimination for total 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.
16
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 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 non-interest 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 September 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 nine months ended September 30, 2003 and 2002 (in
thousands):
SEPTEMBER 30, 2003
------------------
BEFORE TAX NET OF TAX
AMOUNT TAX EFFECT AMOUNT
------ ---------- ------
Unrealized gains on securities available-for-sale:
Unrealized holding gains, net..................... $4,338 $1,475 $2,863
Less: reclassification adjustment for net gains,
included in net income......................... 1,922 653 1,269
------ ------ ------
Unrealized gains, net............................. $2,416 $ 822 $1,594
====== ====== ======
SEPTEMBER 30, 2002
------------------
BEFORE TAX NET OF TAX
AMOUNT TAX EFFECT AMOUNT
------ ---------- ------
Unrealized gains on securities available-for-sale:
Unrealized holding gains, net..................... $11,035 $2,383 $8,652
Less: reclassification adjustment for net gains,
included in net income......................... 324 70 254
------- ------ ------
Unrealized gains, net............................. $10,711 $2,313 $8,398
======= ====== ======
17
NOTE 9--LONG TERM DEBT -- TRUST PREFERRED SECURITIES
Effective February 8, 2001, PrivateBancorp Capital Trust I, a newly
created Delaware statutory trust and wholly-owned financial 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 $20.0 million. As of September 30, 2003, the entire amount of the
preferred securities is eligible for treatment as Tier I capital as allowed by
the Federal Reserve. At September 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--CAPITAL TRANSACTIONS
During the third quarter of 2003, the Company completed its
underwritten public offering of 1,955,000 shares. The public offering price was
$31.25 and the Company received aggregate net proceeds of approximately $57.2
million after deducting underwriting commissions and offering expenses,
including shares issued pursuant to the underwriters' over-allotment option. The
Company used a portion of the net proceeds from the offering to repay $30.0
million outstanding under its revolving credit facility.
18
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 $543.4 million of assets under management at September
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 28 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.
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
19
assumptions and estimates to apply these principles where actual measurements
are not possible or practical. 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
we have identified relating to specific borrowing relationships as well as
probable losses not specifically identified that are inherent in our loan
portfolio. We reassess our allowance for loan losses monthly to determine the
appropriate level of the reserve. We base the amount of the allowance for loan
losses 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
1.23% as of September 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. These intangible assets are being amortized over an estimated
useful life of 15 years. Effective January 1, 2002, the Company adopted SFAS 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 SFAS 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
SFAS 142. The Company performs an annual impairment test of goodwill each year.
Impairment losses on recorded goodwill will be recorded as operating expenses.
Goodwill at September 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 $2.4 million. The acquisition
20
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 NINE MONTHS
ENDED SEPTEMBER 30, 2003 AND 2002
NET INCOME
Net income for the third quarter ended September 30, 2003, was $5.1
million, up 69% compared to third quarter 2002 net income of $3.0 million.
Earnings per diluted share increased 38% to $0.54 per diluted share in the third
quarter 2003 compared to $0.39 per diluted share in the third quarter 2002. Net
income for the nine months ended September 30, 2003, increased to $13.3 million,
or $1.55 per diluted share, compared to $7.8 million, or $1.01 per diluted
share, for the same period last year, reflecting diluted earnings per share
improvement of 53%.
The improvement in earnings per diluted share for the three months
ended September 30, 2003 as compared to the prior year period reflects a
significant increase in net interest margin augmented by strong loan demand and
increases in banking, wealth management services and other income. Non-interest
income for the quarter includes net securities losses of $333,000 compared to
net gains of $280,000 during the third quarter of 2002 and gains of $2.3 million
during the second quarter of 2003.
For the nine months ended September 30, 2003, increases in net interest
income and non-interest income have outpaced the increases in non-interest
expense for the period as compared to the prior year periods. During the second
quarter 2003, we recognized a gain of $2.4 million on the sale of a single
corporate bond from our available-for-sale investment security portfolio. 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. 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. 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. The volume of non-interest-bearing
funds, largely comprised of demand deposits and capital, also affects the net
interest margin.
Net interest income was $14.8 million during the three months ended
September 30, 2003 compared to $10.4 million for the third quarter 2002, an
increase of 42%, and an increase of 18% compared to the second quarter 2003.
Average earning assets during the third quarter 2003 were $1.7 billion, compared
to $1.3 billion in the prior year quarter, an increase of 31%, and an increase
of 6% from June 30, 2003 levels. Net interest margin (on a tax equivalent basis)
was 3.64% in the third quarter 2003, up from 3.46% in the prior year third
quarter and up from 3.33% in the second quarter of 2003. The margin expansion
during the third quarter of 2003 reflects a 6 basis point increase in yields on
average earning assets and a 20 basis point decrease in the costs of average
interest-bearing liabilities from the yields and costs incurred in the second
quarter of 2003. During the third quarter of 2003, we used a portion of the net
proceeds from our public offering to repay obligations outstanding on our
revolving line of credit facility. During the quarter we also repaid in full a
subordinated note with outstanding principal of $5.0 million. The changes made
to funds borrowed during the third quarter 2003 had a positive impact on
improving net interest margin during the quarter relative to the second quarter
of 2003, and will continue to positively impact net interest margin in the
fourth quarter of 2003. The impact of the third quarter FHLB stock dividend
payment after an additional $45.0 million stock
21
investment in May 2003 also contributed to the expansion of net interest margin
on a quarter-linked basis.
Net interest income was $37.6 million during the nine months ended
September 30, 2003 compared to $25.8 million for the same period in 2002, an
increase of 45%. Net interest margin (on a tax equivalent basis) was 3.55% for
the nine months ended September 30, 2003, up from 3.40% in the prior year
period. The improvement in net interest margin during the nine months ended
September 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 nine
months ended September 30, 2003 as compared to the same period in 2002.
Additionally, net interest margin for the nine months ended September 30, 2003
has benefited from the deployment of $57.2 million of capital that was raised
on July 30, 2003. In addition to the repayment of the amounts outstanding under
our revolving line of credit, the capital that was raised in connection with the
common stock offering has been utilized to continue to grow our loan and
investment portfolios.
