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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 000-25887
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 36-3681151
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Ten North Dearborn Street Chicago, Illinois 60602
(Address of principal executive offices)
(312) 683-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
9.50% Cumulative Trust Preferred Securities
(and the Guarantee with respect thereto)
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 check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting common equity of the
Registrant held by non-affiliates of the Registrant was approximately
$48,234,690 based on the closing price of the common stock of $13.50 on March
15, 2001, as reported by the Nasdaq National Market.
As of March 15, 2001, the Registrant had outstanding 4,685,768
shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III.
FORM 10-K
Table of Contents
Page
Number
PART I .................................................................................................1
Item 1. Business................................................................................1
Item 2. Properties.............................................................................19
Item 3. Legal Proceedings .....................................................................20
Item 4. Submission of Matters to a Vote of Security Holders....................................20
PART II ................................................................................................20
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................20
Item 6. Selected Financial Data ...............................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ............................39
Item 8. Financial Statements and Supplementary Data ...........................................43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..43
PART III ................................................................................................43
Item 10. Directors and Executive Officers ......................................................43
Item 11. Executive Compensation ................................................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................43
Item 13. Certain Relationships and Related Transactions ........................................43
PART IV ................................................................................................43
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................43
Index to Consolidated Financial Statements..............................................................F-1
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PART I
ITEM 1. BUSINESS
Overview
We organized PrivateBancorp as a Delaware corporation in 1989 to
serve as the holding company for a Chicago-based de novo (or start-up) bank
designed to provide highly personalized financial services primarily to affluent
individuals, professionals, entrepreneurs and their business interests. We were
one of the first banks newly formed in the Chicago area at that time. The
organizers had significant senior level banking experience and many potential
client contacts from prior banking positions.
We believe that as the financial industry has consolidated, many
financial institutions have focused on a mass market approach using automated
customer service which de-emphasizes personal contact. We believe that the
centralization of decision-making power at these large institutions has resulted
in disruption of client relationships as frontline bank employees who have
limited decision-making authority fill little more than a processor role for
their customers. At many of these large institutions, services are provided by
employees in the "home office" who evaluate requests without the benefit of
personal contact with the customer or an overall view of the customer's
relationship with the institution.
We believe that this trend has been particularly frustrating to
affluent individuals, professionals, owners of closely-held businesses and
commercial real estate investors who traditionally were accustomed to dealing
directly with senior bank executives. These customers typically seek banking
relationships managed by a decision maker who can deliver a prompt response to
their requests and custom tailor a banking solution to meet their needs. As
smaller, independent banks have been acquired by national, multi-bank holding
companies, we believe that the personal relationships that these customers
maintained with the management of such banks have eroded, and their
individualized banking services have been lost.
We have two banking subsidiaries--The PrivateBank and Trust Company,
which we also refer to as The PrivateBank (Chicago), and The PrivateBank, which
we also refer to as The PrivateBank (St. Louis). We provide our clients with
traditional personal and commercial banking services, lending programs, and
trust and asset management services. Using the European tradition of "private
banking" as our model, we strive to develop a unique relationship with each of
our clients, utilizing a team of managing directors to serve our client's
individual and corporate banking needs, and tailoring our products and services
to meet their needs. Our managing directors are strategically located in seven
Midwestern United States locations. Currently, we have six offices in the
Chicago metropolitan area. These offices are strategically located in downtown
Chicago; in the affluent North Shore communities of Wilmette, Winnetka and Lake
Forest; in Oak Brook, centrally located in the fast growing west suburban DuPage
County; and in St. Charles, in the far western Fox Valley area. We currently
operate from one location in the St. Louis market where we established The
PrivateBank (St. Louis), a federally chartered savings bank, in June 2000. The
St. Louis-based bank also focuses on clients who are seeking a higher level of
service and a broad array of personalized banking and wealth management products
and services. The PrivateBank (St. Louis) clients consist of individuals, small
to medium-size businesses, commercial real estate investors and professionals.
Since year-end 1995 to December 31, 2000, we have grown our asset
base at a compound annual rate of 33.9% to $829.5 million. During the same
period, loans have grown at a compound annual rate of 36.9% to $599.4 million,
deposits at a compound annual rate of 30.8% to $670.2 million and trust assets
under administration at a compound annual rate of 30.7% to $777.8 million.
The PrivateBank Approach
We are a client-driven organization. We emphasize personalized
client relationships and custom-tailored financial services, complemented by the
convenience of technology. We target the affluent segment of the market because
we believe that there is significant unmet demand for personalized services
within this segment, and also because we believe it offers significant growth
potential. The key aspects of our private banking approach are:
o Personal Relationships. Our approach begins with the
development of strong, dedicated relationships with our
clients. Each client is matched with a team of individuals
headed by a managing director. This managing director
becomes our client's central point of contact with us. Our
16 managing directors, who are senior financial
professionals, act as the financial partners of our clients,
working with them to identify and service their banking
needs. By dedicating a team of executives to each client, we
are able to build ongoing relationships which allow our
managing directors to use their increasing knowledge of the
client's financial history and goals to quickly adapt our
services to the client's individual needs. Our clients
interact with the same persons for all types of banking
services, enabling them to gain a sense of security and
continuity of personal service in their banking
relationship. On the basis of this trust and confidence, we
seek to expand the scope of services provided to each
client, often including banking needs related to the
business affairs of our clients. Satisfied clients provide
our most fertile source of new business and new client
referrals as well.
o Affluent Target Client. We believe that the affluent segment
of the population, meaning that segment with annual incomes
over $150,000, is increasing and is diverse in terms of its
overall wealth and financial needs. We offer our services to
those members of this segment who are focused on building
and preserving wealth. Our clients include affluent
individuals, professionals, entrepreneurs and their business
interests. We target service industries such as the
accounting, legal and medical professions, as well as owners
of closely-held businesses, commercial real estate investors
and corporate executives. Although we generally target
individuals with high annual incomes and net worths, we also
recognize the growth potential of certain young
professionals and extend our services to those individuals
whose incomes or net worths do not initially meet our
criteria. We believe that this segment of the market is most
suited to our business and that these individuals are most
likely to develop long-term relationships with us.
o Customized Financial Services. In taking a long-term
relationship approach to our clients, we are able to
differentiate our services from the "one-size-fits-all"
mentality of other financial institutions. Our clients use a
wide variety of financial services beyond the traditional
banking products, and we work with them to identify their
particular needs and to develop and shape our services
tailored to meet those needs. While we offer a portfolio of
products, we believe that it is our personalized service
that distinguishes us from our competition. We encourage,
not discourage, our clients to contact us. We use regular
contact as a way to strengthen our relationships, increase
services to existing clients and earn referral business.
o Streamlined Decision-Making Process. Unlike most larger
banks, we do not have a lengthy chain of command. Our
clients generally deal directly with their dedicated
managing directors, who are given broad decision-making
authority. This allows our managing directors to respond
quickly and efficiently to our clients' needs. We are able
to use a streamlined approach because our organization has
many qualified, experienced credit officers. Officers with
credit approval authority make themselves available on short
notice to help consult on or approve credits when time is of
the essence. We use an "on call" approach, rather than
structured meetings, to approve credit. As the amount of the
credit and the complexity increases, we resort to a more
traditional approval process.
o Enhanced Personal Service through Technology. While we
encourage our clients to contact us directly, we also
utilize technology to complement and enhance client service.
We offer products such as PrivateBank Access, our Internet
banking service, Master Money debit cards and Private Line
Access, our voice-response communication system, to enhance,
not replace, personal contact. This technology allows us to
afford our clients the convenience of accessing our services
from remote locations at any time of day.
Our clients may connect to PrivateBank Access directly through our Internet
website, without the need for the diskettes or software downloads found in some
competing PC banking systems. Currently, our product:
o accesses deposit information and current deposit rate
schedules;
o allows transfers of funds among accounts;
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o includes a bill payment service with a variety of options;
o allows information to be exported to financial software
packages;
o includes a help desk which is staffed 92 hours per week; and
o sends e-mail messages from clients to bank personnel.
As technology changes, we intend to modify and enhance our electronic banking
products. We believe that in the future, a growing number of our clients will
desire both personal and electronic services. We intend to work to improve and
expand dual-delivery systems providing the quality of service to which our
clients are accustomed.
o Extensive Financial Network. In order to compete with other
financial service providers, we rely on a network of
professionals in the financial and investment communities
with whom we have developed strategic alliances over the
years. This enables us to offer our clients a broad array of
high quality services. For example, we work with selected
investment management firms in providing services to our
trust clients. Our clients can either maintain their
existing investment management relationships when they
become trust clients, or use our approved providers of
investment management services. We believe this choice
distinguishes our service from the rigid policies set by
some of our competitors. We, in turn, assist our clients in
selecting a complete package of services best suited to
their individual needs without incurring the overhead
associated with directly employing diversified portfolio
managers. We also have a contractual fee sharing agreement
with an independent insurance brokerage firm. Through this
affiliation, we offer a full range of personal and corporate
insurance products to our clients. To complement our
existing financial products and services, we have a
contractual arrangement with a registered securities
broker-dealer firm through which we offer our clients
on-site securities brokerage services.
Strategy for Growth
We seek to enhance long-term stockholder value through internal
growth, expanded product lines and selective geographic expansion. We expect to
continue to evaluate possible acquisition candidates and new office locations
and we intend to pursue opportunities that we perceive to be attractive to the
long-term value of our franchise. Our growth strategy entails four key
components:
o Developing Our Existing Relationships. An important part of
our future growth will be the continued development of our
existing client relationships. As the needs of our clients
change and grow, we seek to grow with them and continue to
provide them with our custom-tailored, flexible services.
For example, we strive to follow our clients from the
purchase of their homes, through the financing of their own
business, to the development and planning of their estate
and continuing the relationship tradition with their
children and grandchildren. We believe we have a significant
opportunity to further develop our existing client
relationships in each of our offices.
o Increasing the Reach of Our Existing Offices. In addition to
increasing the services provided to our existing clients, we
seek to expand the market presence of our existing offices,
particularly in our newer offices. We believe that the
growing need for private banking services in these markets
is still largely unmet and we believe there is a significant
opportunity to increase our client base in these offices. We
hope to capitalize on our reputation and the reputations of
our managing directors in increasing our market presence.
Our managing directors, with their personal and professional
contacts in the financial and corporate arenas, have been
instrumental in developing our business. We encourage our
senior executives to attend and host business receptions,
charitable activities and promotional gatherings so that we
may interact with our clients in a unique and personal
manner. We also hope to grow our business through referrals
from our existing clients. Referrals have been a significant
source of new business for us. We value this system of
networking because it allows us to further develop and
strengthen our personal and professional relationships with
both new and existing clients.
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o Expanding into New Product Lines. Our goal is to be the
primary source of financial products and services for our
clients. We believe that by broadening our product line and
adding additional financial services not currently offered
by us, we should be able to achieve an increase in our
franchise value through diversification of our fee income
and strengthening of our client relationships. To reach this
goal, we intend to consider acquisitions, joint ventures or
strategic alliances with other financial service companies
that emphasize quality service and the value of
relationships. Our targets are businesses that complement
our services and enable us to broaden our product line to
better serve our clients and help us develop new client
relationships.
o Expanding into New Markets. We believe the trend toward bank
consolidation and centralized decision-making that has
created a demand for our private banking services is not
unique to Chicago or St. Louis. As we identify other markets
that present opportunities for growth and development
similar to those in the Chicago and St. Louis markets, we
will consider selective geographic expansion through
possible acquisitions of existing institutions or by
establishing new banking offices.
The PrivateBank (Chicago) and The PrivateBank (St. Louis)
We offer banking services to our clients at a personal level. We
believe this is not the same as personal banking service. We define private
banking as offering banking products and services to our clients when they want
it, how they want it and where they want it. We tailor our products and services
to fit our clients instead of making our clients fit our products and services.
Our services fall into four general categories:
o Commercial Services. We offer a full range of lending
products to businesses owned by or affiliated with our
clients. We offer lines of credit for working capital, term
loans for equipment and other investment purposes, and
letters of credit to support the commitments our clients
make. We tailor these products to meet the varied needs of
our clients. Non-credit products we offer include lockbox,
cash concentration accounts, merchant credit card
processing, electronic funds transfer, other cash management
products and insurance. We strive to offer banking packages
that are competitive and allow us to provide service to our
clients beyond what is expected in our industry.
o Real Estate Services. We provide real estate loan products
to businesses and individuals. Our commercial real estate
lending products are designed for real estate investors. We
provide a full range of fixed and floating rate permanent
and mini-permanent mortgages for our clients to finance a
variety of properties such as apartment buildings, office
buildings, strip shopping centers, and other income
properties. We also provide some construction lending for
residential and commercial developments. We believe that our
lending products are competitively priced with terms that
are tailored to our clients' individual needs.
Our residential mortgage products range from 30-year fixed rate products to
personal construction lending. The home mortgage market is very competitive and
we believe that our service is what separates us from our competition. Many
mortgage lenders cannot work with borrowers who have non-traditional income
sources or non-traditional properties, such as co-ops. Our mortgage lending
staff is trained to work with successful individuals who have complex personal
financial profiles. We have developed a proficiency for mortgages in excess of
$1.0 million per loan and will work with our clients and our market sources to
place these loans into the secondary market. Our experience has been that
residential lending is an excellent vehicle to attract new clients.
o Trust and Asset Management. Our trust services include
investment management, personal trust and estate services,
custodial services, retirement accounts and brokerage and
investment services. Our trust personnel work with our
clients to define objectives, goals and strategies for their
investment portfolios. We assist the client with the
selection of an outside investment manager and work to
tailor the investment program accordingly. During 1999, we
introduced PrivateBank Counselor, an asset allocation
program that combines outside professional portfolio
management with an investment plan that our trust personnel
tailor to the individual client's personal financial goals.
Our trust and estate account administrators work with our
clients and their attorneys to establish their estate plans.
We work closely with our clients and their beneficiaries to
ensure that their needs are met and to advise them on
financial matters. When serving as management agent, trustee
or executor, we often structure
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and periodically monitor the performance of the investment
management of our clients' investment portfolios. We also
provide our clients with custodial services for safekeeping
of their assets. Consistent with our private banking
approach, we emphasize a high level of personal service in
our trust area, including prompt collection and reinvestment
of interest and dividend income, weekly valuation, tracking
of tax information, customized reporting and ease of
security settlement. We also offer retirement products such
as individual retirement accounts, 401(k)s, IRA rollovers,
and administrative services for retirement vehicles such as
profit sharing plans and employee stock option plans, as
well as a full line of brokerage and investment products.
Trust services are currently offered at The PrivateBank (St.
Louis) through the trust department of The PrivateBank
(Chicago).
o Individual Banking Services. Our typical private banking
client has several of the following products: interest
bearing checking with credit line, money market deposit
accounts, certificates of deposit, ATM/debit cards, and
brokerage accounts. Some of our clients are using the
PrivateBank Access Internet PC banking product. In addition
to residential mortgages, we provide clients a variety of
secured and unsecured personal loans and lines of credit.
Through our affiliations and contractual arrangements with
an independent insurance brokerage firm and a registered
securities broker-dealer firm, we offer insurance products
and securities brokerage services. We strive to accommodate
the individual needs of each of our clients by offering the
convenience of highly personalized services, including
domestic and international wire transfers and foreign
currency exchange.
Lending Activities
We work with our clients to provide a full range of commercial, real
estate and personal lending products and services. Our loans are concentrated in
six major areas: (1) commercial real estate; (2) commercial; (3) residential
real estate; (4) personal; (5) home equity; and (6) construction. We have
adopted a loan policy that contains general lending guidelines and is subject to
review and revision by our board of directors. We extend credit consistent with
this comprehensive loan policy.
The goal of our lending program is to meet the credit needs of our
diverse client base while using sound credit principles to protect the quality
of our assets. Our business and credit strategy is relationship-driven and we
strive to provide a reliable source of credit, a variety of lending
alternatives, and sound financial advice. When extending credit, our decisions
are based upon our client's ability to repay the loan from non-speculative
sources. The quality and integrity of the borrower is crucial in the loan
approval process. We monitor the performance of our loan portfolio through
regular contacts with our clients, continual portfolio review, careful
monitoring of delinquency reports and reliance on our loan review function.
We have retained an independent, outside resource to perform our
loan review function. Using an outside resource ensures that our loan review
process remains independent of the loan production and administration processes.
Our loan reviewer examines individual credits to critique individual problems
and the entire portfolio to comment on systemic weaknesses. The reviewer reports
directly to the audit committee of our board of directors on a quarterly basis.
In addition to loan review, the loan/investment committee of our board reviews
the adequacy of the allowance for loan losses on a quarterly basis. The
committee assesses management's loan loss provisions based on loan review's
findings, delinquency trends, historical loan loss experience and current
economic trends.
Our legal lending limits, based on our banks' statements of
financial condition, are calculated to not exceed 20% of capital plus
unencumbered reserves. At December 31, 2000, The PrivateBank (Chicago)'s legal
lending limit was $12.8 million and The PrivateBank (St. Louis)'s legal lending
limit was $1.0 million. A bank's legal lending limit is the maximum amount of
credit that the bank may commit to any one individual or business entity after
aggregating all related credit.
In addition to our chief credit officer, certain individuals have
been designated acting chief credit officers, credit officers, officers with
lending authority, and residential real estate lending officers. No single
individual has sole authority to approve a loan. As the size of aggregate credit
exposure increases, additional officers are required to approve the loan
requests. This serves several purposes: (a) larger credits get more scrutiny,
(b) most senior credit officers become involved in the decision-making process
for the vast majority of dollars loaned without
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approving a proportionate number of loan requests, and (c) we become more
consistent in administration of credit as credit officers experience the
dynamics of our overall portfolio and credit culture.
Our chief credit officer, or his designate, is involved in all
credit decisions when the aggregate credit exposure is in excess of $250,000.
The loan/investment committee of The PrivateBank (Chicago) reviews all credit
decisions over $2.5 million and that of The PrivateBank (St. Louis) reviews all
credit decisions over $250,000. Prior approval is required for credit exposure
in excess of $5.0 million and for all credits related to our board members or
our managing directors. Loans are approved at the bank level by a management
loan committee or by obtaining the approval of individual credit officers. We
believe that this process allows us to be more responsive to our clients' needs
by being able to approve credit without waiting for scheduled committee
meetings. We also use management committee meetings to discuss complex credits
or when we feel that a particular credit may be informative to everyone in the
loan approval process. The PrivateBank (St. Louis) is required to maintain a
specific percentage of its loan portfolio in qualified residential real estate
loans. To address this regulatory requirement, from time to time, The
PrivateBank (St. Louis) intends to purchase qualifying loans from The
PrivateBank (Chicago) in exchange for loans generated in the St. Louis market
that do not meet the criteria for qualified-thrift-loans. We expect to price
sales of loans between the banks so as to allow each bank to achieve equal risk
rewards from a yield perspective. Prior to purchasing any loans, the chief
credit officer of The PrivateBank (Chicago) will apply the same credit policies
and procedures as are followed for any other loan approval. Likewise, The
PrivateBank (St. Louis) will apply the same lending discipline to loans
purchased from The PrivateBank (Chicago) as it does for externally generated
loans.
The following table sets forth the loan portfolio by category as of
December 31, 2000 and 1999:
December 31, Percentage of December 31, Percentage of
2000 total loans 1999 total loans
------------- ------------- ------------ -------------
(dollars in thousands)
Commercial real estate.......... $206,464 34.4% $146,368 36.8%
Commercial...................... 137,343 22.9% 67,026 16.9%
Residential real estate......... 86,052 14.4% 72,972 18.4%
Personal........................ 62,414 10.4% 57,497 14.5%
Home equity..................... 46,013 7.7% 24,396 6.1%
Construction.................... 61,143 10.2% 29,018 7.3%
---------- ----- ---------- -----
Total loans................ $599,429 100.0% $397,277 100.0%
========== ===== ========== =====
Commercial Real Estate Loans. Our commercial real estate portfolio
is comprised primarily of loans secured by multi-family housing units located in
the Chicago metropolitan area. Other types of commercial real estate collateral
include: commercial properties owned by clients housing their manufacturing,
warehousing or service businesses, investments in small retail centers, and
investments in other business properties.
Risks inherent in real estate lending are related to the market
value of the property taken as collateral, the underlying cash flows and
documentation. It is important to accurately assess property values through
careful review of appraisals. Some examples of risky commercial real estate
lending include loans secured by properties with widely fluctuating market
values or income properties occupied by renters with unstable sources of income,
and not perfecting liens on property taken as collateral. We mitigate these
risks by understanding real estate values in areas in which we lend,
investigating the sources of cash flow servicing the debt on the property and
adhering to loan documentation policy.
Commercial real estate loan products include mini-permanent and
permanent financing, transaction loans to purchase properties prior to permanent
financing, and lines of credit secured by commercial real estate portfolios. We
typically structure mini-permanent and permanent financing as adjustable rate
mortgages. ARM structure allows our clients to lock in an interest rate for a
fixed period of time in order to avoid interest rate risk during the lock-in
period. The vast majority of our ARM loans have initial fixed pricing for
between one to five years. Each ARM loan has language defining repricing beyond
the initial fixed pricing term. Transaction loans to purchase commercial
property typically have maturities of one year or less. Lines of credit secured
by commercial real estate portfolios are typically granted for one year with
annual extensions after a successful underwriting review. Interest rates for our
lines of credit typically are based on a floating rate formula.
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In our credit analysis process for commercial real estate loans, we
typically review the appraised value of the property, the ability of the
property as collateral to service debt, the significance of any outside income
of the borrower or income from other properties owned by the borrowers, and the
strength of guarantors, if any. Our real estate appraisal policy has been
approved by our board loan/investment committee. It addresses selection of
appraisers, appraisal standards, environmental issues and specific requirements
for different types of properties.
Commercial Loans. Our commercial loan portfolio is comprised of
lines of credit for working capital, term loans for equipment and expansion, and
letters of credit. These loans are made to businesses affiliated with our
clients, or to clients directly for business purposes. The vast majority of our
commercial loans are personally guaranteed. Unsecured loans are made to
businesses when a guarantor, as a secondary source of repayment, has a
significant ability to repay and a significant interest in the business entity.
Commercial loans can contain risk factors unique to the business of each
borrower. In order to mitigate these risks, we seek to gain an understanding of
the business of each borrower, place appropriate value on collateral taken and
structure the loan properly to make sure that collateral values are maintained
while loans are committed. Appropriate documentation of commercial loans is also
important to protect our interests.
Our lines of credit typically are limited to a percentage of the
value of the assets securing the line, and priced by a floating rate formula.
Lines of credit typically are reviewed annually and are supported by accounts
receivable, inventory and equipment. Depending on the risk profile of the
borrower, we may require periodic aging of receivables, and inventory and
equipment listings to verify the quality of the borrowing base prior to
advancing funds. Our term loans are typically also secured by the assets of our
clients' businesses. Term loans typically have maturities between one to five
years, with either floating or fixed rates of interest. Commercial borrowers are
required to provide updated personal and corporate financial statements at least
annually. Letters of credit are an important product to many of our clients. We
issue standby or performance letters of credit, and can service the
international needs of our clients through correspondent banks. We use the same
underwriting standards for letters of credit as we do for funded loans.
Our credit approval process for commercial loans is comprehensive.
We typically review the current and future cash needs of the borrower, the
business strategy, management's ability, the strength of the collateral, and the
strength of the guarantors. While our loan policy has guidelines for advances on
different types of collateral, we establish eligible asset values on a
case-by-case basis for each borrower. Our officer on the account must be able to
validate his or her position during the approval process.
Residential Real Estate Loans. Our residential real estate portfolio
consists primarily of first and second mortgage loans for 1-4 unit residential
properties. We do not originate long-term fixed rate loans for our own portfolio
due to interest rate risk considerations. However, we do originate these loans
for sale into the secondary market. This is a significant business activity in
our residential real estate lending unit. For our own portfolio, we originate
ARM loans typically structured with 30-year maturities and initial rates fixed
for between one to five years with annual repricing beyond the initial term.
Our credit review process mirrors the standards set by traditional
secondary market sources. We review appraised value and debt service ratios, and
we gather data during the underwriting process in accordance with the various
laws and regulations governing residential real estate lending. Our real estate
appraisal policy sets specific standards for valuing residential property.
We require pre-approval from secondary market sources before we
approve loans to be sold into the secondary market. Our internal approval
process is less stringent for loans pre-approved by our secondary market
sources. This allows us to be responsive to the tight time commitments dictated
for locking in rates in the secondary market.
We believe that we have a competitive advantage in our ability to
offer financing for our clients who have non-traditional income sources or
require large mortgage loans. We have developed secondary market sources for
mortgages, including several able to provide financing in amounts in excess of
$1.0 million per loan which is occasionally required by our clients. By offering
our own ARM loans, we can offer credit to individuals who are self-employed or
have significant income from partnerships or investments. The secondary market
often will not take the time or will be unable to make exceptions for otherwise
qualified borrowers. We also have experience in
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making loans to qualified borrowers secured by co-ops. We believe that we are
one of a limited number of financial institutions in the Chicago area making
these loans.
Personal Loans. Our personal loan portfolio consists of loans to
secure funds for personal investment, loans to acquire personal assets such as
automobiles and boats, and personal lines of credit. Frequently, our borrowers
prefer not to liquidate assets to secure funds for investment or personal
acquisitions. They will use these assets as collateral for personal loans, or if
their financial statements and personal reputations are sufficient, we will
grant unsecured credit. A key factor in originating personal loans is knowing
our borrowers. When personal loans are unsecured, we believe that the character
and integrity of the borrower becomes as important as the borrower's financial
statement.
Our clients request a combination of lines of credit, floating-rate
term loans and fixed-rate term loan products. Many of our clients use their
personal investment portfolios as collateral for personal loans. Personal lines
of credit are used for a variety of purposes such as the comfort of having funds
available for future uses or establishing a line of credit as overdraft
protection. We respond quickly to the needs of our clients within the limits set
by our loan policy.
Personal loans are subject to the same approval process as all other
types of loans. Each client is underwritten to ensure that they have adequate
collateral coverage and/or cash flow. Annual financial statements are required
of each personal borrower.
