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 MARCH 31, 2004
/ / 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 MAY 4, 2004
- --------------------------------------------------------------------------------------------------------------------
Common, no par value 10,023,940
====================================================================================================================
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....................................39
Item 4. Controls and Procedures.......................................................................42
Part II .......................................................................................................43
Item 1. Legal Proceedings.............................................................................43
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities..............43
Item 3. Defaults upon Senior Securities...............................................................43
Item 4. Submission of Matters to a Vote of Security Holders...........................................43
Item 5. Other Information.............................................................................43
Item 6. Exhibits and Reports on Form 8-K..............................................................44
Signatures......................................................................................................45
2
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
----------------------------------------------------------------
03/31/04 12/31/03 09/30/03 06/30/03 03/31/03
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
INTEREST INCOME:
Loans, including fees..................... $ 17,680 $ 16,588 $ 15,830 $ 15,208 $ 15,167
Securities................................ 7,929 7,773 6,333 5,148 5,379
Federal funds sold and interest-bearing
deposits............................... 6 6 6 31 25
------ ------ ------ ------ ------
Total interest income.................. 25,615 24,367 22,169 20,387 20,571
------ ------ ------ ------ ------
INTEREST EXPENSE:
Interest-bearing demand deposits.......... 147 143 134 148 128
Savings and money market deposit accounts. 1,874 1,697 1,375 1,644 1,709
Brokered deposits and other time deposits. 4,072 4,300 4,346 4,348 3,940
Funds borrowed............................ 1,486 970 1,016 1,204 1,312
Long-term debt -- trust preferred
securities............................. 485 485 485 485 485
------ ------ ------ ------ ------
Total interest expense................. 8,064 7,595 7,356 7,829 7,574
------ ------ ------ ------ ------
Net interest income (8)................ 17,551 16,772 14,813 12,558 12,997
Provision for loan losses................. 1,326 1,595 1,092 730 956
------ ------ ------ ------ ------
Net interest income after provision
for loan losses........................ 16,225 15,177 13,721 11,828 12,041
------ ------ ------ ------ ------
NON-INTEREST INCOME:
Banking, wealth management services and
other income........................... 2,980 2,889 3,657 3,181 2,701
Securities gains (losses), net............ 998 (163) (333) 2,310 (55)
Trading (losses) gains on interest rate
swap................................... (1,066) 280 765 (1,054) (230)
------ ------ ------ ------ ------
Total non-interest income.............. 2,912 3,006 4,089 4,437 2,416
------ ------ ------ ------ ------
NON-INTEREST EXPENSE:
Salaries and employee benefits............ 6,035 5,670 5,338 5,070 4,778
Occupancy expense, net.................... 1,360 1,472 1,403 1,270 1,419
Professional fees......................... 1,114 1,189 1,130 1,069 1,284
Marketing................................. 495 678 855 509 486
Data processing........................... 446 391 376 368 393
Insurance................................. 215 200 186 146 168
Amortization of intangibles............... 42 42 42 42 42
Other expense............................. 832 724 1,273 1,282 849
------ ------ ------ ------ ------
Total non-interest expense............. 10,539 10,366 10,603 9,756 9,419
------ ------ ------ ------ ------
Minority interest expense.................... 67 52 59 44 38
Income before income taxes................ 8,531 7,765 7,148 6,465 5,000
------ ------ ------ ------ ------
Income tax provision......................... 2,581 2,042 2,018 1,852 1,397
------ ------ ------ ------ ------
Net income................................ $ 5,950 $ 5,723 $ 5,130 $ 4,613 $ 3,603
========== ========== ========== ========== ==========
PER SHARE DATA:
Basic earnings............................... $ 0.61 $ 0.59 $ 0.57 $ 0.60 $ 0.47
Diluted earnings............................. 0.58 0.56 0.54 0.56 0.44
Dividends.................................... 0.06 0.04 0.04 0.04 0.04
Book value (at end of period)................ 17.44 16.94 16.37 12.89 12.29
3
QUARTER ENDED
----------------------------------------------------------------
03/31/04 12/31/03 09/30/03 06/30/03 03/31/03
-------- -------- -------- -------- --------
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities(1).......................... $ 692,678 $ 699,262 $ 647,433 $ 581,743 $ 505,877
Total loans.................................. 1,344,707 1,224,657 1,131,706 1,066,919 1,018,196
Total assets................................. 2,139,095 1,984,923 1,857,103 1,759,676 1,628,995
Total deposits............................... 1,622,899 1,547,359 1,476,047 1,445,590 1,365,344
Funds borrowed............................... 297,537 219,563 164,491 170,433 124,933
Long-term debt--trust preferred securities... 20,000 20,000 20,000 20,000 20,000
Total stockholders' equity................... 174,041 166,956 161,105 100,340 95,373
Wealth management assets under management.... 1,576,218 1,494,881 1,320,175 1,264,955 1,204,239
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(2)(8)................. 3.80% 3.82% 3.64% 3.33% 3.68%
Net interest spread(3).................... 3.57 3.60 3.43 3.16 3.53
Non-interest income to average assets..... 0.57 0.63 0.92 1.06 0.62
Non-interest expense to average assets.... 2.08 2.16 2.38 2.33 2.41
Net overhead ratio(4)..................... 1.51 1.53 1.46 1.27 1.80
Efficiency ratio(5)....................... 49.1 50.1 53.9 55.0 58.5
Return on average assets(6)............... 1.17 1.19 1.15 1.10 0.92
Return on average equity(7)............... 13.87 14.03 14.57 18.81 15.49
Dividend payout ratio..................... 10.03 6.89 7.67 6.75 8.62
Asset Quality Ratios:
Non-performing loans to total loans....... 0.06% 0.09% 0.17% 0.26% 0.35%
Allowance for loan losses to:
total loans............................ 1.23 1.23 1.23 1.22 1.22
non-performing loans................... 1954 1343 676 476 355
Net charge-offs (recoveries) to average
total loans............................ (0.03) 0.12 0.09 0.07 0.03
Non-performing assets to total assets..... 0.04 0.06 0.10 0.16 0.22
Non-accrual loans to total loans.......... 0.01 0.00 0.05 0.08 0.15
Balance Sheet Ratios:
Loans to deposits......................... 82.9% 79.1% 76.7% 73.8% 74.6%
Average interest-earning assets to
average interest-bearing liabilities... 113.5 113.9 112.4 108.2 107.1
Capital Ratios:
Total equity to total assets.............. 8.14% 8.41% 8.68% 5.70% 5.85%
Total risk-based capital ratio............ 12.14 12.71 12.88 8.37 8.30
Tier 1 risk-based capital ratio........... 11.01 11.59 11.79 7.06 6.99
Leverage ratio............................ 8.03 8.25 8.52 5.23 5.27
- ------------------
(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.
(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
1Q04 4Q03 3Q03 2Q03 1Q03
---- ---- ---- ---- ----
Net interest income............................ $17,551 $16,772 $14,813 $12,558 $12,997
Tax equivalent adjustment to net interest
income...................................... 1,017 925 772 742 695
------- ------- ------- ------- -------
Net interest income, tax equivalent basis...... $18,568 $17,697 $15,585 $13,300 $13,692
======= ======= ======= ======= =======
4
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks.................................. $ 60,047 $ 49,115 $ 46,643
Federal funds sold and other short-term investments...... 1,224 985 7,415
---------- ---------- ----------
Total cash and cash equivalents....................... 61,271 50,100 54,058
---------- ---------- ----------
Loans held for sale...................................... 4,133 4,420 12,591
Available-for-sale securities, at fair value............. 692,678 669,262 505,877
Loans, net of unearned discount.......................... 1,344,706 1,224,657 1,018,196
Allowance for loan losses................................ (16,529) (15,100) (12,471)
---------- ---------- ----------
Net loans............................................. 1,328,177 1,209,557 1,005,725
---------- ---------- ----------
Goodwill................................................. 19,242 19,242 19,242
Premises and equipment, net.............................. 5,924 6,233 6,516
Accrued interest receivable.............................. 8,429 7,868 7,258
Other assets............................................. 19,240 18,241 17,728
---------- ---------- ----------
Total assets.......................................... $2,139,094 $1,984,923 $1,628,995
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Non-interest-bearing.................................. $ 153,197 $ 135,110 $ 88,243
Interest-bearing...................................... 79,453 85,083 73,699
Savings and money market deposit accounts................ 646,838 562,234 476,100
Brokered deposits........................................ 426,022 447,948 387,006
Other time deposits...................................... 317,389 316,984 340,296
---------- ---------- ----------
Total deposits........................................ 1,622,899 1,547,359 1,365,344
Funds borrowed........................................... 297,537 219,563 124,933
Long-term debt -- trust preferred securities............. 20,000 20,000 20,000
Accrued interest payable................................. 3,261 5,053 3,779
Other liabilities........................................ 21,356 25,992 19,566
---------- ---------- ----------
Total liabilities..................................... 1,965,053 1,817,967 1,533,622
---------- ---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized............. -- -- --
Common stock, without par value, $1 stated value;
24,000,000 shares authorized; 9,977,424, 9,853,664, and
7,762,014 shares issued and outstanding as of March 31,
2004, December 31, 2003 and March 31, 2003,
respectively.......................................... 9,977 9,854 7,762
Treasury stock........................................... (341) -- --
Additional paid-in-capital............................... 104,997 103,796 45,594
Retained earnings........................................ 51,545 46,193 31,076
Accumulated other comprehensive income................... 10,770 9,909 11,403
Deferred compensation.................................... (2,907) (2,796) (462)
---------- ---------- ----------
Total stockholders' equity............................ 174,041 166,956 95,373
---------- ---------- ----------
Total liabilities and stockholders' equity............ $2,139,094 $1,984,923 $1,628,995
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
5
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31
2004 2003
---- ----
INTEREST INCOME
Loans, including fees.......................................................... $17,680 $15,167
Federal funds sold and interest-bearing deposits............................... 6 25
Securities:
Taxable .................................................................... 5,590 3,792
Exempt from federal income taxes............................................ 2,339 1,587
------ ------
Total interest income....................................................... 25,615 20,571
------ ------
INTEREST EXPENSE
Deposits:
Interest-bearing demand..................................................... 147 128
Savings and money market deposit accounts................................... 1,874 1,709
Brokered deposits and other time deposits................................... 4,072 3,940
Funds borrowed................................................................. 1,486 1,312
Long-term debt -- trust preferred securities................................... 485 485
------ ------
Total interest expense...................................................... 8,064 7,574
------ ------
Net interest income......................................................... 17,551 12,997
------ ------
Provision for loan losses...................................................... 1,326 956
------ ------
Net interest income after provision for loan losses......................... 16,225 12,041
------ ------
NON-INTEREST INCOME
Banking, wealth management services and other income.......................... 2,980 2,701
Securities gains (losses) net................................................. 998 (55)
Trading losses on interest rate swap.......................................... (1,066) (230)
------ ------
Total non-interest income................................................... 2,912 2,416
------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits................................................. 6,035 4,778
Occupancy expense, net......................................................... 1,360 1,419
Professional fees.............................................................. 1,114 1,284
Marketing...................................................................... 495 486
Data processing................................................................ 446 393
Postage, telephone & delivery.................................................. 229 211
Insurance...................................................................... 215 168
Amortization of intangibles.................................................... 42 42
Other non-interest expense..................................................... 603 638
------ ------
Total non-interest expense.................................................. 10,539 9,419
------ ------
Minority interest expense...................................................... 67 38
------ ------
Income before income taxes.................................................. 8,531 5,000
------ ------
Income tax provision........................................................... 2,581 1,397
------ ------
Net income.................................................................. $ 5,950 $ 3,603
======= =======
Basic earnings per share....................................................... $ 0.61 $ 0.47
Diluted earnings per share..................................................... $ 0.58 $ 0.44
The accompanying notes to consolidated financial statements are an integral part of these statements.
