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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, 2001
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 ExchangeAct 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 $80,921,338 based on the
closing price of the common stock of $22.65 on March 1, 2002, as reported by the
NASDAQ National Market.
As of March 1, 2002, the Registrant had outstanding 4,907,940 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III.
FORM 10-K
Table of Contents
Page
Number
PART I
Item 1. Business...................................................................................1
Item 2. Properties................................................................................18
Item 3. Legal Proceedings.........................................................................18
Item 4. Submission of Matters to a Vote of Security Holders.......................................18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................19
Item 6. Selected Financial Data...................................................................20
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...............................................41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......41
PART III
Item 10. Directors and Executive Officers..........................................................42
Item 11. Executive Compensation....................................................................42
Item 12. Security Ownership of Certain Beneficial Owners and Management............................42
Item 13. Certain Relationships and Related Transactions............................................42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................42
Index to Consolidated Financial Statements................................................................F-1
ii
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 that 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 also refer to The PrivateBank
(Chicago) and The PrivateBank (St. Louis) individually as The PrivateBank or
collectively as The PrivateBanks. We provide our clients with traditional
personal and commercial banking services, lending programs, and wealth
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 eight Midwestern
United States locations. Currently, we have seven 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 and Geneva, 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-sized businesses, commercial real estate investors and professionals.
Since year-end 1995 to December 31, 2001, we have grown our asset base at a
compound annual rate of 35% to $1.2 billion. During the same period, loans have
grown at a compound annual rate of 36% to $780.8 million, deposits at a compound
annual rate of 30% to $850.5 million and trust assets under administration at a
compound annual rate of 24% to $722.7 million. Diluted earnings per share (EPS)
have grown at a compound annual rate of 25% to $1.28 since year-end 1995.
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:
. 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 18 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 that 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
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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.
. 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 worth, we also recognize the
growth potential of certain young professionals and extend our services to
those individuals whose incomes or net worth 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.
. 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.
. 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.
. 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, Trust Plus Online Access and
Business NetBanking directly through the Internet. Business NetBanking became
available during 2001. Through Trust Plus Online Access, which became available
late in 2000, wealth management clients may access account balance and history
information in a read-only format through the Internet. Business NetBanking
allows customers to access loan information, initiate stop payments, establish
repetitive wire transfers and authorize transactions that clear through the
Automated Clearing House (ACH). Business NetBanking is supported by a help desk
that is staffed 60 hours per week. Currently, clients may:
. access information regarding their wealth management account balances and
recent transactions;
. access deposit information;
. transfer funds among deposit accounts;
. utilize a bill payment service with a variety of options;
. export information to financial software packages;
. access the PrivateBank Access help desk which is staffed 24 hours a day,
seven days a week; and
. send e-mail messages 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-
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delivery systems providing the quality of service to which our clients are
accustomed.
. 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 wealth management clients. Our clients
can either maintain their existing investment management relationships when
they become wealth management 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:
. 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.
. 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.
. 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. We continue to direct our energies
towards building the breadth and depth of our wealth management area. We
are very focused on acquiring additional asset management and financial
planning capabilities as well as other fee income generating lines of
business.
. 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
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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:
. 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.
. 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.
. Wealth Management. Our services include investment management, personal
trust and estate services, custodial services, retirement accounts and
brokerage and investment services. Our wealth management 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. Our wealth management 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 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 wealth
management 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. Wealth management services are
currently offered at The PrivateBank (St. Louis) through the wealth
management department of The PrivateBank (Chicago).
. 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
4
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 25% of capital plus unencumbered
reserves. At December 31, 2001, The PrivateBank (Chicago)'s legal lending limit
was $19.8 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 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) purchases 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 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) applies the same credit policies and procedures as are
followed for any other loan approval. Likewise, The PrivateBank (St. Louis)
applies 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, 2001 and 2000:
December 31, Percentage of December 31, Percentage of
2001 total loans 2000 total loans
------------ ------------- ------------ -------------
(dollars in thousands)
Commercial real estate ......... $310,869 40% $206,464 35%
Commercial ..................... 163,279 21% 137,343 23%
Residential real estate ........ 89,889 11% 85,347 14%
Personal ....................... 64,411 8% 62,414 10%
Home equity .................... 59,795 8% 46,013 8%
Construction ................... 92,528 12% 61,143 10%
-------- --- -------- ---
Total loans .................... $780,771 100% $598,724 100%
======== === ======== ===
Commercial Real Estate Loans. Our commercial real estate portfolio is
comprised primarily of loans secured by multi-family housing units located in
the Chicago and St. Louis metropolitan areas. 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.
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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.
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.
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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 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. Knowing our borrowers is a key factor in originating
personal loans. 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 losses, average maturity, federal taxable
equivalent yields and appreciation or depreciation by investment categories.
7
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
buyer of such funds. The purchase of federal funds are effectively short-term
loans to us from 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 that 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.
The investment portfolio is structured to provide interest rate protection in a
rates down scenario. Our loan portfolio is primarily floating-rate and when
market rates decline, loans that are tied to floating rates reprice downward
immediately. Our investment portfolio is structured to perform well in a `rates
down' scenario. Alternatively, in a `rates up' environment, our loan portfolio
performs very well due to the large percentage of floating rate loans. The
investment portfolio will not outperform our loan portfolio in a rates up
environment. During periods of volatility, we actively monitor the investment
securities portfolio to maximize total returns in the construct of our asset
liability management structure.
Wealth 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 wealth
management 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 their stated objectives. As fiduciaries of a trust
or estate, our responsibilities may include:
. administering the account pursuant to the applicable document;
. collecting, holding and valuing assets;
. monitoring investment portfolios;
. paying debts, expenses and taxes;
. distributing property;
. advising beneficiaries; and
. preparation of tax returns.
In addition to trust and estate administration, we offer:
. financial planning accounts;
. investment agency accounts;
. guardianship administration;
. Section 1031 exchanges; and
. custodial accounts.
8
The average account value of new trusts administered by us is approximately
$2.1 million as of December 31, 2001. We seek to continue to grow our wealth
management 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 breakdown of our trust assets under administration at December 31,
2001 by account classification and related gross revenue for the twelve months
ended December 31, 2001:
At or for the twelve months ended
December 31, 2001
---------------------------------
Account Type Market Value Revenue
------------ ------------ -------
(in thousands)
Personal trust--managed .................... $252,820 $1,342
Agency--managed ............................ 116,935 653
Custody .................................... 324,385 578
Employee benefits--managed ................. 28,573 83
-------- ------
Total ................................. $722,713 $2,656
======== ======
We have chosen to outsource the investment management aspect of our wealth
management 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. We continue to direct our energies
towards building breadth and depth of our wealth management area. We are very
focused on acquiring additional asset management and financial planning
capabilities as well as other fee income generating lines of business.
Our wealth management 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 wealth management 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:
. data on economic conditions;
. current interest rate outlook;
. current forecast on loans and deposits;
. mix of interest rate sensitive assets and liabilities;
. bank liquidity position;
. investment portfolio purchases and sales; and
. other matters as presented.
9
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, wealth management 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
wealth management 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 wealth management
services, we compete with the largest Chicago-area banks and some investment
managers as well as financial planning and regional and national securities
brokerage firms. 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 firms. 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, 2001, we had approximately 160.5 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 Ms. Lisa M. O'Neill, our Chief Accounting Officer,
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.
10
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:
. common stockholders' equity;
. qualifying noncumulative perpetual preferred stock;
. qualifying cumulative perpetual preferred stock (subject to some
limitations); and
. minority interests in the common equity accounts of consolidated
subsidiaries.
less:
. goodwill; and
. specified intangible assets.
Tier 2, or "supplementary," capital consists of:
. the allowance for loan and lease losses;
. perpetual preferred stock and related surplus;
. hybrid capital instruments;
. unrealized holding gains on equity securities;
. perpetual debt and mandatory convertible debt securities;
. term subordinated debt, including related surplus; and
. intermediate-term preferred stock, including related securities.
11
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, 2001, we had regulatory capital in excess of the Federal
Reserve's minimum requirements. Our total risk-based capital ratio at December
31, 2001 was 9.71% and our leverage ratio was 6.64%.
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 Branching 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 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.
12
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 FDIC the power to issue cease and desist orders. A cease and
desist order could either prohibit a bank from engaging in certain unsafe and
unsound bank activities 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:
. extensions of credit to the bank holding company and any non-banking
affiliates,
. the purchase of assets from affiliates,
. the issuance of guarantees, acceptances or letters of credit on behalf of
affiliates, and
. 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:
. the nature and amount of loans which it may make to a single borrower (and,
in some instances, a group of affiliated borrowers),
. the nature and amount of securities in which it may invest,
. the amount of investment in The PrivateBank (Chicago) premises, and
. the manner in and extent to which it may borrow money.
Furthermore, all banks are affected by the credit policies of the Federal
Reserve, which regulates 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 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.
13
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 $42.8 million of transaction accounts plus 10%
on the remainder. The first $5.5 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 institution 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 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 2001, and must therefore provide
an annual report as required by FDICIA.
As of December 31, 2001, The PrivateBank (Chicago) had capital in excess of
the requirements for a "well-capitalized" institution under the prompt
corrective action provisions of FDICIA.
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
2001, The PrivateBank (Chicago) paid deposit insurance premiums in the aggregate
amount of $124,188. During 2001, The PrivateBank (St. Louis) paid deposit
insurance premiums in the aggregate amount of $13,746.
14
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 of 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, or 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 tested in three areas: (a) lending,
to evaluate the institution's record of making loans in its assessment areas;
(b) investment, to evaluate the institution's record of investing in community
development projects, affordable housing, and programs benefiting low or
moderate income individuals and business; and (c) service, 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 February
2002 as a result of its last CRA examination.
Bank Secrecy Act. Under the Bank Secrecy Act ("BSA"), a financial
institution is required to have systems in place to detect certain transactions,
based on the size and nature of the transaction. Financial Institutions are
generally required to report cash transactions involving more than $10,000 to
the United States Treasury. In addition, financial institutions are required to
file suspicious activity reports for transactions that involve more than $5,000
and which the financial institution knows, suspects or has reason to suspect
involves illegal funds, is designed to evade the requirements of the BSA or has
no lawful purpose. The Patriot Act of 2001, enacted in response to the September
11, 2001 terrorist attacks, requires bank regulations to consider a financial
institution's compliance with the BSA when reviewing applications from financial
institutions.
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 Mortgage Disclosure Act. Among other things, these acts:
. require banks to meet the credit needs of their communities;
. require banks to disclose credit terms in meaningful and consistent ways;
. prohibit discrimination against an applicant in any consumer or business
credit transaction;
. prohibit discrimination in housing-related lending activities;
. require banks to collect and report applicant and borrower data regarding
loans for home purchases or improvement projects;
. require lenders to provide borrowers with information regarding the nature
and cost of real estate settlements;
. prohibit certain lending practices and limit escrow account amounts with
respect to real estate transactions; and
. 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.
15
Impact of the Gramm-Leach-Bliley Act. On November 12, 1999, the
Gramm-Leach-Bliley Act (the "GLB Act") was enacted. The GLB Act amended or
repealed certain provisions of the Glass-Steagall Act and other legislation that
restricted the ability of bank holding companies, securities firms and insurance
companies to affiliate with one another. The GLB Act has established a
comprehensive framework to permit affiliations among commercial banks, insurance
companies and securities firms. Also, a bank holding company that meets certain
criteria may certify that it satisfies certain 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 non-public personal
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 FDIC and the other federal regulators have promulgated
implementing regulations outlining the duties and responsibilities of financial
institutions with regard to customer privacy. These regulations do not supersede
state regulations regarding privacy, except to the extent that state regulations
conflict with these regulations. The privacy regulations of the Illinois Banking
Act continue to apply to The PrivateBank, except to the extent they conflict
with the GLB Act and its implementing regulations.
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).
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. In addition, the
PrivateBank (St. Louis) is required in many situations to either apply to or
provide notice to the OTS before declaring a dividend. The OTS also 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, such as not being able to retain or operate
out-of-state branches, 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).
16
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. We intend such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and we are
including this statement for purposes of these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, can generally be identified by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," or similar expressions. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain and actual results
may differ materially from the results discussed in forward-looking statements.
Factors which might cause such a difference include, but are not limited to,
fluctuations in market rates of interest and loan and deposit pricing; a
deterioration of general economic conditions in our market areas; legislative or
regulatory changes; adverse developments in our loan or investment portfolios;
significant increases in competition; difficulties in identifying attractive
acquisition opportunities or strategic partners to complement our private
banking approach and the products and services we offer; and the possible
dilutive effect of potential acquisitions or expansion. These risks and
uncertainties should be considered; in evaluating forward-looking statements and
undue reliance should not be placed on such statements. We undertake no
obligation to update publicly any of these statements in light of future events
except as required in subsequent periodic reports we file with the SEC.
EXECUTIVE OFFICERS
The following persons serve as executive officers of PrivateBancorp:
Ralph B. Mandell (61), a Director since 1989, is a co-founder of
PrivateBancorp and The PrivateBank (Chicago). A Director of The PrivateBank
(Chicago) and 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 held 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 1985
until 1988. Prior thereto, Mr. Mandell had served as Executive Vice President of
Oak Park Trust & Savings Bank since 1979.
Gary S. Collins (43) has been Co-Vice Chairman of The PrivateBank (Chicago)
since 2001 and a Managing Director 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.
Richard C. Jensen (56), has been a Director since January 2000. Mr. Jensen
has been a Managing Director of The PrivateBank (Chicago) since November 1999.
He became Chairman, Chief Executive Officer and a Managing Director of The
PrivateBank (St. Louis) upon receipt of its banking charter in June 2000. From
May 1998 until joining us, Mr. Jensen served as Chairman and Chief Executive
Officer of Missouri Holding, Inc. From March to May 1998, he served as President
and Chief Executive Officer of Royal Banks of Missouri. For the previous 18
years, Mr. Jensen served in various executive positions with National Bank and
it predecessor, Boatmen's Bank, in St. Louis.
Hugh H. McLean (42) has been Co-Vice Chairman of The PrivateBank (Chicago)
since 2001 and a Managing Director 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 from 1987 to 1990, where he was employed from
1980 to 1990.
Thomas S. Palmer (54) has been a Managing Director and Senior Trust Officer
of The PrivateBank (Chicago) since July 2000. He serves as director of Wealth
Management services. Mr. Palmer has spent over 30 years servicing the investment
and banking needs of clients. Prior to joining the bank, he was Regional
Director for Bank One Investment Management Company. He spent over 20 years with
Bank One and its predecessor, First Chicago, in management as Senior Vice
President, Head of Affluent Clients and Specialized Trust Divisions.
James A. Ruckstaetter (54) has been a Managing Director and the Chief
Credit Officer of The PrivateBank (Chicago) since 1999. His diverse experience
includes credit and loan administration, commercial lending and residential real
estate
17
lending. Mr. Ruckstaetter's career spans 30 years including various executive
positions with leading Chicago area financial institutions. From January 1998
until June 1999, he was President and CEO of Pan American Bank, a community bank
on the west side of Chicago. From September 1994 to December 1997, Mr.
Ruckstaetter served as a Senior Relationship Manager at Bank of America.
Gary L. Svec (36), 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 2001. 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 LLP 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 eight 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 28,251 square feet comprising the entire seventh, 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, 2006.
In January 2000, we opened our Fox Valley office at 24 South Second Street,
St. Charles, Illinois. We lease approximately 6,000 square feet of a commercial
building. This lease expires October 31, 2009.
In May 2001, we opened a second branch office in the Fox Valley area at the
Herrington Train Station at 308 Crescent Place in Geneva, Illinois. We lease
approximately 1,700 square feet within the commuter station building. This lease
expires March 1, 2006.