Home Equity Loans. Our home equity loan portfolio consists of
traditional home equity lines of credit prevalent in the market today. In
general, we advance up to 80% on the value of a home, less the amount of prior
liens. However, we may vary from that percentage depending on the value of the
home, type of dwelling, and the personal financial situation of the borrower.
Home equity loans are funded either through draws requested by our clients or by
special home equity credit drafts that function as bank checks. Home equity
loans are approved using the same standards as residential mortgage loans. Our
borrower's personal cash flow is compared to debt service requirements to
determine our borrower's ability to repay. Home equity loans are competitively
priced and are based on a floating rate formula.
Construction Loans. Our construction loan portfolio consists of
single residential properties, multi-family properties, and commercial projects.
As construction lending has greater inherent risk, we closely monitor the status
of each construction loan throughout its term. Typically, we require full
investment of the borrower's equity in construction projects prior to injecting
our funds. Generally, we do not allow borrowers to recoup their equity from the
sale proceeds of finished units (if applicable) until we have recovered our
funds on the overall project. We use a title company to disburse periodic draws
from the construction line to ensure that there will be no title problems at the
end of the project.
Our construction loans are often the highest yielding loans in our
portfolio due to the inherent risks and the monitoring requirements. These loans
typically have floating rates, commitment fees and release fees. During our
credit approval process, factors unique to construction loans are considered.
These include assessment of the market for the finished product, reasonableness
of the construction budget, ability of the borrower to fund cost overruns, and
the borrower's ability to liquidate and repay the loan at the point when the
loan-to-value ratio is the greatest. We seek to manage these risks by, among
other things, ensuring that the collateral value of the property throughout the
construction process does not fall below acceptable levels, ensuring that funds
disbursed are within parameters set by the original construction budget, and
properly documenting each construction draw. Due to our more stringent standards
for underwriting and monitoring construction loans and the credit profile of our
borrowers, we are comfortable with the risk associated with this portfolio and
are committed to construction lending as an integral part of our lending
program.
Investment Activities
The objective of our investment policy is to maximize income
consistent with liquidity, asset quality, regulatory constraints and
asset/liability objectives. The policy is to be reviewed at least annually by
our board of directors. Our board is provided quarterly information recapping
purchases and sales with the resulting gains or
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losses, average maturity, federal taxable equivalent yields and appreciation or
depreciation by investment categories.
We invest primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States,
obligations of agencies of the United States, bank-qualified tax-exempt
obligations of state and local political subdivisions and collateralized
mortgage obligations. We also may invest from time to time in corporate debt or
other securities as permitted by our investment policy. In addition, we enter
into federal funds transactions with our principal correspondent banks, and
primarily act as a net seller of such funds. The sale of federal funds are
effectively short-term loans from us to other banks.
Our investment portfolio also includes equity investments in the
Federal Home Loan Bank of Chicago and the Federal Home Loan Bank of Des Moines.
We invest in the Federal Home Loan Bank in order to be a member, which qualifies
us to use their services including Federal Home Loan Bank borrowings. In
addition, we have purchased participations in pools of loans from Neighborhood
Housing Services ("NHS"). NHS is a not-for-profit organization which helps
provide affordable housing to low and moderate income residents in the Chicago
area. The size of our investment is proportionate to the volume of loans in
certain credit programs offered by NHS. NHS is an important vehicle in our
Community Reinvestment Act ("CRA") lending program.
Our chief financial officer is responsible for the management of our
investment portfolio as well as the implementation of our investment strategy.
Trust and Asset Management
We offer our clients a wide variety of trust and asset management
services designed to meet their individual needs and investment goals. Many of
our trust clients have long-standing relationships with our managing directors.
In administering a trust, we work closely with our client, the beneficiaries and
the trustees' attorneys and accountants on personal and tax matters to assist
the client in accomplishing the stated objectives. As fiduciaries of a trust or
estate, our responsibilities may include:
o administering the account pursuant to the applicable
document;
o collecting, holding and valuing assets;
o monitoring investment portfolios;
o paying debts, expenses and taxes;
o distributing property;
o advising beneficiaries; and
o preparation of tax returns.
In addition to trust and estate administration, we offer:
o institutional accounts;
o guardianship administration;
o investment agency accounts;
o Section 1031 exchanges; and
o custodial accounts.
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Since January 1, 1997, the average account value of new trusts
administered by us was approximately $3.0 million. We seek to continue to grow
our trust business as we expand our client base and our clients increasingly
reach retirement age and focus on their estate plans. The following table
indicates the break-down of our trust assets under administration at December
31, 2000 by account classification and related gross revenue for the nine months
ended December 31, 2000:
At or for the twelve months
ended December 31, 2000
-----------------------
Account Type Market Value Revenue
------------ ------------ -------
(in thousands)
Personal trust--managed.................. $274,483 $1,282
Agency--managed.......................... 117,898 411
Custody.................................. 350,175 530
Employee benefits--managed............... 35,209 68
---------- ---------
Total................................ $777,765 $2,291
========== ---======
We have chosen to outsource the investment management aspect of our
trust business so that we may offer our clients diversity and flexibility of
investment representation and to allow us to impartially evaluate investment
performance. This structure also allows our clients to independently designate
one or more specific advisors enabling them to maintain existing relationships
they may have within the financial community. If the client does not have such a
relationship in place, we help them select an investment management firm to best
service their needs. Based on the client's investment strategy and objectives
and the account attributes, one or more investment managers will be selected
from a selected group of approved advisors.
Our trust policy has established controls over our trust activities
to safeguard the assets of our clients against operational and administrative
risk. We have a system of internal controls that is designed to keep our
operating risk at appropriate levels. Our system of internal controls includes
policies and procedures relating to authorization, approval, documentation and
monitoring of transactions. Administrative risk is the risk of loss that may
occur as a result of breaching a fiduciary duty to a client. To manage this
risk, our trust policy has established corporate policies and procedures to
ensure that obligations to clients are discharged faithfully and in compliance
with applicable legal and regulatory requirements. These policies and procedures
provide guidance and establish standards related to the creation, sale, and
management of investment products, trade execution, and counterparty selection.
Asset/Liability Management Committee
We have an asset/liability committee ("ALCO") comprised of selected
senior executives who are charged with the dual goals of optimization and
stabilization of net interest income over time while adhering to prudent banking
practices. ALCO oversees asset growth, liquidity and capital, and directs our
overall acquisition and allocation of funds. At its meetings, ALCO reviews
issues including:
o data on economic conditions;
o current interest rate outlook;
o current forecast on loans and deposits;
o mix of interest rate sensitive assets and liabilities;
o bank liquidity position;
o investment portfolio purchases and sales; and
o other matters as presented.
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ALCO is also responsible for monitoring compliance with our
investment policy. On a quarterly basis, ALCO reports to the loan/investment
committee who reviews the portfolio of reports we prepare for our board of
directors and all the decisions made by ALCO affecting net interest income.
Competition
We do business in the highly competitive financial services
industry. Our geographic market is primarily the greater Chicago and St. Louis
metropolitan areas. The financial services industry is comprised of commercial
banks, thrifts, credit unions, investment banks, brokerage houses, money
managers, and other providers of financial products and services. These firms
compete with us for one or more of the following: loans, deposits, trust
services, or investment products. Some of these firms have business units that
promote themselves as "private banks." The typical private banking competitor is
a unit of a large commercial bank catering to the upper echelon of that bank's
customer base.
We view ourselves as the only private bank in the Chicago and St.
Louis markets focused solely on offering an extended range of traditional
banking and trust products to affluent professionals, entrepreneurial
individuals and their business interests. While our products may be similar to
those of our competitors, we attempt to distinguish ourselves by emphasizing
consistent, superior levels of personal service. For commercial and commercial
real estate lending, we compete with a number of major Chicago-area financial
institutions and suburban banks and, in the St. Louis market, with St.
Louis-based financial institutions and banking offices. For trust services, we
compete with the largest Chicago-area banks and some investment managers. For
private banking services, we compete with the private banking departments of
major Chicago and St. Louis-area financial institutions, some suburban banks,
and brokerage houses. For residential mortgage lending, we compete with banks,
savings and loans, mortgage brokers and numerous other financial services firms
offering mortgage loans in our market areas. Several of our competitors are
national or international in scope.
Some of our competitors are not subject to the same degree of
regulation as that imposed on bank holding companies, state banking
organizations and federal savings banks. In addition, the larger banking
organizations, investment banks and brokerage houses have significantly greater
resources than we do. As a result, some of our competitors have advantages over
us in name recognition and market penetration.
Employees
As of December 31, 2000, we had approximately 137 full-time
equivalent employees. The salaries of all of our employees are paid by either
The PrivateBank (Chicago) or The PrivateBank (St. Louis), with the exception of
Messrs. Mandell and Svec and Lisa M. O'Neill, our controller, a portion of whose
salaries are paid by PrivateBancorp.
We provide our employees with a comprehensive program of benefits,
some of which are on a contributory basis, including comprehensive medical and
dental plans, life insurance plans, and 401(k) plans. We consider our
relationship with our employees to be good.
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SUPERVISION AND REGULATION
General
Banking is a highly regulated industry. The following is a summary
of several applicable statutes and regulations. However, these summaries are not
complete, and you should refer to the statutes and regulations for more
information. Also, these statutes and regulations are likely to change in the
future, and we cannot predict what effect these changes, if made, will have on
our operations. Finally, please remember that the supervision, regulation and
examination of banks and bank holding companies by bank regulatory agencies are
intended primarily for the protection of depositors rather than stockholders of
banks and bank holding companies.
Bank Holding Company Regulation
PrivateBancorp is registered as a "bank holding company" with the
Board of Governors of the Federal Reserve System (the "Federal Reserve")
pursuant to the Bank Holding Company Act of 1956, as amended (the Bank Holding
Company Act of 1956 and the regulations issued thereunder are collectively
referred to as the "BHC Act"), and we are subject to regulation, supervision and
examination by the Federal Reserve.
Minimum Capital Requirements. The Federal Reserve has adopted
risk-based capital requirements for assessing bank holding company capital
adequacy. These standards define capital and establish minimum capital ratios in
relation to assets, both on an aggregate basis, and as adjusted for credit risks
and off-balance sheet exposures. Under the Federal Reserve's risk-based
guidelines applicable to PrivateBancorp, capital is classified into two
categories.
For bank holding companies, Tier 1, or "core," capital consists
of:
o common stockholders' equity;
o qualifying noncumulative perpetual preferred stock;
o qualifying cumulative perpetual preferred stock (subject to
some limitations); and
o minority interests in the common equity accounts of
consolidated subsidiaries.
less:
o goodwill; and
o specified intangible assets.
Tier 2, or "supplementary," capital consists of:
o the allowance for loan and lease losses;
o perpetual preferred stock and related surplus;
o hybrid capital instruments;
o unrealized holding gains on equity securities;
o perpetual debt and mandatory convertible debt securities;
o term subordinated debt, including related surplus; and
o intermediate-term preferred stock, including related
securities.
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Under the Federal Reserve's capital guidelines, bank holding
companies are required to maintain a minimum ratio of qualifying total capital
to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier
1 capital. The Federal Reserve has established a minimum ratio of Tier 1 capital
to total assets of 3% for strong bank holding companies (those rated a composite
"1" under the Federal Reserve's rating system). For all other bank holding
companies, the minimum ratio of Tier 1 capital to total assets is 4%. In
addition, the Federal Reserve continues to consider the Tier 1 leverage ratio
(after deducting all intangibles) in evaluating proposals for expansion or new
activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes
that the foregoing standards are supervisory minimums and that banking
organizations generally are expected to operate well above the minimum ratios.
These guidelines also state that banking organizations experiencing growth,
whether internally or by making acquisitions, are expected to maintain strong
capital positions substantially above the minimum levels.
As of December 31, 2000, we had regulatory capital in excess of the
Federal Reserve's minimum requirements. Our total risk-based capital ratio at
December 31, 2000 was 8.15% and our leverage ratio was 5.54%.
Acquisitions. The BHC Act requires prior Federal Reserve approval
for, among other things, the acquisition by a bank holding company of direct or
indirect ownership or control of more than 5% of the voting shares or
substantially all the assets of any bank, or for a merger or consolidation of a
bank holding company with another bank holding company. With limited exceptions,
the BHC Act prohibits a bank holding company from acquiring direct or indirect
ownership or control of voting shares of any company which is not a bank or bank
holding company and from engaging directly or indirectly in any activity other
than banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined, by regulation or order, to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto,
such as owning and operating a savings association, performing functions or
activities that may be performed by a trust company, or acting as an investment
or financial advisor. Under the BHC Act and Federal Reserve regulations, we are
prohibited from engaging in tie-in arrangements in connection with an extension
of credit, lease, sale of property, or furnishing of services. That means that,
except with respect to traditional banking products, we may not condition a
client's purchase of one of our services on the purchase of another service. The
passage of the Gramm-Leach-Bliley Act, however, allows bank holding companies to
become financial holding companies. Financial holding companies do not face the
same prohibitions to entering into certain business transactions that bank
holding companies currently face. See the discussion of the Gramm-Leach-Bliley
Act below.
Interstate Banking and Branching Legislation. Under the Interstate
Banking and Efficiency Act, adequately capitalized and adequately managed bank
holding companies are allowed to acquire banks across state lines subject to
various limitations. In addition, under the Interstate Banking Act, banks are
permitted, under some circumstances, to merge with one another across state
lines and thereby create a main bank with branches in separate states. After
establishing branches in a state through an interstate merger transaction, a
bank may establish and acquire additional branches at any location in the state
where any bank involved in the interstate merger could have established or
acquired branches under applicable federal and state law.
Ownership Limitations. Under the Illinois Banking Act, any person
who acquires more than 10% of our stock may be required to obtain the prior
approval of the commissioner of the Illinois Office of Banks and Real Estate
(the "Commissioner"). Under the Change in Bank Control Act, a person may be
required to obtain the prior regulatory approval of the Federal Reserve before
acquiring the power to directly or indirectly control the management, operations
or policies of PrivateBancorp or before acquiring control of 10% or more of any
class of our outstanding voting stock.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies. In the policy statement,
the Federal Reserve expressed its view that a bank holding company experiencing
earnings weaknesses should not pay cash dividends exceeding its net income or
which could only be funded in ways that weakened the bank holding company's
financial health, such as by borrowing. Additionally, the Federal Reserve
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and
13
regulations. Among these powers is the ability to prohibit or limit the payment
of dividends by banks and bank holding companies.
Under a longstanding policy of the Federal Reserve, we are expected
to act as a source of financial strength to our banking subsidiaries and to
commit resources to support them. The Federal Reserve takes the position that in
implementing this policy, it may require us to provide financial support when we
otherwise would not consider ourselves able to do so.
In addition to the restrictions on dividends imposed by the Federal
Reserve, Delaware law also places limitations on our ability to pay dividends.
For example, we may not pay dividends to our stockholders if, after giving
effect to the dividend, we would not be able to pay our debts as they become
due. Because a major source of our revenue could be dividends which we expect to
receive from our banking subsidiaries, our ability to pay dividends will depend
on the amount of dividends paid by our banking subsidiaries. We cannot be sure
that our banking subsidiaries will pay such dividends to us.
Bank Regulation
The PrivateBank (Chicago) is subject to supervision and examination
by the commissioner of the Illinois Office of Banks and Real Estate (the
"Commissioner") and, as a non-member, FDIC-insured bank, to supervision and
examination by the Federal Deposit Insurance Corporation ("FDIC"). As an
affiliate of The PrivateBank (Chicago), we are also subject to examination by
the Commissioner. The PrivateBank (Chicago) is a member of the Federal Home Loan
Bank ("FHLB") of Chicago and may be subject to examination by the FHLB of
Chicago. The Federal Deposit Insurance Act ("FDIA") requires prior FDIC approval
for any merger and/or consolidation by or with another depository institution,
as well as for the establishment or relocation of any bank or branch office. The
FDIA also gives the power to the FDIC to issue cease and desist orders. A cease
and desist order could either prohibit a bank from engaging in certain unsafe
and unsound bank activity or could require a bank to take certain affirmative
action. The FDIC also supervises compliance with the federal law and regulations
which place restrictions on loans by FDIC-insured banks to an executive officer,
director or principal shareholder of the bank, the bank holding company which
owns the bank, and any subsidiary of such bank holding company. The FDIC also
examines The PrivateBank (Chicago) for its compliance with statutes which
restrict and, in some cases, prohibit certain transactions between a bank and
its affiliates. Among other provisions, these laws place restrictions upon:
o extensions of credit to the bank holding company and any
non-banking affiliates,
o the purchase of assets from affiliates,
o the issuance of guarantees, acceptances or letters of credit
on behalf of affiliates, and
o investments in stock or other securities issued by
affiliates or acceptance thereof as collateral for an
extension of credit.
Also, The PrivateBank (Chicago) is subject to restrictions with
respect to engaging in the issuance, underwriting, public sale or distribution
of certain types of securities and to restrictions upon:
o the nature and amount of loans which it may make to a single
borrower (and, in some instances, a group of affiliated
borrowers),
o the nature and amount of securities in which it may invest,
o the amount of investment in The PrivateBank (Chicago)
premises, and
o the manner in and extent to which it may borrow money.
Furthermore, all banks are affected by the credit policies of other
monetary authorities, including the Federal Reserve, which regulate the national
supply of bank credit. Such regulation influences overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The
14
Federal Reserve's monetary policies have had a significant effect on the
operating results of commercial banks in the past and we expect this trend to
continue in the future.
Dividends. The Illinois Banking Act provides that an Illinois bank
may not pay dividends of an amount greater than its current net profits after
deducting losses and bad debts while such bank continues to operate a banking
business. For the purpose of determining the amount of dividends that an
Illinois bank may pay, bad debts are defined as debts upon which interest is
past due and unpaid for a period of six months or more unless such debts are
well-secured and in the process of collection.
In addition to the foregoing, the ability of PrivateBancorp and The
PrivateBank (Chicago) to pay dividends may be affected by the various minimum
capital requirements and the capital and non-capital standards established under
the Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"),
as described below.
Federal Reserve System. The PrivateBank (Chicago) is subject to
Federal Reserve regulations requiring depository institutions to maintain
noninterest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations generally
require 3% reserves on the first $44.3 million of transaction accounts plus 10%
on the remainder. The first $5.0 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve) are exempted from the reserve
requirements. The PrivateBank (Chicago) is in compliance with that requirement.
Standards for Safety and Soundness. The FDIA, as amended by FDICIA
and the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the FDIC, together with the other federal bank regulatory agencies, to
prescribe standards of safety and soundness, by regulations or guidelines,
relating generally to operations and management, asset growth, asset quality,
earnings, stock valuation, and compensation. The FDIC and the other federal bank
regulatory agencies have adopted a set of guidelines prescribing safety and
soundness standards pursuant to FDICIA. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. In addition, the FDIC adopted regulations
that authorize, but do not require, the FDIC to order an institution that has
been given notice by the FDIC that it is not satisfying the safety and soundness
guidelines to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the FDIC must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of FDICIA. If an
institution fails to comply with such an order, the FDIC may seek to enforce its
order in judicial proceedings and to impose civil money penalties. The FDIC and
the other federal bank regulatory agencies have also proposed guidelines for
asset quality and earning standards.
Prompt Corrective Action. FDICIA requires the federal banking
regulators, including the Federal Reserve and the FDIC, to take prompt
corrective action with respect to depository institutions that fall below
minimum capital standards and prohibits any depository institution from making
any capital distribution that would cause it to be undercapitalized.
Institutions that are not adequately capitalized may be subject to a variety of
supervisory actions, including restrictions on growth, investment activities,
capital distributions and affiliate transactions, and will be required to submit
a capital restoration plan which, to be accepted by the regulators, must be
guaranteed in part by any company having control of the institution (for
example, the company or a stockholder controlling the company). In other
respects, FDICIA provides for enhanced supervisory authority, including greater
authority for the appointment of a conservator or receiver for critically
under-capitalized institutions. The capital-based prompt corrective action
provisions of FDICIA and its implementing regulations apply to FDIC-insured
depository institutions. However, federal banking agencies have indicated that,
in regulating bank holding companies, the agencies may take appropriate action
at the holding company level based on their assessment of the effectiveness of
supervisory actions imposed upon subsidiary insured depository institutions
pursuant to the prompt corrective action provisions of FDICIA. Also, under
FDICIA, insured depository institutions with assets of $500 million or more at
the beginning of a fiscal year, must submit an annual report for that year,
including financial statements and a
15
management report, to each of the FDIC, any appropriate federal banking agency,
and any appropriate bank supervisor. The PrivateBank (Chicago) had assets of
$500 million or more at the beginning of fiscal year 2000, and must therefore
provide an annual report as required by FDICIA.
As of December 31, 2000, The PrivateBank (Chicago) had capital in
excess of the requirements for a "well-capitalized" institution.
Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured
institution, The PrivateBank (Chicago) is required to pay deposit insurance
premiums based on the risk it poses to the Bank Insurance Fund ("BIF"). The FDIC
has authority to raise or lower assessment rates on insured deposits in order to
achieve statutorily required reserve ratios in the insurance funds and to impose
special additional assessments. Each depository institution is assigned to one
of three capital groups: "well capitalized," "adequately capitalized" or
"undercapitalized." Within each capital group, institutions are assigned to one
of three supervisory subgroups: "A" (institutions with few minor weaknesses),
"B" (institutions which demonstrate weaknesses which, if not corrected, could
result in significant deterioration of the institution and increased risk of
loss to BIF), and "C" (institutions that pose a substantial probability of loss
to BIF unless effective corrective action is taken). Accordingly, there are nine
combinations of capital groups and supervisory subgroups to which varying
assessment rates would be applicable. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. During
2000, The PrivateBank (Chicago) paid deposit insurance premiums in the aggregate
amount of $103,470. During 2000, The PrivateBank (St. Louis) paid deposit
insurance premiums in the aggregate amount of $2,214.
Deposit insurance may be terminated by the FDIC upon a finding that
an institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. Such terminations can
only occur, if contested, following judicial review through the federal courts.
We do not know any practice, condition or violation that might lead to
termination of our deposit insurance.
Community Reinvestment. Under the CRA, a financial institution has a
continuing and affirmative obligation to help meet the credit needs of its
entire community, including low- and moderate-income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial
institutions, nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community. However, institutions are rated on their performance in meeting the
needs of their communities. Performance is judged in three areas: (a) a lending
test, to evaluate the institution's record of making loans in its assessment
areas; (b) an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs benefitting
low or moderate income individuals and business; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices. The CRA requires each federal banking agency, in connection with
its examination of a financial institution, to assess and assign one of four
ratings to the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by the institution, including applications for charters, branches and other
deposit facilities, relocations, mergers, consolidations, acquisitions of assets
or assumptions of liabilities, and savings and loan holding company
acquisitions. The CRA also requires that all institutions make public disclosure
of their CRA ratings.
The PrivateBank (Chicago) was assigned a "satisfactory" rating in
January 1999 as a result of its last CRA examination.
Compliance with Consumer Protection Laws. The PrivateBank (Chicago)
is subject to many federal consumer protection statutes and regulations
including the CRA, the Truth in Lending Act, the Truth in Savings Act, the Equal
Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement
Procedures Act and the Home Disclosure Act. Among other things, these acts:
o require banks to meet the credit needs of their communities;
o require banks to disclose credit terms in meaningful and
consistent ways;
o prohibit discrimination against an applicant in any consumer
or business credit transaction;
16
o prohibit discrimination in housing-related lending
activities;
o require banks to collect and report applicant and borrower
data regarding loans for home purchases or improvement
projects;
o require lenders to provide borrowers with information
regarding the nature and cost of real estate settlements;
o prohibit certain lending practices and limit escrow account
amounts with respect to real estate transactions; and
o prescribe possible penalties for violations of the
requirements of consumer protection statutes and
regulations.
From time to time we have been made aware of certain deficiencies in
our consumer compliance program. Management believes that any deficiencies have
already been or are in the process of being corrected. In the event that
consumer compliance deficiencies were to continue over time, enforcement or
administrative actions by the appropriate federal banking regulators could
result. Such action could in turn affect the implementation of our growth
strategies.
Enforcement Actions. Federal and state statutes and regulations
provide financial institution regulatory agencies with great flexibility to
undertake an enforcement action against an institution that fails to comply with
regulatory requirements, particularly capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
civil money penalties, cease and desist orders, receivership, conservatorship or
the termination of deposit insurance.
Impact of the Gramm-Leach-Bliley Act. On November 12, 1999,
President Clinton signed the Gramm-Leach-Bliley Act (the "GLB Act"), which among
other things, establishes a comprehensive framework to permit affiliations among
commercial banks, insurance companies and securities firms. Also, a bank holding
company which meets certain criteria may certify that it satisfies such criteria
and become a financial holding company, and thereby engage in a broader range of
activity than permitted a bank holding company.
The GLB Act imposes new requirements on financial institutions with
respect to customer privacy by generally prohibiting disclosure of customer
information to non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy policies to
customers annually. The GLB Act directs the federal regulators to promulgate
implementing regulations within six months of enactment. The privacy provisions
will become effective six months thereafter.
We do not believe that the GLB Act will have a material adverse
effect upon our operations in the near term. However, to the extent the GLB Act
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This
consolidation could result in a growing number of larger financial institutions
that offer a wider variety of financial services than we currently offer and
that can aggressively compete in the markets we currently serve.
The PrivateBank (St. Louis). The PrivateBank (St. Louis) is a
federally chartered savings bank. Accordingly, it is governed by and subject to
extensive regulation, examination and supervision by the Office of Thrift
Supervision ("OTS"), and is required to comply with the rules and regulations of
the OTS under the Home Owners' Loan Act ("HOLA"). As a federally chartered
savings bank, The PrivateBank (St. Louis) has greater flexibility in pursuing
interstate branching than an Illinois state bank. The activities of The
PrivateBank (St. Louis) are also governed by the Federal Deposit Insurance Act.
The FDIC has back-up regulatory authority over The PrivateBank (St. Louis).
Although The PrivateBank (St. Louis) has a different primary federal regulator
from The PrivateBank (Chicago), most, if not all, of the federal statutes and
regulations applicable to The PrivateBank (Chicago) are also applicable to The
PrivateBank (St. Louis).