6
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
ADDITIONAL COMPRE- DEFERRED TOTAL
COMMON TREASURY PAID-IN- RETAINED HENSIVE COMPEN- STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME SATION EQUITY
----- ----- ------- -------- ------ ------ ------
BALANCE, JANUARY 1, 2003... $7,704 $ -- $ 45,367 $27,784 $ 8,826 $ (589) $ 89,092
Net income................. -- -- 3,603 -- -- 3,603
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............. -- -- -- -- 2,577 -- 2,577
------ -------- ------- ------- ------- --------
Total comprehensive income -- -- -- 3,603 2,577 -- 6,180
------ -------- ------- ------- ------- --------
Cash dividends declared
($0.07 per share)....... -- -- -- (311) -- -- (311)
Issuance of common stock... 58 -- 227 -- -- -- 285
Awards granted, net of
forfeitures............. -- -- -- -- -- 119 119
Amortization of deferred
compensation............ -- -- -- -- -- 8 8
------ ------- -------- ------- ------- ------- --------
BALANCE, MARCH 31, 2003.... $7,762 $ -- $ 45,594 $31,076 $11,403 (462) $ 95,373
====== ======= ======== ======= ======= ==== ========
BALANCE, JANUARY 1, 2004... $9,854 $ -- $103,796 $46,193 $ 9,909 $(2,796) $166,956
Net income................. -- -- 5,950 -- -- 5,950
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............. -- -- -- -- 861 -- 861
------ ------- -------- ------- ------- ------- --------
Total comprehensive income. -- -- -- -- 10,770 (2,796) 6,811
------ ------- -------- ------- ------- ------- --------
Cash dividends declared
($0.06 per share)....... -- -- -- (597) -- -- (597)
Issuance of common stock... 104 -- 1,120 -- -- 1,224
Acquisition of treasury
stock................... 19 (341) 81 -- -- -- (241)
Awards granted, net of
forfeitures............. -- -- -- -- -- (304) (304)
Amortization of deferred
compensation............ -- -- -- -- -- 193 193
------ ------- -------- ------- ------- ------- --------
BALANCE, MARCH 31, 2004.... $9,977 $ (341) $104,997 $51,546 $10,770 $(2,907) $174,042
====== ======= ======== ======= ======= ======= ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 5,950 $ 3,603
-------- -------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 413 408
Amortization of deferred compensation, net of forfeitures................... 193 8
Provision for loan losses................................................... 1,326 956
Net (gain) loss on sale of securities....................................... (998) 55
Trading losses on interest rate swap........................................ 1,066 230
Net decrease in loans held for sale......................................... 287 1,729
Increase (decrease) in deferred loan fees................................... 200 (132)
(Increase) decrease in accrued interest receivable.......................... (561) 2,169
Decrease in accrued interest payable........................................ (1,792) (1,207)
Increase in other assets.................................................... (1,070) (5,600)
(Decrease) increase in other liabilities.................................... (5,146) 9,585
-------- -------
Total adjustments........................................................... (6,082) 8,201
-------- -------
Net cash (used) provided by operating activities............................ (132) 11,804
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of available-for-sale securities. 45,753 13,232
Purchase of securities available-for-sale...................................... (67,933) (28,468)
Net loan principal advanced.................................................... (120,100) (52,403)
Investment in Lodestar Investment Counsel, LLC................................. 67 36
Premises and equipment expenditures............................................ (81) (86)
--- ---
Net cash used in investing activities....................................... (142,294) (67,689)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits................................................. 75,542 160,084
Proceeds from exercise of stock options........................................ 1,020 404
Acquisition of treasury stock.................................................. (341) --
Dividends paid................................................................. (597) (311)
Net increase (decrease) in funds borrowed...................................... 77,973 (85,021)
-------- -------
Net cash provided by financing activities................................... 153,597 75,156
-------- -------
Net increase in cash and cash equivalents...................................... 11,171 19,271
Cash and cash equivalents at beginning of year................................. 50,100 34,787
-------- -------
Cash and cash equivalents at end of period..................................... $ 61,271 $54,058
======== =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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 three months ended March
31, 2004 are not necessarily indicative of the results expected for the full
year ending December 31, 2004. 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
March 31, 2004 consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes for the year ended December
31, 2003 included in the Company's Annual Report on Form 10-K.
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.
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
-------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income
As reported...................... $5,950 $3,603
Pro forma........................ 5,697 3,576
Basic earnings per share
As reported...................... $ 0.61 $ 0.47
Pro forma........................ 0.58 0.47
Diluted earnings per share
As reported...................... $ 0.58 $ 0.44
Pro forma........................ 0.56 0.44
9
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 2004: dividend yield of 0.40%;
risk-free interest rate of 4.55%; expected lives of 10 years for the stock
options; and expected volatility of approximately 46%, based on the Company's
historical stock price experience. On March 22, 2004, the Company granted 7,000
stock options with an exercise price of $49.95 to certain members of management
that vest over 4 years. Additionally, on March 25, 2004, the Company granted
3,500 stock options with an exercise price of $52.53 to a member of management
that vest over 4 years.
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 months ended March
31, 2004 and 2003:
THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
--------- --------
Net income................................................ $ 5,950 $3,603
Weighted average common shares outstanding................ 9,730 7,601
Weighted average common shares equivalent(1).............. 577 541
--- ---
Weighted average common shares and common share
equivalents............................................ 10,307 8,142
====== =====
Net income per average common share - basic............... $ 0.61 $ 0.47
Net income per average common share - diluted............. $ 0.58 $ 0.44
- ------------------
(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
NOTE 4--NEW ACCOUNTING STANDARDS
In January 2003, the FASB issues 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 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. Because the Company does not have any
interest in VIEs, the adoption of FIN 46 did not have a material impact on its
results of operations, financial position or liquidity.
On March 9, 2004, the SEC issued SAB 105, "Application of Accounting
Principles to Loan Commitments" to inform registrants of the SEC staff's view
that the fair value of the recorded loan commitments, that are required to
follow derivative accounting under Statement 133, Accounting for Derivative
Instruments and Hedging Activities, should not consider the expected future cash
flows related to the associated servicing of the future loan. The staff believes
that incorporating expected future cash flows related to the associated
servicing of the loan essentially results in the immediate recognition of a
servicing asset, which is only appropriate once the servicing asset has been
contractually separated from the underlying loan by sale or by securitization of
the loan with servicing retained. Furthermore, no other internally-developed
intangible assets, such as customer relationship intangibles, should be recorded
as part of the loan commitment derivative. The staff believes that recognition
of such assets is only appropriate in the event of a third-party transaction,
such as the purchase of a loan commitment either individually, in a portfolio,
or in a business combination. In addition, SAB 105 requires registrants to
disclose their accounting policy for loan commitments pursuant to APB Opinion
No. 22, including methods and assumptions used to estimate fair value and any
associated hedging strategies, as required by Statement 107, Statement 133 and
Item 305 of Regulation S-K (Quantitative and Qualitative Disclosures About
Market Risk). The provisions of SAB 105 must be applied to loan commitments
accounted for as derivatives that are entered into after March 31, 2004. The
Company does not expect the adoption of SAB 105 to have a significant impact.
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 three months
of 2004, there were no changes in the measurement methods used to determine
reported segment profit or loss as compared to the same period in 2003. 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
11
(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
$2.3 million at March 31, 2004, which remained relatively unchanged compared to
December 31, 2003 balances.
THE PRIVATEBANK (CHICAGO)
-------------------------
MARCH 31,
-------------------------
2004 2003
----------- ----------
(IN THOUSANDS)
Total gross loans.................. $1,182,466 $ 903,579
Total assets....................... 1,926,444 1,459,706
Total deposits..................... 1,483,647 1,216,101
Total borrowings................... 266,671 93,697
Total capital...................... 154,036 130,599
Net interest income................ 14,927 10,601
Non-interest income................ 1,322 1,407
Non-interest expense............... 6,615 7,030
Net income......................... 5,867 4,153
THE PRIVATEBANK (ST. LOUIS)
The PrivateBank (St. Louis), a federal savings bank, was established as
a new bank subsidiary of the Company on June 23, 2000, and through its main
office located in St. Louis, Missouri, 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.
12
THE PRIVATEBANK
(ST. LOUIS)
------------------
MARCH 31,
------------------
2004 2003
--------- --------
(IN THOUSANDS)
Total gross loans.................. $162,486 $116,559
Total assets....................... 207,978 180,177
Total deposits..................... 159,248 151,293
Total borrowings................... 30,867 12,486
Total capital...................... 16,449 13,987
Net interest income................ 1,629 1,012
Non-interest income................ 555 828
Non-interest expense.............. 1,240 1,236
Net income........................ 543 390
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. The minority interest expense related to Lodestar is included in
non-interest expense for this segment.