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.
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.
18
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 7, 2002, we had approximately 307 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.
2001 High Low
-------- --------
First Quarter .................................... $15.9375 $ 9.3125
Second Quarter ................................... 16.7300 13.5000
Third Quarter .................................... 19.0000 15.0000
Fourth Quarter ................................... 20.0000 15.8900
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
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 that are legally available for that purpose. Because our 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.
2001
First Quarter .................................... $ 0.025
Second Quarter ................................... 0.025
Third Quarter .................................... 0.030
Fourth Quarter ................................... 0.030
2000
First Quarter..................................... $ 0.025
Second Quarter.................................... 0.025
Third Quarter..................................... 0.025
Fourth Quarter.................................... 0.025
19
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, 2001 consolidated
financial statements that 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,
------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Selected Statement of Income Data:
Interest income:
Loans, including fees .................................. $ 50,975 $ 48,633 $ 26,597 $ 19,619 $ 16,729
Federal funds sold and interest-bearing deposits ....... 244 1,058 330 2,181 875
Securities ............................................. 14,377 7,455 5,141 3,492 2,519
---------- -------- -------- -------- --------
Total interest income ............................. 65,596 57,146 32,068 25,292 20,123
---------- -------- -------- -------- --------
Interest expense:
Interest-bearing demand deposits ....................... 923 869 604 487 377
Savings and money market deposit accounts .............. 11,365 13,711 7,671 6,651 5,880
Other time deposits .................................... 17,291 14,635 7,399 6,155 3,821
Funds borrowed ......................................... 6,327 4,116 931 19 3
Long term debt -- trust preferred securities ........... 1,731 -- -- -- --
---------- -------- -------- -------- --------
Total interest expense ............................ 37,637 33,331 16,605 13,312 10,081
---------- -------- -------- -------- --------
Net interest income ............................... 27,959 23,815 15,463 11,980 10,042
Provision for loan losses .............................. 3,179 1,690 1,208 362 603
---------- -------- -------- -------- --------
Net interest income after provision for loan losses 24,780 22,125 14,255 11,618 9,439
---------- -------- -------- -------- --------
Non-interest income:
Banking, trust services and other income ............... 4,028 3,077 1,947 1,280 1,210
Securities gains, net .................................. 2,095 92 57 40 --
---------- -------- -------- -------- --------
Total non-interest income ......................... 6,123 3,169 2,004 1,320 1,210
---------- -------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits ......................... 9,111 8,174 5,156 4,077 3,902
Severance charge ....................................... -- 562 -- -- --
Occupancy expense, net ................................. 4,158 2,987 1,563 1,379 1,274
Data processing ........................................ 1,295 820 478 508 396
Marketing .............................................. 1,208 1,202 692 567 500
Professional fees ...................................... 2,939 2,135 1,295 561 448
Goodwill amortization .................................. 824 731 -- -- --
Insurance .............................................. 354 303 214 134 115
Towne Square Financial Corporation acquisition ......... -- -- 1,300 -- --
Other expense .......................................... 2,763 1,692 1,389 863 627
---------- -------- -------- -------- --------
Total non-interest expense ........................ 22,652 18,606 12,087 8,089 7,262
---------- -------- -------- -------- --------
Income before income taxes ........................ 8,251 6,688 4,172 4,849 3,387
Income tax provision ................................... 2,051 2,263 1,257 1,839 1,242
---------- -------- -------- -------- --------
Net income ........................................ $ 6,200 $ 4,425 $ 2,915 $ 3,010 $ 2,145
========== ======== ======== ======== ========
Per Share Data:
Basic earnings ......................................... $ 1.32 $ 0.96 $ 0.73 $ 0.91 $ 0.69
Diluted earnings ....................................... 1.28 0.92 0.69 0.86 0.65
Dividends .............................................. 0.11 0.10 0.10 0.08 0.07
Book value (at end of period) .......................... 12.97 11.73 10.26 8.53 7.67
Selected Financial Condition Data (at end of period):
Total securities(1) .................................... $ 332,933 $172,194 $ 71,134 $116,891 $ 65,383
Total loans ............................................ 780,771 598,724 397,277 281,965 218,495
Total assets ........................................... 1,176,768 829,509 518,697 416,308 311,872
Total deposits ......................................... 850,495 670,246 453,092 364,994 285,773
Funds borrowed ......................................... 231,488 96,879 15,000 20,000 --
Total stockholders' equity ............................. 62,304 54,249 47,080 29,274 24,688
Trust assets under administration ...................... 722,713 777,800 729,904 611,650 469,646
20
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Selected Financial Ratios and Other Data:(1)
Performance Ratios:
Net interest margin(2).................................. 3.27% 3.63% 3.79% 3.64% 4.01%
Net interest spread(3).................................. 2.87 3.02 3.15 2.98 3.31
Non-interest income to average assets................... 0.64 0.45 0.45 0.37 0.45
Non-interest expense to average assets(8)............... 2.37 2.64 2.71 2.29 2.71
Net overhead ratio(4)(8)................................ 1.73 2.19 2.26 1.91 2.26
Efficiency ratio(5)(8).................................. 63.17 66.76 65.76 60.82 64.53
Return on average assets(6)(8).......................... 0.65 0.63 0.65 0.85 0.80
Return on average equity(7)(8).......................... 10.59 8.81 7.66 11.27 9.49
Dividend payout ratio................................... 8.39 10.43 13.78 8.74 10.13
Asset Quality Ratios:
Non-performing loans to total loans..................... 0.41% 0.24% 0.21% 0.36% 0.24%
Allowance for probable loan losses to:
Total loans............................................. 1.06 1.02 1.14 1.21 1.40
Non-performing loans.................................... 262 423 548 336 578
Net charge-offs to average total loans.................. 0.15 0.18 0.03 -- --
Non-performing assets to total assets................... 0.27 0.17 0.16 0.24 0.17
Balance Sheet Ratios:
Loans to deposits....................................... 91.8% 89.4% 87.7% 77.3% 76.5%
Average interest-earning assets to average interest-
bearing liabilities..................................... 109.8 112.2 116.3 116.4 117.7
Capital Ratios:
Total equity to total assets............................ 5.29% 6.54% 9.08% 7.03% 7.92%
Total risk-based capital ratio.......................... 9.71 8.15 13.96 11.53 11.75
Tier 1 risk-based capital ratio......................... 8.18 6.47 12.84 10.40 10.50
Leverage ratio.......................................... 6.64 5.54 10.77 7.88 8.70
Ratio of Earnings to Fixed Charges(9):
Including deposit interest.............................. 1.22 x 1.20 x 1.25 x 1.36 x 1.34 x
Excluding deposit interest.............................. 2.02 2.62 5.48 256.21 1,130.00
- ----------
(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):
After-Tax Pre-Tax
--------- -------
Severance charges ........................................ $ 562 $ 377
Towne Square Corporation acquisition ..................... 1,433 1,382
St. Louis start-up costs ................................. 324 214
21
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 asset ................. 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.
22
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, or start-up, bank. Our flagship
downtown Chicago location opened in 1991. We expanded to Wilmette in north
suburban Cook County in 1994 and the Oak Brook facility in west suburban DuPage
County was established in 1997. We established the St. Charles office in January
2000, in connection with our purchase of Towne Square Financial Corporation (a
company which was in the process of forming a de novo bank) on August 3, 1999.
On February 11, 2000, we consummated our acquisition of Johnson Bank Illinois
adding two additional locations 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). In May 2001, The PrivateBank (Chicago)
opened a second branch in the Fox Valley area in Geneva, Illinois.
Since year-end 1995 to December 31, 2001, we have grown our asset base at a
compound annual rate of 35% to $1.2 billion. During the same period, loans have
grown at a compound annual rate of 36% to $780.8 million, deposits at a compound
annual rate of 30% to $850.5 million and trust assets under administration at a
compound annual rate of 24% to $722.7 million. Diluted earnings per share (EPS)
have grown at a compound annual rate of 25% to $1.28 since year-end 1995.
For financial information regarding our four separate lines of business,
The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management
Services and Holding Company Activities, see "Note 2 -- Operating Segments" to
our consolidated financial statements as of and for the year ended December 31,
2001, included on page F-10.
The profitability of our operations depends on our net interest income,
provision for loan losses, non-interest income, and non-interest expense. Net
interest income is dependent on the amounts and yields of interest-earning
assets as compared to the amounts and rates on interest-bearing liabilities. Net
interest income is sensitive to changes in market rates of interest as well as
to the execution of our asset/liability management strategy. The provision for
loan losses is affected by changes in the loan portfolio, management's
assessment of the collectability of the loan portfolio, loss experience, as well
as economic and market factors.
Non-interest income consists primarily of net security gains and wealth
management fee income, and to a lesser extent, fees for ancillary banking
services. Non-interest income from fees and deposit service charges are below
peer group levels. This is largely the result of the profile of our typical
client. Our clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, we do not earn
the 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 in St. Charles, the acquisition of Johnson Bank Illinois, and
the opening of The PrivateBank (St. Louis). During 2001 we were impacted by the
start-up nature of operations in St. Louis, and to a lesser extent, by the new
office in Geneva, Illinois. The PrivateBank (St. Louis) began to operate
profitably during the fourth quarter of 2001 and will have a positive impact on
our profitability in 2002. During 2002 we expect profitability and expense
ratios to improve relative to 2001.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with our consolidated financial
statements included herein. Reference should also be made to our accounting
policies set out in the notes to consolidated financial statements. Certain
critical policies involve estimates and assumptions by management. By their
nature, changes in these assumptions and estimates could significantly affect
our financial position or results of operations. Actual results could differ
from those estimates. Estimates and judgments regarding the determination of the
adequacy of the reserve for loan losses, as described in both Management's
Discussion and Analysis and in the financial statement notes, is of particular
significance to us. In addition, effective January 1, 2002, we adopted SFAS No.
142, which requires an annual impairment test of goodwill. Currently, goodwill
is recorded at its estimated net realizable value as discussed in Notes 1o. and
1q. to the consolidated financial statements.
23
CONSOLIDATED RESULTS OF OPERATIONS
Net Income
Our net income for the year ended December 31, 2001 was $6.2 million, or
$1.28 per diluted share, compared to $4.4 million, or $0.92 per diluted share,
for the year ended December 31, 2000. Excluding one-time charges, our earnings
were $4.8 million, or $1.00 per diluted share, in 2000. Our 2001 earnings per
share increased 28% as compared to the prior year earnings per share, adjusted
to exclude the 2000 one-time charges. 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, 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. 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 7% between 2000 and 1999 is due to growth in net interest
income, reflecting higher average loan balances and improvement in net interest
margin, and growth in non-interest income mainly from wealth management
services, 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 contributed $1.0 million to
our net income in 2000. Excluding the Towne Square Financial Corporation
acquisition-related charge and St. Louis start-up costs, 1999 earnings were $4.5
million. Before these one-time charges, 1999 earnings per diluted share were
$1.07.
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
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 and amortization of fees 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. Interest expense includes amortization of prepaid fees on brokered
deposits and trust preferred securities. The volume of non-interest bearing
funds, largely comprised of demand deposits and capital, also affects the net
interest margin.
24
Net interest income was $28.0 million for the year ended December 31, 2001,
compared to $23.8 million for 2000, an increase of 18%. 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 2001 is primarily
attributable to growth in earning assets. Average earning assets for 2001 were
$908.6 million compared to $671.5 million for 2000, an increase of 35%. Our net
interest margin was 3.27% for the year ended December 31, 2001, compared to
3.63% for the prior year.
A changing interest rate environment has an effect on our net interest
margin. A large portion of our loan portfolio is based on floating interest
rates and will likely reprice faster than our deposits and floating rate
borrowings. During 2001, we experienced net interest margin pressure as compared
to 2000 due to the decrease in market interest rates that occurred throughout
2001. In addition, during 2001 our floating rate assets repriced faster than our
deposits and floating rate deposits. Also, we continued to utilize brokered
deposit transactions as part of our asset liability management strategy. These
brokered deposits have staggered maturities and provide a lower costing source
of funding. During 2002, we expect our net interest margin to improve if market
interest rates increase relative to 2001 levels. Alternatively, if market
interest rates decrease, we expect our net interest margin to continue to
decrease.
Net interest income was $23.8 million during the year ended December 31,
2000, compared to $15.5 million for 1999, an increase of 54%. The increase in
2000 was primarily attributable to growth in earning assets and, to a lesser
extent, improvement in net interest spread. Average earning assets during 2000
were $671.5 million compared to $432.2 million for 1999, an increase of 55%. 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.
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,
--------------------------------------------------------------
2001 2000
----------------------------- -----------------------------
Average Average
Balance(1) Interest Rate Balance(1) Interest Rate
---------- -------- ---- ---------- --------- ----
Federal funds sold and other short-term
investments ................................ $ 4,862 $ 244 5.02% $ 17,032 $ 1,058 6.11%
Investment securities(2) ..................... 233,507 16,154 6.92% 114,144 8,340 7.31%
Loans, net of unearned discount(3) ........... 670,235 50,975 7.61% 540,297 48,633 8.92%
-------- ------- ---- -------- ------- ----
Total earning assets ....................... $908,605 $67,373 7.41% $671,473 $58,031 8.57%
======== ======= ======== =======
Deposits--interest bearing:
Interest-bearing demand accounts ........... $ 44,231 $ 923 2.09% $ 37,415 $ 869 2.32%
Savings and money market deposits .......... 326,198 11,365 3.48% 267,597 13,711 5.12%
Time deposits .............................. 318,510 17,291 5.43% 235,049 14,635 6.23%
-------- ------- -------- -------
Total interest-bearing deposits ............ 688,939 29,579 4.29% 540,061 29,215 5.39%
Funds borrowed ............................. 120,585 6,327 5.25% 58,160 4,116 6.96%
Long term debt -- trust preferred securities 17,918 1,731 9.66% -- -- --
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities ........ $827,442 $37,637 4.55% $598,221 $33,331 5.55%
======== ======= ======== =======
Tax equivalent net interest income ........... $ 29,736 $ 24,700
======== ========
Net interest spread .......................... 2.87% 3.02%
Net interest margin .......................... 3.27% 3.63%
Year Ended December 31,
-----------------------------
1999
-----------------------------
Average
Balance(1) Interest Rate
---------- -------- ----
Federal funds sold and other short-term
investments ................................ $ 6,557 $ 329 5.02%
Investment securities(2) ..................... 93,903 6,055 6.45%
Loans, net of unearned discount(3) ........... 331,698 26,598 8.02%
-------- ------- ----
Total earning assets ....................... $432,158 $32,982 7.63%
======== =======
Deposits--interest bearing:
Interest-bearing demand accounts ........... $ 27,248 604 2.22%
Savings and money market deposits .......... 184,192 7,707 4.18%
Time deposits .............................. 141,481 7,364 5.20%
-------- ------- ----
Total interest-bearing deposits ............ 352,921 15,675 4.44%
Funds borrowed ............................. 17,500 931 5.32%
Long term debt -- trust preferred securities -- -- --
-------- ------- ----
Total interest bearing liabilities ........ $370,421 $16,606 4.48%
======== =======
Tax equivalent net interest income ........... $ 16,376 4.48%
========
Net interest spread .......................... 3.15%
Net interest margin .......................... 3.79%
- ----------
(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 $1,777,000, $885,000, and $914,000 in the years ending 2001,
2000 and 1999, 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,
--------------------------------------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
----------------------------------------- -----------------------------------
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 ....................... $ (186) $ (744) $ 116 $ (814) $ 71 $ 526 $ 132 $ 729
Investment securities ...................... (445) 8,725 (466) 7,814 808 1,306 170 2,284
Loans, net of unearned discount ............ (7,078) 11,590 (2,170) 2,342 2,985 16,730 2,321 22,036
------- -------- ------- ------- ------ ------- ------ -------
Total interest income .................. (7,709) 19,571 (2,520) 9,342 3,864 18,562 2,623 25,049
------- -------- ------- ------- ------ ------- ------ -------
Interest bearing deposits .................. (5,941) 8,025 (1,720) 364 3,353 8,309 1,878 13,540
Funds borrowed ............................. (995) 4,345 (1,139) 2,211 287 2,163 735 3,185
Long term debt -- trust preferred securities -- -- 1,731 1,731 -- -- -- --
------- -------- ------- ------- ------ ------- ------ -------
Total interest expense ................. (6,936) 12,370 (1,128) 4,306 3,640 10,472 2,613 16,725
------- -------- ------- ------- ------ ------- ------ -------
Net interest income ........................ $ (773) $ 7,201 $(1,392) $ 5,036 $ 224 $ 8,090 $ 10 $ 8,324
======= ======== ======= ======= ====== ======= ====== =======
26
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.