17
Under such regulation and supervision, The PrivateBank (St. Louis)
is required to file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
establishing branches or entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. The OTS conducts
periodic examinations to test The PrivateBank's (St. Louis) compliance with
various regulatory and safety and soundness requirements. This regulation and
supervision establishes a comprehensive framework of supervision and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including discretion with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on us, The
PrivateBank (St. Louis) and our operations.
The PrivateBank (St. Louis) is also required to be a qualified
thrift lender ("QTL"). The HOLA requires savings institutions to meet a QTL
test, under which the institution is required to either qualify as a "domestic
building and loan association" under the Internal Revenue Code or maintain at
least 65% of its "portfolio assets" (total assets less (1) specified liquid
assets up to 20% of total assets; (2) intangibles, including goodwill; and (3)
the value of property used to conduct business) in certain "qualified thrift
investments," (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least nine months out of
each twelve month period. As part of its application process, The PrivateBank
(St. Louis) submitted a three-year business plan to the FDIC and the OTS which
commits to compliance with the QTL test among other objectives, including the
maintenance of sufficient capital. A savings institution that fails the QTL test
is subject to certain operating restrictions and may be required to convert to a
bank charter. In meeting the QTL test, The PrivateBank (St. Louis) may be
assisted by The PrivateBank (Chicago) through the purchase by The PrivateBank
(Chicago) of certain loans and/or assets from The PrivateBank (St. Louis).
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 the results discussed in
forward-looking statements. Factors which might cause such a difference include,
but are not limited to, fluctuations in market rates of interest and loan and
deposit pricing; a deterioration of general economic conditions in our market
areas; legislative or regulatory changes; adverse developments in our loan or
investment portfolios; significant increases in competition; difficulties in
identifying attractive acquisition opportunities or strategic partners to
complement our private banking approach; and the possible dilutive effect of
potential acquisitions or expansion. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
EXECUTIVE OFFICERS
The following persons serve as executive officers of PrivateBancorp:
Ralph B. Mandell (60), a director since 1989, is a co-founder of
PrivateBancorp and The PrivateBank (Chicago). A Managing Director of The
PrivateBank (Chicago) and a director of The PrivateBank (St. Louis), he has
served as Chairman and Chief Executive Officer of PrivateBancorp and The
PrivateBank (Chicago) since 1994 and assumed the additional title of President
of both entities in March 1999. From inception until 1994, Mr. Mandell had the
title of Co-Chairman. Prior to starting The PrivateBank (Chicago) and
PrivateBancorp, Mr. Mandell was the Chief Operating Officer of First United
Financial Services, Inc., from 1985 to 1989, and served as its President from
1988 to 1989. First United, a company that was traded on the Nasdaq National
Market, was sold to First Chicago Corporation in 1987. He also served as
President of Oak Park Trust & Savings Bank from
18
1985 until 1988. Prior thereto, Mr. Mandell had served as Executive Vice
President of Oak Park Trust & Savings Bank since 1979.
Gary S. Collins (42) has been a Managing Director of The PrivateBank
(Chicago) since 1991. As a specialist in real estate lending, Mr. Collins has
spent more than 20 years managing diverse real estate transactions and the full
range of mortgage financing. Before joining the bank in 1991, he held senior
positions at several Chicago metropolitan area financial institutions, including
First Chicago Bank of Oak Park, First Colonial Bancshares and Avenue Bank of Oak
Park.
Hugh H. McLean (41) has been a Managing Director of The PrivateBank
(Chicago) since 1996. He serves as head of credit marketing and manager of the
Oak Brook office. Prior to joining the bank, he served as a regional manager
with Firstar Bank Illinois and its predecessor from 1990 to 1996, and as head of
a commercial banking division at American National Bank and Trust Company in
Chicago, Illinois, from 1987 to 1990, where he was employed from 1980 to 1990.
Thomas S. Palmer (53) has been a Managing Director of The
PrivateBank (Chicago) since July 2000. He serves as director of trust and asset
management services. Mr. Palmer has spent almost 30 years serving the investment
and banking needs of clients. Prior to joining the bank, he was with First
Chicago, now known as Bank One, in Chicago, Illinois, where he had been employed
since 1979.
Gary L. Svec (34), has been the Secretary/Treasurer and Chief
Financial Officer of PrivateBancorp since August 2000. Prior to joining the
company, Mr. Svec served as Vice President and as Investment and Asset/Liability
Specialist for Betzold, Berg, Nussbaum & Heitman, Inc., working with the firm's
financial institutions clients, from August 1995 to August 2000. He also served
as Chief Financial Officer of Betzold Berg Investment Management from August
1995 to August 1998. From 1988 until July 1995, Mr. Svec was employed by Crowe,
Chizek & Company as an auditor, tax advisor and consultant to their financial
institutions group. Mr. Svec is a certified public accountant.
ITEM 2. PROPERTIES
We currently have seven physical banking locations. We have a
variety of renewal options in each of our properties and certain rights to
secure additional space. The main offices of PrivateBancorp and The PrivateBank
(Chicago) are located in the central business and financial district of Chicago.
We lease 20,923 square feet comprising the entire eighth, ninth and tenth floors
and part of the eleventh floor of a building located at Ten North Dearborn
Street. This lease expires on or about August 31, 2006.
We established a north suburban office in the affluent North Shore
area located at 517 Green Bay Road, Wilmette, Illinois, in October 1994. We
lease approximately 5,300 square feet on the first floor of a commercial
building. This lease expires on June 30, 2004.
In January 1997, we opened a third office of The PrivateBank
(Chicago) in rapidly growing, west suburban DuPage County at 1603 West Sixteenth
Street, Oak Brook, Illinois. We lease approximately 4,200 square feet on the
first floor of a two-story office building. This lease expires on December 14,
2001.
In January 2000, we opened our Fox Valley office at 24 South Second
Street, St. Charles, Illinois. We lease approximately 6,700 square feet of a
commercial building. This lease expires October 31, 2009.
Our St. Louis office is located at 1401 South Brentwood Boulevard,
St. Louis, Missouri. We lease approximately 12,400 square feet on the first and
second floors of a commercial building. This lease expires on February 4, 2009.
Our offices in Lake Forest and Winnetka, Illinois, were both
acquired as part of the purchase of Johnson Bank Illinois. Our Lake Forest
office is on the first floor of a two-story office building located at 920 South
Waukegan Road, Lake Forest, Illinois. The lease is for approximately 9,400
square feet and expires on July 31, 2005. Our Winnetka office leases
approximately 5,100 square feet and is located at 1000 Green Bay Road, Winnetka,
Illinois. This lease expires on June 30, 2003.
19
ITEM 3. 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 a
party to any pending material legal proceedings that we believe will have a
material adverse effect on our business, results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is quoted on the Nasdaq National Market under the
symbol "PVTB." As of March 15, 2001, we had approximately 352 record holders of
our common stock. The table below sets forth the high and low sales prices of
our common stock as reported by Nasdaq for the periods indicated.
High Low
---- ---
2000
First Quarter................. $16.3750 $10.0000
Second Quarter................ 14.7500 10.2500
Third Quarter................. 14.9375 13.6250
Fourth Quarter................ 14.1250 8.8750
1999 High Low
---- ---
Second Quarter(1)............. $35.7500 $18.0000
Third Quarter................. 21.4375 15.2500
Fourth Quarter................ 17.8750 12.4375
(1) Reflects the high and low sales prices on June 30, 1999, the first day of
trading of our common stock on Nasdaq.
Holders of our common stock are entitled to receive dividends that
the board of directors may declare from time to time. We may only pay dividends
out of funds which are legally available for that purpose. Because consolidated
net income consists largely of the net income of our subsidiaries, dividend
payments to stockholders are dependent upon our receipt of dividends from our
subsidiaries. See "Supervision and Regulation" for a discussion of regulatory
restrictions on dividend declarations. Our dividend declaration is discretionary
and will depend on our earnings and financial condition, regulatory limitations,
tax considerations and other factors.
We have paid quarterly dividends on our common stock since the third
quarter of 1995. While the board of directors expects to continue to declare
dividends quarterly, there can be no assurance that we will continue to pay
dividends at these levels or at all. The following table shows the history of
per share cash dividends declared and paid on our common stock for the last two
years.
2000
First Quarter..................... $0.025
Second Quarter.................... 0.025
Third Quarter..................... 0.025
Fourth Quarter.................... 0.025
1999
First Quarter..................... $0.025
Second Quarter.................... 0.025
Third Quarter..................... 0.025
Fourth Quarter.................... 0.025
20
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated
financial and other data of PrivateBancorp at or for the periods indicated. The
balance sheet and statement of income data are derived from our December 31,
2000 consolidated financial statements which have been audited by Arthur
Andersen, LLP. This information should be read in conjunction with our audited
consolidated financial statements and related notes included pursuant to Item 8
of this report. See "Index to Consolidated Financial Statements" on page F-1.
Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Selected Statement of Income Data:
Interest income:
Loans, including fees ............................... $ 48,633 $ 26,597 $ 19,619 $ 16,729 $ 12,152
Federal funds sold and interest-bearing deposits .... 1,058 330 2,181 875 1,392
Securities .......................................... 7,455 5,141 3,492 2,519 2,396
-------- -------- -------- -------- --------
Total interest income ............................. 57,146 32,068 25,292 20,123 15,940
-------- -------- -------- -------- --------
Interest expense:
Interest-bearing demand deposits .................... 869 604 487 377 305
Savings and money market deposit accounts ........... 13,711 7,671 6,651 5,880 4,613
Other time deposits ................................. 14,635 7,399 6,155 3,821 2,973
Funds borrowed ...................................... 4,116 931 19 3 143
-------- -------- -------- -------- --------
Total interest expense ............................ 33,331 16,605 13,312 10,081 8,034
-------- -------- -------- -------- --------
Net interest income ............................... 23,815 15,463 11,980 10,042 7,906
Provision for loan losses ........................... 1,690 1,208 362 603 524
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 22,125 14,255 11,618 9,439 7,382
-------- -------- -------- -------- --------
Non-interest income:
Banking, trust services and other income ............ 3,077 1,947 1,280 1,210 911
Securities gains .................................... 92 57 40 -- --
-------- -------- -------- -------- --------
Total non-interest income ......................... 3,169 2,004 1,320 1,210 911
-------- -------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits ...................... 8,174 5,156 4,077 3,902 3,411
Severance charge .................................... 562 -- -- -- --
Occupancy expense, net .............................. 2,987 1,563 1,379 1,274 990
Data processing ..................................... 820 478 508 396 334
Marketing ........................................... 1,202 692 567 500 424
Amortization of organization costs .................. -- -- -- -- 23
Professional fees ................................... 2,135 1,295 561 448 326
Goodwill amortization ............................... 731 -- -- -- --
Insurance ........................................... 303 214 134 115 82
Towne Square Financial Corporation acquisition ...... -- 1,300 -- -- --
Other expense ....................................... 1,692 1,389 863 627 508
-------- -------- -------- -------- --------
Total non-interest expense ........................ 18,606 12,087 8,089 7,262 6,098
-------- -------- -------- -------- --------
Income before income taxes ........................ 6,688 4,172 4,849 3,387 2,195
Income tax provision ................................ 2,263 1,257 1,839 1,242 762
-------- -------- -------- -------- --------
Net income ........................................ $ 4,425 $ 2,915 $ 3,010 $ 2,145 $ 1,433
======== ======== ======== ======== ========
Per Share Data:
Basic earnings ...................................... $ 0.96 $ 0.73 $ 0.91 $ 0.69 $ 0.49
Diluted earnings .................................... 0.92 0.69 0.86 0.65 0.47
Dividends ........................................... 0.10 0.10 0.08 0.07 0.07
Book value (at end of period) ....................... 11.73 10.26 8.53 7.67 6.84
Selected Financial Condition Data (at end of period):
Total securities(1) ................................. $172,194 $ 71,134 $116,891 $ 65,383 $ 44,617
Total loans ......................................... 599,429 397,277 281,965 218,495 171,343
Total assets ........................................ 829,509 518,697 416,308 311,872 246,734
Total deposits ...................................... 670,246 453,092 364,994 285,773 222,571
Funds borrowed ...................................... 96,879 15,000 20,000 -- 3,000
Total stockholders' equity .......................... 54,249 47,080 29,274 24,688 20,222
Trust assets under administration ................... 777,800 729,904 611,650 469,646 328,662
21
Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Selected Financial Ratios and Other Data:(1)
Performance Ratios:
Net interest margin(2) ............................. 3.63% 3.79% 3.64% 4.01% 3.73%
Net interest spread(3) ............................. 3.02 3.15 2.98 3.31 3.03
Non-interest income to average assets .............. 0.45 0.45 0.37 0.45 0.42
Non-interest expense to average assets(8) .......... 2.64 2.71 2.29 2.71 2.79
Net overhead ratio(4)(8) ........................... 2.19 2.26 1.91 2.26 2.38
Efficiency ratio(5)(8) ............................. 66.76 65.76 60.82 64.53 69.17
Return on average assets(6)(8) ..................... 0.63 0.65 0.85 0.80 0.66
Return on average equity(7)(8) ..................... 8.81 7.66 11.27 9.49 7.38
Dividend payout ratio .............................. 10.43 13.78 8.74 10.13 12.88
Asset Quality Ratios:
Non-performing loans to total loans ................ 0.24% 0.21% 0.36% 0.24% 0.65%
Allowance for probable loan losses to:
Total loans ...................................... 1.02 1.14 1.21 1.40 1.43
Non-performing loans ............................. 423 548 336 578 220
Net charge-offs to average total loans ............. 0.18 0.03 -- -- 0.02
Non-performing assets to total assets .............. 0.17 0.16 0.24 0.17 0.45
Balance Sheet Ratios:
Loans to deposits .................................. 89.4% 87.7% 77.3% 76.5% 77.0%
Average interest-earning assets to average interest-
bearing liabilities .............................. 111.5 116.3 116.4 117.7 118.6
Capital Ratios:
Total equity to total assets ....................... 6.53% 9.08% 7.03% 7.92% 8.20%
Total risk-based capital ratio ..................... 8.15 13.96 11.53 11.75 12.21
Tier 1 risk-based capital ratio .................... 6.47 12.84 10.40 10.50 10.96
Leverage ratio ..................................... 5.54 10.77 7.88 8.70 8.71
Ratio of Earnings to Fixed Charges(9):
Including deposit interest ......................... 1.20 x 1.25 x 1.36 x 1.34 x 1.27 x
Excluding deposit interest ......................... 2.62 5.48 256.21 1,130.00 16.35
- --------------
(1) For all periods, the entire securities portfolio was classified "Available
for Sale."
(2) Net interest income 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, on a tax
equivalent basis, plus non-interest income.
(6) Net income divided by average total assets.
(7) Net income divided by average common equity.
(8) 2000 performance ratios presented in the table above include a third
quarter one-time severance and recruitment of new executive officers
charge, and 1999 performance ratios include one-time charges related to the
Towne Square Financial Corporation acquisition and St. Louis start-up costs
incurred in the third and fourth quarter, respectively, in the following
amounts (in thousands):
Pre-Tax After-Tax
------- ---------
Severance charges.......................... $ 562 $ 377
Towne Square Corporation acquisition....... 1,433 1,382
St. Louis start-up costs................... 324 214
(footnotes continued)
22
2000 and 1999 performance ratios excluding the special charges described
above are as follows:
Year Ended December 31,
-----------------------
2000 1999
------ ------
Non-interest expense to average assets...... 2.56% 2.32%
Net overhead ratio.......................... 2.11 1.87
Efficiency ratio............................ 64.75 57.52
Return on average assets.................... 0.68 1.01
Return on average equity.................... 9.56 11.86
(9) In computing the ratio of earnings to fixed charges: (a) earnings have
been based on income before income taxes and fixed charges, and (b)
fixed charges consist of interest and amortization of debt discount and
expense including amounts capitalized and the estimated interest portion
of rents.
ITEM 7. 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, or
start-up bank) on August 3, 1999. On February 11, 2000, we consummated our
acquisition of Johnson Bank Illinois adding two additional locations of The
PrivateBank (Chicago) 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).
Since year-end 1995 to December 31, 2000, we have grown our asset
base at a compound annual rate of 33.9% to $829.5 million. During the same
period, loans have grown at a compound annual rate of 36.9% to $599.4 million,
deposits at a compound annual rate of 30.8% to $670.2 million and trust assets
under administration at a compound annual rate of 30.7% to $777.8 million.
For financial information regarding our four separate lines of
business, The PrivateBank (Chicago), The PrivateBank (St. Louis), Trust Services
and Holding Company Activities, see "Note 2 -- Operating Segments" to our
consolidated financial statements as of and for the year ended December 31,
2000, included on page F-9.
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 trust fee income, and to a
lesser extent, net securities gains and 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.
Profitability and expense ratios were negatively impacted in 2000 due to the
start-up operation of the St. Charles office, the acquisition of Johnson Bank
Illinois, and the opening of The PrivateBank (St. Louis). During 2001, we expect
to continue to incur operating expenses in excess of revenues for The
PrivateBank (St. Louis).
23
On June 30, 1999, we sold 900,000 shares of common stock in our
initial public offering at $18 per share. The closing date of the offering was
July 6, 1999, when we received net proceeds of approximately $14.4 million
(after deduction of offering expenses). On July 26, 1999, an additional 135,000
shares were sold pursuant to the underwriters' exercise of their over allotment
option for additional net proceeds of $2.3 million. The year to date earnings
per share calculation as of December 31, 1999 does not equal the sum of the
individual quarter earnings per share amounts. Based upon the application of
FASB Statement No. 128, "Earnings per Share," a difference arises that is
attributable to the impact of our initial public offering which closed in July
1999, and the acquisition of Town Square Financial Corporation during the third
quarter 1999.
CONSOLIDATED RESULTS OF OPERATIONS
Net Income
Our net income for the year ended December 31, 2000 was $4.4
million, or $0.92 per diluted share, compared to $2.9 million, or $0.69 per
diluted share, for the year ended December 31, 1999. Excluding one-time charges,
our earnings were $4.8 million, or $1.00 per diluted share, in 2000 and $4.5
million, or $1.07 per diluted share, in 1999.
Net income for the year ended December 31, 2000 included a
previously announced one-time charge of $377,000 after-tax, or $0.08 per diluted
share, comprised of severance packages for two departing executives as well as
amounts incurred to secure their replacements. Net income for the year ended
December 31, 1999, included an acquisition charge of $1.4 million after-tax, or
$0.29 per diluted share, related to the acquisition of Towne Square Financial
Corporation in St. Charles, Illinois and the start-up expenses of The
PrivateBank (St. Louis). The earnings growth of 6.5% between 2000 and 1999 is
due to growth in net interest income and non-interest income offset by higher
operating expenses. Net income in 2000 includes the financial results of the
former Johnson Bank Illinois locations subsequent to their acquisition on
February 11, 2000. Excluding the effects of goodwill amortization and
acquisition interest expense associated with the transaction, the two offices
located in Winnetka and Lake Forest have contributed $1.0 million to our net
income in 2000.
Net income for the year ended December 31, 1999 was $2.9 million, or
$0.69 per diluted share, compared to $3.0 million, or $0.86 per diluted share,
for the year ended December 31, 1998. Excluding the Towne Square Financial
Corporation acquisition-related charge and St. Louis start-up costs, 1999
earnings were $4.5 million, an increase of 50% over 1998 net income. Before
these one-time charges, 1999 earnings per diluted share were $1.07, a 24%
increase over 1998 earnings per diluted share of $0.86.
The increase in earnings from operations before one-time charges is
primarily attributable to growth in the balance sheet, particularly in loans,
and improvement in our net interest margin. Increased fee income, mainly from
trust services, also contributed to the improvement in income before one-time
charges.
The tables below show the computation of earnings from operations
before one-time charges for 2000 and 1999.
Year ended December 31, 2000
----------------------------
Before Tax Net of
Tax (Benefit) Tax
Amount Expense Amount
------ ------- ------
(in thousands, except per share data)
Net income ....................................... $6,688 $2,263 $4,425
One-time severance charge ........................ 562 185 377
------ ------ ------
Earnings from operations before one-time charges . $7,250 $2,448 $4,802
====== ====== ======
Earnings per diluted share before one-time charges $ 1.00
======
24
Year ended December 31, 1999
----------------------------
Before Tax Net of
Tax (Benefit) Tax
Amount Expense Amount
------ ------- ------
(in thousands, except per share data)
Net income ....................................... $4,172 $1,257 $2,915
One-time charges(1) .............................. 1,757 162 1,595
------ ------ ------
Earnings from operations before one-time charges . $5,929 $1,419 $4,510
====== ====== ======
Earnings per diluted share before one-time charges $ 1.07
======
(1) One-time charges for the year ended December 31, 1999 represent the Towne
Square Financial Corporation acquisition charges and St. Louis start-up
costs (pre-tax) of $1,433,200 and $324,000 respectively.
Net Interest Income
Net interest income is the difference between interest income and
fees on earning assets and interest expense on deposits and borrowings. Net
interest margin represents the net interest income on a tax equivalent basis as
a percentage of average earning assets during the period. Net interest margin
reflects the spread between average yields earned on interest earning assets and
the average rates paid on interest bearing deposits and borrowings. Interest
income includes loan origination fees recorded from loans. The volume of
non-interest bearing funds, largely comprised of demand deposits and capital,
also affects the net interest margin.
Net interest income was $23.8 million for the year ended December
31, 2000, compared to $15.5 million for 1999, an increase of 54.0%. Net interest
income is affected by both the volume of assets and liabilities held and the
corresponding rates earned and paid. The increase in net interest income for
2000 is primarily attributable to growth in earning assets. Average earning
assets for 2000 were $671.5 million compared to $432.2 million for 1999, an
increase of 76.2%. Our net interest margin was 3.63% for the year ended December
31, 2000, compared to 3.79% for the prior year. Although the rising interest
rate environment which was in effect during the first six months of 2000 had the
effect of improving the yield on average earning assets during 2000 as compared
to 1999, the rates paid on deposits and other borrowed funds also increased in
2000 as compared to 1999, resulting in reduced net interest spread for 2000 as
compared to 1999. The decrease in net interest margin is primarily attributable
to an increase in borrowed funds utilized to complete the Johnson Bank Illinois
acquisition and to capitalize The PrivateBank (St. Louis). The effect of
non-interest bearing deposits added 61 basis points to 2000 net interest margin.
We expect that we will likely experience margin pressure during 2001
if we continue to experience a falling interest rate environment during 2001. As
interest rates decline, the portion of our loan portfolio that is based on
floating rates will re-price downward. Likewise, our deposits and floating rate
borrowings will re-price downward as well. However, effective February 8, 2001,
we increased our fixed rate borrowings through the issuance of $20.0 million
trust preferred securities. These securities are accounted for as long-term debt
and pay interest at the fixed rate of 9.50%. The effect of the trust preferred
issuance will be to compress interest margin in a falling interest rate
environment.
Net interest income was $15.5 million during the year ended December
31, 1999, compared to $12.0 million for 1998, an increase of 29.1%. The increase
in 1999 was primarily attributable to growth in earning assets and, to a lesser
extent, improvement in net interest spread. Average earning assets during 1999
were $432.2 million compared to $331.6 million for 1998, an increase of 30.3%.
Our net interest margin was 3.79% for the year ended December 31, 1999, compared
to 3.64% for the prior year. The increase in net interest margin was
attributable to a favorable shift in the mix of earning assets resulting in a
higher percentage of average loans to total average assets and to the benefit in
1999 of investing the proceeds of our initial public offering in
interest-earning assets. In 1999, the effect of non-interest bearing funds on
the net interest margin added 64 basis points to the margin.
25
The following table presents a summary of our net interest income
and related net interest margin, calculated on a tax equivalent basis (dollars
in thousands):
Year Ended December 31,
----------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ----------------------------- ---------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Federal funds sold and other short-term
investments .......................... $ 17,032 $ 1,058 6.11% $ 6,557 $ 329 5.02% $ 40,230 $ 2,181 5.42%
Investment securities(2) ................. 114,144 8,339 7.31% 93,903 6,055 6.45% 57,427 3,576 6.23%
Loans, net of unearned discount(3) ....... 540,297 48,634 8.92% 331,698 26,598 8.02% 233,987 19,620 8.39%
-------- -------- -------- -------- -------- --------
Total earning assets ................. $671,473 $ 58,031 8.57% $432,158 $ 32,982 7.63% $331,644 $ 25,377 7.65%
======== ======== ======== ======== ======== ========
Deposits--interest bearing:
Interest-bearing demand accounts ..... $ 37,415 $ 869 2.32% $ 27,248 604 2.22% $ 22,073 487 2.21%
Savings and money market deposits .... 267,597 13,711 5.12% 184,192 7,707 4.18% 151,558 6,651 4.39%
Time deposits ........................ 235,049 14,635 6.23% 141,481 7,364 5.20% 111,407 6,155 5.52%
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits .. 540,061 29,215 5.39% 352,921 15,675 4.44% 285,038 13,293 4.66%
Funds borrowed ........................... 58,160 4,116 6.96% 17,500 931 5.32% 373 19 5.09%
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities $598,221 $ 33,331 5.55% $370,421 $ 16,606 4.48% $285,411 $ 13,312 4.66%
======== ======== ======== ======== ======== ========
Tax equivalent net interest income ....... $ 24,700 $ 16,376 $ 12,065
======== ======== ========
Net interest spread ...................... 3.02% 3.15% 2.99%
Net interest margin ...................... 3.63% 3.79% 3.64%
- ----------------
(1) Average balances were generally computed using daily balances.
(2) Interest income on tax advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
approximately $885,000, $914,000 and $85,000 in the years ending 2000, 1999
and 1998, respectively.
(3) Non-accrual loans are included in the average balances and do not have a
material effect on the average yield. Interest on non-accruing loans was
not material for the periods presented.
The following table shows the dollar amount of changes in interest
income 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, calculated on a tax equivalent basis. Volume
variances are computed using the change in volume multiplied by the previous
year's rate. Rate variances are computed using the changes in rate multiplied by
the previous year's volume.