WEALTH MANAGEMENT
------------------------
MARCH 31,
------------------------
2004 2003
--------- ---------
(IN THOUSANDS)
Wealth Management assets under
management.......................... $1,576,218 $1,204,239
Wealth Management fee revenue.......... 1,957 1,485
Net interest income.................... 438 343
Non-interest expense................... 1,790 1,676
Net income............................. 358 75
The following tables indicates the breakdown of our wealth management
assets under management at March 31, 2004 by account classification and related
gross revenue for the three months ended March 31, 2004 and March 31, 2003:
13
AT OR FOR THE THREE MONTHS
ENDED MARCH 31, 2004
--------------------------
MARKET
VALUE REVENUE
----------- ------------
ACCOUNT TYPE (IN THOUSANDS)
- -------------------------------------
Lodestar.............................. $ 601,788 $ 882
Personal trust--managed............... 332,229 485
Agency--managed....................... 231,997 354
Custody............................... 406,932 201
Employee benefits--managed............ 59,898 35
---------- -----
Less trust assets managed by
Lodestar(1)........................ (56,626)
----------
Total.............................. $1,576,218 $1,957
========== ======
(1) These assets are included in personal trust - managed balances as well as
Lodestar balances. The revenues related to these assets are allocated between
personal trust-managed and Lodestar based on the services provided.
AT OR FOR THE THREE MONTHS
ENDED MARCH 31, 2003
--------------------------
MARKET
VALUE REVENUE
----------- ------------
ACCOUNT TYPE (IN THOUSANDS)
- -------------------------------------
Lodestar............................ $ 501,300 $ 726
Personal trust--managed.............. 238,175 356
Agency--managed...................... 138,327 241
Custody............................. 274,923 141
Employee benefits--managed........... 51,514 21
---------- --------
Total............................ $1,204,239 $ 1,485
========== ========
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.
14
HOLDING COMPANY
ACTIVITIES
--------------------
MARCH 31,
--------------------
2004 2003
--------------------
(IN THOUSANDS)
Total assets....................... $193,419 $149,311
Total borrowings................... -- 33,750
Long-term debt - trust preferred
securities...................... 20,000 20,000
Total capital...................... 174,041 95,373
Interest expense................... 487 758
Non-interest income................ 50 52
Non-interest expense............... 945 786
Net loss........................... (819) (1,015)
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 THREE THE THE HOLDING
MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
MARCH 31, 2004 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
-------------- --------- ----------- ---------- ---------- --------------- ------------
Total assets......... $1,926.4 $208.0 - $193.5 $(188.8) $2,139.1
Total deposits....... 1,483.6 159.2 - - (20.1) 1,622.9
Total borrowings(1).. 266.7 30.9 - 20.0 - 317.5
Total loans.......... 1,182.5 162.5 - - (0.3) 1,344.7
Total capital........ 154.0 16.5 - 174.0 (170.5) 174.0
Net interest income.. 14.9 1.6 0.4 (0.4) 1.0 17.5
Non-interest income.. 1.3 0.6 2.0 0.1 (0.9) 2.9
Non-interest expense. 6.6 1.2 1.8 0.9 - 10.5
Minority interest
expense........... - - 0.1 - - 0.1
Net income........... 5.9 0.5 0.4 (0.8) - 6.0
Wealth Management
assets under
management........ - - 1,632.8 - (56.6) 1,576.2
AT OR FOR THE THREE THE THE HOLDING
MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
MARCH 31, 2003 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
-------------- --------- ----------- ---------- ---------- --------------- ------------
Total assets......... $1,459.7 $180.2 - $149.3 $(160.2) $1,629.0
Total deposits....... 1,216.1 151.3 - - (2.1) 1,365.3
Total borrowings(1).. 93.7 12.5 - 53.8 (15.1) 144.9
Total loans.......... 903.6 116.6 - - (2.1) 1,018.1
Total capital........ 130.6 14.0 - 95.4 (144.6) 95.4
Net interest income.. 10.6 1.0 0.3 (0.8) 1.9 13.0
Non-interest income.. 1.4 0.8 1.5 0.1 (1.4) 2.4
Non-interest expense. 7.0 1.2 1.7 0.7 (1.2) 9.4
Minority interest
expense........... - - - - - -
Net income........... 4.2 0.4 0.1 (1.0) (0.1) 3.6
Wealth Management
assets under
management........ - - 1,204.2 - - 1,204.2
- ------------------
(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.
15
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 March 31, 2004 have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 2003.
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 three months ended March 31, 2004 and 2003 (in
thousands):
MARCH 31, 2004
--------------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX EFFECT AMOUNT
--------------------------------------------------
Change in unrealized gains on securities
available-for-sale............................. $2,389 $ 910 $1,479
Less: reclassification adjustment for gain
included in net income......................... 998 380 618
------ ------ ------
Net unrealized gains.............................. $1,391 $ 530 $ 861
====== ====== ======
MARCH 31, 2003
--------------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX EFFECT AMOUNT
--------------------------------------------------
Change in unrealized gains on securities
available-for-sale............................. $3,850 $1,309 $2,541
Less: reclassification adjustment for gain
included in net income......................... (55) (19) (36)
------ ------ ------
Net unrealized gains.............................. $3,905 $1,328 $2,577
====== ====== ======
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 finance subsidiary of the
Company, issued 2,000,000 shares (including the underwriters' over-allotment) of
9.50% trust preferred securities, which represent preferred undivided interests
in the assets of the trust. The sole assets of the trust are 9.50% junior
subordinated debentures issued by the Company with a maturity date of December
31, 2030.
Subject to certain limitations, the Company has the right to defer
payment of interest on the debentures at any time, or from time to time, for a
period not to exceed 20 consecutive quarters. The
16
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 March 31, 2004, the entire amount of the
preferred securities is eligible for treatment as Tier I capital as allowed by
the Federal Reserve. At March 31, 2004, the unamortized balance of the
underwriting commissions paid and offering expenses was $1.0 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 first quarter 2004, the Company declared and paid a $0.06
per share dividend, which represents a 50% increase from the fourth quarter 2003
dividend rate of $0.04 per share.
During the first quarter 2004, the Company repurchased 6,608 shares of
its common stock in connection with the satisfaction of a stock option exercise
and federal withholding tax requirements on the exercise of stock options by a
board member.
NOTE 11--SUBSEQUENT EVENTS
On April 19, 2004, the Company announced that it had signed a letter of
intent for the site of a new Chicago banking office in the historic Palmolive
Building at the corner of North Michigan Avenue and Walton Place in Chicago's
affluent Gold Coast neighborhood. The second floor site will occupy a total of
4,800 square feet and will have a private first floor entry on Walton Place. The
Palmolive Building, one of the city's most recognized landmarks, is a major
adaptive reuse development with construction underway to transform most of the
building into luxury condominiums. Based upon the current construction schedule,
the Company expects to open this new office late this year.
The Company also announced that it had entered into a letter of intent
to acquire Corley Financial Corporation, a Chicago-based, mortgage banking
boutique that originated approximately $180.0 million in single-family
residential loans in 2003. The Company anticipates that Corley Financial will be
maintained as a separate subsidiary of PrivateBancorp, Inc. and that it will
operate under the name The PrivateBank Mortgage Company after the consummation
of the transaction, which is subject to definitive documentation and regulatory
approval. James F. Brady, the current owner and CEO of Corley Financial, will be
appointed as a Managing Director and head the unit.
On April 21, 2004, the Company announced its intent to expand to the
southeastern Wisconsin market. The Company plans to open a new banking office to
operate as the The PrivateBank (Wisconsin). The PrivateBank (Wisconsin) will
operate under the leadership of Wisconsin banker Jay B.
17
Williams, who will serve as managing director and chief executive officer. In
addition, on April 22, 2004, Williams was appointed to the board of directors of
PrivateBancorp, Inc. and The PrivateBank and Trust Company (Chicago). The
PrivateBank (Wisconsin) is expected to open for business at an as of yet
undisclosed downtown Milwaukee location by the end of 2004.
On April 23, 2004, the Company announced a two-for-one split of its
common stock, which will be effected in the form of a stock dividend.
Stockholders will receive one share for every one share of PrivateBancorp common
stock held on the record date. The stock dividend is payable on May 31, 2004 to
stockholders of record as of the close of business on May 17, 2004. Following
the stock split, PrivateBancorp will have approximately 20.0 million shares
issued and outstanding.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PrivateBancorp was organized as a Delaware corporation in 1989 to serve
as the holding company for a Chicago-based de novo (start-up) bank. Our flagship
downtown Chicago location opened in 1991. We expanded to Wilmette in north
suburban Cook County in 1994 and the Oak Brook facility in west suburban DuPage
County was established in 1997. We established the St. Charles office in January
2000, in connection with our purchase of Towne Square Financial Corporation (a
company which was in the process of forming a de novo bank) on August 3, 1999.
On February 11, 2000, we consummated our acquisition of Johnson Bank Illinois
adding two additional locations in Lake Forest and Winnetka, Illinois. During
the second quarter 2000, we received regulatory approval to create a new banking
subsidiary and on June 23, 2000, PrivateBancorp capitalized The PrivateBank (St.
Louis). In May 2001, The PrivateBank (Chicago) opened a second branch in the Fox
Valley area in Geneva, Illinois. On April 19, 2004, the Company announced that
it has signed a letter of intent for the site of a new Chicago banking office in
the historic Palmolive Building at the corner of North Michigan Avenue and
Walton Place in Chicago's affluent Gold Coast neighborhood to open late in 2004.
On April 21, 2004, the Company announced its intent to expand to the
southeastern Wisconsin market. The Company plans to open a new banking office to
operate as The PrivateBank (Wisconsin), which is expected to open for business
at an as of yet undisclosed downtown Milwaukee location by the end of 2004.
In December 2002, The PrivateBank (Chicago) acquired an 80% controlling
interest in Lodestar Investment Counsel, a Chicago-based investment adviser with
$601.8 million of assets under management at March 31, 2004. On April 19, 2004,
the Company also announced that it has entered into a letter of intent to
acquire Corley Financial Corporation, a Chicago-based, mortgage banking boutique
that originated approximately $180.0 million in single-family residential loans
in 2003. The Company anticipates that Corley Financial will be maintained as a
separate subsidiary of PrivateBancorp, Inc. and that it will operate under the
name The PrivateBank Mortgage Company after the consummation of the transaction,
which is subject to definitive documentation and regulatory approval.
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 27 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 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 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
high service charge income typical of many retail banks.
Non-interest expenses are heavily influenced by the growth of operations.
Our growth directly affects the majority of our expense categories.