A changing interest rate environment has an effect on our net interest
margin. A large portion of our loan portfolio is based on the prime interest
rate and may reprice faster than our deposits and floating rate borrowings. For
the remainder of 2003, we do not expect any margin improvement, compared to
third quarter, given our intention to extend the duration of our liabilities
(see footnotes on page 22). Longer-term liabilities are generally more expensive
than shorter-term liabilities given the upward slope of the yield curve.
Alternatively, if market interest rates decrease, we expect our net interest
margin 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 SEPTEMBER 30,
--------------------------------
2003 2002
---- ----
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ---- ---------- -------- ----
Fed funds sold and other
short-term investments......... $ 1,480 $ 6 1.66% $ 2,585 $ 38 5.68%
Investment securities (taxable)... 435,096 4,564 4.13% 265,454 3,079 4.62%
Investment
securities(non-taxable)(2)..... 146,776 2,541 6.92% 119,763 2,234 7.46%
Loans, net of unearned
discount(3).................... 1,101,824 15,830 5.65% 887,720 13,704 6.07%
---------- ------- ---------- -------
Total earning assets.............. $1,685,176 $22,941 5.37% $1,275,522 $19,055 5.90%
========== ======= ========== =======
Interest-bearing deposits......... $1,309,963 $ 5,855 1.77% $1,041,397 $ 6,067 2.31%
Funds borrowed.................... 169,088 1,016 2.35% 119,714 1,304 4.27%
Trust preferred securities........ 20,000 485 9.70% 20,000 485 9.70%
---------- ------- ---------- -------
Total interest-bearing liabilities $1,499,051 7,356 2.14% $1,181,111 7,856 2.63%
========== ------- ========== -------
Tax equivalent net interest income $15,585 $11,199
======= =======
Net interest spread(4)............ 3.43% 3.27%
Net interest margin(5)(6)......... 3.64% 3.46%
22
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
---- ----
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ---- ---------- -------- ----
Fed funds sold and other
short-term investments......... $ 7,697 $ 62 1.07% $ 2,758 $ 63 3.01%
Investment securities (taxable)... 391,336 11,808 3.99% 259,202 9,282 4.78%
Investment
securities(non-taxable)(2)..... 138,638 7,260 6.98% 118,496 6,600 7.43%
Loans, net of unearned
discount(3).................... 1,050,098 46,205 5.83% 829,107 38,517 6.16%
---------- ------- ---------- -------
Total earning assets.............. $1,587,769 $65,335 5.46% $1,209,563 $54,462 5.98%
========== ======= ========== =======
Interest-bearing deposits......... $1,259,446 $17,772 1.89% $ 968,820 $18,021 2.49%
Funds borrowed.................... 172,862 3,532 2.69% 133,364 3,967 3.92%
Trust preferred securities........ 20,000 1,455 9.70% 20,000 1,454 9.70%
---------- ------- ---------- -------
Total interest-bearing liabilities $1,452,308 $22,759 2.17% $1,122,184 $23,442 2.79%
========== ------- ========== -------
Tax equivalent net interest income $42,576 $31,020
======= =======
Net interest spread(4)............ 3.37% 3.19%
Net interest margin(5)(6)......... 3.55% 3.40%
- ------------------
(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 $772,000 and $756,000 in the third quarters of 2003
and 2002, respectively, and $2.2 million and $2.2 million for the nine
months ended September 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
9/30/03 9/30/02
------- -------
Net interest income............................. $14,813 $10,443
Tax equivalent adjustment to net interest income 772 756
------- -------
Net interest income, tax equivalent basis....... $15,585 $11,199
======= =======
RECONCILIATION OF YEAR TO DATE NET INTEREST INCOME TO YEAR TO DATE NET INTEREST
INCOME ON A TAX EQUIVALENT BASIS
9/30/03 9/30/02
------- -------
Net interest income............................. $40,368 $28,787
Tax equivalent adjustment to net interest income 2,208 2,233
------- -------
Net interest income, tax equivalent basis....... $42,576 $31,020
======= =======
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.
23
THREE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO THREE MONTHS ENDED SEPTEMBER 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............. $ (26) $ (16) $ 10 $ (32)
Investment securities (taxable)............................. (325) 1,975 (165) 1,485
Investment securities (non-taxable)(1)...................... (163) 508 (38) 307
Loans, net of unearned discount............................. (931) 3,276 (219) 2,126
------- ------ ------ ------
Total tax equivalent interest income(1).................. $(1,445) $5,743 $ (412) $3,886
------- ------ ------ ------
Interest-bearing deposits................................... $(1,410) $1,564 $ (366) $ (212)
Funds borrowed.............................................. (579) 531 (240) (288)
Trust preferred securities.................................. -- -- -- --
------- ------ ------ ------
Total interest expense................................... $(1,989) $2,095 $ (606) $ (500)
------- ------ ------ ------
Net tax equivalent interest income(1)....................... $ 544 $3,648 $ 194 $4,386
======= ====== ====== ======
NINE MONTHS ENDED SEPTEMBER 30, 2003
COMPARED TO NINE MONTHS ENDED SEPTEMBER 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............. $ (40) $ 111 $ (72) $ (1)
Investment securities (taxable)............................. (1,523) 4,724 675) 2,526
Investment securities (non-taxable)(1)...................... (396) 1,119 (63) 660
Loans, net of unearned discount............................. (2,016) 10,182 (478) 7,688
------- ------ ------ ------
Total tax equivalent interest income(1).................. $(3,975) $16,136 $(1,288) $10,873
------- ------ ------ ------
Interest-bearing deposits................................... $(4,373) $ 5,413 $(1,289) $ (249)
Funds borrowed.............................................. (1,223) 1,158 (369) (434)
Trust preferred securities.................................. -- -- -- --
------- ------ ------ ------
Total interest expense................................... $(5,596) $ 6,571 $(1,658) $ (683)
------- ------ ------ ------
Net tax equivalent interest income(1)....................... $ 1,621 $ 9,565 $ 370 $11,556
======= ======= ======= =======
- ------------------
(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 $772,000 and $756,000 in the third quarters of 2003 and
2002, respectively, and $2.2 million and $2.2 million for the nine
months ended September 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 $1.1 million for the three months
ended September 30, 2003 compared to $828,000 for the comparable period in 2002.