Our provision for loan losses was $3.2 million for the year ended December
31, 2001, compared to $1.7 million for the comparable period in 2000. Increases
in the provision for loan losses for 2001 as compared to 2000 are related to
growth in the loan portfolio. Net charge-offs for the years ended December 31,
2001 and 2000 were $981,000 and $956,000, respectively. Our provision for loan
loss was $1.2 million in 1999 and we recognized $108,000 of net charge-offs
during 1999.
Non-interest Income
Non-interest income increased approximately $2.9 million or 93%, to $6.1
million for the year ended December 31, 2001, compared to $3.2 million for 2000.
The increase in non-interest income is attributable primarily to $2.1 million of
net gains on the sale of investment securities. Volatility in interest rates
during 2001 provided us with the opportunity to sell available-for-sale
securities for gains and replace the sold securities with securities that
reflect better risk reward parameters and greater return opportunities. Banking
service charge income increased by $153,000 over the prior year. Wealth
management fee revenue increased 17% to $2.7 million in 2001 compared to $2.3
million in 2000. Trust assets under administration decreased 7% to $722.7
million at year-end 2001, compared to $777.8 million at December 31, 2000
attributable primarily to declines in equity valuations since the prior year,
which was partially offset by increases in new business generated during the
year.
Non-interest income increased approximately $1.2 million, or 58%, 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
wealth management 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. Wealth
management fee revenue grew 44% to $2.3 million in 2000, compared to $1.6
million in 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 wealth management services beyond the Chicago office with
the addition of wealth management staff to our suburban offices.
Total non-interest income also included $92,000, and $57,000 in realized
gains from sales of investment securities during 2000 and 1999 respectively.
Non-interest Expense
Year Ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
(in thousands)
Salaries and employee benefits ................ $ 9,111 $ 8,174 $ 5,156
Severance charge .............................. -- 562 --
Towne Square Financial Corporation
acquisition .............................. -- -- 1,300
Occupancy ..................................... 4,158 2,987 1,563
Data processing ............................... 1,295 820 478
Marketing ..................................... 1,208 1,202 692
Professional fees ............................. 2,939 2,135 1,295
Goodwill ...................................... 824 731 --
Insurance ..................................... 354 303 214
Other expense ................................. 2,763 1,692 1,389
------- ------- -------
Total non-interest expense .................... $22,652 $18,606 $12,087
======= ======= =======
Non-interest expense increased $4.1 million or 22% to $22.7 million for the
year ended December 31, 2001 compared to $18.6 million for 2000. 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 26% from $18.0 million during 2000 to $22.7
million during 2001.
27
The increase in non-interest expense during 2001 is a result of our
continued expansion . Increases in expenses for salaries and benefits,
occupancy, professional services, data processing and insurance reflect the
impact of growing our personnel, the opening of our new banking office in
Geneva, and broadening our array of products. We also incurred charges of
$561,000 during 2001 related to the completion of system-related conversions.
During 2001, the Lake Forest and the Winnetka offices (formerly known as
Johnson Bank Illinois) contributed $3.1 million to operating expenses, including
$824,000 of goodwill expense. Non-interest expense for the year ended December
31, 2001 includes operating expenses of $1.2 million and $2.7 million related to
the St. Charles and St. Louis offices, respectively.
Excluding the effect of one-time charges in 2000 and 1999, non-interest
expense increased 75% in 2000 to $18.0 million compared to $10.3 million for
1999. Non-interest expense as a percentage of average assets changed from 2.71%
in 1999 to 2.64% in 2000 to 2.37% in 2001. 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 during 2000 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.
The following table shows our operating efficiency over the last three
years:
December 31,
-------------------------
2001 2000(1) 1999(2)
----- ------- -------
Non-interest expense to average assets ............. 2.37% 2.56% 2.32%
Net overhead ratio(3) .............................. 1.73 2.11 1.87
Efficiency ratio(4) ................................ 63.17 64.75 57.52
- ----------
(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.
Our efficiency ratio (tax equivalent), which measures the percentage of net
revenue that is expended as non-interest expense for the year ended December 31,
2001 improved slightly as compared to the efficiency ratio for the year ended
December 31, 2000 adjusted to exclude one-time charges. Excluding the effects of
one-time charges during 2000 and 1999, our efficiency ratio increased to 65% in
2000 from 58% in 1999.
The slight improvement in our efficiency ratio during 2001 as compared to
2000 demonstrates that our business development efforts at the new offices are
generating revenue sufficient to offset the related operating expenses in
addition to reflecting the impact of securities net gains in 2001. The
PrivateBank (St. Louis) became profitable during the fourth quarter of 2001. Our
newest location in Geneva is not yet profitable, but the location has exceeded
its growth targets for loans and deposits during 2001. 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 2002, the costs of business development at the Geneva office are
expected to exceed the related operating expenses. However, we expect to
continue to report improvements in our efficiency ratio as income sources
contribute to our profitability in excess of the operating expense growth
impact.
Salary and employee benefit expense increased 11% to $9.1 million for the
year ended December 31, 2001 from $8.2 million for the year ended December 31,
2000. Full-time equivalent employees increased 17% to 160.5 at December 31, 2001
from 137 at December 31, 2000. The increase in salary and benefits is due
primarily to the full effect of the Johnson Bank Illinois acquisition, the
opening and staffing of the PrivateBank (St. Louis), and the addition of two
senior officers responsible for establishing the Geneva office. Our main office
in Chicago has also experienced growth in personnel during 2001 in response to
the overall growth of the organization and to increased staffing needs to
support a growing public company.
Salary and employee benefit expense increased 59% 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 50% 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
28
Johnson Bank Illinois acquisition. Our main office in Chicago 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.
Professional fees, which include legal, accounting, consulting services and
investment management fees, increased 38% to $2.9 million for the year ended
December 31, 2001 from $2.1 million for 2000 and $1.3 million for 1999. The
increases in 2001 and 2000 were primarily due to higher legal, accounting and
information-system consultation services, including 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, 2001 in addition to 2000 and 1999.
System related projects are expected to continue in 2002. During 2001, we
spent $1.1 million in information technology- related projects as we began the
renovation of our information technology infrastructure. During 2002, we plan to
invest approximately $2.1 million in our information technology infrastructure.
These expenditures will result in new hardware, innovative software, upgrades to
our disaster recovery systems and overall integration of our various technology
components. During 2001, we began the evaluation and the renovation of our
information technology infrastructure. 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. During 2001, we established an information technology committee that
reports to the audit committee of the board of directors. During 2002, this
committee will monitor the execution of our information technology plan. We have
retained information systems consultants to assist us in the implementation of
the upgrades as well as assist us in the augmentation of our current disaster
recovery network. The 2002 information technology renovation will augment the
technology expenditures that have been made in 2000 and 2001.
The other expense category of non-interest expense consists primarily of
postage, telephone, delivery, office supplies, training and other miscellaneous
expenses. During 2001 these expenses increased relative to 2000 by 63% due to
the continued implementation of our expansion strategy. During 2000 these
expenses increased relative to 1999 by 22% due to the new offices that were
added to the organization in 2000.
Income Taxes
The following table shows our income before income taxes, applicable income
taxes and effective tax rate for the years ended December 31, 2001, 2000, and
1999, respectively.
Year Ended December 31,
------------------------------
2001 2000 1999
------ ------ -----
(dollars in thousands)
Income before taxes ........................ $8,251 $6,688 $4,172
Income tax provision ....................... 2,051 2,263 1,257
Effective tax rate ......................... 24.9% 33.8% 30.1%
The effective income tax rate varies from statutory rates principally due
to certain interest income which is tax-exempt for federal or state purposes,
and certain expenses which are disallowed for tax purposes. The decrease in the
effective tax rate for 2001 as compared to 2000 reflects the impact of growth in
tax-exempt municipal securities. The average balance of municipal securities was
$71.9 million, $37.1 million, and $39.5 million for the years ended December 31,
2001, 2000 and 1999, respectively. Increases in the income tax provision for the
year ended December 31, 2000 as compared to 1999 reflect a lower amount of
interest income which was tax exempt in 2000 relative to 1999. 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.
29
FINANCIAL CONDITION
Total Assets
Total assets were $1.2 billion at December 31, 2001, an increase of $347.3
million, or 42%, over the $829.5 million at December 31, 2000. The balance sheet
growth during 2001 was accomplished mainly through loan growth throughout the
company and growth in the investment securities portfolio. The growth in assets
experienced during 2001 was funded primarily through growth in deposits,
including brokered deposits, and to a lesser extent, through increased
borrowings.
Loans
Total loans increased to $780.8 million at December 31, 2001, an increase
of $182.1 or 30%, from $598.7 at December 31, 2000. The PrivateBank (St. Louis)
had loans outstanding of $73.5 million as of December 31, 2001, growth of $48.3
million since December 31, 2000. The remaining loan growth of $133.7 million
experienced by the company since December 31, 2000 was generated by the
PrivateBank (Chicago). All of the PrivateBank (Chicago) offices posted strong
gains in loan volume during 2001.
The following table sets forth the loan portfolio by category as of
December 31 for the previous five fiscal years:
Year Ended December 31,
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(in thousands)
Commercial real estate ... $310,869 $206,464 $146,368 $ 94,392 $ 55,429
Commercial ............... 163,279 137,343 67,026 46,800 33,862
Residential real estate .. 89,889 85,347 72,972 54,171 56,307
Personal ................. 64,411 62,414 57,497 44,094 42,077
Home equity .............. 59,795 46,013 24,396 20,100 20,680
Construction ............. 92,528 61,143 29,018 22,408 10,140
-------- -------- -------- -------- --------
Total loans .......... $780,771 $598,724 $397,277 $281,965 $218,495
======== ======== ======== ======== ========
The following table classifies the loan portfolio, by category, at December
31, 2001, 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 .. $ 71,087 $166,889 $ 72,893 $310,869 $117,779 $122,003
Commercial .............. 99,083 58,149 6,047 163,279 19,889 44,307
Residential real estate.. 13,901 14,421 61,567 89,889 12,276 63,712
Personal ................ 53,609 7,041 3,761 64,411 6,243 4,559
Home equity ............. 12,669 19,337 27,789 59,795 -- 47,126
Construction ............ 70,968 17,882 3,678 92,528 1,595 19,965
-------- -------- -------- -------- -------- --------
Total loans ........ $321,317 $283,719 $175,735 $780,771 $157,782 $301,672
======== ======== ======== ======== ======== ========
- ----------
(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,
-------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(in thousands)
Balance at beginning of period ............. $ 6,108 $ 4,510 $ 3,410 $ 3,050 $ 2,450
Johnson Bank acquisition - loan loss reserve -- 864 -- -- --
Loans charged-off:
Commercial real estate ..................... -- -- -- -- --
Commercial ................................. (939) (723) -- -- --
Residential real estate .................... -- -- -- -- --
Personal ................................... (113) (249) (108) (2) (3)
Home equity ................................ -- -- -- -- --
Construction ............................... -- -- -- -- --
--------- --------- --------- --------- ---------
Total loans charged-off .............. (1,052) (972) (108) (2) (3)
--------- --------- --------- --------- ---------
Loans Recovered:
Commercial ................................. 43 8 -- -- --
Personal ................................... 28 8 -- -- --
--------- --------- --------- --------- ---------
Total loans recovered ................ 71 16 -- -- --
--------- --------- --------- --------- ---------
Provision for loan losses .................. 3,179 1,690 1,208 362 603
--------- --------- --------- --------- ---------
Balance at end of period ................... $ 8,306 $ 6,108 $ 4,510 $ 3,410 $ 3,050
========= ========= ========= ========= =========
Average total loans ........................ $ 669,114 $ 541,436 $ 332,502 $ 234,486 $ 195,605
========= ========= ========= ========= =========
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,
------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ------------------ ------------------ ------------------ ------------------
% of % of % of % of % of
Total Total Total Total Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
Commercial real
estate ...... $2,407 29% $1,575 26% $1,154 26% $ 732 22% $ 429 14%
Commercial ..... 1,923 23% 1,727 28% 930 21% 693 20% 464 15%
Residential real
estate ...... 500 6% 429 7% 423 9% 277 8% 306 10%
Personal ....... 676 8% 658 11% 568 13% 545 16% 1,037 34%
Home equity .... 475 6% 412 7% 237 5% 201 6% 201 7%
Construction ... 1,225 15% 810 13% 369 8% 236 7% 106 3%
Unallocated .... 1,100 13% 497 8% 829 18% 726 21% 507 17%
------ --- ------ --- ------ --- ------ --- ------ ---
Total ....... $8,306 100% $6,108 100% $4,510 100% $3,410 100% $3,050 100%
====== === ====== === ====== === ====== === ====== ===
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 1.06% as
of December 31, 2001, compared to 1.02% as of December 31, 2000. Net charge-offs
for the year ended December 31, 2001 and 2000 were $981,000 and $956,000,
respectively. Net charge-offs to average total loans were 0.15% for 2001
compared to 0.18% for 2000.
The allowance for loan losses as a percentage of total loans was 1.14% as
of December 31, 1999. Net charge-offs for the year ended December 31, 1999 were
$108,000. Net charge-offs to average total loans was 0.03% for 1999.
Non-performing Loans
The following table classifies our non-performing loans as of the dates
shown:
December 31,
------------
2001 2000 1999 1998 1997
------ ------ ---- ------ ----
(dollars in thousands)
Nonaccrual loans .......................... $ 664 $ 24 $600 $ -- $ --
Loans past due 90 days or more ............ 2,504 1,421 223 1,016 527
------ ------ ---- ------ ----
Total non-performing loans ........... 3,168 1,445 823 1,016 527
------ ----
Other real estate owned ................... -- -- -- -- --
------ ---- ------ ----
Total non-performing assets .......... $3,168 $1,445 $823 $1,016 $527
====== ====== ==== ====== ====
Non-accrual loans to total loans .......... 0.085% 0.004% 0.15% -- --
Total non-performing loans to total
loans ................................ 0.41% 0.24% 0.21% 0.36% 0.24%
Total non-performing assets to total assets 0.27% 0.17% 0.16% 0.24% 0.17%
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. 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 due 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, 2001 was
$2,504,000. Loans past due 90 days or more increased by $1.1 million as of
December 31, 2001 as compared to December 31, 2000 levels. The increase reflects
the growth in our loan portfolio. We believe that asset quality continues to
remain strong as of March 2002. At December 31, 2001, there were no significant
loans which were classified by any bank regulatory agency that are not included
above as nonaccrual, past due or other real estate owned.
Nonaccrual loans increased to $664,000 as of December 31, 2001 from $24,000
as of December 31, 2000. Nonaccrual loans as of December 31, 2001 include a
single personal loan that comprised approximately $472,000 of the amount at that
date. This loan remains on nonaccrual status.