19
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require
management to apply significant judgment to various accounting, reporting and
disclosure matters. Management must use assumptions and estimates to apply these
principles where actual measurements are not possible or practical. 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 for the fiscal year ended December 31,
2003. 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 a review of available and relevant
information. The allowance contains provisions for probable losses that have
been identified relating to specific borrowing relationships as well as probable
losses inherent in our loan portfolio and credit undertakings that are not
specifically identified. Our allowance for loan losses is reassessed monthly to
determine the appropriate level of the allowance. The amount of the allowance
for loan losses is determined based on a variety of factors, including
assessment of the credit risk of the loans in the portfolio, volume of loans in
the portfolio, delinquent loans, impaired loans, evaluation of current economic
conditions in the market area, actual charge-offs and recoveries during the
period 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 March
31, 2004 compared to 1.22% as of March 31, 2003.
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 acquisition of Lodestar. Intangible
assets are amortized over an estimated useful life of 15 years. Effective
January 1, 2002, the Company adopted FAS No. 142, which requires that goodwill
and intangible assets that have indefinite lives no longer be amortized but be
reviewed for impairment annually, or more frequently if certain indicators
arise. Prior to the adoption of FAS No. 142, goodwill was being amortized using
the straight-line method over a period of 15 years. The Company did not incur
any goodwill impairment in 2003 in
20
adopting FAS 142. The Company performs an impairment test of goodwill each year.
Impairment losses on recorded goodwill, if any, will be recorded as operating
expenses.
Goodwill at March 31, 2004 and March 31, 2003 was $19.2 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 MONTHS
ENDED MARCH 31, 2004 AND 2003
NET INCOME
Net income for the first quarter ended March 31, 2004, was $6.0
million, up 65% compared to first quarter of 2003 net income of $3.6 million.
Earnings per diluted share increased 32% to $0.58 per diluted share in the first
quarter of 2004 compared to $0.44 per diluted share in the first quarter of
2003.
The improvement in earnings per diluted share for the three months
ended March 31, 2004 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 was
$2.9 million in the first quarter 2004, reflecting an increase of approximately
$0.5 million or 21% from the first quarter 2003. The increase in fee income was
primarily attributable to increases in wealth management fee revenue, while the
increases in securities gains were more than offset by increased losses
resulting from the fair market value adjustment of an interest rate swap. During
the first quarter 2004, the company recognized securities gains of $998,000,
compared to losses of $55,000 in the first quarter 2003. Non-interest income for
the first quarter 2004 reflects the fair market value adjustment on a $25.0
million 10-year treasury rate for 3-month LIBOR interest rate swap, which
resulted in losses of $1.1 million during the first quarter 2004, versus losses
of $230,000 in the first quarter 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 $17.6 million during the three months ended
March 31, 2004 compared to $13.0 million for the first quarter of 2003, an
increase of 35%, and an increase of 5% compared to the fourth quarter 2003.
Average earning assets during the first quarter of 2004 were $1.9 billion,
compared to $1.5 billion in the prior year quarter, an increase of 27%, and an
increase of 7% from December 31, 2003 levels. Net interest margin (on a tax
equivalent basis) was 3.80% in the first quarter of 2004, up from 3.68% in the
prior year first quarter and down from 3.82% in the fourth quarter of 2003. The
margin compression during the first quarter of 2004 reflects a 2 basis point
decrease in yields on average earning assets. A 1-basis point increase in the
costs of average interest-bearing liabilities was offset by the effect of an
increase in non-interest bearing funds.
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.
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 most significant change in our net interest margin on a
21
quarter linked basis resulted from the decrease in the dividend paid on our FHLB
stock investment, which was 6.5% in the first quarter of 2004 as compared to
7.0% in the fourth quarter 2003. During the first quarter of 2004, we received a
dividend of $3.4 million relating to our investment in the FHLB (Chicago), which
totaled $207.0 million at March 31, 2004 compared to a dividend of $3.7 million
during the fourth quarter 2003. Our FHLB stock investment totaled $208.5 million
at December 31, 2003. Changing our focus to lengthen borrowing terms given
historically lower rates during 2003 and the first quarter of 2004 will slightly
compress net interest margin in the second quarter 2004 but should have a
positive impact in future quarters if market interest rates continue to rise.
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 MARCH 31,
-------------------------------------------------------------------------------
2004 2003
---------------------------------------- ----------------------------------
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
-------------- -------- -------- ---------- -------- ----------
Fed funds sold and other
short-term investments......... $ 1,648 $ 6 1.52% $ 11,833 $ 25 0.85%
Investment securities (taxable)... 475,648 5,590 4.67% 351,486 3,792 4.35%
Investment
securities (non-taxable) ....... 198,648 3,356 6.76% 128,942 2,282 7.08%
Loans, net of unearned
discount(2).................... 1,263,997 17,680 5.56% 1,000,312 15,167 6.10%
---------- ------- ---------- -------
Total earning assets.............. $1,939,941 $26,632 5.46% $1,492,573 $21,266 5.73%
========== ======= ========== =======
Interest-bearing deposits......... $1,382,920 $ 6,093 1.77% $1,181,714 $ 5,777 1.98%
Funds borrowed.................... 305,930 1,486 1.92% 191,897 1,312 2.73%
Trust preferred securities........ 20,000 485 9.70% 20,000 485 9.70%
---------- ------- ---------- -------
Total interest-bearing liabilities $1,708,850 8,064 1.89% $1,393,611 7,574 2.20%
========== ======= ========== =======
Tax equivalent net interest
income(3)...................... $18,568 $13,692
======= =======
Net interest spread(4)............ 3.57% 3.53%
Net interest margin(3)(5)......... 3.80% 3.68%
- ------------------
(1) Average balances were generally computed using daily balances.
(2) 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.
(3) We adjust GAAP reported net interest income by the tax equivalent
adjustment amount to account for the tax attributes on federally tax exempt
municipal securities. The total tax equivalent adjustment reflected in the
above table is $1,016,707 and $695,428 in the first quarters of 2004 and
2003, respectively. 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
3/31/04 3/31/03
------- -------
Net interest income............................. $17,551 $12,997
Tax equivalent adjustment to net interest income 1,017 695
------- -------
Net interest income, tax equivalent basis....... $18,568 $13,692
======= =======
(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.
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
22
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.
THREE MONTHS ENDED MARCH 31, 2004
COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
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............. $ 20 $ (22) $ (17) $ (19)
Investment securities (taxable)............................. 280 1,347 171 1,798
Investment securities (non-taxable)(1)...................... (104) 1,230 (52) 1,074
Loans, net of unearned discount............................. (1,340) 4,010 (157) 2,513
------ ----- ---- -----
Total tax equivalent interest income(1).................. $(1,144) $6,565 $ (55) $5,366
------ ----- ---- -----
Interest-bearing deposits................................... $ (627) $ 993 $ (50) $ 316
------ ----- ---- -----
Funds borrowed.............................................. (387) 776 (215) 174
--
Trust preferred securities.................................. -- -- --
------ ----- ---- -----
Total interest expense................................... $(1,014) $1,769 $(265) $ 490
------ ----- ---- -----
Net tax equivalent interest income(1)....................... $ (130) $4,796 $ 210 $4,876
== ======= ====== ===== ======
- ------------------
(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
$1,016,707 and $695,428 in the first quarters of 2004 and 2003,
respectively.
PROVISION FOR LOAN LOSSES
We made a provision for loan losses of $1.3 million for the three
months ended March 31, 2004 compared to $956,000 for the comparable period in
2003. Net recoveries totaled $103,000 for the quarter ended March 31, 2004
versus net charge-offs of $70,000 for the first quarter of 2003.
The increase in the provision for loan losses during the three months
ended March 31, 2004 as compared to the prior year period reflects management's
latest assessment of the inherent losses estimable in the loan portfolio. Our
allowance for probable loan losses is reassessed monthly to determine the
appropriate level of the reserve. Our analysis is influenced by the following
factors: the volume and quality of loans and commitments in the portfolio, loss
experience, and economic conditions. A discussion of the allowance for loan
losses and the factors on which provisions are based begins on page 29.
NON-INTEREST INCOME
Non-interest income was $2.9 million in the first quarter of 2004,
reflecting an increase of approximately $500,000 or 21% from the first quarter
of 2003. The increase in fee income was primarily attributable to wealth
management fee revenue of $2.0 million for the quarter ended March 31, 2004,
compared to $1.5 million in the prior year quarter. Increases in securities
gains were more than offset by increased losses resulting from the fair market
value adjustment of an interest rate swap. During the first quarter of 2004, the
company recognized securities gains of $998,000, compared to losses of $55,000
in the first quarter 2003. Non-interest income for the first quarter of 2004
reflects the fair market value adjustment on the $25.0 million 10-year treasury
rate for 3-month LIBOR interest rate swap, which resulted in losses of $1.1
million during the first quarter 2004, compared to losses of $230,000 in the
first quarter of 2003.
23
The following table presents the breakdown of banking, wealth
management services and other income for the periods presented:
THREE MONTHS ENDED
----------------------
MARCH 31,
----------------------
2004 2003
---------- ----------
Wealth management fee revenue.......... $1,957 $1,485
Residential real estate secondary
market fees......................... 464 782
Banking and other services............. 435 308
Bank owned life insurance.............. 124 126
------ ------
Total banking, wealth management
services and other income........ $2,980 $2,701
====== ======
Total wealth management assets under management were $1.6 billion at
March 31, 2004 compared to $1.2 billion at March 31, 2003, and up $81.0 million
from $1.5 billion at December 31, 2003. Of these amounts, trust services assets
under management were $974.4 million and Lodestar assets under management were
$601.8 million at March 31, 2004. Excluded from the total wealth management
assets under management are $56.6 million of trust services assets that are
managed by Lodestar. At December 31, 2003, trust services managed $922.0 million
of assets, Lodestar managed $572.9 million of assets, and $53.6 million of
assets managed by Lodestar were excluded from the total wealth management assets
under management. 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 fee income contributed to the expansion in
non-interest income during the quarter. Wealth management fee income totaled
$2.0 million for the first quarter of 2004, an increase of $472,000 from the
first quarter of 2003 and an increase of $101,000 from the fourth quarter of
2003. Of the $2.0 million, approximately $506,000 was revenue generated from
wealth management services provided to those clients where a third-party
investment manager is utilized. For the three months ended March 31, 2003, $1.5
million of wealth management fee revenue was generated; of this amount
approximately $358,700 was third-party investment manager revenue. 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. The fees paid to third-party investment managers are included in the
professional fees category of non-interest expense.
The increase in wealth management fee revenue over the prior year
period reflects a favorable shift in the mix of accounts towards higher fee
structures, the addition of new business and equity market improvements
experienced during 2003 and 2004.