Year Ended December 31,
----------------------------------------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
--------------------------------------- ------------------------------------------
Change Change Change Change Change Change
due to due to due to Total due to due to due to Total
rate volume mix change rate volume mix change
--------- --------- --------- --------- ---------- --------- ---------- ---------
(dollars in thousands)
Federal funds sold and other short-
term investments .............. $ 71 $ 526 $ 132 $ 729 $ (27) $(1,690) $ (135) $(1,852)
Investment securities ............. 808 1,306 170 2,284 207 2,353 (81) 2,479
Loans, net of unearned discount ... 2,985 16,730 2,321 22,036 (1,227) 7,836 369 6,978
------- ------- ------- ------- ------- ------- ------- -------
Total interest income ......... 3,864 18,562 2,623 25,049 (1,047) 8,499 153 7,605
------- ------- ------- ------- ------- ------- ------- -------
Interest bearing deposits ......... 3,353 8,309 1,878 13,540 (776) 3,014 144 2,382
Funds borrowed .................... 287 2,163 735 3,185 40 911 (39) 912
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense ........ 3,640 10,472 2,613 16,725 (736) 3,925 105 3,294
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ............... $ 224 $ 8,090 $ 10 $ 8,324 $ (311) $ 4,574 $ 48 $ 4,311
======= ======= ======= ======= ======= ======= ======= =======
Provision for Loan Losses
We provide for an adequate allowance for loan losses that are
probable and reasonably estimable in the portfolio. The provision for loan
losses reflects management's latest assessment of the inherent losses 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 31.
26
Our provision for loan losses was $1.7 million for the year ended
December 31, 2000, compared to $1.2 million for the comparable period in 1999.
Net charge-offs for the years ended December 31, 2000 and 1999 were $956,000 and
$108,000, respectively. Our provision for loan loss was $362,000 in 1998 and we
recognized $2,000 of net charge-offs during 1998.
Non-interest Income
Non-interest income increased approximately $1.2 million or 58.1%,
to $3.2 million for the year ended December 31, 2000, compared to $2.0 million
for 1999. The increase is primarily attributable to increases in service charge
income and trust fee revenues. Banking service charge income increased by
$456,083 over the prior year due primarily to fees earned on accounts related to
the former Johnson Bank Illinois offices in Winnetka and Lake Forest. Trust fee
revenue increased 43.8% to $2.3 million in 2000 compared to $1.6 million in
1999. Trust assets under administration increased 6.5% to $777.8 million at year
end 2000, compared to $730.0 million at December 31, 1999. In February 2000, the
acquisition of Johnson Bank Illinois added approximately $60.0 million to trust
assets under administration. During 2000 we expanded our trust services beyond
the Chicago office with the addition of trust staff to our suburban offices. We
expect to expand our trust services to The PrivateBank (St. Louis) during 2001.
Non-interest income increased approximately $683,000, or 51.7%, to
$2.0 million for the year ended December 31, 1999, compared to $1.3 million for
1998. Trust fees grew 60.0% to $1.6 million in 1999, reflecting a restructuring
of trust fee schedules and growth in trust assets under administration to $730.0
million at year end 1999 compared to $612.0 million at December 31, 1998, an
increase of 19.3%.
Total non-interest income also included $92,000, $57,000 and $40,000
in realized gains from sales of investment securities during 2000, 1999 and
1998, respectively.
Non-interest Expense
Year Ended December 31,
---------------------------
2000 1999 1998
------- ------- -------
(in thousands)
Salaries and employee benefits ... $ 8,174 $ 5,156 $ 4,077
Severance charge ................. 562 -- --
Towne Square Financial Corporation
acquisition .................. -- 1,300 --
Occupancy ........................ 2,987 1,563 1,379
Data processing .................. 820 478 508
Marketing ........................ 1,202 692 567
Professional fees ................ 2,135 1,295 561
Goodwill ......................... 731 -- --
Insurance ........................ 303 214 134
Other expense .................... 1,692 1,389 863
------- ------- -------
Total non-interest expense ... $18,606 $12,087 $ 8,089
======= ======= =======
Non-interest expense increased $6.5 million or 53.9% to $18.6
million for the year ended December 31, 2000 compared to $12.1 million for 1999.
The 2000 results reflect a one-time severance charge of $562,000 relating to
severance packages for two departing executives and costs incurred in connection
with the recruitment and hiring of their replacements.
Excluding one-time charges, non-interest expense increased 74.7%
from $10.3 million during 1999 to $18.0 million during 2000. A portion of the
increase is attributable to goodwill amortization of $731,000 recorded during
2000 resulting from the Johnson Bank Illinois acquisition, which closed on
February 11, 2000. The remainder of the increase over the prior year level is
also primarily due to expenses incurred in connection with our expansion
initiatives.
27
Non-interest expense for the year ended December 31, 2000 includes
operating expenses of $1.1 million and $1.4 million related to the St. Charles
and the St. Louis offices, respectively. Additionally, 2000 results reflect the
addition of the two new locations acquired through the Johnson Bank Illinois
transaction which increased operating expenses by $2.3 million for the year
ended December 31, 2000 in addition to the $731,000 of goodwill amortization
recognized during 2000 in connection with the acquisition. The remaining
increase in non-interest expense of approximately $2.2 million is due to overall
growth in salaries and benefits, professional services and marketing costs at
our existing offices.
Included in total non-interest expense for the year ended December
31, 1999, is the one-time $1.3 million charge associated with the acquisition of
Towne Square Financial Corporation, as well as $133,200 of transaction costs
associated with the acquisition. The $1.3 million non-recurring charge is not
tax deductible. Excluding the effect of the one-time charges in 1999,
non-interest expense increased 33.3% in 1999 to $10.8 million compared to $8.1
million for 1998. Non-interest expense as a percentage of average assets changed
from 2.3% in 1998 to 2.7% in 1999 to 2.6% in 2000.
Our efficiency ratio (tax equivalent), which measures the percentage
of net revenue that is paid as non-interest expense, for the year ended December
31, 2000 was 66.8% compared to 65.8% for the year ended December 31, 1999 and
60.8% for the year ended December 31, 1998. Excluding the effects of one-time
charges during 2000 and 1999, our efficiency ratio increased to 64.8% in 2000
from 57.5% in 1999 and from 60.8% in 1998.
Our efficiency ratio for 2000 was negatively impacted due to the
start-up nature of the St. Charles office and the St. Louis office. Our St.
Charles office first broke even on a monthly basis in July, 2000, approximately
within one year of the acquisition date. During 2001, we expect to continue to
incur operating expenses in excess of revenues for The PrivateBank (St. Louis).
We expect the efficiency ratio to remain high until business development efforts
at the new offices generate revenue sufficient to offset the related operating
expenses.
The following table shows our operating efficiency (excluding
one-time charges) over the last three years:
December 31,
--------------------------
2000(1) 1999(2) 1998
-------- ------- --------
Non-interest expense to average assets 2.56% 2.32% 2.29%
Net overhead ratio(3) ................ 2.11 1.87 1.91
Efficiency ratio(4) .................. 64.75 57.52 60.80
(1) Excludes the one-time severance charge incurred in 2000 in the amount of
$562,000.
(2) Excludes the one-time charges relating to the Towne Square Financial
Corporation acquisition and the St. Louis start-up costs totaling
$1,757,000.
(3) Non-interest expense less non-interest income divided by average total
assets.
(4) Non-interest expense divided by the sum of net interest income, on a tax
equivalent basis, plus non-interest income.
Salary and employee benefit expense increased 58.5% to $8.2 million
for the year ended December 31, 2000 from $5.2 million for the year ended
December 31, 1999. Full-time equivalent employees increased 49.7% to 137 at
December 31, 2000 from 91.5 at December 31, 1999. The increase in salary and
benefits is due primarily to an increased number of employees, including the
senior officers, responsible for opening the St. Charles and St. Louis offices,
as well as the addition of employees from the Johnson Bank Illinois acquisition.
Our main office in Chicago has also experienced growth in personnel during 2000
in response to the overall growth of the organization and to increased staffing
needs to support a public company.
Salary and employee benefit expense increased 26.5% to $5.2 million
for the year ended December 31, 1999 from $4.1 million for the year ended
December 31, 1998. Full-time-equivalent employees increased 28% to 91.5 at
December 31, 1999 from 71.5 at December 31, 1998. The increase in salary and
benefits for 1999 was affected by the start up of the St. Charles office. In
addition, we incurred approximately $262,000 in salary-related expense in
connection with the formation of the St. Louis office. A portion of the increase
in salaries and benefits is
28
attributable to a general increase in our staffing resulting from growth and
increased staffing needs to support a public company.
Professional fees, which include legal, accounting, consulting
services and investment management fees, increased 64.9% to $2.1 million for the
year ended December 31, 2000 from $1.3 for 1999. The increase in 2000 is
primarily due to higher legal, accounting and information-system consultation
services. These projects included the system merger completed in connection with
the Johnson Bank Illinois acquisition, implementation of a new asset liability
management software program and various other projects which relate to general
upgrades of our current technology infrastructure. In addition, the increase in
trust-related business has resulted in increased investment management fees paid
to third parties during the year ended December 31, 2000 in addition to December
31, 1999.
Professional fees increased 130.8% to $1.3 million for the year
ended December 31, 1999 from $561,000 for 1998. The increase in 1999 is due to a
number of factors including increased consulting services rendered in 1999
relating to year 2000 readiness. During the third quarter of 1999, we completed
our data processing conversion to a new third-party provider. We incurred
$145,000 of consulting expenses related to the data processing conversion during
the third quarter 1999. Included in professional fees for the 1999 period are
approximately $95,000 of non-recurring legal and accounting fees associated with
the Towne Square acquisition and $13,000 of legal fees related to the start-up
costs of the St. Louis office.
System related projects are expected to continue in 2001. During
2001, we plan to invest approximately $1.3 million in our information technology
infrastructure. These expenditures will result in new hardware, innovative
software and overall integration of our various technology components. The
upgrade to our information technology platform is being undertaken as a result
of an independent third-party assessment of our current operating environment,
which was conducted during 2000. The 2001 information technology renovation will
augment the technology expenditures that have been made in 1999 and 2000 in
connection with the implementation of a new data processing system, upgrades to
our Internet banking products, web page development and other system related
projects that have increased our customer service capabilities.
The other expense category of non-interest expense consists
primarily of postage, telephone, delivery, office supplies, training and other
miscellaneous expenses. During 2000 these expenses increased relative to 1999 by
21.8% due to the implementation of our expansion strategy. During 1999 these
expenses increased relative to 1998 by 61.0%. The increase of other expenses for
1999 is attributable to the establishment of the St. Louis and St. Charles
offices, training incurred in connection with the new data processing system and
a general increase in business volumes during 1999.
Income Taxes
The following table shows our income before income taxes, applicable
income taxes and effective tax rate for the years ended December 31, 2000, 1999,
and 1998, respectively.
Year Ended December 31,
-------------------------------
2000 1999 1998
--------- ---------- ---------
(dollars in thousands)
Income before taxes................. $6,688 $4,172 $4,849
Income tax provision................ 2,263 1,257 1,839
Effective tax rate.................. 33.8% 30.1% 37.9%
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 (including the Towne Square acquisition
charge) which are disallowed for tax purposes. The increase in the effective tax
rate for 2000 as compared to 1999 reflects a lower amount of interest income
which was tax exempt in 2000 relative to 1999. Decreases in the income tax
provision for the year ended December 31, 1999 as compared to 1998 resulted from
the increase of our municipal bond portfolio as a percentage of total investment
securities. The average balance of municipal securities was $37.1 million, $39.5
million and $25.0 million for the years ended December 31, 2000, 1999 and 1998,
29
respectively. The impact of increased non-taxable income in 1999 was offset by
the one-time non-tax deductible special charge related to the Towne Square
acquisition.
FINANCIAL CONDITION
Total Assets
Total assets were $829.5 million at December 31, 2000, an increase
of $310.8 million, or 59.9%, over the $518.7 million at December 31, 1999. The
balance sheet growth resulted from the acquisition of Johnson Bank Illinois, the
start-up of a new office in St. Charles, Illinois, the establishment of The
PrivateBank (St. Louis) and asset growth from our existing bank offices in the
Chicago metropolitan area. The growth in assets experienced during 2000 was
funded primarily through growth in deposits, including brokered deposits, and to
a lesser extent, through increased borrowings.
Loans
Total loans increased to $599.4 million at December 31, 2000, an
increase of $202.2 or 50.9%, from $397.3 at December 31, 1999.
The increase in loans of $202.2 million is partially attributable to
the addition of the Winnetka and Lake Forest loan portfolios, which added $86.3
million in loans in February 2000 as a result of the Johnson Bank Illinois
acquisition. The remaining growth experienced during 2000 is the result of the
opening of the St. Charles office and the start-up of The PrivateBank (St.
Louis), in addition to continued growth from our existing offices.
The following table sets forth the loan portfolio by category as of
December 31 for the previous five fiscal years:
Year Ended December 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
Commercial real estate $206,464 $146,368 $ 94,392 $ 55,429 $ 39,452
Commercial ............ 137,343 67,026 46,800 33,862 28,004
Residential real estate 86,052 72,972 54,171 56,307 45,012
Personal .............. 62,414 57,497 44,094 42,077 35,339
Home equity ........... 46,013 24,396 20,100 20,680 20,683
Construction .......... 61,143 29,018 22,408 10,140 2,853
-------- -------- -------- -------- --------
Total loans ....... $599,429 $397,277 $281,965 $218,495 $171,343
======== ======== ======== ======== ========
The following table classifies the loan portfolio, by category, at
December 31, 2000, by date at which the loans mature:
One year From one to After five More than one year
or less five years years Total Fixed Variable(1)
-------- ----------- ---------- -------- ---------- -----------
(in thousands)
Commercial real estate $ 52,475 $104,002 $ 49,987 $206,464 $ 70,537 $ 83,452
Commercial ............ 82,272 47,965 7,106 137,343 21,880 33,191
Residential real estate 6,749 15,138 64,165 86,052 19,124 60,179
Personal .............. 53,307 7,780 1,327 62,414 2,657 6,450
Home equity ........... 7,245 24,299 14,469 46,013 -- 38,768
Construction .......... 51,049 9,309 785 61,143 476 9,618
-------- -------- -------- -------- -------- --------
Total loans ....... $253,097 $208,493 $137,839 $599,429 $114,674 $231,658
======== ======== ======== ======== ======== ========
(1) Includes adjustable rate mortgage products.
30
Allowance for Loan Losses
We believe our loan loss experience to date reflects the high credit
quality of our loan portfolio. The following table shows changes in the
allowance for loan losses resulting from additions to the allowance and loan
charge-offs for each of the periods shown.
December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(in thousands)
Balance at beginning of period ..... $ 4,510 $ 3,410 $ 3,050 $ 2,450 $ 1,955
Johnson Bank acquisition - loan loss
reserve ........................ 864 -- -- -- --
Loans charged-off:
Commercial real estate ............. -- -- -- -- --
Commercial ......................... (723) -- -- -- --
Residential real estate ............ -- -- -- -- --
Personal ........................... (249) (108) (2) (3) (29)
Home equity ........................ -- -- -- -- --
Construction ....................... -- -- -- -- --
Total loans charged-off ........ (972) (108) (2) (3) (29)
--------- --------- --------- --------- ---------
Loans Recovered:
Commercial ......................... 8 -- -- -- --
Personal ........................... 8 -- -- -- --
--------- --------- --------- --------- ---------
Total loans recovered .......... 16 -- -- -- --
--------- --------- --------- --------- ---------
Provision for loan losses .......... 1,690 1,208 362 603 524
--------- --------- --------- --------- ---------
Balance at end of period ........... $ 6,108 $ 4,510 $ 3,410 $ 3,050 $ 2,450
========= ========= ========= ========= =========
Average total loans ................ $ 541,436 $ 332,502 $ 234,486 $ 195,605 $ 141,043
========= ========= ========= ========= =========
The following table shows our allocation of the allowance for loan
losses by specific category at the dates shown. We considered various
qualitative and quantitative factors about the loan portfolio which we deemed
relevant in determining the level of the allowance for loan losses.
December 31,
--------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ----------------- ------------------ ----------------- ------------------
% of % of % of % of % of
Total Total Total Total Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
Commercial real
estate ..... $1,575 25.8% $1,154 25.6% $ 732 21.5% $ 429 14.1% $ 295 12.0%
Commercial ..... 1,727 28.3 930 20.6 693 20.3 464 15.2 422 17.2
Residential real
estate ..... 429 7.0 423 9.4 277 8.1 306 10.0 254 10.4
Personal ....... 658 10.8 568 12.6 545 16.0 1,037 34.0 973 39.7
Home equity .... 412 6.8 237 5.3 201 5.9 201 6.6 184 7.5
Construction ... 810 13.3 369 8.2 236 6.9 106 3.5 28 1.1
Unallocated .... 497 8.0 829 18.3 726 21.3 507 16.6 294 12.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total ...... $6,108 100.0% $4,510 100.0% $3,410 100.0% $3,050 100.0% $2,450 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Loan quality is continually monitored by management and reviewed by
the loan/investment committees of the board 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 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.
31
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 our loan
portfolio and credit undertakings that are not specifically identified. 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
1.02% as of December 31, 2000, compared to 1.14% as of December 31, 1999. Net
charge-offs for the year ended December 31, 2000 and 1999 were $956,000 and
$108,000, respectively. Net charge-offs to average total loans were 0.18% for
2000 compared to 0.03% for 1999. The increase in net charge-offs during 2000 is
due primarily to a single commercial credit relationship. In management's
judgment, an adequate allowance for loan losses has been established.
Non-performing Loans
The following table classifies our non-performing loans as of the
dates shown:
December 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(dollars in thousands)
Nonaccrual loans ................... $ 24 $ 600 $ -- $ -- $ --
Loans past due 90 days or more ..... 1,421 223 1,016 527 1,116
------ ------ ------ ------ ------
Total non-performing loans ..... 1,445 823 1,016 527 1,116
------ ------ ------ ------ ------
Other real estate owned ............ -- -- -- -- --
------ ------ ------ ------ ------
Total non-performing assets .... $1,445 $ 823 $1,016 $ 527 $1,116
====== ====== ====== ====== ======
Total non-performing loans to total
loans .......................... 0.24% 0.21% 0.36% 0.24% 0.65%
Total non-performing assets to total 0.17% 0.16% 0.24% 0.17% 0.45%
assets
It is our policy to discontinue the accrual of interest income on
any loan for which there exists reasonable doubt as to the payment of interest
or principal. Nonaccrual loans are returned to an accrual status when the
financial position of the borrower indicates there is no longer any reasonable
doubt as to the payment of principal or interest.
Other than those loans reflected in the table above, we had no
significant loans for which the terms had been renegotiated or restructured, or
for which there were serious doubts as to the ability of the borrower to comply
with repayment terms. We did not have any other real estate owned as of any of
the dates shown.
Potential Problem Loans. In addition to those loans reflected in the
table above, we have identified some loans through our problem loan
identification process which exhibit a higher than normal credit risk. 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. The
principal amount of loans in this category as of December 31, 2000 was
$1,421,000. At December 31, 2000, there were no significant loans which were
classified by any bank regulatory agency that are not included above as
nonaccrual, past due or restructured.
Loan Concentrations. Loan concentrations are considered to exist
when there are amounts loaned to a multiple number of borrowers engaged in
similar activities which would cause them to be similarly impacted by economic
or other conditions. Other than loans made to borrowers residing in the Chicago
and St. Louis metropolitan areas and our involvement in lending secured by real
estate, we had no concentrations of loans exceeding 10% of total loans at
December 31, 2000.
32
Nonaccrual loans decreased to $24,000 as of December 31, 2000 from
$600,000 as of December 31, 1999. Nonaccrual loans at December 31, 1999 included
one residential real estate loan that comprised approximately $538,000 of the
amount at that date. This loan was charged off during 2000.
Nonperforming loans include nonaccrual loans and accruing loans
which are 90 days or more delinquent. Nonperforming loans were $1,445,000 as of
December 31, 2000, compared to $823,000 at December 31, 1999. Nonperforming
loans were 0.24%, and 0.21% of total loans at December 31, 2000 and December 31,
1999, respectively. Nonperforming loans were 0.17% and 0.16% of total assets as
of December 31, 2000 and December 31, 1999, respectively.
Investment Securities
Investments are comprised of federal funds sold, debt securities
and, to a lesser extent, equity investments. "Federal funds sold" are overnight
investments in which, except for cash reserves, all remaining funds are
invested. Our debt securities portfolio is primarily comprised of U.S.
government agency obligations, municipal bonds, mortgage-backed pools and
collateralized mortgage obligations.
All securities are classified as available-for-sale and may be sold
as part of our asset/liability management strategy in response to changes in
interest rates, liquidity needs or significant prepayment risk. Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital. At December 31, 2000, reported stockholders' equity was reduced by
unrealized securities losses net of tax of $118,000. This represented an
improvement of $2.7 million from unrealized securities losses net of tax of $2.8
million at December 31, 1999.
Securities available-for-sale increased to $172.2 million at
December 31, 2000, up 142.1% from $71.1 million as of December 31, 1999. The
increase in investment securities is partially attributable to the acquisition
of the Johnson Bank Illinois portfolio. Following the acquisition of Johnson
Bank Illinois, we sold approximately $9.7 million of the former Johnson Bank
Illinois investment securities portfolio as part of our realignment of our
available-for-sale investment securities portfolio. The proceeds from the sale
of investment securities were reinvested in U.S. government agency securities.
Increased liquidity which resulted from loan participations that were sold in
the third and fourth quarters of 2000, was invested in U.S. government agency
mortgage backed securities and collateralized mortgage obligations, in
connection with the execution of our interest rate risk management strategy.
During the fourth quarter of 2000, we sold approximately $25.6 million of
collateralized mortgage obligations at a gain of approximately $95,000 and
replaced them with mortgage-backed pools to enhance our interest rate risk
management strategy. In addition, we sold approximately $2.8 million of
municipal bonds at a loss of approximately $95,000 and replaced them with
municipal bonds at current market rates to take advantage of favorable tax
treatment as well as enhance our interest rate risk management strategy. In
addition, we purchased $32.6 million of additional Federal Home Loan Bank stock,
$31.7 million as a short-term investment alternative and $900,000 of which is to
support additional borrowings.
U.S. Government Agency obligations increased by $4.4 million as a
result of the Johnson Bank Illinois acquisition and purchases made by The
PrivateBank (St. Louis). U.S. Government Agency Mortgage Backed Securities and
Collateralized Mortgage Obligations increased 224.2% to $84.3 million at
December 31, 2000 from $26.0 million at December 31, 1999 due to the securities
purchased in the third and fourth quarters. Corporate Collateralized Mortgage
Obligations increased 3.3% because of an increase in the fair market value of
these securities. Municipal securities increased $4.2 million at December 31,
2000 as compared to the year-end 1999 amount of $33.6 million. Federal Home Loan
Bank stock increased by $33.8 million because of the purchases made in the
fourth quarter of 2000.
33
December 31,
------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
Available-for-Sale
U.S. Government Agency Obligations .................. $ 4,399 $ -- $ 6,094
U.S. Government Agency Mortgage Backed Securities and
Collateralized Mortgage Obligations ............. 84,347 25,987 61,414
Corporate Collateralized Mortgage Obligations ....... 10,123 9,796 10,201
Tax Exempt Municipal Securities ..................... 36,644 33,614 37,251
Taxable Municipal Securities ........................ 1,141 -- --
Federal Home Loan Bank stock ........................ 35,175 1,400 1,000
Other ............................................... 365 337 315
-------- -------- --------
Total ............................................... $172,194 $ 71,134 $116,275
======== ======== ========
The following tables show the maturities of investment securities
(based on the amortized cost), by category, as of December 31, 2000, and the
weighted average yield (computed on a tax equivalent basis) for each range of
maturities of securities, by category, as of December 31, 2000:
Within From one to From five After Equity
one year five years to ten years ten years securities Total
---------- ----------- ------------ ---------- ---------- --------
(in thousands)
U.S. Government Agency Obligations ..... $ 995 $ 3,331 $ -- $ -- $ -- $ 4,326
U.S. Government Agency Mortgage
Backed Securities and Collateralized
Mortgage Obligations ............... 7,494 53,097 15,039 8,228 -- 83,858
Corporate Collateralized Mortgage
Obligations ........................ -- 6,186 2,390 1,613 -- 10,189
Tax Exempt Municipal Securities ........ 330 991 1,350 34,707 -- 37,378
Taxable Municipal Securities ........... -- -- -- 1,083 -- 1,083
Federal Home Loan Bank Stock(1) ........ 31,750 -- -- -- 3,425 35,175
Other .................................. -- -- -- -- 365 365
---------- ---------- ---------- ---------- --------- --------
Total .................................. $ 40,569 $ 63,605 $ 18,779 $ 45,631 $ 3,790 $172,374
========== ========== ========== ========== ========= ========
Within From one to From five After Equity
one year five years to ten years ten years securities Total
---------- ----------- ------------ ---------- ---------- --------
(in thousands)
U.S. Government Agency Obligations ..... 6.97% 7.27% -- -- -- 7.20%
U.S. Government Agency Mortgage
Backed Securities and Collateralized
Mortgage Obligations ............... 7.72% 7.99% 7.84% 7.71% -- 7.91%
Corporate Collateralized Mortgage
Obligations ........................ -- 7.57% 7.57% 7.56% -- 7.57%
Tax Exempt Municipal Securities ........ 9.42% 8.57% 6.52% 7.16% -- 7.19%
Taxable Municipal Securities ........... -- -- -- 7.58% -- 7.58%
Federal Home Loan Bank Stock(1) ........ 6.25% -- -- -- 6.25% 6.25%
Other .................................. -- -- -- -- 2.40% 2.40%
---------- ---------- ---------- ---------- --------- --------
Total .................................. 6.56% 7.92% 7.71% 7.28% 5.88% 7.37%
========== ========== ========== ========== ========= ========
- --------------
(1) We are required to maintain an investment in FHLB stock in an amount equal
to 5% of our FHLB borrowings. As of December 31, 2000, we had $68.5 million
dollars in advances from the FHLB ($65.0 million from the FHLB of Chicago
and $3.5 million from the FHLB of Des Moines). The FHLB can redeem and we
can sell, at any time, any FHLB stock we own in excess of the required
minimum. However, the FHLB may delay the sale of the stock for up to six
months if certain conditions are met.