Nonperforming loans include nonaccrual loans and accruing loans which are
90 days or more delinquent. Nonperforming loans were $3,168,000 as of December
31, 2001, compared to $1,445,000 at December 31, 2000. Nonperforming loans were
0.41%, and 0.24% of total loans at December 31, 2001 and December 31, 2000,
respectively. Nonperforming loans were 0.27%
32
and 0.17% of total assets as of December 31, 2001 and December 31, 2000,
respectively.
Loan Concentrations. Loan concentrations are considered to exist when there
are amounts loaned to a multiple number of borrowers engaged in similar
activities or located in a specific geographic area that might be similarly
impacted by changes in 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, 2001.
Investment Securities
Investments are comprised of federal funds sold, debt securities and, to a
lesser extent, equity investments (primarily FHLB stock). 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, 2001, reported stockholders' equity was increased by
unrealized securities gains net of tax of $323,000. This represented an
improvement of $441,000 from unrealized securities losses net of tax of $118,000
at December 31, 2000.
Securities available-for-sale increased to $332.9 million at December 31,
2001, up 93% from $172.2 million as of December 31, 2000. The growth in the
investment security portfolio since December 31, 2000 resulted from the
continued implementation of our asset/liability management strategy. Tax exempt
municipal securities increased by $70.3 million, providing net interest margin
protection in a falling interest-rate environment. Collateralized mortgage
obligations increased $13.3 million in 2001. The net increase in collateralized
CMO's reflects sales of specific CMO's that posed a heightened risk of
prepayments and accelerated premium amortization in a lower market rate
environment. Purchases of new collateralized CMO's have included pools of
mortgages with built-in prepayment penalties and a lower risk of accelerated
premium amortization. Investments in Federal Home Loan Bank Stock increased by
$57.8 million as a result of purchases made to take advantage of the favorable
dividend yield in addition to the liquid nature of the investment. The FHLB can
redeem and we can sell, at any time, any FHLB stock we own, in excess of the
required minimum of $5.8 million and $3.4 million outstanding as of December 31,
2001 and 2000, respectively.
U.S. government agency obligations decreased by $4.4 million. We held no
U.S. government agency obligations at December 31, 2001. U.S. government agency
mortgage backed securities and collateralized mortgage obligations increased 20%
to $101.4 million at December 31, 2001 from $84.3 million at December 31, 2000.
Corporate collateralized mortgage obligations increased by $13.3 million to
$23.5 million. Tax-exempt municipal securities increased to $106.9 million at
December 31, 2001 as compared to the year-end 2000 amount of $36.6 million.
December 31,
---------------------------------
2001 2000 1999
-------- -------- -------
(in thousands)
Available-for-Sale
U.S. government agency obligations .................. $ -- $ 4,399 $ --
U.S. government agency mortgage backed securities and
collateralized mortgage obligations ........... 101,376 84,347 25,987
Corporate collateralized mortgage obligations ....... 23,462 10,123 9,796
Tax exempt municipal securities ..................... 106,925 36,644 33,614
Taxable municipal securities ........................ 6,051 1,141 --
Federal Home Loan Bank stock ........................ 92,964 35,175 1,400
Other ............................................... 2,155 365 337
-------- -------- -------
Total ............................................... $332,933 $172,194 $71,134
======== ======== =======
33
The following tables show the maturities of investment securities (based on
the amortized cost), by category, as of December 31, 2001, and the weighted
average yield (computed on a tax equivalent basis) for each range of maturities
of securities, by category, as of December 31, 2001:
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......... $ -- $ -- $ -- $ -- $ -- $ --
U.S. government agency mortgage
backed securities and collateralized
mortgage obligations ................... 7,356 42,708 8,985 42,367 -- 101,416
Corporate collateralized mortgage
obligations ............................ 3,643 18,361 855 187 -- 23,046
Tax exempt municipal securities ........... 1,314 770 47,254 57,642 106,980
Taxable municipal securities .............. -- -- 6,032 -- -- 6,032
Federal Home Loan Bank stock(1) ........... 90,214 2,750 -- -- -- 92,964
Other ..................................... -- 520 -- 1,123 362 2,005
-------- ------- ------- -------- -------- --------
Total ..................................... $102,527 $65,109 $63,126 $101,319 $ 362 $332,443
======== ======= ======= ======== ======== ========
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 ........ -- -- -- -- -- --
U.S. government agency mortgage
backed securities and collateralized
mortgage obligations ................... 6.01% 6.20% 6.52% 6.94% -- 6.52%
Corporate collateralized mortgage
obligations ............................ 6.31% 5.74% 6.26% 6.27% -- 5.85%
Tax exempt municipal securities ........... 6.90% 5.02% 7.19% 7.09% -- 7.12%
Taxable municipal securities .............. -- -- 2.93% -- -- 2.93%
Federal Home Loan Bank stock(1) ........... 5.35% 5.35% -- -- -- 5.35%
Other ..................................... -- 5.85% -- 0.52% 1.82% 2.14%
---- ---- ---- ---- ---- ----
Total ..................................... 5.45% 6.02% 6.67% 6.95% 1.82% 6.25%
==== ==== ==== ==== ==== ====
- -------------
(1) We are required to maintain a ratio of 20:1 of FHLB borrowings to FHLB
stock. As of December 31, 2001, we had $115.4 million dollars in advances
from the FHLB ($104.9 million from the FHLB of Chicago and $10.5 million
from the FHLB of Des Moines, IA). The remaining $87.2 million of FHLB stock
can be redeemed at any time. 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 $850.5 million as of December 31, 2001 represented an
increase of $180.3 million, or 27%, from $670.2 million as of December 31, 2000.
Non-interest-bearing deposits were $73.1 million as of December 31, 2001, $11.3
million more than the $61.8 million reported as of December 31, 2000.
Interest-bearing demand deposits increased $800,000 to $52.1 million at December
31, 2001 compared to $51.3 million at December 31, 2000. Savings and money
market deposit accounts increased by $53.8 million to $350.8 million at December
31, 2001 as compared to $297.0 million at December 31, 2000. Other time deposits
increased by approximately $122.6 million to $374.5 million as compared to
$251.9 million at year-end 2000. Brokered deposits, which are included in time
deposits, increased to $138.9 million at December 31, 2001 from $43.8 million at
December 31, 2000.
34
The following table presents the balances of deposits by category and each
category as a percentage of total deposits at December 31, 2001 and 2000.
December 31,
-----------------------------------------
2001 2000
------------------- -------------------
Percent Percent
Balance of Total Balance of Total
-------- -------- -------- --------
(dollars in thousands)
Demand ......................... $ 73,146 9% $ 61,789 9%
Savings ........................ 12,158 1% 8,242 1%
Interest-bearing demand ........ 52,061 6% 51,301 8%
Money market ................... 350,829 41% 297,043 44%
Brokered deposits .............. 138,911 17% 43,842 7%
Other time deposits ............ 223,390 26% 208,029 31%
-------- --- -------- ---
Total deposits ............ $850,495 100% $670,246 100%
======== === ======== ===
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,
-------------------
2001 2000
-------- --------
(in thousands)
Three months or less......................... $162,036 $103,755
Over three through six months................ 65,897 55,623
Over six through twelve months............... 87,043 47,379
Over twelve months........................... 17,055 18,627
-------- --------
Total................................... $332,031 $225,384
======== ========
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.
Certain brokered deposited issued by us contain a purchased option to call
(redeem) the brokered deposit prior to maturity at a specified date. Upon the
issuance of the brokered deposits, we pay a broker commission that is amortized
to interest expense over the contractual life of the brokered deposit. The
called brokered deposits have been replaced by new brokered deposits at current
market rates. The following table summarizes our callable brokered deposits
outstanding as of December 31, 2001:
Deferred
Amount Rate Call Date Broker Commissions
----------- ---- --------- ------------------
$ 9,989,000 (1) 6.25% 1/18/02 $ 36,433
10,000,000 (1) 6.15 2/01/02 49,388
5,000,000 (1) 6.05 2/01/02 25,837
3,008,000 (1) 6.15 2/01/02 15,544
5,000,000 (2) 6.00 3/01/02 43,452
10,000,000 (2) 5.50 3/14/02 59,429
5,000,000 (2) 5.40 3/28/02 28,571
----------- --------
$47,997,000 $258,654
=========== ========
- -------------------
(1) On December 11, 2001, we notified the Depository Trust Company of our
intent to exercise our option to call certificates of deposit totaling
$28.0 million. As a result, the remaining unamortized deferred brokered
commissions are now being amortized through the call date versus the
original maturity date. The application of the accelerated term of the
brokered deposits that were called resulted in amortization of $106,494
which was recorded in interest expense in 2001. The remaining deferred
brokered commissions of $127,202 will be recognized in interest expense
during the first quarter of 2002.
(2) By the end of the first quarter of 2002, we intend to call these brokered
deposits. The remaining deferred brokered commissions of $131,452 will be
recognized in interest expense during the first quarter of 2002.
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 2001 2000 1999
- ------ ---- -------- -------- ------------ -------
(in thousands)
Borrowing under revolving line of credit
facility .......................... 3.10% 02/11/02 $ 5,000 $18,000 $ --
Subordinated note ...................... 2.53 02/11/07 5,000 5,000 --
FHLB floating rate advance(1) .......... 6.77 05/01/01 -- 10,000 --
FHLB open line advance ................. 1.74 daily 25,000 -- --
FHLB fixed advance(2) .................. 6.50 10/23/05 24,886 25,000 --
FHLB fixed advance ..................... 6.21 12/05/03 30,000 30,000 --
FHLB fixed advance ..................... 6.49 11/13/01 -- 2,000 --
FHLB fixed advance ..................... 4.30 02/01/02 25,000 -- --
FHLB fixed advance ..................... 6.03 01/20/00 -- -- 15,000
FHLB fixed advance ..................... 5.91 06/21/02 500 500 --
FHLB fixed advance ..................... 5.89 12/20/02 1,000 1,000 --
FHLB fixed advance ..................... 5.21 01/22/02 1,000 -- --
FHLB fixed advance ..................... 5.33 07/22/02 1,000 -- --
FHLB fixed advance ..................... 5.02 03/06/02 1,000 -- --
FHLB fixed advance ..................... 4.21 05/13/02 1,000 -- --
FHLB fixed advance ..................... 2.39 11/12/02 5,000 -- --
Federal funds purchased ................ 2.06 daily 103,000 2,700 --
Demand repurchase agreements(3) ........ 1.60 daily 3,102 2,679 --
-------- ------- -------
Total funds borrowed .............. $231,488 $96,879 $15,000
======== ======= =======
- ------------
(1) The rate on this FHLB floating rate advance is set at one-month LIBOR minus
five basis points.
(2) This FHLB advance is subject to a fair value hedge with an interest rate
swap (see Note 14 to the consolidated financial statements). The
contractual par amount on the advance is $25.0 million.
(3) Demand repurchase agreements are a form of retail repurchase agreements
offered to certain clients of The PrivateBank (Chicago). Funds are swept
each business day from the client's demand deposit account. These amounts
are not deposits and are not insured, but are secured by a pool of
securities pledged specifically for this purpose.
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 2001, 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 2002 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 $115.4 million at December 31, 2001 compared to $68.5
million at December 31, 2000.
At December 31, 2001, we had $3.3 million in FHLB letters of credit
outstanding compared to $20.3 million outstanding at December 31, 2000. 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, 2001-
The PrivateBank (Chicago) ............... $109,146 $108,298
The PrivateBank (St. Louis) ............. 16,295 10,500
As of December 31, 2000-
The PrivateBank (Chicago) ............... $ 91,946 $ 85,340
The PrivateBank (St. Louis) ............. 4,121 3,500
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, 2001 and 2000, we had
approximately $166.2 million and $33.7 million, respectively, of securities
collateralizing such public deposits. Deposits requiring pledged assets are not
considered to be core deposits, and the assets that
36
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 3.10% on December 27, 2001. Upon
issuing $20.0 million of trust preferred securities on February 8, 2001, the
Company repaid the $18.0 million outstanding under the revolving credit
facility. In June 2001, we increased the borrowings on the credit facility to
$250,000 and in December 2001, we increased borrowings by $4.8 million for
general business purposes. As of December 31, 2001, the outstanding balance was
$5.0 million. The Company is currently renegotiating the terms of the revolving
credit facility. The original terms of the credit facility are still currently
in effect.
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 3.89% on February 11, 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 are 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.
Risk Management
We are exposed to market risk from changes in interest rates that could
affect our results of operations and financial condition. We manage our exposure
to these market risks through our regular operating and financing activities.
During 2001, we began to hedge this risk through the use of derivative financial
instruments. We use derivative financial instruments as risk management tools
and not for trading or speculative purposes.
Interest Rate Risk
We use a combination of financial instruments, including medium-term and
short-term financings and variable-rate debt instruments and, to a lesser
extent, interest rate swaps to manage the interest rate mix of our total debt
portfolio and related cash flows. To manage this mix in a cost-effective manner,
in 2001 we entered into our first interest rate swap transaction in which we
agreed to receive a fixed rate in exchange for payment of a floating rate based
on an agreed-upon notional amount. The fair value of the swap was $1.7 million
on December 31, 2001.
During 2001, we actively managed our interest rate exposure in our balance
sheet. The declines in market rates gave us the opportunity to make changes to
our investment security portfolio as part of the implementation of our
asset/liability management strategies. Throughout 2001, we were able to replace
specific investment securities with alternative investment securities with
greater risk reward parameters. In addition, we took advantage of callable
(brokered) deposits which were redeemed and replaced with lower costing brokered
deposits. The improvements in net interest margin resulting from the improved
mix of investment securities coupled with our lower yielding sources of funding
offset the yield compression experienced in our loan portfolio, which is more
than half floating-rate based.
We have not changed our interest rate risk management strategy from the
prior year and do not foresee or expect any significant changes in our exposure
to interest rate fluctuations, but we are considering expanding our use of
interest rate swaps on our debt obligations in the near future.
Capital Resources
Stockholders' equity at December 31, 2001 rose to $62.3 million, an
increase of $8.1 million from the 2000 year-end level of $54.2 million, due
primarily to the increase in net income from the year ended December 31, 2001 as
well as the change in the fair value of investment securities classified as
available-for-sale net of tax.
37
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, asset growth and expansion are
limited and plans for capital restoration are required.
The following table reflects various consolidated measures of our capital
at December 31, 2001 and 2000:
December 31,
------------
2001 2000
---- ----
Leverage ratio ................................... 6.64% 5.54%
Tier 1 risk-based capital ratio .................. 8.18 6.47
Total risk-based capital ratio ................... 9.71 8.15
Total equity to total assets ..................... 5.29 6.54
As of December 31, 2001, the entire amount of our $20.0 million of trust
preferred securities is included in Tier 1 capital. The Tier 1 qualifying amount
is limited to 25% of Tier 1 capital under Federal Reserve regulations. The
entire amount of trust preferred securities qualifies as Tier 1 capital.
The subordinated note in the amount of $5.0 million that 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, 2001, we continued to exceed the minimum
levels of all regulatory capital requirements, and were considered "adequately
capitalized" under regulatory standards. At December 31, 2001, our total
risk-based capital ratio was 9.71%. With the exception of the total risk-based
capital ratio, we exceeded the "well-capitalized" levels of our regulatory
capital requirements. At December 31, 2001, The PrivateBank (Chicago) and The
PrivateBank (St. Louis) were considered "well-capitalized" under all applicable
regulatory standards, including the 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, 2001, 56% of our total assets were
funded by core deposits. At December 31, 2000, 71% 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 2001 we expanded our brokered deposits program in order to fund liquidity
of The PrivateBank (Chicago). During 2002 we expect to continue to utilize
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. The PrivateBank (St. Louis)
began 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 refer to money market assets such as federal funds sold,
available-for-sale securities, FHLB stock, Bank-owned life insurance and loans
held for sale. Net liquid assets represent the sum of the liquid asset
categories less the amount of assets pledged to secure public funds and the
Federal Reserve deposit requirements. At December 31, 2001, net liquid assets at
The PrivateBank (Chicago) were $240.3 million as compared to $137.1 million at
December 31, 2000. At December 31, 2001, net liquid assets at The PrivateBank
(St. Louis) were $18.2 million as compared to $1.9 million at December 31, 2000.