Sales of residential real estate loans generated $464,000 of income
during the first quarter of 2004 compared to $782,000 during the prior year
quarter primarily due to a lower volume of loans sold as a result of relatively
decreased demand for residential real estate loans. Late in the first quarter
2004, when market interest rates declined, we experienced an increase in the
demand for residential real estate loans. We expect that the majority of these
loans will close in the second quarter with a resulting benefit to residential
loan fees. We do not expect the impact on earnings to exceed the 2003 levels for
the same period, but we do expect an increase from the levels recognized during
the first quarter 2004.
During the first quarter of 2004, we recognized income of $124,000
related to the increased cash surrender value of a bank owned life insurance
(BOLI) policy that was entered into in the fourth quarter
24
of 2001 as compared to relatively similar levels of income in the first quarter
of 2003. 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 March 31, 2004 was $11.4 million and is included in other assets on the
balance sheet.
Included in non-interest income for the 2004 period are trading losses
recorded to reflect the fair market value adjustment on an interest rate swap
used to economically 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 resulted in a loss for the three months ended March 31, 2004
because of the overall decline in market rates of interest during the period.
For the three months ended March 31, 2004, the trading loss totaled $1.1 million
compared to a loss of $230,000 during the first quarter of 2003. Securities
gains for the three months ended March 31, 2004 were $998,000 compared to losses
of $55,000 in the prior year quarter. The securities were sold after interest
rates had decreased significantly late in the first quarter of 2004; the
proceeds were reinvested in securities that we expect will improve our
asset/liability position going forward.
NON-INTEREST EXPENSE
THREE MONTHS ENDED
----------------------
MARCH 31,
----------------------
2004 2003
---------- ---------
(IN THOUSANDS)
Salaries and employee benefits.......... $ 6,035 $4,778
Occupancy............................... 1,360 1,419
Professional fees....................... 1,114 1,284
Marketing............................... 495 486
Data processing......................... 446 393
Postage, telephone and delivery......... 229 211
Office supplies and printing............ 136 159
Insurance............................... 215 168
Amortization of intangibles............. 42 42
Other expense........................... 467 479
------- ------
Total non-interest expense.............. $10,539 $9,419
======= ======
Non-interest expense increased to $10.5 million in the first quarter of
2004 from $9.4 million in the first quarter of 2003, an increase of 12%. The
increase in non-interest expense between periods is attributable to increases in
personnel costs associated with our growing client service team, including the
addition of several managing directors within the past year. Our efficiency
ratio was 49.1% for the first quarter of 2004 as compared to 58.5% for the first
quarter of 2003 and 50.1% in the fourth quarter of 2003. The improvement in the
efficiency ratio reflects the impact of faster growth in net interest income,
coupled with slower growth in non-interest expense. On a tax-equivalent basis,
this ratio indicates that in the first quarter of 2004, we spent 49.1 cents to
generate each dollar of revenue, compared to 58.5 cents in the first quarter of
2003. During the remainder of 2004, we expect to continue to maintain our
efficiency ratio at a level of approximately 50%; however, our anticipated
acquisition of Corley Financial and our planned branch expansion initiatives
into southeastern Wisconsin and our planned Gold Coast office may negatively
impact our efficiency ratio in future periods. 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 3 on page 22
for a reconciliation of net interest income to net interest income on a tax
equivalent basis.
Salaries and benefits increased to $6.0 million, or 26% during the
first quarter of 2004 as compared to the year ago quarter, reflecting the
increased level of full-time equivalent employees to 226
25
people at March 31, 2004 from 194 people at March 31, 2003. The increase is due
primarily to overall growth in the organization.
Occupancy expense decreased to $1.4 million during the first quarter of
2004, reflecting a decrease of 4% over the prior year quarter. Renovations to
several floors in the downtown Chicago office during 2003 caused occupancy
expense, which includes purchases of furniture, fixtures and equipment, to be
temporarily higher.
Professional fees, which include legal, accounting, consulting services
and investment management fees, decreased to $1.1 million during the first
quarter of 2004, reflecting a decrease of 13% over the prior year quarter.
Professional fees in the prior year reflected consulting fees paid for the
management of our investment portfolio from February to May 2003; in May, the
bank hired a full time chief investment officer to manage the investment
portfolio.
Marketing expenses increased to $495,000 for the quarter ended March
31, 2004 from $486,000 in the prior year quarter, an increase of 2%.
Insurance expense increased 28% during the first quarter of 2004 to
$215,000 over the prior year quarter due to the increased cost of insurance in
the marketplace, and the renewal of our annual insurance coverage.
During the first three months of 2004, we amortized $42,000 in
intangible assets related to our acquisition of a controlling interest in
Lodestar.
MINORITY INTEREST EXPENSE
On December 30, 2002, The PrivateBank (Chicago) acquired an 80%
controlling interest in Lodestar Investment Counsel LLC ("Lodestar"). The
Company records its 20% noncontrolling interest in Lodestar related to
Lodestar's results of operations, in minority interest expense on the
consolidated statement of income. For the quarter ended March 31, 2004, we
recorded approximately $67,000 of minority interest expense.
INCOME TAXES
The following table shows our income before income taxes, applicable
income taxes and effective tax rate for the three months ended March 31, 2004
and 2003, respectively (in thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
---------- ----------
Income before taxes.......... $8,531 $5,000
Income tax provision......... 2,581 1,397
Effective tax rate........... 30.3% 27.9%
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 three months ended March 31, 2004 as compared
to the prior year period reflects growth in pretax income of 71% that has
outpaced the growth on our federally tax-exempt municipal bonds income.
Federally tax-exempt municipal bonds increased to $205.2 million as of March 31,
2004, a 38% increase from $149.2 million at March 31, 2003.
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.
26
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 three
months ended March 31, 2004 increased 43% to $5.9 million from $4.2 million for
the three months ended March 31, 2003. 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 three months ended March 31, 2004 more than offset
increases in operating expenses associated with continued growth of The
PrivateBank (Chicago). Net interest income for The PrivateBank (Chicago) for the
three months ended March 31, 2004 increased to $14.9 million from $10.6 million,
or 41%, primarily due to growth in earning assets.
Total loans at the PrivateBank (Chicago) increased by 31%, or $278.9
million, to $1.2 billion at March 31, 2004 as compared to total loans of $903.6
million at March 31, 2003. The majority of the loan growth for the three months
ended March 31, 2004 occurred in the commercial real estate and construction
loan categories. Total deposits increased by 22% to $1.5 billion at March 31,
2004, from $1.2 billion at March 31, 2003. 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 three months ended
March 31, 2004 increased to $543,000 as compared to $390,000 in the prior year
period. This growth in net income resulted from increases in net interest income
and non-interest income, which more than offset increases in operating expenses.
Net interest income for The PrivateBank (St. Louis) for the three months ended
March 31, 2004 increased to $1.6 million from $1.0 million in the prior year
period, an increase of 61%, primarily due to growth in earning assets.
Total loans at the PrivateBank (St. Louis) increased 39% to $162.5
million at March 31, 2004 from $116.6 million at March 31, 2003, 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. Total deposits increased by $7.9 million to $159.2 million
at March 31, 2004 from $151.3 million at March 31, 2003. The majority of the
deposit growth at The PrivateBank (St. Louis) was due to increased money market
and jumbo certificates of deposit during the three months ended March 31, 2004
as compared to the prior year period. Brokered deposits were $37.2 million at
March 31, 2004, a decrease of $18.1 million since March 31, 2003.
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
$428.6 million (including assets managed by Lodestar of $56.6 million) to $1.6
billion at March 31, 2004, as compared to $1.2 billion at March 31, 2003, due
primarily to the improvement in the equity markets and increases in net new
business. Wealth management fee revenue was $2.0 million compared to $1.5
million for the three months ended March 31, 2003. Net income for three months
ended March 31, 2004 for our Wealth Management segment was $358,000 as compared
to $75,000 for the three months ended March 31, 2003.
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 $819,000
for the three months ended March 31, 2004 as compared to a net loss of $1.0
million for the three months ended March 31, 2003. The decrease in the amount of
the net loss reported for 2004 as compared to prior year period reflects the
decrease in the amount of borrowings recorded at the Holding Company Activities
segment.
27
During the third quarter of 2003, the Company repaid a $30.0 million
revolving line of credit and a $5.0 million subordinated note. The reduced level
of borrowings has reduced the interest expense recognized at the Holding Company
Activities segment. Total debt outstanding, which included trust preferred
securities, at the Holding Company at March 31, 2004, was $20.0 million,
compared to total debt outstanding of $53.8 million at March 31, 2003.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets increased to $2.1 billion at March 31, 2004, an increase
of $154.2 million, or 8% over total assets of $2.0 billion at December 31, 2003,
and an increase of $510.1 million, or 31% over $1.6 billion of total assets at
March 31, 2003. The balance sheet growth during the three months ended March 31,
2004 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 FHLB advances, and core deposit growth, including
savings, money market, and non-interest bearing demand deposits.
LOANS
Total loans increased to $1.3 billion, an increase of $120.1 million,
or 10%, from $1.2 billion at December 31, 2003 and an increase of $326.5
million, or 32%, from $1.0 billion at March 31, 2003.
Loan growth since December 31, 2003 has occurred primarily in the
commercial real estate and construction loan categories. The reduction in market
interest rates during the quarter caused higher demand for residential real
estate and home equity loans. The PrivateBank (St. Louis) had loans outstanding
of $162.5 million as of March 31, 2004, which reflects growth of $11.0 million,
or 7%, since December 31, 2003. The remaining loan growth of $111.1 million
(excluding intercompany eliminations) during the first three months of 2004 was
generated by The PrivateBank (Chicago). All of The PrivateBank (Chicago) offices
posted strong gains in loan volume throughout the period. Loan volume at The
PrivateBank (Chicago) offices increased 10% at March 31, 2004 as compared to
December 31, 2003 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:
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
---------------- --------------------- ----------------
LOANS
Commercial real estate................ $ 679,698 $639,296 $492,952
Commercial............................ 208,441 181,062 158,227
Residential real estate............... 83,785 69,541 76,885
Personal(1)........................... 73,949 77,025 68,119
Home Equity........................... 101,973 94,855 83,924
Construction.......................... 196,860 162,878 138,089
---------- ---------- ----------
Total loans, net of unearned
discount........................ $1,344,706 $1,224,657 $1,018,196
========== ========== ==========
- ------------------
(1) Includes overdraft lines.