Deposits and Funds Borrowed
Total deposits of $670.2 million as of December 31, 2000
represented an increase of $217.1 million, or 47.9%, from $453.1 million as of
December 31, 1999. Non-interest-bearing deposits were $61.8 million as of
December 31, 2000, $25.0 million more than the $36.8 million reported as of
December 31, 1999. Interest-bearing
34
demand deposits increased $17.9 million to $51.3 million at December 31, 2000
compared to $33.4 million at December 31, 1999. Savings and money market deposit
accounts increased by $93.7 million to $297.0 million at December 31, 2000 as
compared to $203.3 million at December 31, 1999. Other time deposits increased
by approximately $73.0 million to $251.9 million as compared to $178.9 million
at year end 1999. Brokered deposits, which are included in time deposits,
increased to $43.8 million at December 31, 2000 from $21.7 million at December
31, 1999.
The following table presents the balances of deposits by category
and each category as a percentage of total deposits at December 31, 2000 and
1999.
December 31,
-------------------------------------------
2000 1999
--------------------- -------------------
Percent Percent
Balance of Total Balance of Total
-------- -------- -------- --------
(dollars in thousands)
Demand ................ $ 61,789 9.2% $ 36,771 8.1%
Savings ............... 8,242 1.2 757 0.1
Interest-bearing demand 51,301 7.7 33,400 7.4
Money market .......... 297,043 44.3 203,311 44.9
Certificates of deposit 208,029 31.0 157,157 34.7
Brokered deposits ..... 43,842 6.6 21,696 4.8
-------- ----- -------- -----
Total deposits .... $670,246 100.0% $453,092 100.0%
======== ===== ======== =====
The aggregate amounts of time deposits, in denominations of $100,000
or more, by maturity, are shown below as of the dates indicated:
December 31,
----------------------
2000 1999
-------- --------
(in thousands)
Three months or less....................... $103,755 $106,181
Over three through six months.............. 55,623 24,915
Over six through twelve months............. 47,379 23,110
Over twelve months......................... 18,627 3,218
-------- --------
Total.................................. $225,384 $157,424
======== ========
Over the past several years, our clients have chosen to keep the
maturities of their deposits short. We expect these short-term certificates of
deposit to be renewed on terms and with maturities similar to those currently in
place. In the event that certain of these certificates of deposits are not
renewed and the funds are withdrawn from the bank, those deposits will be
replaced with traditional deposits, brokered deposits, borrowed money or
capital, or we will liquidate assets to reduce our funding needs.
35
A summary of all funds borrowed and outstanding and the rate in
effect while such borrowings were outstanding, at the period end, is presented
below:
December 31,
-----------------------------------
Amount Rate Maturity 2000 1999 1998
- ------ ---- -------- -------- --------- ----------
(in thousands)
Borrowing under revolving line of credit
facility.................................... 7.96% 02/11/02 $18,000 $ -- $ --
Subordinated note............................... 7.26 02/11/07 5,000 -- --
FHLB floating rate advance(2)................... 6.77 05/01/01 10,000 -- --
FHLB fixed advance.............................. 6.50 10/23/05 25,000 -- --
FHLB fixed advance.............................. 6.21 12/05/03 30,000 -- --
FHLB fixed advance.............................. 6.49 11/13/01 2,000 -- --
FHLB fixed advance.............................. 5.91 06/21/02 500 -- --
FHLB fixed advance.............................. 5.89 12/20/02 1,000 -- --
FHLB fixed advance.............................. 6.03 01/20/00 -- 15,000 --
FHLB fixed advance.............................. 5.20 01/07/99 -- -- 20,000
Fed funds purchased............................. 6.75 daily 2,700 -- --
Demand repurchase agreements(1)................. 5.00 daily 2,679 -- --
--------- --------- ---------
Total funds borrowed........................ $96,879 $15,000 $20,000
========= ========= =========
- ----------------
(1) 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.
(2) The rate on this FHLB floating rate advance is set at one-month LIBOR minus
five basis points.
Membership in the Federal Home Loan Bank System gives us the ability
to borrow funds from the Federal Home Loan Bank of Chicago and from the Federal
Home Loan Bank of Des Moines for short- or long-term purposes under a variety of
programs. We have periodically used services of the FHLB for short-term funding
needs and other correspondent services.
During 2000, we increased our utilization of Federal Home Loan Bank
advances to fund loan growth. Management anticipates that our reliance on
Federal Home Loan Bank borrowings as a funding source will likely remain at
current levels in 2001 to the extent that rates on Federal Home Loan Bank
advances continue to be more attractive than deposit pricing. Federal Home Loan
Bank borrowings totaled $68.5 million at December 31, 2000 compared to $15.0
million at December 31, 1999, all of which were at that time fixed advances
maturing in less than three months.
At December 31, 2000, we had $20.3 million in FHLB letters of credit
outstanding. At December 31, 1999, we had $21.4 million in FHLB letters of
credit outstanding. We pay 0.125% per annum for FHLB letters of credit. The
following table shows the maximum availability for and usage of FHLB advances
and letters of credit for The PrivateBank (Chicago) and The PrivateBank (St.
Louis).
Maximum
Date Availability Usage
- ---- ------------ -----
(in thousands)
As of December 31, 2000-
The PrivateBank (Chicago)................. $91,946 $85,340
The PrivateBank (St. Louis)............... 4,121 3,500
As of December 31, 1999-
The PrivateBank (Chicago)................. $64,219 $36,380
The PrivateBank (St. Louis)............... N/A N/A
36
We accept deposits from a variety of municipal entities. Typically,
these municipal entities require that banks pledge marketable securities to
collateralize these public deposits. The State of Illinois also accepts FHLB
letters of credit as collateral. At December 31, 2000 and 1999, we had
approximately $33.7 million and $17.5 million, respectively, of securities
collateralizing such public deposits. Deposits requiring pledged assets are not
considered to be core deposits, and the assets that are pledged as collateral
for these deposits are not deemed to be liquid assets.
On February 11, 2000, we entered into a new, two-year, $18.0 million
revolving credit facility. We borrowed $7.5 million under the line in connection
with the Johnson Bank Illinois acquisition at an initial rate of 7.20%. During
the second quarter 2000, we increased borrowings under the revolving credit
facility by approximately $8.0 million in order to capitalize The PrivateBank
(St. Louis). During the third and fourth quarters of 2000, we increased our
borrowings under the revolving credit facility by approximately $1.75 million
and $750,000, respectively, for business operating purposes. The interest rate
on borrowings under the revolving line resets quarterly, and is based on, at our
option, either the lender's prime rate or a 90-day LIBOR-based rate. The
interest rate on the revolving line reset to 7.60% on January 2, 2001.
We also issued a $5.0 million subordinated note to Johnson
International, Inc. as partial payment of the purchase price of the Johnson Bank
Illinois acquisition. The interest rate on the subordinated note resets each
quarter based on the 90-day LIBOR rate. The note is payable in full on or before
February 11, 2007, and provides for certain rate escalation beginning after two
years. The initial rate of interest on the subordinated note was 6.60% and reset
to 5.89% on February 12, 2001.
On February 8, 2001, we issued $20.0 million in trust preferred
securities at a fixed rate of 9.50% which mature on December 31, 2030. At our
option, the securities may be redeemed prior to maturity on or after December
31, 2005. The trust preferred securities will be presented in our consolidated
balance sheet as "Long-term debt-trust preferred securities." Upon receipt of
the net proceeds of $18.9 million, after deducting underwriting commissions and
offering expenses and including the underwriters' over-allotment shares, we
repaid the full amount of borrowings under our revolving line of credit with a
commercial bank in the amount of $18.0 million. As of March 22, 2001, borrowings
under the revolving line of credit were $0 and the maximum amount available
under the line of credit is $18.0 million.
Capital Resources
Stockholders' equity at December 31, 2000 rose to $54.2 million, an
increase of $7.2 million from the 1999 year-end level of $47.1 million, due
primarily to the increase in net income from the year ended December 31, 2000 as
well as the change in the fair value of investment securities classified as
available for sale net of tax. During July 1999, we raised approximately $16.7
million in capital (net of commissions and offering costs) through the issuance
of 1,035,000 shares of our common stock in our initial public offering.
We 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.
37
The following table reflects various consolidated measures of our
capital at December 31, 2000 and 1999:
December 31,
--------------------------------
Pro forma
2000 2000 1999
------ ------ --------
Leverage ratio...................................... 5.54% 7.88% 10.77%
Tier 1 risk-based capital ratio..................... 6.47 9.21 12.84
Total risk-based capital ratio...................... 8.15 11.18 13.96
Total equity to total assets........................ 6.53 6.53 9.08
The pro forma ratios presented for 2000 in the table above reflect
the impact of the issuance of $20.0 million of trust preferred securities
assuming the issuance had occurred on December 31, 2000. As of such date, the
trust preferred securities would have been included in Tier 1 capital in the
amount of $18.1 million. The Tier 1 qualifying amount is limited to 25.0% of
Tier 1 capital under Federal Reserve regulations. The excess amount of $1.9
million pro forma as of December 31, 2000 qualifies as Tier 2 capital.
The subordinated note in the amount of $5.0 million which was issued
to Johnson International as consideration in connection with the Johnson Bank
Illinois acquisition qualifies as Tier 2 capital for regulatory capital
purposes.
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," an entity 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 December 31, 2000, we continued to exceed the minimum
levels of all regulatory capital requirements, and were considered "adequately
capitalized" under regulatory standards. At December 31, 2000, our total
risk-based capital ratio was 8.15%. With the exception of the total risk-based
capital ratio, we exceeded the "well-capitalized" levels of our regulatory
capital requirements. At December 31, 2000, The PrivateBank (Chicago) and The
PrivateBank (St. Louis) were considered "well-capitalized" under all applicable
regulatory standards, including total risk-based capital ratio.
Liquidity
Liquidity measures our ability to meet maturing obligations and our
existing commitments, to withstand fluctuations in deposit levels, to fund our
operations and to provide for our clients' credit needs. Our liquidity
principally depends on our cash flows from our 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. Liquidity
management involves planning to meet anticipated funding needs at a reasonable
cost. Liquidity management is guided by policies, formulated and monitored by
our senior management and the banks' asset/liability committees, which take into
account the marketability of assets, the sources and stability of funding and
the level of unfunded commitments. Our principal sources of funds are deposits,
short-term borrowings and capital contributions by PrivateBancorp to the banks
funded by proceeds from draws on our line of credit or through new capital.
Our core deposits, the most stable source of liquidity due to the
nature of long-term relationships generally established with our clients, are
available to provide long-term liquidity. At December 31, 2000, 70.8% of our
total assets were funded by core deposits. At December 31, 1999, 79.6% of our
total assets were funded by core deposits. Core deposits are defined to include
all deposits including time deposits but excluding brokered deposits and public
funds. Time deposits are included as core deposits since these deposits have
historically not been volatile deposits for us.
Over the past several years, our clients have chosen to keep the
maturities of their deposits short. We expect these short-term certificates of
deposit to be renewed on terms and with maturities similar to those currently in
place. In the event that certain of these certificates of deposit are not
renewed and the funds are withdrawn from the bank, unless those deposits are
replaced with traditional deposits, brokered deposits, borrowed money or
capital, we will liquidate assets to reduce our funding needs.
38
We have continued to use Federal Home Loan Bank advances and
brokered deposits as alternative methods of funding loan growth. During 1999, we
first utilized brokered deposits as a funding tool to enhance liquidity in
anticipation of increasing loan demand and year 2000 contingency planning.
During 2000 we expanded our brokered deposits program in order to fund liquidity
of The PrivateBank (Chicago). During 2001 we expect to continue to rely on
brokered deposits together with increased Federal Home Loan Bank advances as
alternative methods of funding loan growth. We will first look toward internally
generated deposits as funding sources, but plan to supplement our funding needs
with non-traditional funding sources as needed. We anticipate that our average
cost of funds will increase in 2001 compared to 2000 due to the increased
reliance on non-traditional funding sources. We expect that The PrivateBank (St.
Louis) will begin to purchase brokered deposits in 2001 as well, in the absence
of traditional deposit growth sufficient to fund the expected loan growth in
that market.
Liquid assets refers to money market assets such as federal funds
sold, as well as available-for-sale securities. Net liquid assets represent the
sum of the liquid asset categories less the amount of assets pledged to secure
public funds. At December 31, 2000, net liquid assets at The PrivateBank
(Chicago) were $137.1 million as compared to $79.5 million at December 31, 1999.
At December 31, 2000, net liquid assets at The PrivateBank (St. Louis) were $1.9
million.
Net cash inflows provided by operations were $11.9 million for the
year ended December 31, 2000 compared to a net inflow of $3.2 million a year
earlier. Net cash outflows from investing activities were $232.3 million for the
year ended December 31, 2000, compared to a net cash outflow of $74.1 million a
year earlier. Cash inflows from financing activities for the year ended December
31, 2000 were $216.7 million compared to a net inflow of $99.6 million in 1999.
In the event of short-term liquidity needs, The PrivateBank
(Chicago) and The PrivateBank (St. Louis) may purchase federal funds from
correspondent banks.
Impact of Inflation
Our consolidated financial statements and the related notes thereto
included in this report have been prepared in accordance with generally accepted
accounting principles and practices within the banking industry. Under these
principles and practices, we are required to measure our financial position in
terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike many industrial companies, virtually all of our assets and
liabilities are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the general level of inflation. Over
short periods of time, interest rates may not necessarily move in the same
direction or in the same magnitude as inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a continuing part of our financial strategy, we attempt to manage
the impact of fluctuations in market interest rates on our net interest income.
This effort entails providing a reasonable balance between interest rate risk,
credit risk, liquidity risk and maintenance of yield. Asset/liability management
policy is established by our board of directors and is monitored by management.
Our asset/liability 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 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.
39
We have structured the assets and liabilities of our company 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 policy and attempt to maximize our returns within an
acceptable degree of risk. Our policy states that we shall maintain a gap
position at the one year horizon of between 0.70 and 1.30. Our position at
December 31, 2000 was 1.11 and was within the guidelines of our policy. We have
continued to maintain our gap position near the low end set by our policy
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 hurt our earnings, while a short-term drop in interest rates would help our
earnings.
Interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously. There are other factors which 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.
40
The following tables illustrate the estimated interest rate
sensitivity and periodic and cumulative gap positions calculated as of December
31, 2000 and 1999.
December 31, 2000
------------------------------------------------------------------
Time to Maturity or Repricing
0-90 days 91-365 days 1-5 years Over 5 years Total
--------- ----------- --------- ------------ ---------
(dollars in thousands)
Interest-Earning Assets
Loans ................................ $ 340,187 $ 50,032 $ 174,428 $ 34,782 $ 599,429
Investments .......................... 1,882 6,578 65,078 98,836 172,374
Federal funds sold ................... 11,876 -- -- -- 11,876
--------- --------- --------- --------- ---------
Total interest-earning assets .... $ 353,945 $ 56,610 $ 239,506 $ 133,618 $ 783,679
========= ========= ========= ========= =========
Interest-Bearing Liabilities
Interest-bearing demand .............. $ -- $ -- $ -- $ 51,301 $ 51,301
Savings and money market ............. 192,462 104,510 72 3,063 300,107
Time deposits ........................ 112,398 119,823 23,260 1,568 257,049
Funds borrowed ....................... 38,379 2,000 56,500 -- 96,879
--------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 343,239 $ 226,333 $ 79,832 $ 55,932 $ 705,336
========= ========= ========= ========= =========
Cumulative
Rate sensitive assets (RSA) .......... $ 353,945 $ 410,555 $ 650,061 $ 783,679
Rate sensitive liabilities (RSL) ..... 343,239 569,572 649,404 705,336
GAP (GAP=RSA-RSL) .................... 10,706 (159,017) 657 78,343
RSA/RSL .............................. 103.12% 72.08% 100.10% 111.11%
RSA/Total assets ..................... 42.67% 49.49% 78.37% 94.48%
RSL/Total assets ..................... 41.38% 68.66% 78.29% 85.03%
GAP/Total assets ..................... 1.29% 19.17% 0.08% 9.44%
GAP/RSA .............................. 3.02% 38.73% 0.10% 10.00%
December 31, 1999
---------------------------------------------------------------------
Time to Maturity or Repricing
0-90 days 91-365 days 1-5 years Over 5 years Total
--------- ----------- --------- ------------ ---------
(dollars in thousands)
Interest-Earning Assets
Loans ................................ $ 184,288 $ 29,485 $ 157,332 $ 26,619 $ 397,724
Investments .......................... 23,426 5,144 16,067 46,497 91,134
Federal funds sold ................... 9,243 -- -- -- 9,243
--------- --------- --------- --------- ---------
Total interest-earning assets .... $ 216,957 $ 34,629 $ 173,399 $ 73,116 $ 498,101
========= ========= ========= ========= =========
Interest-Bearing Liabilities
Interest-bearing demand .............. $ -- $ -- $ -- $ 33,400 $ 33,400
Savings and money market ............. 117,438 85,873 -- 4,133 207,444
Time deposits ........................ 114,614 56,001 4,832 -- 175,447
Funds borrowed ....................... 15,000 -- -- -- 15,000
--------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 247,052 $ 141,874 $ 4,832 $ 37,533 $ 431,291
========= ========= ========= ========= =========
Cumulative
Rate sensitive assets (RSA) .......... $ 216,957 $ 251,586 $ 424,985 $ 498,101
Rate sensitive liabilities (RSL) ..... 247,052 388,926 393,758 431,291
GAP (GAP=RSA-RSL) .................... (30,095) (137,340) 31,227 66,810
RSA/RSL .............................. 87.8% 64.7% 107.9% 115.5%
RSA/Total assets ..................... 41.8% 48.5% 81.9% 96.0%
RSL/Total assets ..................... 47.6% 75.0% 75.9% 83.1%
GAP/Total assets ..................... 5.8% 26.5% (6.0)% (12.9)%
GAP/RSA .............................. 6.0% 27.6% (6.3)% (13.4)%
41
The following table shows the impact of an immediate 200 basis point
change in interest rates, assessed through a simulation model, on our earning
asset portfolio as of December 31, 2000 and 1999. The simulation model attempts
to measure the effect of rising and falling interest rates over the next
two-year horizon in a rapidly changing rate environment.
December 31, 2000 December 31, 1999
------------------------ ------------------------
+200 Basis -200 Basis +200 Basis -200 Basis
Points Points Points Points
---------- ---------- ---------- ----------
Percentage change in net interest income due to
an immediate 200 basis point change in
interest rates over a two-year time horizon........... (9.6)% 9.3% (8.3)% 10.8%
This table shows that if there was an instantaneous, parallel shift
in the yield curve of +200 basis points, we would suffer a decline in net
interest income of 9.6% and 8.3% over a two-year horizon based on our earning
asset portfolio as of December 31, 2000 and 1999, respectively. Conversely, a
like shift of -200 basis points would increase net interest income by 9.3% over
a two-year horizon based on December 31, 2000 balances, down slightly from the
10.8% measured on the basis of the December 31, 1999 portfolio.
Changes in the effect on net interest income from a 200 basis point
movement at December 31, 2000 as compared to December 31, 1999 are relatively
similar because of the timing of the repricing of rate sensitive assets to rate
sensitive liabilities. In each period, the increase in interest income in the
reduced rate environment and the decrease in interest income in an increased
rate environment is due to our negatively gapped balance sheet within a two-year
horizon.
In a rates down 200 basis points scenario, rate sensitive
liabilities would reprice to reduced rates more quickly than many rate sensitive
assets, resulting in higher net interest income. The percentage increase in a
rates down scenario is less at December 31, 2000 than at December 31, 1999
because the percentage of our assets that would prepay in rates down has
increased between years. In addition, we increased our term borrowings and
brokered deposits during 2000. These additional sources of funding mature or
reprice within one month to five years. The rate shock simulation over a
two-year horizon does not reflect the issuance of $20.0 million of trust
preferred securities which we completed on February 8, 2001 at a fixed rate of
9.50%. In a rates down scenario, the fixed rate trust preferred securities will
negatively impact net interest income as these securities are fixed rate in
nature.
The increased loss in a rates up 200 basis points environment at
December 31, 2000 compared to December 31, 1999 is due to the addition of fixed
rate assets and liabilities from the Johnson Bank acquisition. These fixed rate
liabilities reprice faster than the assets, increasing the compression on our
margin.
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 our 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.
We continue to monitor our gap and rate shock reports to detect
changes to our exposure to fluctuating rates. We have the ability to shorten or
lengthen maturities on newly acquired assets, sell investment securities, or
seek funding sources with different maturities in order to change our asset and
liability structure for the purpose of mitigating the effect of interest rate
risk.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding directors of the Company is included in the
Company's Proxy Statement for its 2001 Annual Meeting of Stockholders (the
"Proxy Statement") under the heading "Election of Directors" and the information
included therein is incorporated herein by reference. Information regarding the
executive officers of the Company is included in "Part I., Item 1. Business."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of executive officers and
directors is included in the Company's Proxy Statement under the headings "Board
of Directors' Compensation," "Executive Compensation," and "Employment
Agreements" and the information included therein is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial
owners and management is included in the Company's Proxy Statement under the
heading "Security Ownership of Certain Beneficial Owners, Directors and
Executive Officers" and the information included therein is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
is included in the Company's Proxy Statement under the heading "Transactions
with Related Persons" and the information included therein is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Index to Financial Statements
The consolidated financial statements of the Company and its
subsidiaries as required by Item 8 are filed as a part of this document. See
"Index to Consolidated Financial Statements" on page F-1.
(a) (2) Financial Statement Schedules
All financial statement schedules called for by Item 8 and Item 14
of Form 10-K have been omitted because the information requested is either not
applicable or has been included in the consolidated financial statements or
notes thereto.
43
(a) (3) Exhibits
Exhibit
No. Description of Exhibits
- ------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc.(1)
3.2 [Intentionally left blank]
3.3 Amended and Restated By-laws of PrivateBancorp, Inc.+
4.1 Subordinated Note of PrivateBancorp Inc., dated February 11, 2000,
principal amount of $5 million due February 11, 2007, issued to Johnson
International, Inc.(3)
4.2 Certain instruments defining the rights of the holders of long-term debt of
the Company and certain of its subsidiaries, none of which authorize a
total amount of indebtedness in excess of 10% of the total assets of the
Company and its subsidiaries on a consolidated basis, have not been filed
as Exhibits. The Company hereby agrees to furnish a copy of any of these
agreements to the SEC upon request.
10.1 Lease Agreement for banking facility located at Ten North Dearborn,
Chicago, Illinois dated January 1, 1992, as amended, by and between General
American Life Insurance Company as successor-in-interest to LaSalle
National Trust, N.A., as successor trustee to LaSalle National Bank, not
personally but as Trustee under Trust Agreement dated November 6, 1985 and
known as Trust No. 110519 and The PrivateBank and Trust Company.(1)
10.2 Lease Agreement for banking facility located at 1603 West Sixteenth Street,
Oak Brook, Illinois dated October , 1996 by and between Columbia Lisle
Limited Partnership and The PrivateBank and Trust Company.(1)
10.3 Lease Agreement for banking facility located at 517 Green Bay Road,
Wilmette, Illinois dated as of May 2, 1994 by and between Gunnar H.
Hedlund, Doris S. Hedlund, Robert P. Hedlund and Gerald A. Hedlund, LaSalle
National Trust, N.A., as successor trustee to LaSalle National Bank, not
personally but solely as Trustee under Trust Agreement dated December 28,
1972 and known as Trust No. 45197 and The PrivateBank and Trust Company.(1)
10.4 Building Lease by and between Towne Square Realty, L.L.C. and The
PrivateBank and Trust Company dated August 6, 1999.(3)
10.5 Sublease Agreement for banking facility located at 1401 South Brentwood
Blvd., St. Louis, Missouri, dated as of December 13, 1999, by and between
Union Planters Bank, National Association, St. Louis Brentwood Associates,
L.P. and PrivateBancorp, Inc.(4)
10.6 Stock Purchase Agreement dated as of May 28, 1998 by and among
PrivateBancorp, Inc., Delaware Charter Guarantee and Trust Co., Trustee FBO
Ralph B. Mandell, IRA and The Ralph B. Mandell Revocable Trust UTA dated
June 5, 1997.(1)
10.7 Pledge Agreement dated as of May 28, 1998 by and between the Ralph B.
Mandell Revocable Trust UTA dated June 5, 1997 and PrivateBancorp, Inc.
(included as Exhibit B to Stock Purchase Agreement filed as Exhibit
10.6).(1)
10.8 PrivateBancorp, Inc. Amended and Restated Stock Incentive Plan (filed as
Appendix A to the Company's Proxy Statement for its 2000 Annual Meeting of
Stockholders and incorporated herein by reference).*
10.9 Employment Agreement by and between Ralph B. Mandell and PrivateBancorp,
Inc. dated July 1, 1999.(1)*
10.10 Employment Agreement by and between Donald A. Roubitchek and
PrivateBancorp, Inc. dated July 1, 1999.(1)*
10.11 Outsourcing Agreement by and between The PrivateBank and Trust Company and
Marshall & Ilsley Corporation, acting through its division M&I Data
Services, dated as of April 9, 1999.(1)
10.12 Form of Indemnification Agreement by and between PrivateBancorp, Inc. and
its directors and executive officers.(1)*
10.13 Agreement and Plan of Reorganization by and between PrivateBancorp, Inc.
and Towne Square Financial Corporation dated as of June 24, 1999.(1)
10.14 Stock Purchase Agreement dated as of October 4, 1999 by and among
PrivateBancorp, Inc., Johnson International, Inc. and Johnson Bank
Illinois.(2)
10.15 Loan Agreement dated as of February 11, 2000, between PrivateBancorp, Inc.
and LaSalle Bank National Association.(3)
44
Exhibit
No. Description of Exhibits
- ------- -----------------------
10.16 Letter Agreement dated September 26, 2000 by and between PrivateBancorp,
Inc., The PrivateBank and Trust Company and Donald A. Roubitchek.(5)*
10.17 Employment Agreement by and between Richard C. Jensen and PrivateBancorp,
Inc. dated as of July 27, 2000.(6)*
12.1 Calculation of Ratio of Earnings to Fixed Charges.+
21.1 Subsidiaries of the Registrant.(6)
23.1 Consent of Arthur Andersen LLP.+
24.1 Powers of Attorney (set forth on signature page to Registration Statement).
- --------------
+ Filed herewith.
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit.
(1) Filed as an exhibit to the Company's Form S-1 Registration Statement (File
No. 333-77147) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form S-1 Registration Statement (File
No. 333-52676) and incorporated herein by reference.