Net cash inflows provided by operations were $9.6 million for the year
ended December 31, 2001 compared to a net inflow of $11.9 million a year
earlier. Net cash outflows from investing activities were $363.0 million for the
year ended December 31, 2001, compared to a net cash outflow of $232.3 million a
year earlier. Cash inflows from financing activities for the year ended December
31, 2001 were $335.7 million compared to a net inflow of $216.7 million in 2000.
In the event of short-term liquidity needs, The PrivateBank (Chicago) and
The PrivateBank (St. Louis) may purchase federal funds from correspondent banks.
In addition, we currently have available borrowing capacity of $13 million under
the $18.0 million credit facility at the holding company. We utilize this credit
facility from time to time for general business purposes.
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.
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, 2001 was
1.09 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
39
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.
The following tables illustrate the estimated interest rate sensitivity and
periodic and cumulative gap positions calculated as of December 31, 2001 and
2000.
December 31, 2001
---------------------------------------------------------------
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....................................... $467,083 $ 66,521 $ 204,859 $ 53,643 $ 792,106
Investments................................. 95,269 8,516 45,147 183,511 332,443
Federal funds sold.......................... 518 -- -- -- 518
-------- ---------- --------- ---------- ----------
Total interest-earning assets............ $562,870 $ 75,037 $ 250,006 $ 237,154 $1,125,067
======== ========== ========= ========== ==========
Interest-Bearing Liabilities
Interest-bearing demand..................... $ -- $ -- $ -- $ 52,061 $ 52,061
Savings and money market.................... 205,926 144,903 -- 4,450 355,279
Time deposits............................... 173,401 171,111 20,978 4,519 370,009
Funds borrowed.............................. 168,102 8,500 75,000 -- 251,602
-------- ---------- --------- ---------- ----------
Total interest-bearing liabilities....... $547,429 $ 324,514 $ 95,978 $ 61,030 $1,028,951
======== ========== ========= ========== ==========
Cumulative
Rate sensitive assets (RSA)................. $562,870 $ 637,907 $ 887,913 $1,125,067
Rate sensitive liabilities (RSL)............ 547,429 871,943 967,921 1,028,951
GAP (GAP=RSA-RSL)........................... 15,441 (234,036) (80,008) 96,116
RSA/RSL..................................... 102.82% 73.16% 91.73% 109.34%
RSA/Total assets............................ 47.83% 54.21% 75.45% 95.61%
RSL/Total assets............................ 46.52% 74.10% 82.25% 87.44%
GAP/Total assets............................ 1.31% 19.89% 6.80% 8.17%
GAP/RSA..................................... 2.74% 36.69% 9.01% 8.54%
December 31, 2001
---------------------------------------------------------------
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%
40
The following table shows the impact of an immediate 200 basis point change
in interest rates on our earning asset portfolio as of December 31, 2001 and
December 31, 2000. The effects are determined through the use of a simulation
model based on our earning asset and interest-bearing liability portfolios,
assuming the size of these portfolios remains constant from the balance sheet
date throughout the one-year measurement period. The simulation assumes that
assets and liabilities accrue interest on their current pricing basis. Assets
and liabilities then reprice based on their terms and remain at that interest
rate through the end of the measurement period. The model attempts to illustrate
the potential change in net interest income if the foregoing occurred.
December 31, 2001 December 31, 2000
------------------------- -------------------------
+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 one-year time horizon............... 3.0% -4.7% 3.7% -5.5%
This table shows that if there had been an instantaneous parallel shift in
the yield curve of -200 basis points on December 31, 2001 and December 31, 2000,
we would suffer a decline in net interest income of -4.7% and -5.5%,
respectively, over each one-year period. Conversely, a shift of +200 basis
points would increase net interest income 3.0% over a one-year horizon based on
December 31, 2001 balances, as compared to 3.7% measured on the basis of the
December 31, 2000 portfolio.
Changes in the effect on net interest income from a 200 basis point
movement at December 31, 2001, compared to December 31, 2000 are due to the
timing and nature of the repricing of rate sensitive assets to rate sensitive
liabilities within the one year time frame. Although we are negatively gapped
within one year, the asset sensitive position of the balance sheet in the first
90 days of the simulation, coupled with the timing of repricing within the 91 to
365 day bucket, leads to the increase in net interest income from a +200 basis
point move. The difference in the effect on net interest income at December 31,
2001 as compared to December 31, 2000 is due to the differences in the timing,
balances, and current rates versus simulated rates of repricing assets and
liabilities.
Management's likely reaction to changes in interest rates is incorporated
in assumptions made in these calculations. Differences in these assumptions
between the reporting periods have also had the effect of reducing the impact of
a changing interest rate environment.
The preceding sensitivity analysis is based on numerous assumptions
including: the nature and timing of interest rate levels including the shape of
the yield curve, prepayments on loans and securities, changes in deposit levels,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows and others. While 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.
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.
41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding directors of the Company is included in the Company's
Proxy Statement for its 2002 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.
42
(a) (3) Exhibits
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of
PrivateBancorp, Inc. (Filed as an exhibit to the
Company's Form S-1 Registration Statement (File No.
333-77147) and incorporated herein by reference).
3.2 [Intentionally left blank]
3.3 Amended and Restated By-laws of PrivateBancorp, Inc. (Filed
as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 and incorporated
herein by reference).
4.1 Subordinated Note of PrivateBancorp Inc., dated February
11, 2000, principal amount of $5 million due February
11, 2007, issued to Johnson International, Inc. (Filed
as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999 and
incorporated herein by reference).
4.2 Certain instruments defining the rights of the holders
of long-term debt of the Company and certain of its
subsidiaries, none of which authorize a total amount of
indebtedness in excess of 10% of the total assets of the
Company and its subsidiaries on a consolidated basis,
have not been filed as Exhibits. The Company hereby
agrees to furnish a copy of any of these agreements to
the SEC upon request.
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 (Filed as
an exhibit to the Company's Form S-1 Registration
Statement (File No. 333-77147) and incorporated herein
by reference).
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 (Filed as an exhibit to the
Company's Form S-1 Registration Statement (File No.
333-77147) and incorporated herein by reference).
10.3 First Amendment to lease dated May 31, 2001 by and between
Columbia Lisle Limited Partnership and The PrivateBank and
Trust Company (Filed as an exhibit to the Company's Form
10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference).
10.4 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
(Filed as an exhibit to the Company's Form S-1
Registration Statement (File No. 333-77147) and
incorporated herein by reference).
10.5 Building Lease by and between Towne Square Realty, L.L.C.
and The PrivateBank and Trust Company dated August 6, 1999
(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).
10.6 First Amendment to lease dated January 1, 2002 by and
between Towne Square Realty, L.L.C. and The PrivateBank and
Trust Company. +
10.7 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. (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).
10.8 Lease Agreement by and between Shodeen Management
Company as agent for the beneficiaries of a land trust
with Harris Bank St. Charles, pursuant to Trust
Agreement dated March 4, 1994, and known as Trust No.
2321, and The PrivateBank and Trust Company dated
January 9, 2001, for banking facility located at 312
Crescent Place, Geneva, Illinois (Filed as an exhibit to
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 and incorporated herein by
reference).
10.9 Stock Purchase Agreement dated as of May 28, 1998 by and
among PrivateBancorp, Inc., Delaware Charter Guarantee and
Trust Co., Trustee FOB Ralph B. Mandell, IRA and The Ralph
B. Mandell Revocable Trust UTA dated June 5, 1997 (Filed as
an exhibit to the Company's Form S-1 Registration Statement
(File No. 333-77147) and incorporated herein by reference).
10.10 Pledge Agreement dated as of May 28, 1998 by and between
the Ralph B. Mandell Revocable Trust UTA dated June
43
Exhibit No. Description of Exhibits
- ----------- -----------------------
5, 1997 and PrivateBancorp, Inc. (included as Exhibit B to
Stock Purchase Agreement filed as Exhibit 10.9) (Filed as an
exhibit to the Company's Form S-1 Registration Statement
(File No. 333-77147) and incorporated herein by reference).
10.11 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).*
10.12 Employment Agreement by and between Ralph B. Mandell and
PrivateBancorp, Inc. dated July 1, 2001 (Filed as an exhibit
to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 and incorporated herein by
reference).*
10.13 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 (Filed as an exhibit to the Company's Form S-1
Registration Statement (File No. 333-77147) and incorporated
herein by reference).
10.14 Form of Indemnification Agreement by and between
PrivateBancorp, Inc. and its directors and executive
officers (Filed as an exhibit to the Company's Form S-1
Registration Statement (File No. 333-77147) and incorporated
herein by reference).*
10.15 Agreement and Plan of Reorganization by and between
PrivateBancorp, Inc. and Towne Square Financial Corporation
dated as of June 24,1999 (Filed as an exhibit to the
Company's Form S-1 Registration Statement (File No.
333-77147) and incorporated herein by reference).
10.16 Stock Purchase Agreement dated as of October 4, 1999 by and
among PrivateBancorp, Inc., Johnson International, Inc. and
Johnson Bank Illinois (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).
10.17 Loan Agreement dated as of February 11, 2000, between
PrivateBancorp, Inc. and LaSalle Bank National Association
(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).
10.18 Letter Agreement dated September 26, 2000 by and between
PrivateBancorp, Inc., The PrivateBank and Trust Company
and Donald A. Roubitchek (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).*
10.19 Employment Agreement by and between Richard C. Jensen and
PrivateBancorp, Inc. dated as of July 27, 2000 (Filed as an
exhibit to the Company's Form S-1 Registration Statement
(File No. 333-52676) and incorporated herein by reference).
*
12.1 Calculation of Ratio of Earnings to Fixed Charges.+
21.1 Subsidiaries of the Registrant (Filed as an exhibit to the
Company's Form S-1 Registration Statement (File No.
333-52676) and incorporated herein by reference).
23.1 Consent of Arthur Andersen LLP.+
24.1 Powers of Attorney (set forth on signature page).
+ Filed herewith.
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit.
44
(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 2001:
Form 8-K dated October 22, 2001.
45
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 13, 2002 PRIVATEBANCORP, INC.
By: /s/ Ralph B. Mandell
-----------------------------------
Ralph B. Mandell,
Chairman, President and Chief
Executive Officer
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 13, 2002
- --- ----------------
Executive Officer and Director
Ralph B. Mandell
/s/ CAREN L. REED Director March 13, 2002
- --- -------------
Caren L. Reed
/s/ GARY L. SVEC Chief Financial Officer March 13, 2002
- --- ------------
Gary L. Svec
/s/ LISA M. O'NEILL Chief Accounting Officer March 13, 2002
- --- ---------------
Lisa M. O'Neill
/s/ DONALD L. BEAL Director March 13, 2002
- --- --------------
Donald L. Beal
/s/ NAOMI T. BORWELL Director March 13, 2002
- --- ----------------
Naomi T. Borwell
/s/ WILLIAM A. CASTELLANO Director March 13, 2002
- --- ---------------------
William A. Castellano
46
/s/ ROBERT F. COLEMAN Director March 13, 2002
- --- -----------------
Robert F. Coleman
/s/ JOHN E. GORMAN Director March 13, 2002
- --- --------------
John E. Gorman
Director March 13, 2002
- --------------------------
Alvin J. Gottlieb
/s/ JAMES M. GUYETTE Director March 13, 2002
- --- ----------------
James M. Guyette
/s/ RICHARD C. JENSEN Director March 13, 2002
- --- -----------------
Richard C. Jensen
/s/ PHILIP M. KAYMAN Director March 13, 2002
- --- ----------------
Philip M. Kayman
/s/ WILLIAM R. LANGLEY Director March 13, 2002
- --- ------------------
William R. Langley
Director March 13, 2002
- ---------------------------
Thomas F. Meagher
/s/ WILLIAM J. PODL Director March 13, 2002
- --- ---------------
William J. Podl
/s/ MICHAEL B. SUSMAN Director March 13, 2002
- --- -----------------
Michael B. Susman
47
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
Page
----
Report of Arthur Andersen LLP, Independent Public Accountants................................................. F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000.................................................. F-3
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999........................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2001,
2000 and 1999.............................................................................................. F-5
Consolidated Statements of Cash Flow for the years ended December 31, 2001, 2000 and 1999..................... F-6
Notes to Consolidated Financial Statements.................................................................... F-7
Selected Quarterly Financial Data (unaudited)................................................................. F-30
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
PrivateBancorp, Inc.:
We have audited the accompanying consolidated balance sheets of PRIVATEBANCORP,
INC. (the Company) (a Delaware corporation) AND SUBSIDIARIES as of December 31,
2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Chicago, Illinois
January 17, 2002
F-2
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2000
(In thousands)
December 31,
------------------------
2001 2000
----------- ---------
Assets
Cash and due from banks ................................................................... $ 22,283 $ 28,637
Federal funds sold and other short-term investments ....................................... 518 11,876
----------- ---------
Total cash and cash equivalents ...................................................... 22,801 40,513
----------- ---------
Loans held for sale ....................................................................... 11,335 705
Available-for-sale securities, at fair value .............................................. 332,933 172,194
Loans, net of unearned discount ........................................................... 780,771 598,724
Allowance for loan losses ............................................................ (8,306) (6,108)
----------- ---------
Net loans ............................................................................ 772,465 592,616
----------- ---------
Goodwill .................................................................................. 10,805 11,629
Premises and equipment, net ............................................................... 3,814 4,138
Accrued interest receivable ............................................................... 7,262 5,524
Other assets .............................................................................. 15,353 2,190
----------- ---------
Total assets ......................................................................... $ 1,176,768 $ 829,509
=========== =========
Liabilities and Stockholders' Equity
Demand deposits:
Noninterest-bearing .................................................................. $ 73,146 $ 61,789
Interest-bearing ..................................................................... 52,061 51,301
Savings and money market deposit accounts ................................................. 362,987 300,107
Brokered deposits ......................................................................... 138,911 43,842
Other time deposits ....................................................................... 223,390 213,207
----------- ---------
Total deposits ....................................................................... 850,495 670,246
----------- ---------
Funds borrowed ............................................................................ 231,488 96,879
Long term debt -- trust preferred securities .............................................. 20,000 --
Accrued interest payable .................................................................. 2,112 3,552
Other liabilities ......................................................................... 10,369 4,583
----------- ---------
Total liabilities .................................................................... $ 1,114,464 $ 775,260
----------- ---------
Stockholders' Equity
Preferred Stock, 1,000,000 shares authorized.............................................. $ -- $ --
Common stock, without par value, $1 stated value; 12,000,000 shares
authorized; 4,804,280 and 4,623,532 shares issued and outstanding as of
December 31, 2001 and December 31, 2000, respectively ................................ 4,804 4,624
Surplus ................................................................................... 41,516 40,107
Retained earnings ......................................................................... 17,468 11,388
Accumulated other comprehensive income (loss) ............................................. 323 (118)
Deferred compensation ..................................................................... (857) (802)
Loans to officers ......................................................................... (950) (950)
----------- ---------
Total stockholders' equity ........................................................... 62,304 54,249
----------- ---------
Total liabilities and stockholders' equity ........................................... $ 1,176,768 $ 829,509
=========== =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
Year Ended December 31,
---------------------------
2001 2000 1999
------- ------- -------
Interest income
Loans, including fees ..................................... $50,975 $48,633 $26,597
Federal funds sold and interest bearing deposits .......... 244 1,058 330