ALLOWANCE FOR LOAN LOSSES
Loan quality is continually monitored by management and reviewed by the
loan committees of the boards of directors of the banks on a monthly basis. The
amount of additions to the allowance for loan losses, which is charged to
earnings through the provision for loan losses, is determined based on a variety
of factors, including assessment of the credit risk of the portfolio, delinquent
loans, evaluation of
28
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 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 supported by all available and relevant information. The allowance contains
provisions for probable losses that have been identified relating to specific
borrowing relationships, as well as probable losses inherent in 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 $16.5 million at March
31, 2004 compared with $15.1 million at December 31, 2003, primarily reflecting
growth in the loan portfolio during the quarter. 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 March 31, 2004, 1.23% at December 31, 2003 and 1.22% at March 31, 2003. Net
recoveries totaled $103,000 for the three months ended March 31, 2004 versus net
charge-offs of $70,000 in the year earlier period. The provision for loan losses
was $1.3 million for the three months ended March 31, 2004, versus $956,000 for
the three months ended March 31, 2003.
Following is a summary of changes in the allowance for loan losses for
the three months ended March 31, 2004 and 2003 (in thousands):
2004 2003
-------- --------
Balance, January 1.............................................. $15,100 $11,585
Provisions charged to earnings.................................. 1,326 956
Loans charged-off, net of recoveries............................ 103 (70)
------- -------
Balance, March 31............................................... $16,529 $12,471
======= =======
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 $230,000 during the first three months of 2004
resulting in an increase in this component of approximately $333,000 after
giving effect to $103,000 in recoveries 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
29
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 $1,261,000 during the first three months of 2004. The
increase in the allocated portion of the reserve reflects a significant
migration of loans to slightly higher risk ratings as well as the increase in
volume in our commercial real estate loan portfolio and construction loan
portfolio. Loss factors for the construction and commercial real estate loan
portfolios were also increased to reflect management's evaluation of the current
economic conditions and its impact on these sectors of the portfolio. Management
has identified a weakening of credit quality of certain borrowers as reflected
by risk rating downgrades in 2004. Management has noticed lower sales, decreased
profitability and lower cash flows within its client base. These trends led to
the increased loss factors noted above. The increase in this component of the
reserve was partially offset by a decline in the impact of residential real
estate and home equity loans, resulting from a decrease in their respective loss
factors. Loss factors applied to residential real estate and home equity loans
were decreased or unchanged based on management's assessment of our historical
loss experience coupled with the quality of the underlying collateral securing
the residential real estate and home equity loan portfolios.
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 portion of the provision related to the unallocated inherent component
of the reserve was decreased by $165,000 for the first three months of 2004. The
decrease reflects our view that the inherent losses related to certain factors,
such as general economic and business conditions and the possible imprecision
due to changes in the portfolio mix, which we considered in our evaluation of
the unallocated allowance at December 31, 2003 are now recognized at March 31,
2004 in the allocated allowance through increased specific reserves or in the
higher loss factors utilized in determining the risk allocated allowance. The
growth and complexity of the loan portfolio exposes us to larger individual
charge-offs.
30
NONPERFORMING LOANS
The following table classifies our non-performing loans as of the dates
shown:
3/31/04 12/31/03 9/30/03 6/30/03 3/31/03
--------- ---------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Nonaccrual loans...................... $ 131 $ 36 $ 517 $ 889 $1,483
Loans past due 90 days or more........ 715 1,088 1,401 1,849 2,032
------ ------ ------ ------ ------
Total nonperforming loans.......... 846 1,124 1,918 2,738 3,515
------ ------ ------ ------ ------
Total nonperforming assets......... $ 846 $1,124 $1,918 $2,738 $3,515
====== ====== ====== ====== ======
Total nonaccrual loans to total loans. 0.010% 0.003% 0.046% 0.080% 0.146%
Total nonperforming loans to total
loans.............................. 0.06% 0.09% 0.17% 0.26% 0.35%
Total nonperforming assets to total
assets............................. 0.04% 0.06% 0.10% 0.16% 0.22%
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 $131,000 at March 31, 2004 as compared to $36,000
at December 31, 2003 and $1.5 million at March 31, 2003. Nonaccrual loans
increased by $95,000 since December 31, 2003. Loans delinquent over 90 days
decreased by $373,000 since December 31, 2003 to $715,000.
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities at March
31, 2004 and December 31, 2003, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
------------------------------------------------------------------
MARCH 31, 2004
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------
U.S. government agency mortgage
backed securities and collateralized
mortgage obligations.................. $250,471 $ 4,763 $ (522) $254,712
Corporate collateralized mortgage
obligations........................... 4,254 -- (1) 4,253
Tax exempt municipal securities.......... 205,227 11,772 (170) 216,829
Taxable municipal securities............. 3,855 30 -- 3,885
Federal Home Loan Bank stock............. 208,097 -- -- 208,097
Other.................................... 4,378 532 (8) 4,902
-------- ------- ------- --------
Total.................................... $676,282 $17,097 $ (701) $692,678
======== ======= ======= ========
31
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
------------------------------------------------------------------
DECEMBER 31, 2003
------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------------------------------------------------------------
U.S. government agency mortgage
backed securities and collateralized
mortgage obligations.................. $239,092 $ 4,695 $(1,060) $242,727
Corporate collateralized mortgage
obligations........................... 4,910 -- (1) 4,909
Tax exempt municipal securities.......... 192,417 11,141 (163) 203,395
Taxable municipal securities............. 3,855 2 -- 3,857
Federal Home Loan Bank stock............. 209,633 -- -- 209,633
Other.................................... 4,363 391 (13) 4,741
-------- ------- ------- --------
Total.................................... $654,270 $16,229 $(1,237) $669,262
======== ======= ======= ========
All securities are classified as available-for-sale and may be sold as
part of our asset/liability management strategy in response to changes in
interest rates, liquidity needs or significant prepayment risk.
Available-for-sale securities 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 March 31, 2004, reported stockholders' equity reflected
unrealized securities gains net of tax of $10.8 million. This represented an
improvement of approximately $900,000 from unrealized securities gains net of
tax of $9.9 million at December 31, 2003.
Net unrealized gains increased to $16.4 million at March 31, 2004 compared
to net unrealized gains of $15.0 million at December 31, 2003. The increase was
the result of a decline in interest rates during the quarter, which improved the
market value of the bank's fixed-income investment portfolio. The market value
of fixed-income securities moves in the opposite direction of interest rates.
Securities available-for-sale increased to $692.7 million at March 31,
2004, up 4% from $669.3 million as of December 31, 2003. The growth in the
investment security portfolio since December 31, 2003 resulted from the
continued implementation of our asset/liability management strategy. Compared to
December 31, 2003, investments in U.S. government agency mortgage-backed
securities and CMOs increased by $12.0 million from $242.7 million to $254.7
million; investments in tax-exempt municipal securities increased by $13.4
million from $203.4 million to $216.8 million; and investments in FHLB stock
decreased by $1.5 million from $209.6 million to $208.1 million. The FHLB has
communicated to the Bank that generally the stock will be redeemed immediately
upon request; however, they have the right to require six months advance notice
of any stock sale before the liquidation at par actually occurs.
32
DEPOSITS AND FUNDS BORROWED
The following table presents the balances of deposits by category and
each category as a percentage of total deposits at March 31, 2004 and December
31, 2003:
MARCH 31, DECEMBER 31,
------------- ----------------
2004 2003
------------- ----------------
PERCENT OF PERCENT OF
BALANCE TOTAL BALANCE TOTAL
------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Non-interest bearing demand....... $ 153,197 9% $ 135,110 9%
Savings........................... 11,721 1% 9,795 1%
Interest-bearing demand........... 79,453 5% 85,083 5%
Money market...................... 635,117 39% 552,439 36%
Brokered deposits................. 426,022 26% 447,948 29%
Other time deposits............... 317,389 20% 316,984 20%
---------- --- ---------- ---
Total deposits................. $1,622,899 100% $1,547,359 100%
========== === ========== ===
Total deposits of $1.6 billion at March 31, 2004 represent an increase
of $75.5 million or 5% as compared to total deposits of $1.5 billion as of
December 31, 2003. Non-interest-bearing demand deposits increased by 13% to
$153.2 million at March 31, 2004 as compared to $135.1 million at December 31,
2003. Interest-bearing demand deposits decreased by 7% to $79.5 million as
compared to $85.1 million at December 31, 2003. Money market accounts increased
by $82.7 million, or 15%, to $635.1 million at March 31, 2004 as compared to
$552.4 million at December 31, 2003. Brokered deposits decreased by 5% or $22.0
million to $426.0 million at March 31, 2004 as compared to $447.9 million at
December 31, 2003. During the first quarter of 2004, we increased the use of
FHLB advances as a funding source and allowed certain brokered deposits to
mature, taking advantage of more favorable interest rates at the FHLB. Other
time deposits increased by approximately $405,000 to $317.4 million as compared
to $317.0 million at year-end 2003 due to growth in core deposits.
We continue to utilize brokered deposits as a source of funding for
growth in the loan and investment portfolios. We have issued certain brokered
deposits that 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. On March 30, 2004, we notified the Depository
Trust Company of our intent to call two brokered deposits. The deposits, a $15.0
million 4-year original maturity at 3.50% deposit and a $10.0 million 20-year
original maturity at 6.00% deposit, were redeemed on April 14, 2004 and April
26, 2004, respectively. The remaining prepaid broker commissions relating to
these two deposits were amortized between the notification date and the call
redemption dates. Therefore, the amortization expense will be higher in the
second quarter than if we had held these brokered deposits to their maturity.
The bank replaced these called brokered deposits with new brokered deposits. The
new deposits, a $15.0 million deposit entered into on March 26, 2004 with a
4-year maturity at 3.20% and a $10.0 million deposit entered into on April 23,
2004 with a 20-year maturity at 5.50%, are also callable. There was no
meaningful impact to our net interest margin in the first quarter of 2004
associated with our call of these two deposits; we expect second quarter margin
will be slightly negatively impacted by the increase in fee amortization of
$176,000 associated with our call of these two deposits.
33
As of March 31, 2004, there were five outstanding brokered deposits
containing unexercised call provisions. We have brokered deposits with eight
different brokers and we receive periodic information from other brokers
regarding potential deposits. The scheduled maturities of brokered deposits, net
of unamortized prepaid broker commissions, as of March 31, 2004, for the fiscal
years 2004 through 2007 and thereafter, are as follows:
SCHEDULED MATURITIES OF BROKERED DEPOSITS
NET OF UNAMORTIZED PREPAID BROKER COMMISSIONS
AT DECEMBER 31, 2003
For year ending December 31,
2004(1) 160,329
2005 131,592
2006 46,480
2007+(2) 89,485
-------
Total brokered deposits.................................. 427,886
Unamortized prepaid broker commissions................... (1,864)
-------
Total brokered deposits, net of unamortized prepaid
broker commissions....................................... $426,022
========
(1) Of the $160.3 million of brokered deposits maturing in 2004, $88.6
million are maturing in the third quarter of 2004.