Net charge-offs totaled $246,000 for the quarter ended September 30, 2003 versus
net charge-offs of $95,000 for the third quarter of 2002 and net charge-offs of
$182,000 for the quarter ended June 30, 2003. The increase in charge-offs was
attributable primarily to a single commercial credit.
24
For the nine months ended September 30, 2003, the provision for loan
losses was $2.8 million compared to $2.9 million for the year earlier period.
For the nine months ended September 30, 2003, net charge-offs totaled $498,000
versus net charge-offs of $612,000 in the year earlier period.
The increase in the provision for loan losses during the nine months
ended September 30, 2003 as compared to the prior year period reflects
management's ongoing assessment of the losses that are probable and reasonably
estimable in the loan portfolio. The increase in the allowance for loan losses
as a percentage of total loans as of September 30, 2003 compared to September
30, 2002 reflects the credit outlook as of September 30, 2003 based on a review
of economic developments and the weakening of credit quality of certain
borrowers as reflected by risk rating downgrades. A discussion of the allowance
for loan losses and the factors management considers in assessing the adequacy
of the allowance begins on page 30.
NON-INTEREST INCOME
Non-interest income was $4.1 million in the third quarter of 2003,
reflecting an increase of approximately $2.7 million or 196% from the third
quarter of 2002. The increase includes a gain of approximately $765,000 recorded
to reflect the fair market value adjustment on an interest rate swap compared to
a loss of $662,000 recorded in the third quarter of 2002. Growth in wealth
management income and residential mortgage fee income contributed to the
expansion in non-interest income compared to the prior year period. Wealth
Management income totaled $1.7 million for the third quarter 2003, an increase
of $1.0 million from the third quarter 2002 and an increase of $130,000 from the
second quarter of 2003. The year-over year increase in wealth management income
was primarily due to the inclusion of $810,000 of asset management revenue from
Lodestar. Lodestar recognized $756,000 in revenue in the second quarter 2003.
The Company acquired Lodestar in the fourth quarter 2002. Our wealth management
trust business contributed $900,000 of revenue from trust accounts under
administration compared to $686,000 during the prior year third quarter and
$824,000 during the second quarter 2003.
Non-interest income was $10.9 million for the nine months ended
September 30, 2003, reflecting an increase of $6.2 million or 129% as compared
to non-interest income of $4.8 million for the same period in 2002. The increase
in non-interest income for the nine months ended September 30, 2003 was
attributable primarily to net securities gains of $1.9 million, a trading loss
on an interest rate swap of $519,000, the inclusion of $2.3 million of Lodestar
revenue as well as a $1.6 million increase in fee income resulting from the sale
of residential mortgages in the secondary market.
25
The following table presents the breakdown of banking, wealth
management services and other income for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Residential real estate secondary
market fees......................... $1,204 $ 522 $3,023 $1,428
Wealth management fee revenue.......... 900 686 2,483 2,187
Lodestar asset management revenue...... 810 -- 2,292 --
Banking and other services............. 616 393 1,339 1,040
Bank owned life insurance.............. 127 162 402 452
------ ------ ------ ------
Total banking, wealth management
services and other income........ $3,657 $1,763 $9,539 $5,107
====== ====== ====== ======
Sales of residential real estate loans generated $1.2 million of income
during the third quarter 2003 compared to $522,000 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 nine months ended September
30, 2003, sales of newly originated residential real estate loans generated $3.0
million of income as compared to $1.4 million in the year earlier period, an
increase of 112%. It is anticipated that the demand for residential real estate
loans will subside in the fourth quarter of 2003.
Consolidated wealth management assets under management were $1.320
billion at September 30, 2003 compared to $694.0 million at September 30, 2002,
and up $55.0 million from $1.265 billion at June 30, 2003. Of these amounts,
trust services assets under management were $823.5 million and Lodestar assets
under management were $543.4 million at September 30, 2003. Excluded from the
consolidation are $46.7 million of trust services assets that are managed by
Lodestar. At June 30, 2003, trust services managed $769.1 million of assets,
Lodestar managed $538.4 million of assets, and $42.6 million of assets managed
by Lodestar were excluded from the consolidation. Trust growth in assets under
management during the quarter reflects the impact of net new business generated
and the continued rebound in the equity markets.
Growth in wealth management income contributed to the expansion in
non-interest income during the quarter. Wealth management income totaled $1.7
million for the third quarter of 2003, an increase of $1.0 million from the
third quarter of 2002 and an increase of $130,000 from the second quarter of
2003. Of the $1.7 million, approximately $558,000 was revenue generated from
wealth management services provided to those clients where a third-party
investment manager is utilized. A portion of revenue is used to pay these
third-party investment managers and the remaining amount of fees collected are
utilized to cover costs associated with administering other aspects of the
wealth management services that we provide to clients. Wealth management fee
revenue for the nine months ended September 30, 2003 was $4.8 million, including
$2.3 million of Lodestar asset management revenue, compared to $2.2 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. For the three months ended
September 30, 2003, we paid $211,000 to third-party investment managers. These
fees are included in the professional fees category of non-interest expense.
For the nine months ended September 30, 2003, we paid approximately
$532,000 to third-party investment managers. The increase in trust fees over the
prior year period reflects a favorable shift in
26
the mix of accounts towards higher fee structures, the addition of new business
and equity market improvements experienced during 2003.
Of total trust fee revenue, Lodestar asset management revenue
contributed approximately $810,000 for the third quarter ended September 30,
2003. For the nine months ended September 30, 2003, Lodestar asset management
revenue totaled approximately $2.3 million.
During the third quarter of 2003, we recognized income of $127,000
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 September
30, 2003 was $11.1 million and is included in other assets on the balance sheet.
Securities gains and losses for the third quarter 2003 also include a
permanent impairment write-down of $43,000 on the Company's interest-only CMO
investments. Continued low levels of market interest rates during the third
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 $12,000 as of
September 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 for the nine months ended September 30, 2003 because of
the overall decline in market rates of interest during the period; for the
quarterly period, the change in the fair market value of the swap resulted in a
gain due to a slight rise in market rates in July 2003. For the three months
ended September 30, 2003, the trading gain totaled $765,000 compared to a loss
of $662,000 during the third quarter of 2002 and for the nine months ended
September 30, 2003, the trading loss totaled $519,000.
NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Salaries and employee benefits.......... $5,338 $3,393 $15,186 $10,076
Occupancy............................... 1,403 1,227 4,092 3,572
Professional fees....................... 1,130 997 3,483 2,915
Marketing............................... 855 351 1,850 1,090
Data processing......................... 376 433 1,137 1,115
Postage, telephone and delivery......... 217 185 641 546
Office supplies and printing............ 119 106 415 251
Insurance............................... 186 118 499 317
Amortization of intangibles............. 42 - 126 -
Other expense........................... 937 278 2,349 791
------- ------ ------- -------
Total non-interest expense.............. $10,603 $7,088 $29,778 $20,673
======= ====== ======= =======
Non-interest expense increased to $10.6 million in the third quarter of
2003 from $7.1 million in the third quarter of 2002, an increase of 50%. For the
nine months ended September 30, 2003, non-interest expense increased 44% to
$29.8 million from $20.7 million in the prior period.
27
The Company recognized an early termination fee of $408,000 in other
operating expenses in connection with the early extinguishment of a $30.0
million fixed rate FHLB advance during the third quarter of 2003. The remaining
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. Our efficiency ratio was 53.9% for the third quarter
2003 as compared to 56.3% for the third quarter 2002 and 55.0% in the second
quarter 2003. The improvement in the efficiency ratio is primarily due to
increases in net interest income as compared to the second quarter 2003. On a
tax-equivalent basis, this ratio indicates that in the third quarter of 2003, we
spent 53.9 cents to generate each dollar of revenue, compared to 56.4 cents in
the third quarter of 2002. Our efficiency ratio declined to 55.6% for the nine
months ended September 30, 2003 as compared to 57.8% 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 as the level of noninterest expense
increases with the growth of the Company. 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 $5.3 million, or 57% during the
third quarter 2003 as compared to the year ago quarter, reflecting the increased
level of full-time equivalent employees to 206 people at September 30, 2003 from
176 people at September 30, 2002. Salaries and benefits increased to $15.2
million, or 51% during the nine months ended September 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 $1.4 million during the third quarter
2003, reflecting an increase of 14% over the prior year quarter. Occupancy
expense increased to $4.1 million during the nine months ended September 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 third
quarter of 2003, reflecting an increase of 13% over the prior year quarter.
Professional fees increased to $3.5 million, or 19%, during the nine months
ended September 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.
Marketing expenses increased to $855,000 for the quarter ended
September 30, 2003 from $351,000 in the prior year quarter, an increase of 144%.
For the nine months ended September 30, 2003, marketing expenses were $1.9
million, an increase of $760,000, or 70%, from the year earlier period. During
the third quarter 2003, the Company recognized $350,000 of advertising expense
related to a marketing campaign that is being distributed via radio
advertisements and periodical advertising.
Insurance expense increased 58% during the third quarter 2003 over the
prior year quarter and 57% for the nine months ended September 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.
During the third quarter 2003, the Company recognized an early
termination fee of $408,000 in other operating expenses in connection with the
early extinguishment of a $30.0 million fixed rate FHLB advance. For the nine
months ended September 30, 2003, other operating expenses included a $400,000
loss in connection with a check fraud scheme involving a new deposit account
during the second quarter of 2003, accounting for a large 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 who initially denied coverage for the loss.
28
During the first nine months of 2003, we amortized $126,000 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 nine months ended September 30, 2003
and 2002, respectively (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
Income before taxes.......... $18,613 $9,935
Income tax provision......... 5,267 2,148
Effective tax rate........... 28.3% 21.6%
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 nine months ended September 30, 2003 as
compared to the prior year period reflects growth in pretax income of 87% that
has outpaced the growth on our federally tax-exempt municipal bonds income.
Federally tax-exempt municipal bonds increased to $159.1 million as of September
30, 2003, a 21% increase from $131.5 million at September 30, 2002. In addition,
the higher effective tax rate for the nine months ended September 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 nine
months ended September 30, 2003 increased 50% to $14.6 million from $9.7 million
for the nine months ended September 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 nine months ended September 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
nine months ended September 30, 2003 increased to $34.7 million from $26.7
million, or 30%, primarily due to growth in earning assets. The PrivateBank
(Chicago)'s investment in FHLB stock increased by approximately $50.8 million
during 2003 and continues to have a positive impact on the yield on earning
assets during 2003.
Total loans increased by 22%, or $176.8 million, to $992.0 million at
September 30, 2003 as compared to total loans of $815.2 million at September 30,
2002. The majority of the loan growth for the nine months ended September 30,
2003 occurred in the commercial real estate and construction loan categories.
Total deposits increased by 30% to $1.4 billion at September 30, 2003, from $1.1
billion at September 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 nine months ended
September 30, 2003 increased by $892,000 to $1.4 million as compared to $527,000
in the prior year period. This growth in net income resulted from increases in
net interest income and non-interest income, which more than
29
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 nine months ended September 30, 2003 increased to $3.9 million from $2.4
million in the prior year period, an increase of 62%, primarily due to growth in
earning assets.
Total loans increased 41% to $139.9 million at September 30, 2003 from
$99.5 million at September 30, 2002, due primarily to growth in commercial real
estate and commercial loans categories. Construction and personal loans also
contributed to the increase in loans but to a lesser extent as compared to the
growth in the commercial real estate and commercial categories. Total deposits
increased by $19.9 million to $128.0 million at September 30, 2003 from $108.1
million at September 30, 2002. The majority of the deposit growth at The
PrivateBank (St. Louis) was due to increased money market and jumbo certificates
of deposit during the nine months ended September 30, 2003 as compared to the
prior year period. Brokered deposits were $34.8 million at September 30, 2003, a
decrease of $15.0 million since September 30, 2002.
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
$626.3 million to $1.3 billion at September 30, 2003, as compared to $693.9
million at September 30, 2002, due primarily to our acquisition of Lodestar.