(b) Reports on Form 8-K
The following Current Report on Form 8-K was filed by the Company
during the last quarter of fiscal 2000:
o Form 8-K dated October 23, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 26, 2000 PRIVATEBANCORP, INC.
By: /s/ Ralph B. Mandell
--------------------
Ralph B. Mandell,
Chairman, President and Chief
Executive Officer
45
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Ralph B. Mandell and Gary L. Svec,
and each of them, the true and lawful attorney-in-fact and agents of the
undersigned, with full power of substitution and resubstitution, for and in the
name, place and stead of the undersigned, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, and hereby grants to such attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully as to all intents and purposes as
each of the undersigned might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ RALPH B. MANDELL Chairman, President, Chief March 26, 2001
- ------------------------------ Executive Officer and Director
Ralph B. Mandell
/s/ CAREN L. REED Vice Chairman March 26, 2001
- ------------------------------
Caren L. Reed
/s/ GARY L. SVEC Chief Financial Officer March 26, 2001
- ------------------------------
Gary L. Svec
/s/ LISA M. O'NEILL Controller March 26, 2001
- ------------------------------
Lisa M. O'Neill
/s/ DONALD L. BEAL Director March 26, 2001
- ------------------------------
Donald L. Beal
/s/ NAOMI T. BORWELL Director March 26, 2001
- ------------------------------
Naomi T. Borwell
/s/ WILLIAM A. CASTELLANO Director March 26, 2001
- ------------------------------
William A. Castellano
/s/ ROBERT F. COLEMAN Director March 26, 2001
- ------------------------------
Robert F. Coleman
/s/ JOHN E. GORMAN Director March 26, 2001
- ------------------------------
John E. Gorman
/s/ ALVIN J. GOTTLIEB Director March 26, 2001
- ------------------------------
Alvin J. Gottlieb
/s/ JAMES M. GUYETTE Director March 26, 2001
- ------------------------------
James M. Guyette
/s/ RICHARD C. JENSEN Director March 26, 2001
- ------------------------------
Richard C. Jensen
46
/s/ PHILIP M. KAYMAN Director March 26, 2001
- ------------------------------
Philip M. Kayman
/s/ WILLIAM R. LANGLEY Director March 26, 2001
- ------------------------------
William R. Langley
Director March 26, 2001
- ------------------------------
Thomas F. Meagher
/s/ WILLIAM J. PODL Director March 26, 2001
- ------------------------------
William J. Podl
/s/ MICHAEL B. SUSMAN Director March 26, 2001
- ------------------------------
Michael B. Susman
47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PRIVATEBANCORP, INC.
Page
----
Report of Arthur Andersen LLP, Independent Public Accountants............. F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.............. F-3
Consolidated Statements of Income for the years ended December
31, 2000, 1999 and 1998....................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998........................ F-5
Consolidated Statements of Cash Flow for the years ended December 31,
2000, 1999 and 1998........................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Selected Quarterly Financial Data (unaudited).............................F-29
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
PrivateBancorp, Inc.:
We have audited the accompanying consolidated balance sheets of
PRIVATEBANCORP, INC. (a Delaware corporation) AND SUBSIDIARIES as of December
31, 2000 and 1999, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PrivateBancorp, Inc.
and Subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 22, 2001(except with respect to the matter discussed in Note 20, as to
which the date is February 9, 2001).
F-2
PRIVATEBANCORP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 1999
(In thousands)
December 31,
-----------------------
2000 1999
--------- ---------
Assets
Cash and due from banks .................................................... $ 28,637 $ 14,940
Fed Funds sold and other short-term investments ............................ 11,876 29,243
--------- ---------
Total cash and cash equivalents ........................................ 40,513 44,183
--------- ---------
Available-for-sale securities, at fair value ............................... 172,194 71,134
Loans net of unearned discount ............................................. 599,429 397,277
Allowance for loan losses .............................................. (6,108) (4,510)
--------- ---------
Net loans .............................................................. 593,321 392,767
--------- ---------
Goodwill ................................................................... 11,629 --
Premises and equipment, net ................................................ 4,138 2,028
Accrued interest receivable ................................................ 5,524 2,870
Other assets ............................................................... 2,190 5,715
--------- ---------
Total assets ........................................................... $ 829,509 $ 518,697
========= =========
Liabilities and Stockholders' Equity
Demand deposits:
Noninterest-bearing .................................................... $ 61,789 $ 36,771
Interest-bearing ....................................................... 51,301 33,400
Savings and money market deposit accounts .................................. 300,107 204,068
Brokered deposits .......................................................... 43,842 21,696
Other time deposits ........................................................ 213,207 157,157
--------- ---------
Total deposits ......................................................... 670,246 453,092
--------- ---------
Funds borrowed ............................................................. 96,879 15,000
Accrued interest payable ................................................... 3,552 1,056
Other liabilities .......................................................... 4,583 2,469
--------- ---------
Total liabilities ...................................................... $ 775,260 $ 471,617
--------- ---------
Stockholders' Equity
Preferred Stock, 1,000,000 shares authorized ............................... -- --
Common stock, without par value, $1 stated value; 12,000,000 shares
authorized; 4,623,532 and 4,590,332 shares issued and outstanding as of
December 31, 2000 and December 31, 1999, respectively .................. 4,624 4,590
Surplus .................................................................... 40,107 39,761
Retained earnings .......................................................... 11,388 7,425
Accumulated other comprehensive loss ....................................... (118) (2,812)
Deferred compensation ...................................................... (802) (759)
Loans to officers .......................................................... (950) (1,125)
--------- ---------
Total stockholders' equity ............................................. 54,249 47,080
--------- ---------
Total liabilities and stockholders' equity ............................. $ 829,509 $ 518,697
========= =========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-3
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
(In thousands, except per share data)
Year Ended December 31,
-----------------------------
2000 1999 1998
------- ------- -------
Interest income
Loans, including fees ................................. $48,633 $26,597 $19,619
Federal funds sold and interest bearing deposits ...... 1,058 330 2,181
Securities ............................................ 7,455 5,141 3,492
------- ------- -------
Total interest income ............................. 57,146 32,068 25,292
------- ------- -------
Interest expense
Deposits:
Interest-bearing demand ........................... 869 604 487
Savings and money market deposit accounts ......... 13,711 7,671 6,651
Other time ........................................ 14,635 7,399 6,155
Funds borrowed ........................................ 4,116 931 19
------- ------- -------
Total interest expense ............................ 33,331 16,605 13,312
------- ------- -------
Net interest income ............................... 23,815 15,463 11,980
Provision for loan losses ............................. 1,690 1,208 362
------- ------- -------
Net interest income after provision for loan losses 22,125 14,255 11,618
------- ------- -------
Non-interest income
Banking, trust services and other income .......... 3,077 1,947 1,280
Securities net gains .............................. 92 57 40
------- ------- -------
Total non-interest income ..................... 3,169 2,004 1,320
------- ------- -------
Non-interest expense
Salaries and employee benefits .................... 8,174 5,156 4,077
Severance charge .................................. 562 -- --
Occupancy expense, net ............................ 2,987 1,563 1,379
Goodwill amortization ............................. 731 -- --
Towne Square Financial Corporation acquisition .... -- 1,300 --
Professional fees ................................. 2,135 1,295 561
Marketing ......................................... 1,202 692 567
Data Processing ................................... 820 478 508
Insurance ......................................... 303 214 134
Other non-interest expense ........................ 1,692 1,389 863
------- ------- -------
Total non-interest expense .................... 18,606 12,087 8,089
------- ------- -------
Income before income taxes .................... 6,688 4,172 4,849
Income tax provision .............................. 2,263 1,257 1,839
------- ------- -------
Net income .................................... $ 4,425 $ 2,915 $ 3,010
======= ======= =======
Basic earnings per share .............................. $ 0.96 $ 0.73 $ 0.91
Diluted earnings per share ............................ $ 0.92 $ 0.69 $ 0.86
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-4
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1999 and 2000
(In thousands)
Accumulated
Other
Compre- Deferred Total
Common Retained hensive Compen- Loans to Stockholders'
Stock Surplus Earnings Income sation Officers Equity
-------- -------- -------- ----------- --------- -------- -------------
Balance, January 1, 1998 ................ $ 3,217 $ 19,783 $ 2,165 $ 29 $ (506) $ -- $ 24,688
Net income .......................... -- -- 3,010 -- -- -- 3,010
Net increase in fair value of securities
classified as available-for-sale, net
of income taxes and reclassification
adjustments ......................... -- -- -- 121 -- -- 121
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income .............. -- -- 3,010 121 -- -- 3,131
-------- -------- -------- -------- -------- -------- --------
Cash dividends declared ($0.08 per
share) .............................. -- -- (262) -- -- -- (262)
Issuance of common stock ................ 214 2,491 -- -- -- -- 2,705
Awards granted .......................... -- -- -- -- (188) -- (188)
Amortization of deferred
compensation ........................ -- -- -- -- 150 -- 150
Loan to chief executive officer ......... -- -- -- -- -- (950) (950)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1998 .............. $ 3,431 $ 22,274 $ 4,913 $ 150 $ (544) $ (950) $ 29,274
======== ======== ======== ======== ======== ======== ========
Balance, January 1, 1999 ................ $ 3,431 $ 22,274 $ 4,913 $ 150 $ (544) $ (950) $ 29,274
Net income .......................... -- -- 2,915 -- -- -- 2,915
Net decrease in fair value of securities
classified as available-for-sale, net
of income taxes and reclassification
adjustments ......................... -- -- -- (2,962) -- -- (2,962)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income .............. -- -- 2,915 (2,962) -- -- (47)
-------- -------- -------- -------- -------- -------- --------
Cash dividends declared ($0.10 per
share) .............................. -- -- (403) -- -- -- (403)
Issuance of common stock ................ 1,159 17,487 -- -- -- -- 18,646
Awards granted net of forfeitures ....... -- -- -- -- (448) -- (448)
Amortization of deferred
compensation ........................ -- -- -- -- 233 -- 233
Loans to officers ....................... -- -- -- -- -- (175) (175)
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1999 .............. $ 4,590 $ 39,761 $ 7,425 $ (2,812) $ (759) $ (1,125) $ 47,080
======== ======== ======== ======== ======== ======== ========
Balance, January 1, 2000 ................ $ 4,590 $ 39,761 $ 7,425 $ (2,812) $ (759) $ (1,125) $ 47,080
Net income .......................... -- -- 4,425 -- -- -- 4,425
Net increase in fair value of securities
classified as available-for-sale, net
of income taxes and reclassification
adjustments ......................... -- -- -- 2,694 -- -- 2,694
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income .............. -- -- 4,425 2,694 -- -- 7,119
Cash dividends declared ($0.10 per
share) .............................. -- -- (462) -- -- -- (462)
Issuance of common stock ................ 34 346 -- -- -- -- 380
Awards granted, net of forfeitures ...... -- -- -- -- (270) -- (270)
Amortization of deferred
compensation ........................ -- -- -- -- 227 -- 227
Loans to officers ....................... -- -- -- -- -- 175 175
-------- -------- -------- -------- -------- -------- --------
Balance, December 31, 2000 .............. $ 4,624 $ 40,107 $ 11,388 $ (118) $ (802) $ (950) $ 54,249
======== ======== ======== ======== ======== ======== ========
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-5
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
(In thousands)
Year Ended December 31,
-------------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities
Net income ...................................................... $ 4,425 $ 2,915 $ 3,010
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................... 1,030 498 508
Goodwill amortization ........................................... 731 -- --
Johnson Bank Illinois fair value accretion, net ................. (304) -- --
Amortization of deferred compensation ........................... 227 233 150
Provision for loan losses ....................................... 1,690 1,208 362
Gain on sale of securities ...................................... (92) (56) (40)
Increase in deferred loan fees .................................. 259 51 348
(Increase) in accrued interest receivable ....................... (1,894) (606) (683)
Increase (decrease) in accrued interest payable ................. 1,886 (324) 268
(Increase) decrease in other assets ............................. 1,797 (2,571) (221)
Increase in other liabilities ................................... 2,106 1,808 570
--------- --------- ---------
Total adjustments ........................................... 7,436 241 1,262
--------- --------- ---------
Net cash provided by operating activities ................... 11,861 3,156 4,272
--------- --------- ---------
Cash flows from investing activities
Proceeds from maturities, paydowns, and sales of securities ..... 48,075 55,930 85,391
Purchase of securities available-for-sale ....................... (124,624) (14,725) (136,662)
Johnson Bank Illinois acquisition, net of cash received ......... (15,763) -- --
Capitalization of The PrivateBank (St. Louis) ................... (8,000) -- --
Towne Square acquisition ........................................ -- 1,300 --
Net loan principal advanced ..................................... (129,615) (115,646) (63,820)
Premises and equipment expenditures ............................. (2,341) (939) (190)
--------- --------- ---------
Net cash used in investing activities ....................... (232,268) (74,080) (115,282)
--------- --------- ---------
Cash flows from financing activities
Net increase in total deposits .................................. 125,606 88,098 79,220
Proceeds from participated loans ................................ 12,862 -- --
Issuance of common stock ........................................ 109 16,898 1,361
Dividends paid .................................................. (461) (403) (263)
Net increase (decrease) in funds borrowed ....................... 78,621 (5,000) 20,000
--------- --------- ---------
Net cash provided by financing activities ................... 216,737 99,593 100,318
--------- --------- ---------
Net increase in cash and cash equivalents ........................... (3,670) 28,669 (10,692)
Cash and cash equivalents at beginning of year ...................... 44,183 15,514 26,206
--------- --------- ---------
Cash and cash equivalents at end of period .......................... $ 40,513 $ 44,183 $ 15,514
========= ========= =========
Cash paid during year for:
Interest ........................................................ $ 30,835 $ 16,929 $ 13,044
Income taxes .................................................... 1,800 2,280 1,827
Non-cash transactions
Loans to executive officers for purchase of common stock ........ $ -- $ 175 $ 950
Issuance of stock to purchase Towne Square ...................... -- $ 1,300 --
The accompanying notes to consolidated financial
statements are an integral part of these statements.
F-6
PRIVATEBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
a. Nature of Operations
PrivateBancorp, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on November 7, 1989. The Company is a bank holding
company with two bank subsidiaries, The PrivateBank and Trust Company (The
PrivateBank (Chicago)), which was formed as a de novo, or start up bank, on
February 6, 1991, and The PrivateBank (The PrivateBank (St. Louis)), which was
formed as a de novo, or start up, federal savings bank on June 26, 2000. On
February 11, 2000, the Company completed its acquisition of Johnson Bank
Illinois. At closing, Johnson Bank Illinois was merged into The PrivateBank
(Chicago). The two acquired offices, located on Chicago's North Shore in Lake
Forest and Winnetka, became additional offices of The PrivateBank (Chicago).
The banks provide private banking and trust and asset management
services primarily to affluent individuals, professionals, entrepreneurs and
their business interests. The banks focus on the personal financial services
needs of their clients as well as the banking needs of their clients' various
business and investment interests.
b. Consolidation
The consolidated financial statements of the Company and
subsidiaries include the accounts of the Company and its wholly owned
subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis).
Significant intercompany accounts and transactions have been eliminated in the
preparation of these statements.
c. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold and other
short-term investments. Generally, federal funds are sold for one-day periods,
but not longer than 30 days. Short-term investments mature in less than 30 days.
d. Securities
Available for sale securities are intended to be invested for an
indefinite period but may be sold in response to events we expect to occur in
the foreseeable future. Securities available-for-sale are reported at fair
value, with unrealized gains and losses, net of taxes, reported as adjustments
to other comprehensive income in a separate component of stockholders' equity.
Any decline in fair value of securities which is deemed other than temporary is
charged against current period earnings. At December 31, 2000 and 1999, all
securities were classified as available for sale.
Premium amortization and discount accretion on securities are
included in interest income on securities over the period from acquisition to
maturity or earlier call date using the effective interest rate method. The
specific identification method is used to record gains and losses on security
transactions.
e. Loans
Loans are generally reported at the principal amount outstanding,
net of unearned income. Loans originated and intended for sale in the secondary
market are classified as held for sale and reported at the lower of cost or
market value.
Loan origination and commitment fees, offset by certain direct loan
origination costs, are being deferred and the net amount amortized as an
adjustment of the related loan's yield. The Company is generally amortizing
these amounts over the contractual life of the related loans.
F-7
Loans are placed on nonaccrual status when, in the opinion of
management, there are doubts as to the collectability of interest or principal,
or when principal or interest is past due 90 days or more and the loan is not
well secured and in the process of collection. All loans classified as
nonaccrual are considered to be impaired. Any shortfall in the estimated value
of an impaired loan compared with the recorded investment of the loan is
identified as an allocated portion of the allowance for loan losses and is one
of the factors considered by management in its overall assessment of the
adequacy of the allowance for loan losses. Interest previously accrued but not
collected is reversed and charged against interest income at the time the
related loan is placed on nonaccrual status. Interest payments received on
impaired loans are recorded as reductions of principal if principal payment is
doubtful.
f. Allowance for Loan Losses
The allowance for loan losses is determined by management based on
factors such as past loan loss experience, known and inherent risks in the loan
portfolio, the estimated value of any underlying collateral, prevailing economic
conditions and other factors and estimates which are subject to change over
time. Management adjusts the allowance for loan losses by recording a provision
for loan losses in an amount sufficient to maintain the allowance at a level
commensurate with the risks in the loan portfolio. Loans are charged off when
deemed to be uncollectible by management.
g. Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. For financial reporting purposes, depreciation is
computed using the straight-line method over the estimated useful lives of the
assets.
h. Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes," an
asset and liability approach to accounting for income taxes is followed. The
objective is to recognize the amount of taxes payable or refundable for the
current year, and to recognize deferred tax assets and liabilities resulting
from temporary differences between the amounts reported in the financial
statements and the tax bases of assets and liabilities. The measurement of tax
assets and liabilities is based on enacted tax laws and applicable tax rates.
i. Earnings per Share
The Company accounts for and reports earnings per share using a dual
presentation of basic and diluted earnings per share. Basic earnings per common
share are determined by dividing earnings by the weighted average number of
common shares. Dilutive stock options are included as share equivalents using
the treasury stock method in determining diluted earnings per share.
j. Comprehensive Income
Components of comprehensive income are reported in the Consolidated
Statement of Stockholders' Equity that is displayed with the same prominence as
other financial statements.
k. Use of Estimates in the Preparation of Financial Statements
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 reporting
period. Actual results could differ from these estimates.
l. Intangible Assets
The Company has recorded approximately $12.2 million in intangible
assets and goodwill in connection with the Johnson Bank Illinois acquisition.
The intangible assets and the goodwill will be amortized over an estimated
useful life ranging between 5 and 15 years.
F-8
m. Reclassifications
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.
n. New Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Related Hedging Activities," amended by SFAS No. 137
"Accounting for Derivative Instrument and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133 -- an Amendment of SFAS No. 133," and SFAS No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" effective January 1, 2001, standardize the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, by requiring that an entity recognize those items as assets or
liabilities in the balance sheet and measure them at fair value. Changes in fair
value of these instruments must be recorded in the income statement unless
specific hedge accounting criteria are met. Adoption of this standard is not
expected to have a material impact since the Company does not have derivative
instruments or hedging activity.
In September 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 140 ("FAS No. 140"),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", a replacement of FASB Statement No. 125. The new statement,
while largely including the provisions of FAS 125, revises the standards for
accounting for securitizations and requires certain disclosures. FAS No. 140 is
effective for all transfers of financial assets occurring after March 31, 2001
and for disclosures relating to securitization transactions for fiscal years
ending after December 15, 2000. The adoption of FAS 140 is not expected to have
a material impact on the Company.
NOTE 2--OPERATING SEGMENTS
The Company manages its operations in four lines of business: The
PrivateBank (Chicago), The PrivateBank (St. Louis), Trust Services and Holding
Company activities. For purposes of making operating decisions and assessing
performance, management treats The PrivateBank (Chicago), The PrivateBank (St.
Louis), Trust Services and the Holding Company as four operating segments. The
Company's investment portfolio is included in total assets of The PrivateBank
(Chicago) and reported in the results of The PrivateBank (Chicago). The business
segments summarized below and in the following tables are primarily managed with
a focus on various performance objectives including total assets, total
deposits, borrowings, gross loans, total capital and net income. Indirect costs
are allocated to Trust Services from The PrivateBank (Chicago) based on Trust
Services full time equivalent employees as a percentage of total The PrivateBank
(Chicago) employees.
The PrivateBank (Chicago)
The PrivateBank (Chicago) segment, through its main office located
in downtown Chicago as well as five full-service Chicago suburban locations,
provides personal and commercial banking services primarily to affluent
individuals, professionals, entrepreneurs and their business interests. Until
June 23, 2000, the date The PrivateBank (St. Louis) was established, operations
in St. Louis were a loan production office of The PrivateBank (Chicago) and
those activities are reflected in the segment reporting for The PrivateBank
(Chicago). The PrivateBank (Chicago)'s commercial lending products include lines
of credit for working capital, term loans for equipment and letters of credit to
support the commitments made by its clients. Non-credit products include
lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, other cash management products and insurance. The
PrivateBank (Chicago) offers a full range of real estate lending products
including fixed and floating rate permanent and mini-permanent mortgages,
construction and commercial real estate loans. Personal loans include
installment loans and lines of credit, home equity loans and a wide variety of
home mortgage loans.
Individual banking services include interest bearing checking,
money market accounts, certificates of deposit, ATM/debit cards and investment
brokerage accounts. Additionally, The PrivateBank (Chicago) offers secured and
unsecured personal loans and lines of credit. Through The PrivateBank
(Chicago)'s affiliations with Mesirow Financial, Inc. and Sterling Investment
Services, Inc., clients have access to insurance products and
F-9
securities brokerage services. The PrivateBank (Chicago) also offers domestic
and international wire transfers and foreign currency exchange.
The PrivateBank (Chicago)
-------------------------
December 31,
2000 1999
----------- ------------
(in millions)
Total assets..................... $800.6 $518.2
Total deposits................... 655.9 462.2
Total borrowings................. 65.0 15.0
Total gross loans................ 574.9 397.3
Total capital ............... 69.3 38.3
Net interest income.............. 23.5 15.3
Net income....................... 7.1 4.9
The PrivateBank (St. Louis)
The PrivateBank (St. Louis), a federal savings bank, was established
as a new bank subsidiary of PrivateBancorp, Inc. on June 23, 2000, upon the
Company's receipt of the final regulatory approval necessary to open a federal
savings bank in St. Louis. The revenues and expenses associated with the St.
Louis loan production office that was operated by The PrivateBank (Chicago)
prior to June 23, 2000, are included in The PrivateBank (Chicago).
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 (St.
Louis) offers a full range of real estate lending products including fixed and
floating rate permanent and mini-permanent mortgages and construction loans.
Personal loans include installment loans and lines of credit, home equity loans
and a wide variety of home mortgage loans. 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.
F-10
The PrivateBank (St. Louis)
---------------------------
December 31,
2000 1999
------ ------
(in millions)
Total gross loans.................. $25.2 $ --
Total assets....................... 28.2 --
Total deposits..................... 14.7 --
Total borrowings................... 3.5 --
Total capital ................. 7.1 --
Net interest income(1)............. .4 --
Year-to-date net loss(1)........... (.9) --
(1) Since June 23, 2000 when the subsidiary bank was established.
Trust Services
Trust Services include investment management, personal trust and
estate services, custodial services, retirement accounts and brokerage and
investment services. Investment management professionals work with trust clients
to define objectives, goals and strategies of the clients' investment
portfolios. Trust services personnel assist 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, trust services emphasizes a
high level of personal service, demonstrated by prompt collection and
reinvestment of interest and dividend income, weekly valuation, tracking of tax
information, customized reporting and ease of security settlement.
Trust Services
---------------------------
December 31,
2000 1999
------ ------
(in millions)
Trust assets under administration... $777.8 $730.0
Trust fee revenue................... 2.3 1.6
Net income (loss)................... 0.1 0.1
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).
Holding Company Activities are reflected primarily by operating expenses.
Recurring holding company operating expenses consist of compensation
(amortization of restricted stock awards, other salary expense) and
miscellaneous professional fees.
Holding Company Activities
----------------------------
December 31,
2000 1999 1998
------ ------ ------
(in millions)
Total assets.................... $77.9 $47.1 $29.3
Total capital................... 54.2 47.1 29.3
Total borrowings................ 23.0 -- --
Interest expense................ 1.2 -- --
Net loss........................ (1.9) (2.1) (0.2)
F-11
The following table identifies the significant differences between
the sum of the reportable segments and the reported consolidated results for
total assets:
Total Assets
---------------------------
December 31,
2000 1999
------ ------
(in millions)
Sum of reportable segments......................... $906.7 $565.3
Adjustments........................................ (77.2) (46.6)
------ ------
Consolidated PrivateBancorp, Inc................... $829.5 $518.7
====== ======
The adjustments to total assets presented in the table above
represent the elimination of the net investment in The PrivateBank (Chicago) and
The PrivateBank (St. Louis) in consolidation, the elimination of the Company's
cash that is maintained in an account at The PrivateBank (Chicago), the
reclassification of the unearned discount of loans and the reclassification
related to deferred taxes.
NOTE 3--EARNINGS PER SHARE
The following table shows the computation of basic and diluted
earnings per share (in thousands, except per share data):
Weighted
Average Per
Income Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Year Ended December 31, 2000
Basic Earnings Per Share--
Income available to common stockholders $4,425 4,611 $ 0 .96
=======
Effect of Dilutive Stock Options .............. -- 183
------ ------
Diluted Earnings Per Share--
Income available to common stockholders $4,425 4,794 $ 0 .92
====== ====== =======
Year Ended December 31, 1999
Basic Earnings Per Share--
Income available to common stockholders $2,915 3,988 $ 0 .73
=======
Effect of Dilutive Stock Options .............. -- 242
------ ------
Diluted Earnings Per Share--
Income available to common stockholders $2,915 4,230 $ 0 .69
====== ====== =======
Year Ended December 31, 1998
Basic Earnings Per Share--
Income available to common stockholders $3,010 3,313 $ 0 .91
=======
Effect of Dilutive Stock Options .......... -- 202
------ ------
Diluted Earnings Per Share--
Income available to common stockholders $3,010 3,515 $ 0 .86
====== ====== =======
The year to date earnings per share calculation as of December 31,
1999 does not equal the sum of the individual quarter earnings per share
amounts. Based upon the application of FASB Statement No. 128, "Earnings per
Share," a difference arises that is attributable to the impact of the Company's
initial public offering which closed in July, 1999, and the acquisition of Towne
Square Financial Corporation during the third quarter 1999.