(2) Includes five callable-brokered deposits: 1) $5.8 million with a
maturity of 3/18/2024 and a call date of 9/18/2004; 2) $10.0 million
with a maturity of 3/12/2024 and a call date of 9/24/2004; 3) $12.5
million with a maturity of 2/27/2019 and a call date of 8/27/2004; 4)
$10.0 million with a maturity of 1/21/2014 and a call date of
7/21/2004; 5) $15.0 million with a maturity of 3/26/2008 and a call
date of 9/26/2004.
Membership in the FHLB System gives us the ability to borrow funds from
the FHLB (Chicago) and from the FHLB (Des Moines) under a variety of programs.
We have periodically used the services of the FHLB for funding needs and other
correspondent services.
During the first quarter of 2004, we increased our use of FHLB advances
to fund loan and investment securities growth. Management anticipates that our
reliance on FHLB borrowings as a funding source will likely remain the same for
the remainder of 2004 to the extent that rates on brokered deposits continue to
be more attractive and our availability to borrow with the FHLB remains at
current levels. FHLB borrowings totaled $250.5 million at March 31, 2004
compared to $67.1 million at March 31, 2003 and $156.2 million at December 31,
2003.
34
A summary of all funds borrowed and outstanding at March 31, 2004,
December 31, 2003 and March 31, 2003 is presented in the table below:
CURRENT
LONG TERM FUNDS BORROWED: RATE MATURITY 3/31/2004 12/31/2003 3/31/2003
------------------------- ---- -------- --------- ---------- ---------
FHLB fixed advance (1) 4.16% 09/04/2007 25,000 25,000 --
Subordinated note 3.35% 02/11/2007 -- -- 5,000
FHLB fixed advance 2.87% 11/14/2006 25,000 25,000 --
FHLB fixed advance 2.43% 07/17/2006 1,000 1,000 --
FHLB fixed advance 2.12% 01/17/2006 2,000 2,000 --
FHLB fixed advance 2.28% 01/03/2006 10,000 10,000 --
FHLB fixed advance 2.31% 11/07/2005 2,000 2,000 --
FHLB fixed advance (2) 6.50% 10/24/2005 26,213 26,225 26,648
FHLB fixed advance 2.40% 09/06/2005 5,000 5,000 --
FHLB fixed advance 1.69% 08/17/2005 25,000 -- --
FHLB fixed advance 1.83% 07/15/2005 3,000 3,000 --
FHLB fixed advance 1.91% 06/15/2005 7,000 7,000 --
FHLB fixed advance 1.96% 06/15/2005 25,000 25,000 --
FHLB fixed advance 1.95% 05/09/2005 2,000 2,000 --
FHLB fixed advance 1.55% 01/30/2005 25,000 -- --
FHLB fixed advance 1.45% 01/13/2005 1,000 1,000 --
------- ------- ------
TOTAL LONG-TERM FUNDS BORROWED 184,213 134,225 31,648
SHORT TERM FUNDS BORROWED:
-------------------------
FHLB fixed advance 1.59% 12/15/2004 10,000 10,000 --
FHLB fixed advance 1.56% 12/13/2004 2,000 2,000 --
FHLB fixed advance 1.56% 11/16/2004 5,000 5,000 --
FHLB fixed advance 1.74% 11/08/2004 3,000 3,000 --
FHLB fixed advance 1.57% 10/25/2004 2,000 2,000 --
FHLB fixed advance 1.31% 10/20/2004 25,000 -- --
FHLB fixed advance 1.61% 01/16/2004 -- -- 1,000
FHLB fixed advance 6.21% 12/05/2003 -- -- 30,000
FHLB fixed advance 1.73% 11/07/2003 -- -- 6,000
FHLB fixed advance 2.74% 07/17/2003 -- -- 1,000
FHLB fixed advance 2.21% 07/17/2003 -- -- 1,000
FHLB fixed advance 2.46% 06/16/2003 -- -- 500
FHLB fixed advance 2.70% 05/08/2003 -- -- 1,000
Borrowing under revolving line of
credit facility 3.50% 04/11/2003 -- -- 28,750
Fed funds purchased 1.11% daily 47,000 50,000 9,000
Demand repurchase agreements (3) 0.90% daily 19,324 13,338 15,035
------- ------ ------
TOTAL SHORT-TERM FUNDS BORROWED 113,324 85,338 93,285
------- ------ ------
TOTAL FUNDS BORROWED $297,537 $219,563 $124,933
======== ======== ========
(1) The Company has the right to cancel this advance after one year and
semi-annually thereafter with 5 business day written notice.
(2) This FHLB advance is subject to a fair value hedge utilizing an
interest rate swap with a fair value of $2.0 million. The contractual
par amount on the advance is $25.0 million.
(3) Demand repurchase agreements are a form of retail repurchase agreements
offered to certain clients of The PrivateBank (Chicago). Funds are
swept each business day from the client's demand deposit account. These
amounts are not deposits and are not insured, but are secured by a pool
of securities pledged specifically for this purpose.
The Company has a $40.0 million revolving credit facility with a
commercial bank that matures on December 1, 2004. At March 31, 2004, we had a
zero balance outstanding under the line, compared to $28.8 million outstanding
at March 31, 2003. On July 30, 2003, the outstanding balance on the line of
credit was paid in full using proceeds from the common stock offering completed
on July 30, 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, we
have elected to pay interest based on the three-month LIBOR rate +120 basis
points.
As of March 31, 2003, we had a $5.0 million subordinated note
outstanding. The interest on the subordinated note was reset each quarter based
on the three-month LIBOR rate +200 basis points. The
35
note was payable in full on or before February 11, 2007, and provided for
certain rate escalation beginning after February 11, 2002. On August 19, 2003,
the subordinated note was paid in full.
CAPITAL RESOURCES
Stockholders' equity rose to $174.0 million at March 31, 2004, an
increase of $7.1 million from December 31, 2003 stockholders' equity of $167.0
due primarily to year-to-date 2004 net income of $6.0 million and an increase of
$861,000 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.
At March 31, 2004, $20.0 million of our outstanding trust-preferred
securities was treated as Tier 1 capital. 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:
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.
36
The following table sets forth our consolidated regulatory capital
amounts and ratios as of March 31, 2004 and 2003, and December 31, 2003:
MARCH 31, DECEMBER 31,
-------------------------------------------------------------- --------------------------
2004 2003 2003
------------------------------- ---------------------------- --------------------------
"Well "Well "Well
capital- Excess/ capital- Excess/ capital-
ized" (Deficit) ized" (Deficit) ized"
Capital Standard Capital Capital Standard Capital Capital Standard Capital
------- -------- ------- ------- -------- --------- ------ -------- -------
DOLLAR BASIS:
Tier 1 leverage
capital......... $161,698 $100,629 $61,069 $82,226 $78,020 $4,206 $155,431 $94,171 $61,260
Tier 1 risk-based
capital......... 161,698 88,090 73,608 82,226 70,600 11,626 155,431 80,495 74,936
Total risk-based
capital......... 178,227 146,816 31,411 97,697 117,667 (19,970) 170,531 134,158 36,373
PERCENTAGE BASIS:
Leverage ratio..... 8.03% 5.00% 5.27% 5.00% 8.25% 5.00%
Tier 1 risk-based
capital ratio... 11.01 6.00 6.99 6.00 11.59 6.00
Total risk-based
capital ratio... 12.14 10.00 8.30 10.00 12.71 10.00
Total equity to
total assets.... 8.14 5.85 8.41
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 March 31, 2004, the Company and each of the banking
subsidiaries exceeded the minimum levels of all regulatory capital requirements,
and were considered "well-capitalized" under regulatory standards.
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 used in operations was $132,000 in the three months ended
March 31, 2004 compared to net cash provided by operations of $11.8 million in
the prior year period. The net cash provided during the three months ended March
31, 2004 was impacted by the growth and timing of receipts of interest and cash
settlement payments. Net cash outflows from investing activities were $142.3
million in the first three months of 2004 compared to a net cash outflow of
$67.7 million in the prior year period. Cash inflows from financing activities
in the first three months of 2004 were $153.6 million compared to a net inflow
of $75.2 million in the first three months of 2003.
In the event of short-term liquidity needs, our banking subsidiaries
may purchase federal funds from correspondent banks. Membership in the FHLB
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 upon redemption, our
investment in FHLB stock is a source of liquidity for us. At March 31, 2004, we
owned $208.1 million of FHLB stock. We 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 us that
37
generally the stock will be redeemed immediately upon a request by us, however,
FHLB can legally require six months advance notice of the stock sale before the
stock is actually liquidated for cash at its par value. Alternatively, FHLB can
redeem, at any time any FHLB stock we own, in excess of the required minimum.
During the first quarter of 2004, we sold $4.9 million of FHLB stock, which was
redeemed in one business day. Currently, we plan to limit our FHLB stock
investment to no more than the $208.5 million we had outstanding at December 31,
2003. The FHLB of Chicago paid a 6.5% (annualized) dividend in the first, second
and third quarters of 2003 and a 7.0% (annualized) dividend in the fourth
quarter 2003. The FHLB (Chicago) has declared and paid a 6.5% dividend for the
first quarter of 2004. We have been notified that the FHLB (Chicago) will pay a
6.0% dividend in the second quarter 2004.
During the three months ended March 31, 2004, we increased the level of
FHLB advances while the level of brokered deposits decreased. During the first
quarter of 2004, our utilization of FHLB advances increased due to new advances
obtained to take advantage of the availability of longer maturity advances at
lower rates. Management anticipates that our reliance on FHLB borrowings and
brokered deposits as a funding source will continue for the remainder of 2004 to
the extent that brokered deposit pricing rates continue to be attractive and our
available collateral for FHLB advances remains at current levels. 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 26% of total deposits at March 31, 2004 compared to 28% of
total deposits at March 31, 2003. We do not expect our 40% threshold limitation
to limit our ability to implement our growth plan.
38
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 FHLB (Chicago).
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 $1.9 million as of March 31, 2004, a decrease of $129,400
as compared to December 31, 2003.