Excluding Lodestar, trust assets under administration for the Wealth Management
segment were $776.8 million at September 30, 2003, compared to $693.9 million as
of September 30, 2002. Lodestar assets under management were $543.4 million as
of September 30, 2003. Excluding Lodestar, trust fee revenue generated by the
Wealth Management segment was $2.5 million compared to $2.2 million for the nine
months ended September 30, 2002. Revenue generated by Lodestar for nine months
ended September 30, 2003 added $2.3 million for a total of $4.8 million in
wealth management revenue generated in the nine months ended September 30, 2003.
Net income for nine months ended September 30, 2003 for our Wealth Management
segment was $393,000 as compared to $240,000 for the nine months ended September
30, 2002. Lodestar contributed net income of approximately $372,000 (net of
taxes) to the Wealth Management segment during the nine months ended September
30, 2003. Net income from the trust area for the nine months ended September 30,
2003 compared to prior year period reflects 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 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 $3.0
million for the nine months ended September 30, 2003 as compared to $2.7 million
for the nine months ended September 30, 2002. The increase in the amount of the
net loss reported for 2003 as compared to prior year period reflects the amount
of borrowings recorded at the Holding Company Activities segment. During the
third quarter of 2003, the Company repaid a $30.0 million revolving line of
credit and a $5.0 million subordinated note, however those balances were
outstanding through the end of July 2003 and the middle of August 2003,
respectively. Total borrowings, which included trust preferred securities at the
Holding Company at September 30, 2003, were $20.0 million, compared to total
borrowings of $42.3 million at September 30, 2002.
30
FINANCIAL CONDITION
TOTAL ASSETS
Total assets increased to $1.9 billion at September 30, 2003, an
increase of $313.7 million, or 20% over total assets of $1.5 billion at December
31, 2002, and an increase of $452.8 million, or 32% over $1.4 billion of total
assets at September 30, 2002. The balance sheet growth during the nine months
ended September 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 $1.132 billion, an increase of $166.1 million,
or 18%, from $965.6 million at December 31, 2002 and an increase of $218.5
million, or 24%, from $913.2 million at September 30, 2002.
Loan growth since September 30, 2002 has occurred primarily in the
commercial real estate and construction loan categories. The PrivateBank (St.
Louis) had loans outstanding of $131.9 million as of September 30, 2003, which
reflects growth of $27.2 million, or 26%, since December 31, 2002. The remaining
loan growth of $139.9 million during the first nine months of 2003 was generated
by The PrivateBank (Chicago). Loan volume at The PrivateBank (Chicago) offices
increased 15% at September 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:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2003 2002 2002
---- ---- ----
LOANS
Commercial real estate............................ $ 572,577 $452,703 $427,303
Residential real estate........................... 68,749 72,289 79,269
Commercial........................................ 177,788 165,993 162,341
Personal(1)....................................... 160,021 151,452 134,801
Construction...................................... 152,571 123,204 109,483
---------- -------- --------
Total loans, net of unearned discount.......... $1,131,706 $965,641 $913,197
========== ======== ========
- ------------------
(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 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
31
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 $13.9 million at September 30, 2003
compared with $10.6 million at September 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 1.23%
at September 30, 2003, 1.20% at December 31, 2002 and 1.17% at September 30,
2002. Net charge-offs totaled $498,000 for the nine months ended September 30,
2003 versus net charge-offs of $612,000 in the year earlier period. Charge-offs
for the nine months ended September 30, 2003 are primarily the result of two
commercial credits. The provision for loan losses was $2.8 million for the nine
months ended September 30, 2003, versus $2.9 million for the nine months ended
September 30, 2002.
Following is a summary of changes in the allowance for loan losses for
the nine months ended September 30, 2003 and 2002 (in thousands):
2003 2002
---- ----
Balance, January 1............................. $11,585 $ 8,306
Provisions charged to earnings................. 2,778 2,948
Loans charged-off, net of recoveries........... (498) (612)
------ -------
Balance, September 30.......................... $13,865 $10,642
======= =======
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 $489,000 during the first nine months of 2003
resulting in a decrease in this component of approximately $9,000 after giving
effect to $498,000 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 $1,651,000 during the first nine 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
32
applied to the allocated inherent component of the reserve have not changed from
December 31, 2002 levels.
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 $638,000 for the first nine months of 2003.
NONPERFORMING LOANS
The following table classifies our non-performing loans as of the dates
shown:
9/30/03 6/30/03 3/31/03 12/31/02 9/30/02
------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans...................... $ 517 $ 889 $1,483 $ 749 $ 430
Loans past due 90 days or more........ 1,401 1,849 2,032 650 2,549
------ ------ ------ ------ ------
Total nonperforming loans............. 1,918 2,738 3,515 1,399 2,979
------ ------ ------ ------ ------
Total nonperforming assets............ $1,918 $2,738 $3,515 $1,399 $2,979
====== ====== ====== ====== ======
Total nonaccrual loans to total loans. 0.046% 0.080% 0.146% 0.078% 0.047%
Total nonperforming loans to total
loans.............................. 0.17% 0.26% 0.35% 0.14% 0.33%
Total nonperforming assets to total
assets............................. 0.10% 0.16% 0.22% 0.09% 0.21%
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 $517,000 at September 30, 2003 as compared to
$749,000 at December 31, 2002 and $430,000 at September 30, 2002. Nonaccrual
loans decreased by $232,000 since December 31, 2002. Loans delinquent over 90
days increased by $751,000 since December 31, 2002 to $1.4 million.