Securities ................................................ 14,377 7,455 5,141
------- ------- -------
Total interest income ............................ 65,596 57,146 32,068
------- ------- -------
Interest expense
Deposits:
Interest-bearing demand ............................. 923 869 604
Savings and money market deposit accounts ........... 11,365 13,711 7,671
Brokered deposits and other time deposits ........... 17,291 14,635 7,399
Funds borrowed ............................................ 6,327 4,116 931
Long term debt -- trust preferred securities .............. 1,731 -- --
------- ------- -------
Total interest expense .............................. 37,637 33,331 16,605
Net interest income ................................. 27,959 23,815 15,463
Provision for loan losses ................................. 3,179 1,690 1,208
------- ------- -------
Net interest income after provision for loan losses.. 24,780 22,125 14,255
------- ------- -------
Non-interest income
Banking, trust services and other income ............ 4,028 3,077 1,947
Securities gains, net ............................... 2,095 92 57
------- ------- -------
Total non-interest income ........................ 6,123 3,169 2,004
------- ------- -------
Non-interest expense
Salaries and employee benefits ...................... 9,111 8,174 5,156
Severance charge .................................... -- 562 --
Occupancy expense, net .............................. 4,158 2,987 1,563
Professional fees ................................... 2,939 2,135 1,295
Marketing ........................................... 1,208 1,202 692
Data Processing ..................................... 1,295 820 478
Goodwill amortization ............................... 824 731 --
Towne Square Financial Corporation acquisition ...... -- -- 1,300
Insurance ........................................... 354 303 214
Other ............................................... 2,763 1,692 1,389
------- ------- -------
Total non-interest expense ....................... 22,652 18,606 12,087
------- ------- -------
Income before income taxes .......................... 8,251 6,688 4,172
Income tax provision ................................ 2,051 2,263 1,257
------- ------- -------
Net income ....................................... $ 6,200 $ 4,425 $ 2,915
======= ======= =======
Basic earnings per share .................................. $ 1.32 $ 0.96 $ 0.73
Diluted earnings per share ................................ $ 1.28 $ 0.92 $ 0.69
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
(In thousands)
Accumulated
Other
Compre- Deferred Total
Common Retained hensive Compen- Loans to Stockholders'
Stock Surplus Earnings Income sation Officers Equity
------ ------- -------- ------------ -------- -------- -------------
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, net of forfeitures 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
====== ======= ======== ======= ===== ======= ========
Balance, January 1, 2001 ................... $4,624 $40,107 $ 11,388 $ (118) $(802) $ (950) $ 54,249
Net income ................................. -- -- 6,200 -- -- -- 6,200
Net increase in fair value of securities
classified as available-for-sale, net
of income taxes and reclassification
adjustments ............................ -- -- -- 441 -- -- 441
Total comprehensive income ................. -- -- 6,200 441 -- -- 6,641
Cash dividends declared ($0.11 per share) .. -- -- (520) -- -- --
(520)
Issuance of common stock ................... 180 1,409 -- -- -- -- 1,589
Awards granted, net of forfeitures ......... -- -- -- -- (331) -- (331)
Amortization of deferred compensation ...... -- -- 400 -- 276 -- 676
Loans to officers .......................... -- -- -- -- -- -- --
------ ------- -------- ------- ----- ------- --------
Balance, December 31, 2001 ................. $4,804 $41,516 $ 17,468 $ 323 $(857) $ (950) $ 62,304
====== ======= ======== ======= ===== ======= ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
(In thousands)
Year Ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities
Net income ..................................................... $ 6,200 $ 4,425 $ 2,915
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization .................................. 1,649 1,030 498
Goodwill amortization .......................................... 824 731 --
Johnson Bank Illinois fair value accretion, net ................ (291) (304) --
Amortization of deferred compensation .......................... 276 227 233
Provision for loan losses ...................................... 3,179 1,690 1,208
Gain on sale of securities ..................................... (2,095) (92) (56)
Increase in deferred loan fees ................................. 315 259 51
Increase in accrued interest receivable ........................ (1,739) (1,894) (606)
(Decrease) increase in accrued interest payable ................ (1,440) 1,886 (324)
(Increase) decrease in other assets ............................ (3,022) 1,797 (2,571)
Increase in other liabilities .................................. 5,705 2,106 1,808
--------- --------- ---------
Total adjustments .......................................... 3,361 7,436 241
--------- --------- ---------
Net cash provided by operating activities .................. 9,561 11,861 3,156
--------- --------- ---------
Cash flows from investing activities
Proceeds from maturities, paydowns, and sales of securities .... 148,419 48,075 55,930
Purchase of securities available-for-sale ...................... (306,395) (124,624) (14,725)
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 .................................... (193,784) (129,615) (115,646)
Investment in Bank Owned Life Insurance Policy ................. (10,000) -- --
Premises and equipment expenditures ............................ (1,236) (2,341) (939)
--------- --------- ---------
Net cash used in investing activities ...................... (362,996) (232,268) (74,080)
Cash flows from financing activities
Net increase in total deposits ................................. 180,261 125,606 88,098
Proceeds from participated loans ............................... -- 12,862 --
Issuance of common stock, net of forfeitures ................... 1,258 109 16,898
Issuance of trust preferred securities ......................... 20,000 -- --
Dividends paid ................................................. (520) (461) (403)
Net increase (decrease) in funds borrowed ...................... 134,724 78,621 (5,000)
--------- --------- ---------
Net cash provided by financing activities .................. 335,723 216,737 99,593
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ................ (17,712) (3,670) 28,669
Cash and cash equivalents at beginning of year ...................... 40,513 44,183 15,514
--------- --------- ---------
Cash and cash equivalents at end of period .......................... $ 22,801 $ 40,513 $ 44,183
========= ========= =========
Cash paid during year for:
Interest ....................................................... $ 39,076 $ 30,835 $ 16,929
Income taxes ................................................... 1,757 1,800 2,280
Non-cash transactions
Loans to executive officers for purchase of common stock ....... $ -- $ -- $ 175
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 federal savings bank on June 23, 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 wealth 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 current or foreseeable events. 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 that is deemed other than temporary is charged against current period
earnings. At December 31, 2001 and 2000, 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 reported at the principal amount outstanding, net of unearned
income. Loan origination and commitment fees, offset by certain direct loan
origination costs, are deferred and amortized as an adjustment to the loan's
yield. The Company is generally amortizing these amounts over the contractual
life of the related loans.
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. Nonaccrual
loans are placed on accrual status upon the receipt of all outstanding payments
and management's review of the borrower's ability to remain current under the
loan covenants.
F-7
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. Loans Held for Sale
Loans classified as held for sale consist of residential real estate loans
originated by the Company and intended to be sold in the secondary market at
face value. Loans intended for sale in the secondary market are reported at the
lower of cost or market value, with unrealized losses, if any, recorded in a
valuation allowance by a charge to income. Fair value is determined based on
quoted market rates. Gains and losses on the disposition of loans held for sale
are determined on the specific identification method and are recognized in
non-interest income. No lower-of-cost-or-market adjustments were required at
December 31, 2001 or 2000.
h. Brokered Deposits
The Company utilizes brokered deposits (prepackaged jumbo certificates of
deposit) as liquidity and asset-liability management tools in the normal course
of business. Certain brokered deposits issued by the Company contain a purchased
option to call (redeem) the brokered deposit prior to maturity at a specified
date. Upon issuance of brokered deposits, the Company recognizes a contra
liability account that reflects the fees paid to brokers for raising the funds
in the retail market. The deferred broker commissions are amortized to interest
expense as an adjustment to the brokered deposit yield over the contractual
maturity of the brokered deposit. In the event the Company notifies the
certificate holders of its intent to exercise the call option on the callable
brokered deposit, the remaining unamortized broker commissions are amortized to
the call date.
i. Derivative Financial Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Related Hedging Activities" and its related amendments on January 1, 2001.
In November 2001, the Company entered into its first interest rate swap which is
recorded on the balance sheet at fair value. The interest rate swap was entered
into for asset liability management purposes and not for trading purposes. The
interest rate swap has been designated as a fair value hedge of a fixed-rate
$25.0 million advance with the Federal Home Loan Bank of Chicago (FHLB). Changes
in the fair value of the interest rate swap are reported through income. Changes
in the fair value of the borrowings from the date of designation are recorded
through income. Documentation and evaluation of hedge effectiveness was
performed at inception and on a recurring periodic basis.
j. 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.
k. 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.
l. 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.
m. Comprehensive Income
Components of comprehensive income are reported in the Consolidated
Statement of Stockholders' Equity.
F-8
n. 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.
o. 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 are being amortized over an estimated useful life of 5 years.
The goodwill was amortized over a 15 year estimated useful life through December
31, 2001.
p. 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.
q. New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 141 applies to all business combinations completed after June 30,
2001. All future business combinations must be recorded using the purchase
method of accounting. As the Company contemplates further acquisitions as part
of its growth strategy, this Statement will likely have an impact on the
Company's future financial statements.
SFAS No. 142 supercedes APB Opinion No. 17 "Intangible Assets" and
addresses the accounting of intangible assets and goodwill. Adoption of this
Statement is required beginning January 1, 2002 in relation to all of the
Company's goodwill and intangible assets. Early application of this standard is
not permitted. The Statement discontinues the regular amortization of goodwill
and a transitional impairment test of goodwill is required as of January 1,
2002. An annual impairment test of goodwill is required every year thereafter.
Impairment losses from goodwill recognized in the initial application of this
Statement are to be reported as resulting from a change in accounting principle.
Impairment losses in subsequent years will be recorded as operating expenses.
Goodwill at December 31, 2001 totaled $10.8 million and is currently being
amortized using a straight-line method over fifteen years. Goodwill amortization
for the year ended December 31, 2001 totaled $824,000. Although the assessment
to be required by SFAS No. 142 upon adoption has not yet been completed, under
current accounting rules, the Company is also required to write down the value
of goodwill if that goodwill becomes impaired, and to date, the Company has not
incurred any goodwill impairment. Any future acquisitions completed by the
Company will also be subject to this Statement.
In September 2000, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", a replacement of SFAS No. 125. The
new statement, while largely including the provisions of SFAS 125, revises the
standards for accounting for securitizations and requires certain disclosures.
SFAS 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 SFAS 140 did not
have a material impact on the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 supersedes SFAS No.
121 and the accounting and reporting provisions of APB Opinion No. 30. The
Statement addresses the accounting for a segment of a business accounted for as
a discontinued operation and the accounting for the disposition of long-lived
assets. The provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001. The Company intends
to adopt the Statement in the first quarter of 2002 and does not anticipate that
the adoption will have a material effect on the Company's results of operations.
F-9
NOTE 2--OPERATING SEGMENTS
For purposes of making operating decisions and assessing performance,
management regards The PrivateBank (Chicago), The PrivateBank (St. Louis),
Wealth Management and the Holding Company as four operating segments. The
Company's investment portfolios are included in total assets and reported in the
results of The PrivateBank (Chicago) and The PrivateBank (St. Louis). The
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.
The PrivateBank (Chicago)
The PrivateBank (Chicago) through its main office located in downtown
Chicago as well as six full-service Chicago suburban locations, provides
personal and commercial banking services primarily to affluent individuals,
professionals, entrepreneurs and their business interests. Until June 23, 2000,
the date The PrivateBank (St. Louis) was established, operations in St. Louis
consisted of 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 securities brokerage
services. The PrivateBank (Chicago) also offers domestic and international wire
transfers and foreign currency exchange.
The PrivateBank (Chicago)
--------------------------------------
December 31,
2001 2000 1999
---------- -------- --------
(in millions)
Total assets .................... $ 1,077.7 $ 800.6 $ 518.2
Total deposits .................. 800.6 655.9 462.2
Total borrowings ................ 183.4 65.0 15.0
Total gross loans ............... 708.3 574.9 397.3
Total capital ................... 82.9 69.3 38.3
Net interest income ............. 27.8 23.5 15.3
Net income ...................... 9.2 7.1 4.9
F-10
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. The revenues and
expenses for 2000 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) segment.
The PrivateBank (St. Louis) offers a full range of real estate lending products
including fixed and floating rate permanent and mini-permanent mortgages and
construction loans. Personal loans include installment loans and lines of
credit, home equity loans and a wide variety of home mortgage loans. Commercial
lending products provided by The PrivateBank (St. Louis) include lines of credit
for working capital, term loans for equipment and letters of credit to support
the commitments made by its clients. Non-credit products include lock-box, cash
concentration accounts, merchant credit card processing, electronic funds
transfer, other cash management products and insurance. Individual banking
services include interest bearing checking, money market deposit accounts,
certificates of deposit, ATM/debit cards and investment brokerage accounts. The
PrivateBank (St. Louis) also offers domestic and international wire transfers
and foreign currency exchange.
The PrivateBank (St. Louis)
---------------------------
December 31,
2001 2000
------- -------
(in millions)
Total assets ................................. $ 96.6 $ 28.2
Total deposits ............................... 50.2 14.7
Total borrowings ............................. 38.1 3.5
Total gross loans ............................ 73.5 25.2
Total capital ................................ 7.6 7.1
Net interest income(1)........................ 1.8 0.4
Year-to-date net loss(1)...................... (0.5) (0.9)
- -----------------
(1) For 2000, results are reported beginning from June 23, 2000 through
year-end 2000 when the subsidiary bank was established.
Wealth Management
Wealth Management includes investment management, personal trust and estate
services, custodial services, retirement accounts and brokerage and investment
services. Investment management professionals work with wealth management
clients to define objectives, goals and strategies of the clients' investment
portfolios. Wealth Management personnel assist clients with the selection of an
outside portfolio manager to direct account investments. Trust and estate
account administrators work with clients and their attorneys to establish estate
plans. Consistent with the Company's philosophy, Wealth Management emphasizes a
high level of personal service, including prompt collection and reinvestment of
interest and dividend income, weekly valuation, tracking of tax information,
customized reporting and ease of security settlement.
Wealth Management
--------------------------------
December 31,
2001 2000 1999
-------- -------- --------
(in millions)
Trust assets under administration .......... $ 722.7 $ 777.8 $ 730.0
Wealth management fee revenue .............. 2.7 2.3 1.6
Net income (loss) .......................... 0.5 0.1 0.1
F-11
Holding Company Activities
Holding Company Activities consist of parent company only matters. The
Holding Company's most significant assets are its net investments in its two
banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis).
During the first quarter 2001, in connection with the issuance of $20.0 million
of 9.50% trust preferred securities, the Holding Company issued $20.0 million of
9.50% subordinated debentures which are accounted for as long-term debt and also
qualify as Tier 1 and Tier 2 capital. (See Note 10.) The Tier 1 qualifying
amount is limited to 25% of Tier 1 capital under Federal Reserve regulations.
The excess amount qualifies as Tier 2 capital. Holding Company Activities are
reflected primarily by interest expense on borrowings and operating expenses.
Recurring holding company operating expenses consist of compensation
(amortization of restricted stock awards, other salary expense) and
miscellaneous professional fees.