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 March 31, 2004 fair market value
adjustment on this swap resulted in the trading loss of $1.1 million for the
three months ended March 31, 2004, 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 March 31, 2004, the carrying value of
the trading swap was a liability of $1.1 million.
ASSET/LIABILITY MANAGEMENT POLICY
As a continuing part of our financial strategy, we attempt to manage the
impact of fluctuations in market interest rates on our net interest income. This
effort entails providing a reasonable balance between interest rate risk, credit
risk, liquidity risk and maintenance of yield. Asset/liability management policy
is established by our investment committee of our board of directors and is
monitored by management. Our asset/liability management policy sets standards
within which we are expected to operate. These standards include guidelines for
exposure to interest rate fluctuations, liquidity, loan limits as a percentage
of funding sources, exposure to correspondent banks and brokers, and reliance on
non-core deposits. The policy also states our reporting requirements to our
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.
We have structured our assets and liabilities to mitigate the risk of
either a rising or falling interest rate environment. We manage our gap position
at the one-year horizon. Depending upon our assessment of economic factors such
as the magnitude and direction of projected interest rates over the short- and
long-term, we generally operate within guidelines set by our asset/liability
management policy and attempt to maximize our returns within an acceptable
degree of risk. Our policy states that we shall maintain a rate sensitive assets
to rate sensitive liabilities position at the one-year horizon between 70% and
130%. Our position at March 31, 2004 was 100% as compared to 101% at December
31, 2003 and was within the guidelines of our policy. We have continued to
maintain our gap position set by our policy
39
guidelines and expect to continue to operate in this manner as long as the
general rate structure of the economy and our business opportunities remain
consistent. Therefore, generally speaking, a short-term rise in interest rates
will positively impact our earnings, while a short-term drop in interest rates
would negatively impact our earnings.
Interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously. There are other factors that are
difficult to measure and predict that would influence the effect of interest
rate fluctuations on our income statement. For example, a rapid drop in interest
rates might cause our loans to repay at a more rapid pace and certain
mortgage-related investments to prepay more quickly than projected. This could
mitigate some of the benefits of falling rates that are expected when negatively
gapped. Conversely, a rapid rise in rates could give us an opportunity to
increase our margins and stifle the rate of repayment on our mortgage-related
loans, which would increase our returns. The following tables illustrate our
estimated interest rate sensitivity and periodic and cumulative gap positions
calculated as of March 31, 2004 and December 31, 2003:
MARCH 31, 2004
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 882,599 143,380 297,516 10,537 1,334,032
Investments 54,457 68,249 145,135 234,960 502,801
FHLB stock 208,097 - - - 208,097
Fed funds sold 307 - - - 307
--------- -------- -------- -------- ----------
Total interest-earning assets $1,145,460 $211,629 $442,651 $245,497 $2,045,238
--------- -------- -------- -------- ----------
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits - - - 79,453 79,453
Savings deposits 11,721 - - - 11,721
Money market deposits 654,935 - - - 654,935
Time deposits 131,772 132,956 52,562 100 317,389
Brokered deposits 52,780 203,611 120,227 48,309 424,926
Funds borrowed 91,324 73,000 152,000 - 316,324
--------- -------- -------- -------- ----------
Total interest-bearing liabilities $ 942,531 $409,567 $ 324,789 $127,862 $1,804,747
--------- -------- --------- -------- ----------
CUMULATIVE
Rate sensitive assets (RSA) $1,145,460 $1,357,090 $1,799,740 $2,045,238
Rate sensitive liabilities (RSL) 942,531 1,352,097 1,676,886 1,804,747
GAP (GAP=RSA-RSL) 202,930 4,993 122,855 240,491
RSA/RSL 121.53% 100.37% 107.33% 113.33%
RSA/Total assets 53.55% 63.44% 84.14% 95.61%
RSL/Total assets 44.06% 63.21% 78.39% 84.37%
GAP/Total assets 9.49% 0.23% 5.74% 11.24%
GAP/Total RSA 17.72% 0.37% 6.83% 11.76%
40
DECEMBER 31, 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 $ 807,928 $ 126,498 $ 269,343 $ 12,278 $1,216,046
Investments 77,785 94,530 81,997 214,082 468,394
FHLB stock 209,633 209,633
Fed funds sold 45 -- -- -- 45
---------- ---------- ---------- ---------- ----------
Total interest-earning assets $1,095,391 $ 221,028 $ 351,340 $ 226,360 $1,894,117
---------- ---------- ---------- ---------- ----------
INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $ -- $ -- $ -- $ 85,083 $ 85,083
Savings deposits 11,352 -- -- -- 11,352
Money market deposits 574,214 -- -- -- 574,214
Time deposits 134,018 132,709 49,852 -- 316,579
Brokered deposits 155,686 161,349 122,980 10,000 450,015
Funds borrowed 84,338 47,000 107,000 -- 238,338
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 959,608 $ 341,058 $ 279,832 $ 95,083 $1,675,581
---------- ---------- ---------- ---------- ----------
CUMULATIVE
Rate sensitive assets (RSA) $1,095,391 $1,316,419 $1,667,759 $1,894,119
Rate sensitive liabilities (RSL) 959,608 1,300,666 1,580,498 1,675,581
GAP (GAP=RSA-RSL) 135,783 15,753 87,261 218,538
RSA/RSL 114.15% 101.21% 105.52% 113.04%
RSA/Total assets 55.21% 66.35% 84.06% 95.47%
RSL/Total assets 48.37% 65.56% 79.66% 84.45%
GAP/Total assets 6.84% 0.79% 4.40% 11.01%
GAP/Total RSA 12.40% 1.20% 5.23% 11.54%
The following table shows the impact of immediate 200 and 100 basis
point changes in interest rates as of March 31, 2004 and December 31, 2003. 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.
MARCH 31, 2004 DECEMBER 31, 2003
-------------------------------- --------------------------------
+200 -200 -100 +200 -200 -100
BASIS BASIS BASIS BASIS BASIS BASIS
POINTS POINTS POINTS POINTS POINTS POINTS
-------- -------- -------- -------- -------- --------
Percentage change in net interest
income due to an immediate 200 or
100 basis point change in interest
rates over a one-year time horizon... 0.6% (8.2)% (0.4)% 4.1% (9.2)% (5.9)%
This table shows that if there had been an instantaneous parallel shift
in the yield curve of -100 basis points on March 31, 2004, net interest income
would decrease by 0.4% over a one-year period. Due to current market interest
rates, a -100 basis point shift is presented for March 31, 2004 as a more
reasonable illustration of possible rate changes. The measurement of a -200
basis point instantaneous parallel shift in the yield curve at March 31, 2004
would result in a decline in net interest income of 8.2% over a one-year period
versus a decline of 9.2% at December 31, 2003. At December 31, 2003, if there
had been an instantaneous parallel shift in the yield curve of -100 we would
have suffered a decline in net interest income of 5.9%. Conversely, a shift of
+200 basis points would increase net interest income
41
0.6% over a one-year horizon based on March 31, 2004 balances, as compared to an
increase of net interest income of 4.1% measured on the basis of the December
31, 2003 portfolio.
Changes in the effect on net interest income from the presented basis
point movements at March 31, 2004, compared to December 31, 2003 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 March 31, 2004 as compared to December 31, 2003 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 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 those predicted 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; greater than anticipated deterioration in asset quality due to
a prolonged economic downturn in the greater Chicago and St. Louis metropolitan
areas; legislative or regulatory changes; adverse developments or changes in the
composition of our loan or investment portfolios; significant increases in
competition; difficulties in identifying attractive acquisition opportunities or
strategic partners to complement our private banking approach and the products
and services we offer; unanticipated difficulties in signing and closing the
Corley Financial transaction or unexpected difficulties in integrating or
operating the mortgage banking business; unanticipated construction delays
relating to our new office to be located in the Palmolive Building;
unanticipated delays in regulatory approvals required to open in Wisconsin;
unanticipated delays in opening the planned Milwaukee location; the possible
dilutive effect of potential acquisitions or
42
expansion; and our ability to raise new capital as needed and the timing, amount
and type of such capital raises. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
PART II
Item 1. Legal Proceedings
From time to time, we may be party to various legal proceedings arising
in the normal course of our business. Since we act as a depository of funds, we
may be named from time to time as a defendant in various lawsuits (such as
garnishment proceedings) involving claims to the ownership of funds in
particular accounts. Neither PrivateBancorp nor any of our subsidiaries is
currently a defendant in any such proceedings that we believe will have a
material adverse effect on our business, results of operations, financial
condition or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information about purchases by the Company
during the quarter ended March 31, 2004 of equity securities that are registered
by the Company pursuant to Section 12 of the Exchange Act.
(C)
TOTAL NUMBER OF
SHARES PURCHASED (D)
(A) AS PART OF MAXIMUM NUMBER OF
TOTAL NUMBER OF (B) PUBLICLY SHARES THAT MAY BE
SHARES AVERAGE PRICE ANNOUNCED PLANS PURCHASED UNDER THE
PERIOD PURCHASED (1) PAID PER SHARE OR PROGRAMS PLANS/PROGRAM (2)
------ ------------- -------------- ----------- -----------------
01/01/04-01/31/04 -- -- -- 231,192
02/01/04-02/29/04 -- -- -- 231,192
03/01/04-03/31/04 -- -- -- 231,192
---- ---- ---- --------
Total -- -- -- 231,192
(1) Does not include shares reacquired by the Company in payment of the
exercise price and/or withholding taxes in connection with the exercise
of certain employee/director stock options.
(2) The Company's Board of Directors approved the repurchase by the Company
of up to an aggregate of 231,192 shares of its common stock pursuant to
the repurchase program that was publicly announced on July 25, 2001
(the "Program"). Unless terminated earlier by the Company's Board of
Directors, the Program will expire when the Company has repurchased all
shares authorized for repurchase thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Certificate of amendment of the Amended and Restated Certificate of
Incorporation of PrivateBancorp, Inc., as amended.
3.2 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc., as amended. (filed as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 2003, and
incorporated herein by reference).
3.3 Amended and Restated By-laws of Private Bancorp, Inc. (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the period
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.
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:
none.
44
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: May 7, 2004
45
EXHIBIT INDEX
(a) Exhibits.
3.1 Certificate of amendment of the Amended and Restated Certificate of
Incorporation of PrivateBancorp, Inc., as amended.
3.2 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc., as amended. (filed as an exhibit to the Company's quarterly
report on Form 10-Q for the quarter ended March 31, 2003, and
incorporated herein by reference).
3.3 Amended and Restated By-laws of Private Bancorp, Inc. (filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the period
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.
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.