33
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities at
September 30, 2003 and December 31, 2002, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
-------------------------------------------
SEPTEMBER 30, 2003
------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
---- ----- ------ ----------
U.S. government agency mortgage backed
securities and collateralized
mortgage obligations.................. $251,141 $ 4,630 $ (770) $255,001
Corporate collateralized mortgage
obligations........................... 7,457 230 -- 7,687
Tax exempt municipal securities.......... 159,108 11,744 (402) 170,450
Taxable municipal securities............. 3,865 33 -- 3,898
Federal Home Loan Bank stock............. 205,741 -- -- 205,741
Other.................................... 4,356 321 (21) 4,656
-------- ------- ------- --------
Total.................................... $631,668 $16,958 $(1,193) $647,433
======== ======= ======= ========
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, prepayment risk or liquidity needs. 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 September 30, 2003, net unrealized gains in the available-for-sale
securities portfolio totaled $15.8 million compared to $13.4 million at December
31, 2002. Unrealized gains at September 30, 2003 resulted in an increase of
$10.4 million in reported stockholders' equity. This was an increase of $1.6
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 nine 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 nine months of 2003 as rates on
tax-free municipal bonds have fallen. The credit quality of the investment
portfolio remains strong. Substantially all of our investments are rated "AAA"
by bond rating agencies. It is our policy not to take any undue credit risk with
the investment portfolio.
34
Securities available for sale increased to $647.4 million at September
30, 2003, up 33% 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 $35.6 million. These securities provide net
interest margin protection in a falling interest-rate environment because they
are long duration assets and they will not reprice as quickly as assets with
shorter durations, thereby protecting yields in a falling rate environment. U.S.
government agency mortgage backed securities and collateralized mortgage
obligations increased by $96.6 million, or 61%. These securities perform
relatively well in a rising rate environment because they have shorter durations
and will reprice more quickly, which would allow us to reinvest the proceeds at
higher rates. Investments in Federal Home Loan Bank stock increased by $50.1
million due to the purchase of $45.0 million of stock in May 2003 and stock
dividends received during 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 September 30, 2003 and
December 31, 2002:
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2003 2002
---- ----
PERCENT OF PERCENT
BALANCE TOTAL BALANCE OF TOTAL
------- ----- ------- --------
(DOLLARS IN THOUSANDS)
Demand............................ $ 125,505 8% $ 88,986 7%
Savings........................... 8,990 1% 6,344 1%
Interest-bearing demand........... 71,958 5% 64,893 5%
Money market...................... 475,672 32% 482,597 40%
Brokered deposits................. 454,264 31% 279,806 23%
Other time deposits............... 339,658 23% 282,645 24%
---------- --- ---------- ---
Total deposits................. $1,476,047 100% $1,205,271 100%
========== === ========== ===
Total deposits of $1.5 billion at September 30, 2003 represent an
increase of $270.8 million or 22% as compared to total deposits of $1.2 billion
as of December 31, 2002. Non-interest-bearing deposits increased by 41% to
$125.5 million at September 30, 2003 as compared to $89.0 million at December
31, 2002. Interest-bearing demand deposits increased by 11% to $72.0 million as
compared to $64.9 million at December 31, 2002. Money market accounts decreased
by $6.9 million, or 1%, to $475.7 million at September 30, 2003 as compared to
$482.6 million at December 31, 2002. Brokered deposits increased by 62% or
$174.5 million to $454.3 million at September 30, 2003 as compared to $279.8
million at December 31, 2002. Other time deposits increased by approximately
$57.0 million, or 20%, to $339.7 million as compared to $282.6 million at
year-end 2002.
35
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 September 30, 2003, there was one outstanding brokered
deposit containing a call provision. The scheduled maturities of brokered
deposits, net of unamortized prepaid broker commissions, as of September 30,
2003, for the fiscal years 2003 through 2007 and thereafter, are as follows:
For year ending December 31,
2003 $ 35,652
2004(1) 298,185
2005 69,733
2006 30,000
2007(2) 22,000
--------
Total brokered deposits.................................. 455,570
Unamortized prepaid broker commissions................... (1,306)
Total brokered deposits, net of unamortized prepaid --------
broker commissions....................................... $454,264
========
(1) Of the $298.2 million of brokered deposits maturing in 2004, $155.9
million are maturing in the first quarter of 2004.
(2) Includes one callable-brokered deposit for $15.0 million with a
maturity of 9/28/2007 and a call date of 3/29/2004.
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.
Federal Home Loan Bank borrowings totaled $84.5 million at September
30, 2003 compared to $77.8 million at December 31, 2002. Using proceeds from the
common stock offering that was completed in the third quarter of 2003, the
Company repaid Holding Company borrowings of $30.0 million, costing 3.50% under
the Company's $35.0 million revolving line of credit. The Company also retired a
$5.0 million subordinated note costing 3.31% during the third quarter 2003.
36
A summary of all funds borrowed and outstanding at September 30, 2003,
December 31, 2002 and September 30, 2002 is presented in the table below:
LONG TERM FUNDS BORROWED: CURRENT RATE MATURITY 9/30/2003 12/31/2002 9/30/2002
------------------------- ------------ -------- --------- ---------- ---------
FHLB fixed advance(1) 4.16% 09/03/07 $ 25,000 $ -- $ --
Subordinated note 3.35% 02/11/07 -- 5,000 5,000
FHLB fixed advance 2.43% 07/17/06 1,000 -- --
FHLB fixed advance 2.12% 01/17/06 2,000 -- --
FHLB fixed advance (2) 6.50% 10/23/05 26,497 26,616 26,540
FHLB fixed advance 2.40% 09/04/05 5,000 -- --
FHLB fixed advance 1.83% 07/15/05 3,000 -- --
FHLB fixed advance 1.59% 12/15/04 10,000 -- --
FHLB fixed advance 1.56% 11/06/04 5,000 -- --
-------- -------- --------
Total long-term funds borrowed 77,497 31,616 31,540
-------- -------- --------
SHORT TERM FUNDS BORROWED:
--------------------------
FHLB fixed advance 1.61% 01/13/04 1,000 -- --
FHLB fixed advance 6.21% 12/05/03 -- 30,000 30,000
FHLB fixed advance 1.73% 11/07/03 6,000 6,000 --
FHLB fixed advance 2.21% 07/22/03 -- 1,000 1,000
FHLB fixed advance 2.74% 07/17/03 -- 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
Borrowing under revolving line of
credit facility 3.50% 12/1/2003 -- 25,000 17,250
FHLB open line advance 1.48% daily -- 9,700 --
Fed funds purchased 1.21% daily 70,000 98,000 29,000
Demand repurchase agreements(3) 0.90% daily 9,994 4,138 6,132
-------- -------- --------
Total short-term funds borrowed 86,994 178,338 93,882
-------- -------- --------
Total funds borrowed $164,491 $209,954 $125,422
======== ======== ========
- ------------------
(1) This FHLB advance contains a call provision effective 9/7/2004 and
semi-annually thereafter.