The 2000 diluted earnings per share calculation excludes 187,950
option shares which were granted in 2000, 1999 and 1998, as the options are
anti-dilutive at December 31, 2000. The exercise prices for stock option grants
range from $13.56 to $14.50 in 2000, $18.00 in 1999 and $17.19 in 1998.
F-12
NOTE 4--SECURITIES
The par value and amortized cost of securities as of December 31,
2000 and December 31, 1999 were as follows (in thousands):
Investment Securities--Available for Sale
December 31, 2000
-----------------------------------------------------
Gross Gross
Unamortized Unaccreted Amortized
Par Value Premium Discount Cost
--------- ----------- ---------- ---------
U. S. Government Agency Obligations ......... $ 4,444 $ 3 $ (121) $ 4,326
U. S. Government Agency Mortgage Backed
Securities and Collateralized Mortgage
Obligations ............................. 81,732 2,391 (265) 83,858
Corporate Collateralized Mortgage Obligations 10,000 189 -- 10,189
Tax Exempt Municipal Securities ............. 40,560 361 (3,543) 37,378
Taxable Municipal Securities ................ 1,075 8 -- 1,083
Federal Home Loan Bank Stock ................ 35,175 -- -- 35,175
Other ....................................... 365 -- -- 365
--------- --------- --------- ---------
$ 173,351 $ 2,952 $ (3,929) $ 172,374
========= ========= ========= =========
Investment Securities--Available for Sale
December 31, 1999
-----------------------------------------------------
Gross Gross
Unamortized Unaccreted Amortized
Par Value Premium Discount Cost
--------- ----------- ---------- ---------
U. S. Government Agency Obligations ......... $ -- $ -- $ -- $ --
U. S. Government Agency Mortgage Backed
Securities and Collateralized Mortgage
Obligations ............................. 26,224 555 (84) 26,695
Corporate Collateralized Mortgage Obligations 10,000 196 -- 10,196
Tax Exempt Municipal Securities ............. 40,701 134 (3,719) 37,116
Taxable Municipal Securities ................ -- -- -- --
Federal Home Loan Bank Stock ................ 1,400 -- -- 1,400
Other ....................................... 337 -- -- 337
--------- --------- --------- ---------
$ 78,662 $ 885 $ (3,803) $ 75,744
========= ========= ========= =========
F-13
The amortized cost and the estimated fair value of securities as of
December 31, 2000 and December 31, 1999, were as follows (in thousands):
Investment Securities--Available for Sale
December 31, 2000
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- ---------- ---------
U. S. Government Agency Obligations ......... $ 4,326 $ 73 $ -- $ 4,399
U. S. Government Agency Mortgage Backed
Securities and Collateralized Mortgage
Obligations ............................. 83,858 680 (191) 84,347
Corporate Collateralized Mortgage Obligations 10,189 -- (66) 10,123
Tax Exempt Municipal Securities ............. 37,378 187 (921) 36,644
Taxable Municipal Securities ................ 1,083 58 -- 1,141
Federal Home Loan Bank Stock ................ 35,175 -- -- 35,175
Other ....................................... 365 -- -- 365
--------- --------- --------- ---------
$ 172,374 $ 998 $ (1,178) $ 172,194
========= ========= ========= =========
Investment Securities--Available for Sale
December 31, 1999
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- ---------- ---------
U. S. Government Agency Obligations ......... $ -- $ -- $ -- $ --
U. S. Government Agency Mortgage Backed
Securities and Collateralized Mortgage
Obligations ............................. 26,695 -- (708) 25,987
Corporate Collateralized Mortgage Obligations 10,196 -- (400) 9,796
Tax Exempt Municipal Securities ............. 37,116 9 (3,511) 33,614
Taxable Municipal Securities ................ -- -- -- --
Federal Home Loan Bank Stock ................ 1,400 -- -- 1,400
Other ....................................... 337 -- -- 337
--------- --------- --------- ---------
$ 75,744 $ 9 $ (4,619) $ 71,134
========= ========= ========= =========
The amortized cost and estimated fair value of securities at
December 31, 2000, by contractual maturity, are shown below (in thousands).
Expected maturities will differ from contractual maturities because obligors may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
Cost Fair Value
--------- ----------
Due within one year......................... $ 792 $ 798
Due after one year through five years....... 4,999 5,101
Due after five years through ten years...... 6,354 6,311
Due after ten years......................... 124,689 124,444
Equity securities........................... 35,540 35,540
-------- --------
$172,374 $172,194
======== ========
During 2000 and 1999, securities were sold for total proceeds of
$38,159,353 and $8,827,770, respectively, resulting in net gains of
approximately $92,000 and $57,000 respectively. No securities were sold in 1998.
F-14
At December 31, 2000, securities carried at $135.6 million were
pledged to secure public and trust deposits and for other purposes as required
or permitted by law.
In the opinion of management, there were no investments in
securities at December 31, 2000, which constituted an unusual credit risk for
the Company.
Change in 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 other comprehensive income as of
December 31, 2000 and 1999 on a gross basis (in thousands):
December 31, 2000
-------------------------------------
Tax
Amount (Benefit) Amount
Before Tax Expense Net of Tax
---------- ------- ----------
Unrealized gains on securities available for sale--
Unrealized holding gains .......................... $ 4,174 $ 1,419 $ 2,755
Less: reclassification adjustment for gain
included in net income ........................ 92 31 61
------- ------- -------
Net unrealized gains .............................. $ 4,082 $ 1,388 $ 2,694
======= ======= =======
December 31, 1999
-------------------------------------
Tax
Amount (Benefit) Amount
Before Tax Expense Net of Tax
---------- ------- ----------
Unrealized (losses) on securities available for
sale--
Unrealized holding (losses) ....................... $(4,713) $(1,786) $(2,927)
Less: reclassification adjustment for gain
included in net income ........................ 57 22 35
------- ------- -------
Net unrealized (losses) ........................... $(4,770) $(1,808) $(2,962)
======= ======= =======
NOTE 5--LOANS
Amounts outstanding by selected loan categories at December 31, 2000
and 1999, were as follows (in thousands):
2000 1999
---- ----
Real estate--
Residential.......... $ 85,347 $ 71,332
Commercial........... 206,464 146,368
Construction......... 61,143 29,018
Commercial............... 137,343 67,026
Personal................. 108,427 81,893
Held for sale............ 705 1,640
-------- --------
$599,429 $397,277
======== ========
Loans held for sale are residential real estate loans intended to be
sold in the secondary market. Under the banks' sales program, such loans are
sold at face value. No lower-of-cost-or-market adjustments were required at
December 31, 2000 or 1999.
As of December 31, 2000, $24,000 of loans were designated as
nonaccrual loans. The average balance of impaired loans and the related amount
of interest income recognized while such loans were impaired amounted to
$553,466 and $0 in 2000 and $260,585 and $0 in 1999. The gross interest income
that would have been recorded if the non-accrual loans had been current in
accordance with their original terms was $47,283 in 2000 and $20,847 in 1999.
F-15
NOTE 6--ALLOWANCE FOR LOAN LOSSES
The changes in the allowance for loan losses for the three years
ended December 31 were as follows (in thousands):
2000 1999 1998
---- ---- ----
Beginning balance.................................... $4,510 $3,410 $3,050
Johnson Bank acquisition - loan loss reserve......... 864 -- --
Loans charged off.................................... (972) (108) (2)
Loans recovered...................................... 16 -- --
Provision for loan losses............................ 1,690 1,208 362
------ ------ ------
Ending balance....................................... $6,108 $4,510 $3,410
====== ====== ======
NOTE 7--PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 2000 and 1999, consisted
of the following (in thousands):
2000 1999
---- ----
Furniture, fixtures and equipment.................. $4,588 $2,817
Leasehold improvements............................. 3,223 1,874
------- -------
7,811 4,691
Accumulated depreciation and amortization.......... (3,673) (2,663)
------- -------
$4,138 $2,028
======= =======
Included in occupancy expense in the consolidated statements of
income is depreciation and amortization expense of $1.0 million, $498,115 and
$507,853 for 2000, 1999 and 1998, respectively.
Each of the banks leases its main banking facility and branch
facilities under noncancellable operating lease agreements. The minimum annual
rental commitments under these leases, at December 31, 2000, are as follows:
2001........................ $1,208,919
2002........................ 1,134,718
2003........................ 1,118,905
2004........................ 1,059,410
2005........................ 1,038,268
2006 and thereafter......... 1,930,879
-----------
$7,491,099
Total rent expense included in the consolidated statements of income
was $1.7 million, $750,973, and $635,761 for 2000, 1999 and 1998, respectively.
F-16
NOTE 8--INCOME TAXES
The components of total income tax provision in the consolidated
statements of income for the years ended December 31, 2000, 1999 and 1998 are as
follows (in thousands):
2000 1999 1998
---- ---- ----
Income tax provision--
Current--
Federal........................................ $2,179 $1,886 $1,759
State.......................................... -- -- 371
------ ------ ------
Deferred-- 2,179 1,886 2,130
Federal........................................ (164) (373) (255)
State.......................................... 248 (256) (36)
------ ------ ------
84 (629) (291)
------ ------ ------
Total....................................... $2,263 $1,257 $1,839
====== ====== ======
The tax effect of fair value adjustments on securities available for
sale is recorded directly to other comprehensive income in a separate component
of stockholders' equity. The net tax provision (benefit) recorded directly to
other comprehensive income amounted to $1.4 million, $(1.8 million) and $76,523
in 2000, 1999 and 1998, respectively.
A summary reconciliation of the differences between the total income
tax provision (benefit) and the amounts computed at the statutory federal tax
rate of 34% for the years ended December 31, 2000, 1999 and 1998 as follows (in
thousands):
2000 1999 1998
---- ---- ----
Income tax provision at statutory federal income
tax rate............................................ $2,274 $1,418 $1,649
Increase (decrease) in taxes resulting from:
Tax exempt income................................... (586) (608) (67)
Other permanent items............................... 137 -- --
State income taxes.................................. 17 (170) 221
Towne Square Financial Corp. acquisition............ -- 442 --
Other............................................... 421 175 36
------ ------ ------
Total........................................... $2,263 $1,257 $1,839
====== ====== ======
A net deferred tax asset is included in other assets in the
consolidated balance sheet as a result of temporary differences between the
carrying amounts of assets and liabilities in the financial statements and their
related tax bases. The components of the net deferred tax asset as of December
31, 2000 and 1999 are as follows (in thousands):
2000 1999
---- ----
Gross deferred tax assets--
Allowance for loan losses.................................. $1,698 $1,650
Leasehold improvements..................................... 358 294
Amortization of restricted stock........................... 256 199
Unrealized loss on securities available for sale........... 61 1,786
Other...................................................... 184 118
------ ------
Gross deferred tax assets...................................... 2,557 4,047
------ ------
Gross deferred tax liabilities................................. (496) (177)
------ ------
Net deferred tax asset......................................... $2,061 $3,870
====== ======
F-17
NOTE 9--ACQUISITIONS
On August 3, 1999, in a stock-for-stock transaction, the Company
completed its acquisition of Towne Square Financial Corporation, a company then
in the process of forming a de novo bank. At closing, the Company issued 91,668
shares of common stock and recorded a one-time $1.3 million charge that is
non-deductible for tax purposes.
On February 11, 2000, the Company completed its acquisition of
Johnson Bank Illinois, a unit of Johnson International, Inc., Racine, Wisconsin.
At closing, Johnson Bank Illinois had total assets of approximately $113 million
and total deposits of approximately $77 million. The purchase price was $20
million, of which $15 million was paid in cash and the remainder was paid in the
form of a LIBOR-based, floating rate subordinated note issued to Johnson
International in the principal amount of $5 million. The interest rate on the
subordinated note is set each quarter based on the 90-day LIBOR rate. The note
is payable in full on or before February 11, 2007, and provides for certain rate
escalations beginning after two years.
The cash portion of the purchase price was funded with $7.5 million
out of the remaining proceeds of the Company's initial public offering and $7.5
million from borrowings under the Company's revolving credit facility with a
commercial bank entered into at closing. The interest rate on borrowings under
the revolving line is based on, at the borrower's option, either the lender's
prime rate or a 90-day LIBOR-based rate.
At closing, Johnson Bank Illinois was merged into The PrivateBank
(Chicago). The two acquired offices, located on Chicago's North Shore in Lake
Forest and Winnetka, became additional offices of The PrivateBank (Chicago). The
Johnson Bank Illinois transaction was accounted for as a purchase. All assets
and liabilities were adjusted to fair value as of the effective date of the
merger creating goodwill in the amount of $12.3 million, which was pushed-down
to The PrivateBank (Chicago), and is being amortized on the straight line basis
over 15 years. Premiums and discounts related to the Johnson Bank Illinois
transaction were recorded on the balance sheet as fair value adjustments and
amounted to $20,045 and $2,344,041, respectively.
The following table summarizes the unaudited pro forma financial
results for the years ended December 31, 2000 and 1999 as if Johnson Bank
Illinois had been acquired on January 1, 1999.
December 31, December 31,
2000 1999
------------ ------------
(in thousands, except per share amounts)
Net interest income after provision for loan losses...... $22,555 $17,415
Total non-interest income................................ 3,505 3,256
Total non-interest expense............................... 19,197 17,260
Income taxes............................................. 2,462 1,078
Net income............................................... 4,400 2,333
Diluted earnings per share............................... .92 .55
The pro forma information is not necessarily indicative of the
actual results of operations which would have occurred had the acquisition of
Johnson Bank Illinois been consummated on January 1, 1999, nor is it indicative
of future operating results.
F-18
NOTE 10--FUNDS BORROWED
A summary of all funds borrowed and outstanding and the rate in
effect on such borrowings at December 31, 2000 and 1999 is presented in the
table below:
December 31,
--------------------
Amount Rate Maturity 2000 1999
- ------ ---- -------- ------- -------
(in thousands)
Borrowing under revolving line of
credit facility...................... 7.96% 02/11/02 $18,000 $ --
Subordinated note........................ 7.26 02/11/07 5,000 --
FHLB floating rate advance(1)............ 6.77 05/01/01 10,000 --
FHLB fixed advance....................... 6.50 10/23/05 25,000 --
FHLB fixed advance....................... 6.21 12/05/03 30,000 --
FHLB fixed advance....................... 6.49 11/13/01 2,000 --
FHLB fixed advance....................... 5.91 06/21/02 500 --
FHLB fixed advance....................... 5.89 12/20/02 1,000 --
FHLB fixed advance....................... 6.03 01/20/00 -- 15,000
Fed funds purchased...................... 6.75 daily 2,700 --
Demand repurchase agreements............. 5.00 daily 2,679 --
------- -------
Total funds borrowed................. $96,879 $15,000
======= =======
- ----------------
(1) The rate on this FHLB floating rate advance is set at one-month LIBOR minus
five basis points.
On February 11, 2000, the Company entered into a two-year, $18.0
million revolving credit facility with a commercial bank. The interest rate on
borrowings under this revolving line resets quarterly, and is based on, at our
option, either the lender's prime rate or three-month LIBOR plus 120 basis
points. At December 31, 2000, $18.0 million was outstanding under the revolving
credit facility. The Company has elected to pay interest based on the
three-month LIBOR rate plus 120 basis points. The initial rate of interest on
the revolver was 7.20%, and most recently reset to 7.60% on January 2, 2001. The
collateral for this borrowing consists of the common stock of The PrivateBank
(Chicago) and The PrivateBank (St. Louis), which is held in custody by the
lender.
On February 11, 2000, the Company entered into a subordinated note
issued to Johnson International, Inc. in the principal amount of $5.0 million.
The interest on the subordinated note is set each quarter based on the
three-month LIBOR rate. The note is payable in full on or before February 11,
2007, and provides for certain rate escalation beginning after February 11,
2002. The initial rate of interest on the subordinated note was 6.60% and most
recently reset to 5.89% on February 12, 2001. The Company has the right to
redeem the subordinated note at any time after giving at least 30 days, but not
more than 60 days, advance notice.
NOTE 11--EMPLOYEE SAVINGS AND INCENTIVE PLANS
a. Savings and Retirement Plan
The Company maintains The PrivateBank and Trust Company Savings and
Retirement Plan (the "Plan") pursuant to Section 401(k) of the Internal Revenue
Code, whereby eligible employees may contribute a percentage of compensation,
but not in excess of the maximum amount allowed under the Code. The banks can
make discretionary contributions to the Plan as determined and approved by the
bank's Board of Directors. Total discretionary contributions to the Plan
amounted to $100,634, $67,200, and $61,462 in 2000, 1999 and 1998, respectively.
b. Stock Options
The Company has stock options outstanding under its Stock Incentive
Plan, a director stock option program and certain compensation replacement
options.
F-19
As in effect as of December 31, 2000, the Stock Incentive Plan
allows 912,007 shares to be issued under the Plan either pursuant to the
exercise of stock options granted thereunder or as restricted stock awards. The
option price may not be less than the fair market value on the date of grant.
All options have a term of 10 years. Options other than those granted in 1998
are first exercisable beginning at least two years following the date of grant.
Options granted in 1998 are first exercisable five years from the date of grant
or up to two years earlier if certain conditions for total stockholder return
are met.
Since 1992, the Company has compensated non-employee directors with
annual option grants. The option price of the director options is fair market
value on the date of grant, and the exercise period is 10 years from the date of
grant.
In 1992, the Company granted compensation replacement options to
certain officers of the company who agreed to reduced cash compensation. The
option price is the fair market value on the date of grant. The compensation
replacement options are exercisable during a 10-year period from the date of
grant.
The following table summarizes the status of the Company's stock
option agreements and stock option program as of December 31, 2000 and 1999, and
changes during the years then ended:
2000 1999
------------------------------ -----------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding at beginning of year........... 634,748 $10.54 542,208 $ 9.09
Granted.................................... 131,000 12.68 99,600 18.00
Exercised.................................. (12,000) 9.22 (6,240) 7.35
Forfeited.................................. (26,390) 15.39 (820) 18.00
-------- ------ -------- ------
Outstanding at end of year................. 727,358 $10.78 634,748 $10.54
======== ====== ======== ======
Options exercisable at year-end............ 537,168 462,568
======== ========
Weighted average fair value of options $12.68 $18.00
granted during the year................
The range of exercise prices and weighted average remaining
contractual life for stock options outstanding as of December 31, 2000, was
$6.25-$18.00 and six years, respectively.
The Company applies APB Opinion 25 in accounting for stock-based
compensation. Accordingly, no compensation expense has been recognized for its
stock option program. Had compensation expense for stock options been determined
based on the fair value at the grant dates for awards under the stock option
program consistent with the method of FASB Statement No. 123, the Company's net
income and earnings per share would have been adjusted to the pro forma amounts
indicated below:
2000 1999 1998
---- ---- ----
(dollars in thousands)
Net income--
As reported........................ $4,425 $2,915 $3,010
Pro forma.......................... 4,737 3,240 2,870
======= ======= =======
Basic earnings per share--
As reported........................ $.96 $.73 $.91
Pro forma.......................... 1.03 .81 .87
Diluted earnings per share--
As reported........................ .92 .69 .86
Pro forma.............................. $.99 $.77 $.82
======= ======= =======
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 in 2000 and 1999, respectively: dividend
yield of 1.10% and .70% for 2000 and 1999 respectively; risk-free interest rate
of 5.9% and 6.5% for 2000
F-20
and 1999, respectively; and expected lives for both years of 10 years for the
Stock Incentive Plan options, 10 years for the compensation replacement options
and 10 years for the various director options.
c. Restricted Stock
In 2000 and 1999, the Company issued the following restricted share
grants:
Grant Date Shares Granted Price
---------- -------------- -----
March, 1999............ 20,400 $18.0000
July, 1999............. 2,600 18.0000
August, 1999........... 3,000 18.0000
May, 2000.............. 26,100 12.3750
July, 2000............. 5,500 14.5000
August, 2000........... 3,500 13.8750
During 2000, 13,900 restricted shares were forfeited. These shares
carry voting and dividend rights. Sale of the shares is restricted prior to
vesting. Subject to continued employment, vesting occurs five years from the
date of grant. Shares issued under the plan are recorded at their fair market
value on the date of grant with a corresponding charge to deferred compensation.
The deferred compensation, a component of stockholders' equity, is being
amortized as compensation expense on a straight-line basis over the vesting
period. Included in salaries and employee benefits in the consolidated
statements of income is compensation expense for restricted shares of $227,000,
$233,000, and $149,566 for 2000, 1999 and 1998, respectively.
NOTE 12--RELATED-PARTY TRANSACTIONS
An analysis of loans made to directors and executive officers of the
Company and the banks follows:
Balance, December 31, 1999......... $16,061,193
Additions...................... 873,991
Collections.................... (5,020,544)
-----------
Balance, December 31, 2000......... $11,914,640
===========
Directors and executive officers of the Company and the banks were
clients of and had transactions with the banks in the ordinary course of
business during the period presented above and additional transactions may be
expected in the future. In management's opinion, all outstanding loans,
commitments and deposit relationships included in such transactions were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with others, and did not
involve more than a normal risk of collectability or other unfavorable features.
On July 6, 1999, the Company loaned $175,000 to a managing director
of The PrivateBank (Chicago), for the purpose of purchasing common stock of the
Company in the IPO. The shares purchased serve as collateral for such loan. The
loan accrues no interest and is payable upon receipt of certain bonus payments,
but not later than December 31, 2000. The loan was repaid in August, 2000.
In May 1998, Ralph B. Mandell, our Chairman, President and Chief
Executive Officer, purchased 72,720 shares of newly issued common stock at
$13.75 per share from the Company. The purpose of the transaction was to enhance
Mr. Mandell's interest in our long-term performance and further align his
interests with those of our stockholders. As part of the transaction, we loaned
Mr. Mandell approximately 95% of the purchase price on a full recourse basis.
The loan matures in five years but becomes payable prior to the fifth year in
the event Mr. Mandell sells any of the 72,720 shares or Mr. Mandell's employment
is terminated. Interest accrues at 5.69% per annum, compounded annually (the
applicable Federal rate), on the principal amount of the loan; however, provided
Mr. Mandell does not sell any of the shares purchased and remains in our employ,
25% of the accumulated interest on the loan will be forgiven on the loan's
second anniversary, 50% of the accumulated interest on the loan will be forgiven
on its third anniversary, 75% of the accumulated interest on the loan will be
forgiven on its fourth anniversary, and 100% of the accumulated interest on the
loan will be forgiven on the loan's fifth anniversary.
F-21
Mr. Mandell pledged all of the shares of common stock purchased in the
transaction as collateral for the loan he received from us, but he is entitled
to vote, and receive dividends on, the shares. The loan is reflected in the
consolidated financial statements as a reduction in stockholders' equity.
The Company is the general partner in a partnership for investment
purposes. Through a contractual arrangement, The PrivateBank (Chicago)'s trust
department maintains the partnership's records and earns an administrative fee
from the partnership.
During 1998, The PrivateBank (Chicago) began offering insurance
products to its clients through a strategic alliance with a Chicago-based
financial services firm which is a stockholder of the Company. In addition, this
financial services firm serves as an insurance agency in coordinating certain
insurance coverage for the Company and The PrivateBank (Chicago) during 2000 and
1999. During 2000 and 1999, The PrivateBank (Chicago) earned commission revenue
of $27,030 and $33,125, respectively, for referred business and paid $41,076 and
$533,544 in 2000 and 1999, respectively, for fees to this financial services
firm for insurance and related services related to a three-year insurance
contract.
During 2000, 1999 and 1998, The PrivateBank (Chicago) acquired
selected furniture with a total cost of $61,733, $28,402 and $2,655,
respectively, through related parties.
During 2000, 1999 and 1998, The PrivateBank (Chicago) incurred
professional fees for services provided by the law firm Spitzer, Addis, Susman &
Krull in the amount of approximately $186,000, $205,000 and $94,000,
respectively. Michael B. Susman, who is one of our directors, is a partner of
that firm.
In connection with Company's acquisition of Towne Square Financial
Corporation, William J. Podl, who subsequently became a director of the Company,
received 15,278 shares of common stock of the Company as consideration for his
16.667% ownership interest of Towne Square Financial Corporation. Mr. Podl is
currently a 16.667% owner of Towne Square Realty, LLC, from which The
PrivateBank (Chicago) leases approximately 6,700 square feet in a building
located in St. Charles, IL. This lease became effective August 1, 1999. In 2000
and 1999, we paid rent in the amount of $107,245 and $44,500, respectively, to
Towne Square Realty, LLC under such lease.
NOTE 13--CREDIT-RELATED INSTRUMENTS
The Company has, through its subsidiaries, entered into
credit-related instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its clients. These financial instruments
include commitments to extend credit and standby letters of credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the consolidated financial statements. Credit risk
represents the loss that would be recognized at the reporting date if
counterparties failed to completely perform as contracted.
Our exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments, assuming that the amounts are fully advanced and that collateral or
other security is of no value. The banks use the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. At December 31, 2000 and 1999, the banks had the following
categories of credit-related financial instruments (at contract amount):
2000 1999
---- ----
(in thousands)
Commitments to extend credit...... $235,184 $111,929
Standby letters of credit......... 27,375 10,452
Commitments to extend credit are agreements to lend to a client as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The banks evaluate each client's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed
F-22
necessary, upon extension of credit is based on management's credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the
banks to guarantee the performance of a client to a third party. Those
guarantees are primarily issued to support commercial business activities of
bank clients. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to clients.
The bank holds collateral supporting those commitments for which collateral is
deemed necessary.
NOTE 14--CONCENTRATIONS OF CREDIT RISK
Loan concentrations are defined as amounts loaned to a multiple
number of borrowers engaged in similar activities, which would cause them to be
similarly impacted by economic or other conditions. The banks grant loans to
clients located primarily in the metropolitan Chicago and St. Louis areas. There
are no other significant concentrations of loans and commitments to make loans
other than the categories of loans disclosed in Note 5.