Holding Company Activities
---------------------------
December 31,
2001 2000 1999
------- ------- -------
(in millions)
Total assets .................................... $ 92.4 $ 77.9 $ 47.1
Total capital ................................... 62.3 54.2 47.1
Funds borrowed .................................. 10.0 23.0 --
Long term debt--trust preferred securities ...... 20.0 -- --
Interest expense ................................ 2.1 1.2 --
Net loss ........................................ (2.5) (1.9) (2.1)
The following table reconciles the significant differences between the sum
of the reportable segments and the reported consolidated balance of total
assets:
Total Assets
---------------------------------
December 31,
2001 2000 1999
--------- ------- -------
(in millions)
Sum of reportable segments ............ $ 1,266.7 $ 906.7 $ 565.3
Adjustments ........................... (89.9) (77.2) (46.6)
--------- ------- -------
Consolidated PrivateBancorp,Inc ....... $ 1,176.8 $ 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.
F-12
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, 2001
Basic Earnings Per Share--
Income available to common stockholders ... $6,200 4,705 $ 1.32
======
Effect of Dilutive Stock Options ....................... -- 145
------ -----
Diluted Earnings Per Share--
Income available to common stockholders ... $6,200 4,850 $ 1.28
====== ===== ======
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
====== ===== ======
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 2001 diluted earnings per share calculation does not exclude any option
shares as all options of the Company are dilutive at December 31, 2001.
F-13
NOTE 4--SECURITIES
The par value and amortized cost of securities as of December 31, 2001 and
December 31, 2000 were as follows (in thousands):
Investment Securities--Available-for-Sale
December 31, 2001
------------------------------------------------
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 ............................... 97,825 3,906 (315) 101,416
Corporate Collateralized Mortgage Obligations .. 22,676 370 -- 23,046
Tax Exempt Municipal Securities ................ 110,530 5,231 (8,781) 106,980
Taxable Municipal Securities ................... 6,020 48 36 6,032
Federal Home Loan Bank Stock ................... 92,964 -- -- 92,964
Other .......................................... 2,112 20 (127) 2,005
-------- ------ ------- --------
$332,127 $9,575 $(9,259) $332,443
======== ====== ======= ========
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
========= ====== ======= ========
The amortized cost and the estimated fair value of securities as of
December 31, 2001 and December 31, 2000, 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 ............ $ -- $ -- $ -- $ --
U. S. Government Agency Mortgage Backed
Securities and Collateralized Mortgage
Obligations ............................... 101,416 483 (523) 101,376
Corporate Collateralized Mortgage Obligations .. 23,046 416 -- 23,462
Tax Exempt Municipal Securities ................ 106,980 645 (700) 106,925
Taxable Municipal Securities ................... 6,032 19 -- 6,051
Federal Home Loan Bank Stock ................... 92,964 -- -- 92,964
Other .......................................... 2,005 150 -- 2,155
-------- ------ ------- --------
$332,443 $1,713 $(1,223) $332,933
======== ====== ======= ========
F-14
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
======== ==== ======= ========
The amortized cost and estimated fair value of securities at December 31,
2001, by contractual maturity, are shown below (in thousands). Expected
maturities may differ from contractual maturities because obligors have the
right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized Fair
Cost Value
--------- ---------
Due within one year .............................. $ 630 $ 636
Due after one year through five years ............ 4,742 4,758
Due after five years through ten years ........... 11,085 11,246
Due after ten years .............................. 222,660 222,967
FHLB stock and other securities .................. 93,326 93,326
-------- --------
$332,443 $332,933
======== ========
During 2001 and 2000, securities were sold for total proceeds of
$131,289,933 and $38,159,353, respectively, resulting in gross gains of
approximately $2,439,000 and $211,000, respectively, and gross losses of
$344,000 and $119,000 in 2001 and 2000, respectively.
At December 31, 2001, securities carried at $222.5 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, 2001, 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, 2001 and 2000 on a gross basis (in thousands):
December 31, 2001
---------------------------------
Amount Tax Amount
Before Tax Expense Net of Tax
---------- ------- ----------
Unrealized net gains on securities available for sale--
Unrealized holding gains, net ......................... $2,682 $667 $2,015
Less: reclassification adjustment for net gain
included in net income ............................ 2,095 521 1,574
------ ---- ------
Unrealized net gains .................................. $ 587 $146 $ 441
====== ==== ======
F-15
December 31, 2001
---------------------------------
Amount Tax Amount
Before Tax Expense Net of Tax
---------- ------- ----------
Unrealized net gains on securities available for sale--
Unrealized holding gains, net ......................... $4,174 $1,419 $2,755
Less: reclassification adjustment for net gain
included in net income ............................ 92 31 61
------ ------ ------
Unrealized net gains .................................. $4,082 $1,388 $2,694
====== ====== ======
NOTE 5--LOANS
Amounts outstanding by selected loan categories at December 31, 2001 and
2000, were as follows (in thousands):
2001 2000
-------- --------
Real estate--
Residential ............... $ 89,889 $ 85,347
Commercial ................ 310,869 206,464
Construction .............. 92,528 61,143
Commercial ...................... 163,279 137,343
Personal (1) .................... 124,206 108,427
-------- --------
$780,771 $598,724
======== ========
- ----------
(1) Includes Home Equity Loans
As of December 31, 2001, $664,251 of loans were designated as nonaccrual
loans, as compared to $24,000 of nonaccrual loans at December 31, 2000. The
average balance of impaired loans amounted to $1.5 million in 2001 and $553,466
in 2000. The gross interest income that would have been recorded if the
non-accrual loans had been current in accordance with their original terms was
$108,913 in 2001 and $47,283 in 2000.
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):
2001 2000 1999
------- ------- -------
Beginning balance ............................. $ 6,108 $ 4,510 $ 3,410
Johnson Bank acquisition - loan loss reserve .. -- 864 --
Loans charged off ............................. (1,052) (972) (108)
Loans recovered ............................... 71 16 --
Provision for loan losses ..................... 3,179 1,690 1,208
------- ------- -------
Ending balance ................................ $ 8,306 $ 6,108 $ 4,510
======= ======= =======
NOTE 7--PREMISES AND EQUIPMENT
Bank premises and equipment at December 31, 2001 and 2000, consisted of the
following (in thousands):
2001 2000
------- -------
Furniture, fixtures and equipment .................. $ 5,640 $ 4,588
Leasehold improvements ............................. 3,794 3,223
------- -------
9,434 7,811
Accumulated depreciation and amortization .......... (5,620) (3,673)
------- -------
$ 3,814 $ 4,138
======= =======
F-16
Included in occupancy expense in the consolidated statements of income is
depreciation and amortization expense of $1.6, $1.0 million, and $498,115 for
2001, 2000, and 1999, 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, 2001, are as follows:
2002................................ $1,388,765
2003................................ 1,377,391
2004................................ 1,322,362
2005................................ 1,305,710
2006................................ 949,682
2007 and thereafter................. 1,173,928
----------
Total Rental Commitments............ $7,517,838
==========
Total rent expense included in the consolidated statements of income was
$1.8 million, $1.7 million, and $750,973, for 2001, 2000 and 1999, respectively.
NOTE 8--INCOME TAXES
The components of total income tax provision in the consolidated statements
of income for the years ended December 31, 2001, 2000 and 1999 are as follows
(in thousands):
2001 2000 1999
------- ------- -------
Income tax provision--
Current--
Federal ....................... $ 2,226 $ 2,179 $ 1,886
State ......................... -- -- --
------- ------- -------
2,226 2,179 1,886
Deferred--
Federal ....................... (175) (164) (373)
State ......................... -- 248 (256)
------- ------- -------
(175) 84 (629)
------- ------- -------
Total ......................... $ 2,051 $ 2,263 $ 1,257
======= ======= =======
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 $146,000, $1.4 million, and $(1.8 million) in
2001, 2000 and 1999, respectively. The tax benefits related to stock options
exercised and vested restricted stock are recorded directly to stockholders
equity. The benefit recorded directly in stockholders equity amounted to
approximately $400,000 in 2001 and $0 in 2000.
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, 2001, 2000 and 1999 is as follows (in
thousands):
2001 2000 1999
------- ------- -------
Income tax provision at statutory federal income
tax rate ....................................... $ 2,805 $ 2,274 $ 1,418
Increase (decrease) in taxes resulting from:
Tax exempt income ......................... (1,182) (586) (608)
Other permanent items ..................... 145 137 --
State income taxes ........................ -- 17 (170)
Towne Square Financial Corp. acquisition .. -- -- 442
Other ..................................... 283 421 175
------- ------- -------
Provision for income taxes ............ $ 2,051 $ 2,263 $ 1,257
======= ======= =======
F-17
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, 2001 and
2000 are as follows (in thousands):
2001 2000
------- -------
Gross deferred tax assets--
Allowance for loan losses ................................... $ 2,482 $ 1,698
Leasehold improvements ...................................... 490 358
Amortization of restricted stock ............................ 238 256
Unrealized loss on securities available for sale ............ 5 61
Illinois net deduction carryforward ......................... 161 151
Valuation allowance on Illinois net deduction carryforward .. (161) (151)
Other ....................................................... 267 184
------- -------
Gross deferred tax assets, net of valuation allowance ............. 3,482 2,557
------- -------
Gross deferred tax liabilities--
Federal Home Loan Bank Stock Dividends ...................... (1,018) (183)
Unrealized gain on securities available for sale ............ (171) --
Other ....................................................... (311) (313)
------- -------
Gross deferred tax liabilities .................................... (1,500) (496)
------- -------
Net deferred tax asset ............................................ $ 1,982 $ 2,061
======= =======
NOTE 9--ACQUISITIONS
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. As of December 31, 2001, goodwill totaled $10.8 million. 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.
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, 2001 and 2000 is presented in the table below:
December 31,
Amount Rate Maturity 2001 2000 1999
- ------ ---- -------- -------- -------------- -------
(in thousands)
Borrowing under revolving line of credit
facility .......................... 3.10% 02/11/02 $ 5,000 $18,000 $ --
Subordinated note ...................... 2.53 02/11/07 5,000 5,000 --
FHLB floating rate advance(1) .......... 6.77 05/01/01 -- 10,000 --
FHLB open line advance ................. 1.74 daily 25,000 -- --
FHLB fixed advance(2) .................. 6.50 10/23/05 24,886 25,000 --
FHLB fixed advance ..................... 6.21 12/05/03 30,000 30,000 --
FHLB fixed advance ..................... 6.49 11/13/01 -- 2,000 --
FHLB fixed advance ..................... 4.30 02/01/02 25,000 -- --
FHLB fixed advance ..................... 6.03 01/20/00 -- -- 15,000
FHLB fixed advance ..................... 5.91 06/21/02 500 500 --
FHLB fixed advance ..................... 5.89 12/20/02 1,000 1,000 --
FHLB fixed advance ..................... 5.21 01/22/02 1,000 -- --
FHLB fixed advance ..................... 5.33 07/22/02 1,000 -- --
FHLB fixed advance ..................... 5.02 03/06/02 1,000 -- --
FHLB fixed advance ..................... 4.21 05/13/02 1,000 -- --
FHLB fixed advance ..................... 2.39 11/12/02 5,000 -- --
Federal funds purchased ................ 2.06 daily 103,000 2,700 --
Demand repurchase agreements(3) ........ 1.60 daily 3,102 2,679 --
-------- ------- -------
Total funds borrowed .............. $231,488 $96,879 $15,000
======== ======= =======
- ----------
(1) The rate on this FHLB floating rate advance is set at one-month LIBOR minus
five basis points.
(2) This FHLB advance is subject to a fair value hedge with an interest rate
swap (see Note 14). The contractual par amount on the advance is $25.0
million.
(3) Demand repurchase agreements are a form of retail repurchase agreements
offered to certain clients of The PrivateBank (Chicago). Funds are swept
each business day from the client's demand deposit account. These amounts
are not deposits and are not insured, but are secured by a pool of
securities pledged specifically for this purpose.
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 the
Company's option, either the lender's prime rate or three-month LIBOR plus 120
basis points. The Company has elected to pay interest based on the three-month
LIBOR rate plus 120 basis points. The initial rate of interest on the revolver
was 7.20%, and most recently reset to 3.10% on December 27, 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. Upon
issuing $20.0 million of trust preferred securities on February 8, 2001, the
Company repaid the $18.0 million outstanding under the revolving credit
facility. In June 2001, the Company increased the borrowings on the credit
facility to $250,000 and in December 2001, the Company increased borrowings by
$4.8 million for general business purposes. As of December 31, 2001, the
outstanding balance was $5.0 million. The Company is currently renegotiating the
terms of the revolving credit facility. The original terms of the credit
facility are still in effect at March 2002.
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 reset each quarter based on the three-month
LIBOR rate. The note is payable in full on or before February 11, 2007, and
provides for certain rate escalation beginning after February 11, 2002. The
initial rate of interest on the subordinated note was 6.60% and most recently
reset to 3.89% on February 11, 2002. The Company has the right to repay the
subordinated note at any time after giving at least 30 days, but not more than
60 days advance notice.
NOTE 11--LONG TERM DEBT - TRUST PREFERRED SECURITIES
Effective February 8, 2001, PrivateBancorp Capital Trust I, a newly created
Delaware business trust and wholly-owned finance subsidiary of the Company,
issued 2,000,000 shares (including the underwriters' over-allotment) of 9.50%
trust preferred securities, which represent preferred undivided interests in the
assets of the trust. The sole assets of the trust are 9.50% junior subordinated
debentures issued by the Company with a maturity date of December 31, 2030.
F-19
Subject to certain limitations, the Company has the right to defer payment
of interest on the debentures at any time, or from time to time, for a period
not to exceed 20 consecutive quarters. The trust preferred securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
debentures at maturity or their earlier redemption. At the option of the
Company, the debentures may be redeemed in whole or in part prior to maturity on
or after December 31, 2005, if certain conditions are met, and only after the
Company has obtained Federal Reserve approval, if then required under applicable
guidelines or regulations.
The Company has guaranteed the payment of distributions and payments upon
liquidation or redemption of the trust preferred securities, in each case to the
extent of funds held by the trust. The Company and the trust believe that, taken
together, the obligations of the Company under the guarantee, the debentures and
other related agreements provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of all of the obligations of
the trust under the trust preferred securities.
The trust preferred securities are recorded as long-term debt of the
Company. The trust received net proceeds of approximately $18.9 million after
deducting underwriting commissions and offering expenses and including the
underwriters' over-allotment shares. As of December 31, 2001, the entire amount
of the trust preferred securities is eligible for treatment as Tier 1 capital as
allowed by the Federal Reserve. The balance of the underwriting commissions and
offering expenses at December 31, 2001 was $1.1 million and is classified as
part of other assets on the balance sheet. This amount is being amortized on a
straight-line basis until maturity. The amortization is recognized as interest
expense on the income statement.
NOTE 12--EMPLOYEE SAVINGS AND INCENTIVE PLANS
a. Savings and Retirement Plan
The Company maintains The PrivateBancorp, Inc. 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
$123,548, $100,634, and $67,200 in 2001, 2000 and 1999, 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.
As in effect as of December 31, 2001, 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
exercise price may not be less than the fair market value of our common stock 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
stock option grants. The option exercise price of the director options is fair
market value of our common stock on the date of grant. The options are
exercisable for up to 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 reduce their cash compensation. The option
exercise price is the fair market value of our common stock on the date of
grant. The compensation replacement options are exercisable for up to 10 years
from the date of grant.