(2) This FHLB advance is subject to a fair value hedge utilizing an
interest rate swap with a fair value of $2.4 million at September 30,
2003. The contractual par amount on the advance is $25.0 million.
(3) 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 any borrowings
under this revolving line resets quarterly, and is based on, at our option,
either the lender's prime rate or three-month LIBOR +120 basis points with a
floor of 3.50%. Historically, the Company has elected to pay interest based on
the three-month LIBOR rate +120 basis points. On July 30, 2003, the outstanding
balance on the line of credit was paid in full
37
using proceeds from the common stock offering completed on July 30, 2003. The
payoff included interest of $84,583.
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 was payable in
full on or before February 11, 2007, and provided 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
was in effect until February 11, 2004, at which point the pricing would increase
to LIBOR +350 basis points until maturity on February 11, 2007. On August 19,
2003, the subordinated note was paid in full. The average rate of interest on
the subordinated note during the 50 days it was outstanding during the quarter
was 3.32% compared to 3.84% during the third quarter 2002.
On September 5, 2003, the Company prepaid a $30.0 million, 6.21% fixed
rate Federal Home Loan Bank advance that was scheduled to mature on December 5,
2003. The Company replaced the advance with two new FHLB advances totaling $30.0
million: a $25.0 million advance at 4.16% scheduled to mature on September 3,
2007 and a $5.0 million advance at 2.40% scheduled to mature on September 4,
2005. The Company received two additional advances from the FHLB on the last day
of the quarter; a $10.0 million advance at 1.59% scheduled to mature on December
15, 2004 and a $5.0 million advance at 1.56% scheduled to mature on November 6,
2004.
CAPITAL RESOURCES
At September 30, 2003, $20.0 million of the trust-preferred securities
was treated as Tier 1 capital. Stockholders' equity rose to $161.1 million at
September 30, 2003, an increase of $72.0 million from the 2002 year-end level,
due primarily to gross proceeds of $57.2 from the common stock offering
completed on July 30, 2003, year-to-date 2003 net income of $13.3 million and an
increase of $1.6 million for the fair value of securities classified as
available-for-sale, net of income taxes.
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. On August 28, 2003, the Company granted 78,350
restricted shares to directors and certain officers of the Company. These shares
vest after five years.
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.
38
The following table sets forth our consolidated regulatory capital
amounts and ratios as of September 30, 2003 and 2002, and December 31, 2002:
SEPTEMBER 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......... $149,027 $87,456 $61,571 $75,016 $69,344 $5,672 $78,524 $71,818 $6,706
Tier 1 risk-based
capital......... 149,027 75,853 73,174 75,016 61,791 13,225 78,524 68,134 10,390
Total risk-based
capital......... 162,892 126,421 36,471 90,407 102,985 (12,578) 94,109 113,556 (19,447)
PERCENTAGE BASIS:
Leverage ratio..... 8.52% 5.00% 5.91% 5.00% 5.47% 5.00%
Tier 1 risk-based
capital ratio... 11.79 6.00 7.61 6.00 6.91 6.00
Total risk-based
capital ratio... 12.88 10.00 9.10 10.00 8.29 10.00
Total equity to
total assets.... 8.68 5.65 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 September 30, 2003, the Company and each of the banking subsidiaries
continued to exceed the minimum levels of all regulatory capital requirements.
The Company and each banking subsidiary were considered "well-capitalized" under
all regulatory standards at September 30, 2003. The Company's issuance of
additional common stock to raise additional equity capital during the third
quarter 2003 resulted in the Company being considered "well-capitalized" as of
September 30, 2003.
The preliminary estimate of Total risk-based capital, Tier-1 risk-based
capital and leverage ratios was 12.40%, 11.34% and 8.62%, respectively, as
reported in a our third quarter 2003 earnings release dated October 20, 2003.
The ratios reported in the table above are higher than the preliminary ratios
because the preliminary calculations were based on estimates of the breakdown of
our loans by type of underlying collateral. The estimates used for loans
collateralized by residential real estate, which has a lower risk weighting for
regulatory capital purposes, were lower than the actual amounts. The final
capital ratio calculations are based on the actual composition of loans by
collateral type as is reported in the third quarter report we have filed with
our banking regulator.
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 $41.8 million in the nine months
ended September 30, 2003 compared to net cash inflows of $14.9 million in the
prior year period. The net cash provided during the
39
nine months ended September 30, 2003 was impacted by the growth and timing of
receipts of interest and cash settlement payments. Securities totaling $13.3
million were purchased on September 30, 2003 did not settle until October 4,
2003. As a result, $13.3 million payable to a broker for securities purchased
was recorded on the balance sheet as of September 30, 2003. Net cash outflows
from investing activities were $323.2 million in the first nine months of 2003
compared to a net cash outflow of $195.0 million in the prior year period. Cash
inflows from financing activities in the first nine months of 2003 were $282.2
million compared to a net inflow of $205.7 million in the first nine months of
2002. Cash inflows from financing activities include net proceeds from the
common stock offering of $57.2 million and the repayment of $35.0 million of
borrowings at the holding company.
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 additional FHLB stock due to the
liquid nature of the investment and management's belief that the FHLB Chicago
has shown a consistently strong fundamental business performance. At September
30, 2003, we owned $205.7 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. On September 24, 2003, the Company
redeemed $5.0 million of its FHLB stock holdings for liquidity management
purposes; cash proceeds were received the same day as requested. 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 nine months ended September 30, 2003, our utilization of
FHLB advances increased due to new advances obtained to take advantage of the
availability of longer maturity advances at lower rates. 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.
On October 22, 2003, the FHLB Chicago announced that its third quarter
dividend will be paid to member financial institutions in stock at an annualized
rate of 7.0%. The FHLB Chicago paid first and second quarter dividends at an
annualized rate of 6.5%. The third quarter divided will be paid to the Company
on November 14, 2003.