NOTE 15--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following presents the carrying value and estimated fair value
of the various classes of financial instruments, all nontrading, held by the
Company and its subsidiaries at December 31, 2000 and 1999. This information is
presented solely for compliance with SFAS No. 107 "Disclosures about Fair Value
of Financial Instruments," and is subject to change over time based on a variety
of factors. Because no active market exists for a significant portion of the
financial instruments presented below and the inherent imprecision involved in
the estimation process, management does not believe the information presented
reflects the amounts that would be received if the Company's assets and
liabilities were sold nor does it represent the fair value of the Company as an
entity.
Where possible, the Company has utilized quoted market prices to
estimate fair value. Since quoted market prices were not available for a
significant portion of the financial instruments, the fair values were
approximated using discounted cash flow techniques. Fair value estimates are
made at a specific point in time, based on judgments regarding future expected
loss experience, current economic conditions, risk conditions, risk
characteristics of various financial instruments and other factors. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
December 31, 2000 December 31, 1999
----------------------- ------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(in thousands)
Assets--
Cash and cash equivalents ...... $ 40,513 $ 40,513 $ 44,183 $ 44,183
Securities ..................... 172,194 172,194 71,134 71,134
Net loans ..................... 593,321 612,339 392,767 393,423
Accrued interest receivable .... 5,524 5,524 2,870 2,870
Liabilities--
Deposits with no stated maturity 413,197 413,197 274,239 274,239
Time deposits .................. 257,049 257,007 178,853 178,839
Total deposits ................. 670,246 670,246 453,092 453,078
Accrued interest payable ....... 3,552 3,552 1,056 1,056
Funds borrowed ................. 96,879 98,425 15,000 15,000
F-23
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments. These assumptions were based on
subjective estimates of market conditions and perceived risks of the financial
instruments at a certain point in time.
a. Cash and Cash Equivalents, Accrued Interest Receivable and Interest
Payable
For these short-term instruments, the carrying value approximates
fair value because these instruments are short-term in nature and do not present
unanticipated credit concerns.
b. Securities
For securities held to maturity or available for sale, fair values
are based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
instruments.
c. Net Loans
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Company's and the industry's
historical experience with repayments for each loan classification, modified, as
required, by an estimate of the effect of current economic and lending
conditions.
Fair value for significant nonaccrual (impaired) loans is based on
estimated cash flows which are discounted using a rate commensurate with the
risk associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally determined using available
market information and specific borrower information.
d. Deposit Liabilities
The fair value of deposits with no stated maturity, such as
non-interest-bearing deposits, interest-bearing deposits, savings and money
market deposit accounts, is equal to the amount payable on demand as of
year-end. The fair value of certificates of deposit and brokered deposits are
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
e. Funds Borrowed
Rates currently available to the Company and the banks for debt with
similar terms and remaining maturities are used to estimate fair value of
existing debt.
f. Off-Balance Sheet Financial Instruments
The fair value of off-balance sheet financial instruments, including
commitments to extend credit, standby letters of credit and financial
guarantees, is insignificant and, therefore, not presented.
NOTE 16--REGULATORY REQUIREMENTS
The banks are subject to federal and state laws, which restrict the
payment of dividends to the Company. Based on these restrictions, at January 1,
2001, The PrivateBank (Chicago) could have declared approximately $15,435,499 in
dividends without requesting approval of the applicable federal or state
regulatory agency. As of January 1, 2001, The PrivateBank (St. Louis) could not
have declared any dividends due to a net loss since inception.
The PrivateBank (Chicago) is required to maintain
noninterest-bearing cash balances with the Federal Reserve based on the types
and amounts of deposits held. During 2000 and 1999, the average balances
maintained to meet the requirement were $1,961,263 and $1,664,741, respectively.
F-24
The Company and the banks are subject to various regulatory capital
requirements as established by the applicable federal or state banking
regulatory authorities. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the banks must meet
specific capital guidelines that involve quantitative measures of the banks'
assets, liabilities and certain off-balance sheet items. The quantitative
measures for capital adequacy require the Company and the banks to maintain
minimum amounts and ratios of total and Tier 1 capital to risk weighted assets
and of Tier 1 capital to average assets (leverage). The Company's and the banks'
capital components, classification, risk weightings and other factors are also
subject to qualitative judgments by regulators. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a material effect on the Company's financial statements. Prompt
corrective action provisions are not applicable to bank holding companies.
Management believes that as of December 31, 2000, the Company and the banks meet
all minimum capital adequacy requirements to which they are subject.
The most recent notification from the Federal Deposit Insurance
Corporation categorized The PrivateBank (Chicago) as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain ratios as set forth in the following
table. Management believes that no events or changes in conditions have occurred
subsequent to such notification to change the bank's category.
The following table presents selected capital information for the
Company (Consolidated) and The PrivateBank (Chicago) as of December 31, 2000 and
1999 and The PrivateBank (St. Louis) as of December 31, 2000 (dollars in
thousands):
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 2000--
Total risk-based capital--
Consolidated........................... $53,845 8.15% $52,847 8.00%
The PrivateBank (Chicago).............. 63,680 10.06 50,657 8.00 $63,321 10.00%
The PrivateBank (St. Louis)............ 7,383 28.05 2,105 8.00 2,632 10.00
Tier 1 risk-based capital--
Consolidated........................... 42,737 6.47 26,423 4.00
The PrivateBank (Chicago).............. 57,849 9.14 25,329 4.00 37,993 6.00
The PrivateBank (St. Louis)............ 7,106 27.00 1,053 4.00 1,579 6.00
Tier 1 (leverage) capital--
Consolidated........................... 42,737 5.54 33,306 4.00
The PrivateBank (Chicago).............. 57,849 7.71 32,124 4.00 40,156 5.00
The PrivateBank (St. Louis)............ 7,106 35.16 1,140 4.00 1,425 5.00
As of December 31, 1999--
Total risk-based capital--
Consolidated........................... $56,286 13.96% $32,260 8.00%
The PrivateBank (Chicago).............. 45,578 11.32 32,208 8.00 $40,260 10.00%
The PrivateBank (St. Louis)............ N/A N/A N/A N/A N/A N/A
Tier 1 risk-based capital--
Consolidated........................... 51,776 12.84 16,130 4.00
The PrivateBank (Chicago).............. 41,068 10.20 16,104 4.00 24,156 6.00
The PrivateBank (St. Louis)............ N/A N/A N/A N/A N/A N/A
Tier 1 (leverage) capital--
Consolidated........................... 51,776 10.77 19,228 4.00
The PrivateBank (Chicago).............. 41,068 8.55 19,205 4.00 25,006 5.00
The PrivateBank (St. Louis)............ N/A N/A N/A N/A N/A N/A
F-25
NOTE 17--CONTINGENT LIABILITIES
Because of the nature of its activities, the Company is from time to
time involved in legal actions that arise in the normal course of business. In
the judgment of management, after consultation with legal counsel, none of the
litigation to which the Company or its subsidiaries is a party will have a
material effect, either individually or in the aggregate, on the consolidated
financial position or results of operations.
NOTE 18--PRIVATEBANCORP, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
STATEMENTS
CONDENSED BALANCE SHEETS
As of December 31, 2000 and 1999
2000 1999
---- ----
(in thousands)
Assets
Cash and due from banks--bank subsidiaries ... $ 371 $ 8,213
Investment in bank subsidiaries .............. 76,466 38,256
Other assets ................................. 1,053 646
------- -------
Total assets ............................. $77,890 $47,115
======= =======
Liabilities and Stockholders' Equity
Funds borrowed ............................... $23,000 $ --
Other liabilities ............................ 641 35
Total liabilities ............................ 23,641 35
------- -------
Stockholders' equity ......................... 54,249 47,080
------- -------
Total liabilities and stockholders' equity $77,890 $47,115
======= =======
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
(in thousands)
Operating income:
Interest income .......................................... $ 5 $ -- $ 32
Interest expense ......................................... 1,230 -- --
------- ------- -------
Net interest income .................................. (1,225) -- 32
------- ------- -------
Non interest income:
Other income ............................................. 6 -- --
------- ------- -------
Operating expense:
Amortization of deferred compensation .................... 227 233 150
Towne Square Financial Corporation acquisition ........... -- 1,300 --
Other ................................................ 1,359 1,014 226
------- ------- -------
Total ................................................ 1,586 2,547 376
------- ------- -------
(Loss) before income taxes and equity in undistributed
net income of bank subsidiaries ................... (2,805) (2,547) (344)
Income tax (benefit) ..................................... (913) (457) (134)
------- ------- -------
(Loss) before equity in undistributed net income of
bank subsidiaries ................................. (1,892) (2,090) (210)
------- ------- -------
Equity in undistributed net income of bank subsidiaries .. 6,317 5,005 3,220
------- ------- -------
Net income ........................................... $ 4,425 $ 2,915 $ 3,010
======= ======= =======
The Parent Company Only Statements of Changes in Stockholders'
Equity are the same as the Consolidated Statements of Changes in Stockholders'
Equity.
F-26
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income ................................................ $ 4,425 $ 2,915 $ 3,010
-------- -------- --------
Adjustments to reconcile net income to net cash provided by
operating activities--
Equity in net income of bank subsidiaries ............. (6,317) (5,005) (3,220)
Amortization of deferred compensation ................. 227 233 150
Increase in other assets .............................. (407) (236) (135)
Decrease (increase) in other liabilities .............. 607 (158) --
-------- -------- --------
Total adjustments .................................. (5,890) (5,166) (3,205)
-------- -------- --------
Net cash (used in) operating activities ............ (1,465) (2,251) (195)
-------- -------- --------
Cash flows from investing activities:
Net (increase) in capital investments in bank subsidiaries (29,200) (8,000) (2,000)
Purchase of Towne Square Financial Corporation ............ -- 1,300 --
-------- -------- --------
Net cash (used in) investing activities ................... (29,200) (6,700) (2,000)
-------- -------- --------
Cash flows from financing activities:
Funds borrowed ............................................ 23,000 -- --
Issuance of common stock .................................. 110 16,898 1,361
Repayment of loan to executive officer .................... 175 -- --
Dividends paid ............................................ (462) (403) (263)
-------- -------- --------
Net cash provided by financing activities ............. 22,823 16,495 1,098
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .......... (7,842) 7,544 (1,097)
Cash and cash equivalents at beginning of year ................ 8,213 669 1,766
-------- -------- --------
Cash and cash equivalents at end of year ...................... $ 371 $ 8,213 $ 669
======== ======== ========
Other cash flow disclosures:
Income taxes paid ......................................... $ 1,917 $ 2,623 $ 1,827
======== ======== ========
Non-cash transactions:
Loans to executive officers for purchase of common stock .. $ -- $ 175 $ 950
Issuance of stock to purchase Towne Square Financial ...... $ -- $ 1,300 $ --
Corporation
NOTE 19--CAPITAL TRANSACTIONS
On June 23, 2000, the Company established The PrivateBank (St.
Louis) as a federal savings bank in St. Louis, Missouri. The PrivateBank (St.
Louis) was capitalized with $8.0 million of borrowed funds drawn from the
Company's revolving credit facility. This facility, entered into with a
commercial bank in February 2000, is a two-year $18 million revolver. The
interest rate on borrowings under the revolving line is based on, at the
borrower's option, either the lender's prime rate or a 90-day LIBOR-based rate.
The PrivateBank (St. Louis) is a wholly-owned subsidiary of the Company, and its
financial condition and results of operations are included in the Company's
consolidated financial statements.
During the third quarter of 1999, the Company completed its initial
public offering of 1,035,000 shares. The initial public offering price was
$18.00 per share, and the Company received aggregate net proceeds of
approximately $16.7 million after deducting underwriting commissions and
offering expenses and including the underwriters' over-allotment shares.
During March and April, 1999, the Company's Board of Directors and
stockholders approved an increase in the number of authorized shares to
12,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
Board also approved a change in the per share stated value of the common stock
from $2.50 to $1.00 per share. Such change in authorized shares and change in
stated value became effective prior to the effectiveness of the registration
statement relating to the Company's initial public offering. On June 24, 1999,
to effect a two-for-one stock split, the Company's Board of Directors declared a
one-for-one stock dividend on its common stock payable
F-27
on June 28, 1999 to stockholders of record as of the close of business on June
25, 1999. All references to number of shares, per share amounts and stock option
data in the consolidated financial statements have been adjusted to reflect the
stock split on a retroactive basis.
NOTE 20--SUBSEQUENT EVENTS
Effective February 8, 2001, PrivateBancorp Capital Trust I, a newly
created Delaware business trust subsidiary of the Company, issued 2,000,000
shares (including the underwriters' over-allotment) of 9.50% of trust preferred
securities, which represent preferred undivided interests in the assets of the
trust. The sole assets of the trust are 9.50% subordinated debentures issued by
the Company with a mandatory redemption on December 31, 2030. At the option of
the Company, the debentures may be redeemed prior to maturity on or after
December 31, 2005. The trust received net proceeds of approximately $18.9
million after deducting underwriting commissions and offering expenses and
including the underwriters' over-allotment shares. The preferred securities will
be treated as Tier I capital as allowed by the Federal Reserve.
F-28
PRIVATEBANCORP, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
Selected Quarterly Financial Data (unaudited)
The following are the consolidated results of operations on a
quarterly basis:
2000 1999
----------------------------------------------- -------------------------------------------------
Fourth Third Second First Fourth Third Second First
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands except ratios and per share data)
Summary Income Statement
Interest Income
Loans, including fees ........ $ 13,451 $ 13,540 $ 12,167 $ 9,475 $ 7,737 $ 7,006 $ 6,218 $ 5,636
Federal funds sold and
interest bearing deposits 236 357 78 387 115 134 33 48
Securities ................... 2,714 1,813 1,543 1,385 1,088 1,189 1,294 1,570
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total interest income ........ 16,401 15,710 13,788 11,247 8,940 8,329 7,545 7,254
Interest expense ............. 9,821 9,378 7,781 6,351 4,653 4,166 3,948 3,838
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income .......... 6,580 6,332 6,007 4,896 4,287 4,163 3,597 3,416
Provision for loan loss ...... 334 383 662 311 437 273 213 285
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan loss .. 6,246 5,949 5,345 4,585 3,850 3,890 3,384 3,131
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Non-Interest income
Banking, trust services and
other income ............. 951 745 751 630 535 504 512 396
Securities (losses) gains .... -- -- -- 92 (1) 8 4 46
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-interest income .... 951 745 751 722 534 512 516 442
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Non-Interest expense
Salaries and employee
benefits ................. 2,268 2,211 1,818 1,877 1,753 1,309 1,088 1,115
Severance .................... -- 562 -- -- -- -- -- --
Towne Square acquisition ..... -- -- -- -- -- 1,300 -- --
Goodwill ..................... 206 206 206 113 -- -- -- --
Occupancy expense ............ 807 803 764 613 437 401 373 352
Other non-interest expense ... 1,609 1,445 1,664 1,434 1,026 1,227 918 788
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-interest expense ... 4,890 5,227 4,452 4,037 3,216 4,237 2,379 2,255
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes ... 2,307 1,467 1,644 1,270 1,168 165 1,521 1,318
Provision for income taxes ... 797 499 546 421 191 366 409 291
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ............ $ 1,510 $ 968 $ 1,098 $ 849 $ 977 $ (201) $ 1,112 $ 1,027
========== ========== ========== ========== ========== ========== ========== ==========
Key Statistics
Earnings before one-time
charges per diluted share $ 0.32 $ 0.28 $ 0.23 $ 0.18 $ 0.25 $ 0.25 $ 0.30 $ 0.28
One-time charges (per
diluted share) ........... -- 0.08 -- -- (0.05) (0.29) -- --
Diluted earnings per share ... 0.33 0.21 0.24 0.18 0.20 (0.05) 0.30 0.28
Basic earnings per share ..... 0.32 0.20 0.23 0.18 0.21 (0.05) 0.32 0.30
Return on average total
assets (before one-time
charges) ................. 0.77% 0.71% 0.65% 0.57% 0.89% 1.04% 1.02% 0.97%
Return on average total
equity before one-time
charges) ................. 11.35% 10.55% 9.04% 7.20% 10.06% 10.17% 14.82% 13.84%
Net interest margin .......... 3.6% 3.59% 3.81% 3.59% 3.85% 3.87% 3.61% 3.57%
Yield on average earning
assets ................... 8.82% 8.77% 8.61% 8.06% 7.83% 7.63% 7.39% 7.40%
Cost of average paying
liabilities .............. 5.82% 5.77% 5.39% 5.09% 4.72% 4.46% 4.31% 4.38%
Efficiency Ratio excluding
one-time charges (tea) ... 63.0% 63.9% 63.8% 69.2% 57.5% 57.5% 57.2% 54.9%
Common Stock Information
Book value per share ......... $ 11.73 $ 11.04 $ 10.73 $ 10.57 $ 10.26 $ 10.11 $ 8.68 $ 8.71
Dividends paid per share ..... 0.025 0.025 0.025 0.025 0.025 0.025 0.025 0.025
Outstanding shares at end of
period ................... 4,623,532 4,623,532 4,615,832 4,590,332 4,590,332 4,584,092 3,451,824 3,451,824
F-29
PRIVATEBANCORP, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
Selected Quarterly Financial Data (unaudited)(continued)
2000 1999
---------------------------------------------- ----------------------------------------------
Fourth Third Second First Fourth Third Second First
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands except ratios and per share data)
Number of shares used to compute:
Basic earnings per share ............ $4,623,532 $4,627,873 $4,600,740 $4,590,332 $4,585,109 $4,460,280 $3,451,824 $3,436,524
Diluted earnings per share .......... 4,749,636 4,823,982 4,752,269 4,777,351 4,794,770 4,717,660 3,705,116 3,683,388
Capital Ratios
Total equity to total assets ........ 6.53% 6.69% 6.85% 7.38% 9.08% 10.30% 6.83% 6.97%
Total risk-based capital ratio ...... 8.15% 8.51% 8.73% 9.56% 13.96% 15.22% 10.77% 11.21%
Tier-1 risk based capital ratio ..... 6.47% 6.72% 6.84% 7.56% 12.84% 14.09% 9.63% 10.05%
Leverage ratio ...................... 5.54% 5.54% 5.94% 6.76% 10.77% 11.19% 7.63% 7.53%
Selected Financial Condition
Data (at end of period)
Total securities .................... $ 172,194 $ 132,814 $ 96,969 $ 89,924 $ 71,134 $ 77,269 $ 89,026 $ 105,136
Total loans ......................... 599,429 584,919 583,522 521,188 397,277 352,236 335,306 307,766
Total assets ........................ 829,509 763,815 723,023 656,981 518,697 449,838 438,169 431,055
Total deposits ...................... 670,246 633,007 598,881 578,557 453,092 386,157 375,032 384,454
Funds borrowed ...................... 96,879 71,258 68,544 23,328 15,000 15,000 31,000 10,000
Total stockholders' equity .......... 54,249 51,066 49,545 48,498 47,080 46,351 29,966 30,054
Credit Quality
Ending allowance for loan losses .... $ 6,108 $ 5,991 $ 5,951 $ 5,670 $ 4,510 $ 4,079 $ 3,903 $ 3,695
Non-performing assets:
Loans delinquent over 90 days ....... 1,421 242 340 355 223 135 710 361
Nonaccrual loans .................... 24 324 635 1,222 600 569 94 --
Other real estate ................... -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total non-performing assets ......... $ 1,445 $ 566 $ 975 $ 1,577 $ 823 $ 704 $ 804 $ 361
========== ========== ========== ========== ========== ========== ========== ==========
Loans charged-off ................... 225 346 381 20 6 97 5 --
Recoveries .......................... 8 2 -- 5 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net charge-offs ..................... $ 217 $ 344 $ 381 $ 15 $ 6 $ 97 $ 5 $ --
========== ========== ========== ========== ========== ========== ========== ==========
Provision for loan losses ........... $ 334 $ 383 $ 662 $ 311 $ 437 $ 273 $ 213 $ 285
========== ========== ========== ========== ========== ========== ========== ==========
Key Ratios:
Net charge-offs to average loans .... 0.15% 0.23% 0.28% 0.013% 0.002% 0.11% 0.002% --
Total non-performing loans to total
loans ........................... 0.24% 0.10% 0.17% 0.3% 0.21% 0.20% 0.24% 0.12%
Total non-performing assets to total
assets .......................... 0.17% 0.07% 0.13% 0.24% 0.16% 0.16% 0.18% 0.08%
Loan Loss Reserve Summary
Balance at beginning of period ...... $ 5,991 $ 5,951 $ 5,670 $ 4,510 $ 4,079 $ 3,903 $ 3,695 $ 3,410
Johnson Bank acquisition ............ -- -- -- 864 -- -- -- --
Provision ........................... 334 383 662 311 437 273 213 285
Net charge-offs ..................... 217 343 381 15 6 97 5 --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Ending allowance .................... $ 6,108 $ 5,991 $ 5,951 $ 5,670 $ 4,510 $ 4,079 $ 3,903 $ 3,695
========== ========== ========== ========== ========== ========== ========== ==========
Net loan charge-offs:
Commercial real estate .............. $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Residential real estate ............. -- -- -- -- -- -- -- --
Commercial .......................... -- 343 361 8 -- -- -- --
Personal ............................ 217 -- 20 7 6 97 5 --
Home equity ......................... -- -- -- -- -- -- -- --
Construction ........................ -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total net loan charge-offs .......... $ 217 $ 343 $ 381 $ 15 $ 6 $ 97 $ 5 $ --
========== ========== ========== ========== ========== ========== ========== ==========
F-30
EXHIBIT INDEX
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of
PrivateBancorp, Inc.(1)
3.2 [Intentionally left blank]
3.3 Amended and Restated By-laws of PrivateBancorp, Inc.+
4.1 Subordinated Note of PrivateBancorp Inc., dated February 11, 2000,
principal amount of $5 million due February 11, 2007, issued to
Johnson International, Inc.(3)
4.2 Certain instruments defining the rights of the holders of long-term
debt of the Company and certain of its subsidiaries, none of which
authorize a total amount of indebtedness in excess of 10% of the
total assets of the Company and its subsidiaries on a consolidated
basis, have not been filed as Exhibits. The Company hereby agrees
to furnish a copy of any of these agreements to the SEC upon
request.
10.1 Lease Agreement for banking facility located at Ten North Dearborn,
Chicago, Illinois dated January 1, 1992, as amended, by and between
General American Life Insurance Company as successor-in-interest to
LaSalle National Trust, N.A., as successor trustee to LaSalle
National Bank, not personally but as Trustee under Trust Agreement
dated November 6, 1985 and known as Trust No. 110519 and The
PrivateBank and Trust Company.(1)
10.2 Lease Agreement for banking facility located at 1603 West Sixteenth
Street, Oak Brook, Illinois dated October , 1996 by and between
Columbia Lisle Limited Partnership and The PrivateBank and Trust
Company.(1)
10.3 Lease Agreement for banking facility located at 517 Green Bay Road,
Wilmette, Illinois dated as of May 2, 1994 by and between Gunnar H.
Hedlund, Doris S. Hedlund, Robert P. Hedlund and Gerald A. Hedlund,
LaSalle National Trust, N.A., as successor trustee to LaSalle
National Bank, not personally but solely as Trustee under Trust
Agreement dated December 28, 1972 and known as Trust No. 45197 and
The PrivateBank and Trust Company.(1)
10.4 Building Lease by and between Towne Square Realty, L.L.C. and The
PrivateBank and Trust Company dated August 6, 1999.(3)
10.5 Sublease Agreement for banking facility located at 1401 South
Brentwood Blvd., St. Louis, Missouri, dated as of December 13,
1999, by and between Union Planters Bank, National Association, St.
Louis Brentwood Associates, L.P. and PrivateBancorp, Inc.(4)
10.6 Stock Purchase Agreement dated as of May 28, 1998 by and among
PrivateBancorp, Inc., Delaware Charter Guarantee and Trust Co.,
Trustee FBO Ralph B. Mandell, IRA and The Ralph B. Mandell
Revocable Trust UTA dated June 5, 1997.(1)
10.7 Pledge Agreement dated as of May 28, 1998 by and between the Ralph
B. Mandell Revocable Trust UTA dated June 5, 1997 and
PrivateBancorp, Inc. (included as Exhibit B to Stock Purchase
Agreement filed as Exhibit 10.6).(1)
10.8 PrivateBancorp, Inc. Amended and Restated Stock Incentive Plan
(filed as Appendix A to the Company's Proxy Statement for its 2000
Annual Meeting of Stockholders and incorporated herein by
reference).*
10.9 Employment Agreement by and between Ralph B. Mandell and
PrivateBancorp, Inc. dated July 1, 1999.(1)*
10.10 Employment Agreement by and between Donald A. Roubitchek and
PrivateBancorp, Inc. dated July 1, 1999.(1)*
10.11 Outsourcing Agreement by and between The PrivateBank and Trust
Company and Marshall & Ilsley Corporation, acting through its
division M&I Data Services, dated as of April 9, 1999.(1)
10.12 Form of Indemnification Agreement by and between PrivateBancorp,
Inc. and its directors and executive officers.(1)*
10.13 Agreement and Plan of Reorganization by and between PrivateBancorp,
Inc. and Towne Square Financial Corporation dated as of June 24,
1999.(1)
10.14 Stock Purchase Agreement dated as of October 4, 1999 by and among
PrivateBancorp, Inc., Johnson International, Inc. and Johnson Bank
Illinois.(2)
Exhibit No. Description of Exhibits
- ----------- -----------------------
10.15 Loan Agreement dated as of February 11, 2000, between
PrivateBancorp, Inc. and LaSalle Bank National Association.(3)
10.16 Letter Agreement dated September 26, 2000 by and between
PrivateBancorp, Inc., The PrivateBank and Trust Company and Donald
A. Roubitchek.(5)*
10.17 Employment Agreement by and between Richard C. Jensen and
PrivateBancorp, Inc. dated as of July 27, 2000.(6)*
12.1 Calculation of Ratio of Earnings to Fixed Charges.+
21.1 Subsidiaries of the Registrant.(6)
23.1 Consent of Arthur Andersen LLP.+
24.1 Powers of Attorney (set forth on signature page to Registration
Statement).
+ Filed herewith.
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit.
(1) Filed as an exhibit to the Company's Form S-1 Registration Statement (File
No. 333-77147) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2000 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Form S-1 Registration Statement (File
No. 333-52676) and incorporated herein by reference.