During the nine months ended September 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 31% of total deposits at September 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.
40
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
3-month LIBOR floating rate based on an agreed-upon notional amount of $25.0
million. The fair value of the interest rate swap was $2.4 million as of
September 30, 2003, a decrease of $485,366 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 September 30, 2003 fair market value
adjustment on this swap resulted in the trading loss of $519,000 for the nine
months ended September 30, 2003, with a corresponding derivative liability of
the same amount. This swap does not qualify for hedge accounting treatment
pursuant to SFAS No. 133 ("Accounting for Derivative Instruments and Hedging
Activities") and, accordingly, changes in the fair value of the swap are
reported in other non-interest income. At September 30, 2003, the carrying value
of the trading swap was a liability of $695,000.
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 intend 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. At
September 30, 2003, we have become more neutrally gapped as compared to balances
at December 31, 2002. During 2003, we have extended the duration of our
liabilities in an effort to migrate from a negatively gapped position in the
short term to a more interest rate neutral position in the current period. The
following tables illustrate our estimated interest rate sensitivity and periodic
and cumulative gap positions calculated as of September 30, 2003 and December
31, 2002:
41
SEPTEMBER 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
Net loans(1)......................... $ 794,035 $ 97,742 $222,365 $ 9,252 $1,123,394
Investments........................48 90,845 94,885 79,955 160,241 425,927
FHLB stock........................... 205,741 - - - 205,741
Fed funds sold....................... 1,499 - - - 1,499
---------- -------- -------- -------- ----------
Total interest-earning assets........ $1,092,120 $192,627 $302,320 $169,493 $1,756,560
========== ======== ======== ======== ==========
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposit
accounts.......................... $ 2,226 $ 6,224 $ 24,142 $ 39,366 $ 71,958
Savings deposits..................... 465 921 3,612 3,993 8,990
Money market deposits................ 475,672 - - - 475,672
Total time deposits.................. 163,176 126,476 50,005 - 339,657
Brokered deposits.................... 35,652 280,477 138,135 - 454,264
Total borrowings(2).................. 110,995 1,000 51,000 20,000 182,995
---------- -------- -------- -------- ----------
Total interest-bearing liabilities... $ 788,186 $415,097 $266,894 $ 63,359 $1,533,535
========== ======== ======== ======== ==========
CUMULATIVE
Rate sensitive assets (RSA)......... 1,092,120 1,284,747 1,587,067 1,756,560
Rate sensitive liabilities (RSL).... 788,186 1,203,283 1,470,177 1,533,535
GAP (GAP=RSA-RSL).................... 303,934 81,464 116,890 223,025
RSA/RSL.............................. 138.56% 106.77% 107.95% 114.54%
RSA/Total assets..................... 58.81% 69.18% 85.46% 94.59%
RSL/Total assets..................... 42.44% 64.79% 79.17% 82.58%
GAP/Total assets..................... 16.37% 4.39% 6.29% 12.01%
GAP/Total RSA........................ 27.83% 6.34% 7.37% 12.70%
- ------------------
(1) Loans held for sale are excluded from GAP analysis. Loans held for sale
totaled $5.5 million as of September 30, 2003.
(2) The fair value adjustment on the interest rate swap is excluded from
GAP analysis. The fair value adjustment on the $2.4 million interest
rate swap was $1.5 million as of September 30, 2003.
42
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
Net 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 immediate 200 and 100 basis
point changes in interest rates as of September 30, 2003 and December 31, 2002.
The effects are determined through the use of a simulation model based on our
interest-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.
SEPTEMBER 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.... 7.8% (3.4%) 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 September 30, 2003, net interest
income would decrease by 3.4% over a one-year period. Due to current market
interest rates, a -100 basis point shift is presented for September 30, 2003 as
a more reasonable illustration of possible rate changes. The measurement of a
- -200 basis point instantaneous parallel shift in the yield curve at September
30, 2003 would result in a decline in net interest income of 11.7% 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 7.8%
43
over a one-year horizon based on September 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.
Changes in the effect on net interest income from the presented basis
point movements at September 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 September 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 or changes in
the composition of the Company's 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
44
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 are involved in routine litigation incidental
to their respective businesses, currently neither the Company nor any of its
subsidiaries is a party to any pending 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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 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.
10.1 Executive Employment Agreement by and between Dennis Klaeser and
PrivateBancorp, Inc. dated October 1, 2003.
10.2 Executive Employment Agreement by and between Hugh H. McLean,
PrivateBancorp, Inc. and The PrivateBank and Trust Company dated
October 1, 2003.
10.3 Executive Employment Agreement by and between Gary S. Collins,
PrivateBancorp, Inc. and The PrivateBank and Trust Company dated
October 1, 2003.
10.4 Executive Employment Agreement by and between Richard C. Jensen,
PrivateBancorp, Inc. and The PrivateBank (St. Louis) dated October 1,
2003.
46
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.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K dated July 1, 2003, filed with the
SEC on July 1, 2003.
(2) Current Report on Form 8-K dated July 2, 2003, filed with the
SEC on July 2, 2003.
(3) Current Report on Form 8-K dated July 9, 2003, filed with the
SEC on July 9, 2003.
(4) Current Report on Form 8-K dated July 21, 2003, filed with the
SEC on July 21, 2003.
(5) Current Report on Form 8-K dated July 30, 2003, filed with the
SEC on July 30, 2003.
(6) Current Report on Form 8-K dated September 24, 2003, filed
with the SEC on September 24, 2003.
47
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: November 14, 2003
48
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).
3.2 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 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.
10.1 Executive Employment Agreement by and between Dennis Klaeser, and
PrivateBancorp, Inc. dated October 1, 2003.
10.2 Executive Employment Agreement by and between Hugh H. McLean,
PrivateBancorp, Inc. and The PrivateBank and Trust Company dated
October 1, 2003.
10.3 Executive Employment Agreement by and between Gary S. Collins,
PrivateBancorp, Inc. and The PrivateBank and Trust Company dated
October 1, 2003.
10.4 Executive Employment Agreement by and between Richard C. Jensen,
PrivateBancorp, Inc. and The PrivateBank (St. Louis) dated October 1,
2003.
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.
49