F-20
The following table summarizes the status of the Company's stock option
agreements and stock option program as of December 31, 2001 and 2000, and
changes during the years then ended:
2001 2000
---------------------------- ---------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------- ---------------- -------- ----------------
Outstanding at beginning of year ..... 727,358 $10.78 634,748 $10.54
Granted .............................. 121,900 14.32 131,000 12.68
Exercised ............................ (158,848) 7.93 (12,000) 9.22
Forfeited ............................ (13,525) 15.95 (26,390) 15.39
--------- --------
Outstanding at end of year ........... 676,885 11.98 727,358 10.78
========= ========
Options exercisable at year-end ...... 445,620 537,168
Weighted average fair value of options
granted during the year .............. $ 9.89 $ 12.68
The range of exercise prices and weighted average remaining contractual
life for stock options outstanding as of December 31, 2001, was $6.25 to $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:
2001 2000 1999
--------- --------- ---------
(dollars in thousands)
Net income--
As reported ................ $ 6,200 $ 4,425 $ 2,915
Pro forma .................. 5,493 3,824 2,575
Basic earnings per share--
As reported ................ $ 1.32 $ 0.96 $ 0.73
Pro forma .................. 1.17 0.83 0.64
Diluted earnings per share--
As reported ................ $ 1.28 $ 0.92 $ 0.69
Pro forma ......................... 1.13 0.79 0.61
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 2001, 2000 and 1999, respectively: dividend
yield of 0.55%, 1.10% and 0.70% for 2001, 2000 and 1999, respectively; risk-free
interest rate of 5.9% for 2001and 2000 and 6.5% for 1999; and expected lives of
10 years for the Stock Incentive Plan options, for the compensation replacement
options and for the various director options. The valuation utilizes an expected
volatility of approximately 54% and 57% for 2001 and 2000, respectively. No
volatility rates were available for the stock options granted during 1999 and
prior years since the Company went public in June of 1999.
F-21
c. Restricted Stock
In 2001 and 2000, the Company issued the following restricted share grants:
Grant Date Shares Granted Price
---------- -------------- --------
May 2000............... 26,100 $12.3750
July 2000.............. 5,500 14.5000
August 2000............ 3,500 13.8750
January 2001........... 300 12.7500
February 2001.......... 23,200 14.1250
April 2001............. 500 14.0000
June 2001.............. 1,500 16.7300
December 2001.......... 1,000 17.0800
December 2001.......... 2,500 17.0800
During 2001, 7,100 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. The Company recognizes compensation expense ratably over the life of the
restricted stock grant based on the fair value at the date of grant. Shares
issued under the plan are recorded at the fair market value of our common stock
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 $275,771, $227,000, and $233,000
for 2001, 2000 and 1999, respectively.
NOTE 13--RELATED-PARTY TRANSACTIONS
An analysis of loans made to directors and executive officers of the
Company and the banks follows:
Balance, December 31, 2000............................ $11,914,640
Additions........................................ 4,192,517
Collections...................................... (4,577,249)
-----------
Balance, December 31, 2001............................ $11,529,908
===========
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 our initial public offering. 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, 2001. The loan was repaid in
August, 2000.
In May 1998, Ralph B. Mandell, the Company's 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 the Company's stockholders. As part of the transaction,
the Company 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-22
Mr. Mandell pledged all of the shares of common stock purchased in the
transaction as collateral for the loan he received from the Company, 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 wealth
management 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 2001, 2000 and 1999. During
2001, 2000 and 1999, The PrivateBank (Chicago) earned commission revenue of
$19,000, $27,030, and $33,125, respectively, for referred business and paid
$21,901, $41,076 and $533,544, respectively, for fees to this financial services
firm for insurance and related services related to a three-year insurance
contract.
During 2001, 2000 and 1999, The PrivateBank (Chicago) acquired selected
furniture with a total cost of $75,609, $61,733, and $28,402, respectively,
through related parties.
During 2001, 2000 and 1999, The PrivateBank (Chicago) incurred professional
fees for services provided by the law firm Spitzer, Addis, Susman & Krull in the
amount of approximately $263,264, $186,000, and $205,000, respectively. Michael
B. Susman, who is one of the Company's directors, is a partner of that firm.
In connection with the Company's acquisition of Towne Square Financial
Corporation, Thomas Castronovo, who became a managing director of the Company,
has a 25% ownership in Towne Square Realty as of December 31, 2001. In addition,
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. During 2001, Mr. Podl
was a 16.667% owner of Towne Square Realty. The PrivateBank (Chicago) leases
approximately 6,000 square feet in a building located in St. Charles, IL and
owned by Towne Square Financial Corporation. This lease became effective August
1, 1999. In 2001 and 2000, the Company paid rent in the amount of $117,857 and
$107,245, respectively, to Towne Square Realty, LLC under such lease.
NOTE 14--DERIVATIVE FINANCIAL INSTRUMENTS AND FINANCIAL INSTRUMENTS WITH OFF
BALANCE SHEET RISK
Derivative Financial Instruments
The Company entered into an interest rate swap agreement on November 23,
2001 in order to hedge a 6.5% fixed-rate $25.0 million FHLB advance maturing on
October 23, 2005. An interest rate swap is an agreement in which two parties
agree to exchange, at specified intervals, interest payment streams calculated
on an agreed-upon notional principal amount with at least one stream based on a
specified floating rate index. The Company paid $1.9 million in order to swap
the interest on a 6.5% fixed-rate for a 90-day LIBOR-based rate. A basis
difference of $1.9 million arises due to the fact that the fair value hedge was
initiated one year following the issuance of the FHLB advance. The basis
difference impacts the carrying value of the FHLB advance and is being amortized
to interest expense over the debt's remaining term outstanding.
Changes in the fair value of the interest rate swap are reported through
income. Changes in the fair value of the advance from the date of designation
are recorded through income. The interest rate swap includes credit risk for
non-performance by counterparties. Exposure to credit risk is mitigated by
credit approvals, credit limits and monitoring procedures.
The interest rate swap is recorded in other assets of the consolidated
balance sheet at its fair value of $1.7 million. The Company has elected to
designate the interest rate swap as a fair value hedge of a 6.5% fixed-rate FHLB
advance with a notional amount of $25.0 million, maturing October 23, 2005.
Credit Risk and Market Risk
By their nature, all financial instruments involve risk, including credit
risk for non-performance by counterparties. The contract or notional amounts of
these instruments reflect the extent of involvement we have in particular
classes of financial instruments. The maximum potential loss may exceed any
amounts recognized in the Consolidated Balance Sheets. However, the Company's
maximum exposure to credit loss in the event of non-performance by the other
party to the financial instruments for commitments to extend credit and
financial guarantees is limited to the amount drawn and outstanding on those
instruments.
F-23
Exposure to credit risk is controlled through credit approvals, credit
limits and continuous monitoring procedures and reserves for losses are
established when deemed necessary.
All financial instruments inherently expose the holders to market risk,
including changes in interest rates. The Company manages its exposure to these
market risks through our regular operating and financing activities and,
commencing in 2001, when appropriate, through the use of derivative financial
instruments.
Financial Instruments with Off Balance Sheet Risk
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, 2001 and 2000, the banks had the following
categories of credit-related financial instruments (at contract amount):
2001 2000
-------- --------
(in thousands)
Commitments to extend credit........................ $224,144 $235,184
Standby letters of credit........................... 19,950 27,375
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 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.
The following table summarizes the maturity of standby letters of credit
and commitments to extend credit:
Total *1 year 1-3 years 4-5 years **5 years
-------- -------- --------- --------- --------
(in thousands)
Standby Letters of Credit ...... $ 19,950 $ 14,328 $ 5,320 $ 214 $ 88
Commitments to extend Credit ... 224,144 122,343 64,114 8,605 29,082
-------- -------- ------- ------ -------
Total .................. $244,094 $136,671 $69,434 $8,819 $29,170
======== ======== ======= ====== =======
* Less than
** More than
NOTE 15--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.
F-24
NOTE 16--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, 2001 and 2000. 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, 2001 December 31, 2000
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
(in thousands)
Assets--
Cash and cash equivalents .................... $ 22,801 $ 22,801 $ 40,513 $ 40,513
Securities ................................... 332,933 332,933 172,194 172,194
Loans held for sale .......................... 11,335 11,335 705 705
Net loans .................................... 772,465 780,705 592,616 612,339
Accrued interest receivable .................. 7,262 7,262 5,524 5,524
Interest Rate Swap ........................... 1,704 1,704 -- --
Cash Surrender Value of Bank
Owned Life Insurance ..................... 10,128 10,128 -- --
Liabilities--
Deposits with no stated maturity ............. $480,486 $480,486 $413,197 $413,197
Time deposits ................................ 370,009 370,935 257,049 257,007
Total deposits ............................... 850,495 851,421 670,246 670,204
Accrued interest payable ..................... 2,112 2,112 3,552 3,552
Funds borrowed ............................... 231,488 232,827 96,879 98,425
Long term debt - Trust Preferred Securities .. 20,000 21,879 -- --
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.
F-25
c. Loans Held for Sale
Loans held for sale are carried at fair value. Fair value is determined
based on quoted market rates or, in the case where a firm commitment has been
made to sell the loan, the firm committed price.
d. 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 determined using available market
information and specific borrower information.
e. Interest Rate Swap
The fair value of the interest swap executed by the Company is determined
based on the fair market value as quoted by broker-dealers. The change in the
fair value of the interest rate swap is recorded in other income on a periodic
basis.
f. Cash Surrender Value of Bank Owned Life Insurance
The cash surrender value of bank owned life insurance is carried at fair
value.
g. 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.
h. 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.
i. Off-Balance Sheet Financial Instruments
The Company's commitments to originate loans, and for unused lines and
outstanding letters of credit are primarily at market-based interest rates and
therefore there is no fair value adjustment.
NOTE 17--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, 2002,
The PrivateBank (Chicago) could have declared approximately $21,420,879 in
dividends without requesting approval of the applicable federal or state
regulatory agency. As of January 1, 2002, 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 2001 and 2000, the average balances maintained to meet the
requirement were $3,037,720 and $1,961,263, respectively.
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
F-26
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, 2001, 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, 2001 and 2000
and The PrivateBank (St. Louis) as of December 31, 2001 (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, 2001--
Total risk-based capital--
Consolidated................... $84,482 9.71% $69,617 8.00%
The PrivateBank (Chicago)...... 79,222 10.02 63,233 8.00 $79,042 10.00
The PrivateBank (St. Louis).... 8,455 10.86 6,228 8.00 7,786 10.00
Tier 1 risk-based capital--
Consolidated................... $71,176 8.18 $34,809 4.00
The PrivateBank (Chicago)...... 71,725 9.07 31,617 4.00 $47,425 6.00
The PrivateBank (St. Louis).... 7,646 9.82 3,114 4.00 4,671 6.00
Tier 1 (leverage) capital--
Consolidated................... $71,176 6.64 $42,904 4.00
The PrivateBank (Chicago)...... 71,125 7.25 39,565 4.00 $49,456 5.00
The PrivateBank (St. Louis).... 7,646 9.43 3,242 4.00 4,053 5.00
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
F-27
NOTE 18--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 19--PRIVATEBANCORP, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
STATEMENTS
CONDENSED BALANCE SHEETS
As of December 31, 2001 and 2000
2001 2000
------- -------
(in thousands)
Assets
Cash and due from banks--bank subsidiaries ........... $ 361 $ 371
Investment in bank subsidiaries ...................... 90,499 76,466
Other assets ......................................... 1,939 1,053
------- -------
Total assets ......................................... $92,799 $77,890
======= =======
Liabilities and Stockholders' Equity
Funds borrowed ....................................... $10,000 $23,000
Long term debt - trust preferred securities .......... 20,000 --
Other liabilities .................................... 495 641
------- -------
Total liabilities .................................... 30,495 23,641
------- -------
Stockholders' equity ................................. 62,304 54,249
------- -------
Total liabilities and stockholders' equity ........... $92,799 $77,890
======= =======
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------- ------- -------
(in thousands)
Operating income:
Interest income ......................................... $ -- $ 5 $ --
Interest expense ........................................ 2,127 1,230 --
------- ------- -------
Net interest expense .................................... (2,127) (1,225) --
------- ------- -------
Non interest income:
Other income ............................................ 12 6 --
------- ------- -------
Operating expense:
Amortization of deferred compensation ................... 276 227 233
Towne Square Financial Corporation acquisition .......... -- 1,300
Other ................................................... 1,652 1,359 1,014
------- ------- -------
Total ................................................ 1,928 1,586 2,547
------- ------- -------
Loss before income taxes and equity in undistributed
net income of bank subsidiaries ...................... (4,043) (2,805) (2,547)
Income tax benefit ...................................... (1,547) (913) (457)
------- ------- -------
Loss before equity in undistributed net income of
bank subsidiaries .................................... (2,496) (1,892) (2,090)
------- ------- -------
Equity in undistributed net income of bank subsidiaries.. 8,696 6,317 5,005
------- ------- -------
Net income .............................................. $ 6,200 $ 4,425 $ 2,915
======= ======= =======
The Parent Company Only Statements of Changes in Stockholders' Equity are
the same as the Consolidated Statements of Changes in Stockholders' Equity.
F-28
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
-------- -------- --------
(in thousands)
Cash flows from operating activities:
Net income ................................................ $ 6,200 $ 4,425 $ 2,915
-------- -------- --------
Adjustments to reconcile net income to net cash used in
operating activities--
Equity in net income of bank subsidiaries ................. (8,696) (6,317) (5,005)
Amortization of deferred compensation ..................... 276 227 233
Increase in other assets .................................. (646) (407) (236)
Decrease (increase) in other liabilities .................. 386 607 (158)
Other, net ................................................ (269) -- --
-------- -------- --------
Total adjustments ..................................... (8,949) (5,890) (5,166)
-------- -------- --------
Net cash used in operating activities ................. (2,749) (1,465) (2,251)
-------- -------- --------
Cash flows from investing activities:
Net increase in capital investments in bank subsidiaries .. (5,000) (29,200) (8,000)
Purchase of Towne Square Financial Corporation ............ -- -- 1,300
-------- -------- --------
Net cash used in investing activities ..................... (5,000) (29,200) (6,700)
Cash flows from financing activities:
Funds borrowed ............................................ 5,000 23,000 --
Issuance of Long term debt - Trust Preferred Securities ... 20,000 -- --
Repayment of funds borrowed ............................... (18,000) -- --
Issuance of common stock .................................. 1,259 110 16,898
Repayment of loan to executive officer .................... -- 175 --
Dividends paid ............................................ (520) (462) (403)
-------- -------- --------
Net cash provided by financing activities ................. 7,739 22,823 16,495
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ............ (10) (7,842) 7,544
Cash and cash equivalents at beginning of year .................. 371 8,213 669
-------- -------- --------
Cash and cash equivalents at end of year ........................ $ 361 $ 371 $ 8,213
======== ======== ========
Other cash flow disclosures:
Income taxes paid ......................................... $ 1,757 $ 1,917 $ 2,623
Non-cash transactions:
Loans to executive officers for purchase of common stock .. $ -- $ -- $ 175
Issuance of stock to purchase Towne Square Financial
Corporation ........................................... $ -- $ -- $ 1,300
NOTE 20--CAPITAL TRANSACTIONS
In the fourth quarter of 2001, the Company contributed capital of $4.0
million to the PrivateBank (Chicago) and $1.0 million to the PrivateBank (St.
Louis). 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.
F-29
PRIVATEBANCORP, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
Selected Quarterly Financial Data (unaudited)
The following are the consolidated results of operations on a quarterly basis:
2001
-------------------------------------------------------
Fourth Third Second First
----------- ---------- ---------- ------------
(dollars in thousands except ratios and per share data)
Summary Income Statement
Interest Income
Loans, including fees ................. $ 12,311 $ 12,785 $ 12,877 $ 13,002
Federal funds sold and
interest bearing deposits ........ 13 23 31 177
Securities ............................ 4,144 3,704 3,327 3,202
---------- ---------- ---------- ----------
Total interest income ................. 16,468 16,512 16,235 16,381
Interest expense ...................... 8,548 9,478 9,625 9,986
---------- ---------- ---------- ----------
Net interest income ................... 7,920 7,034 6,610 6,395
Provision for loan loss ............... 1,257 845 738 339
---------- ---------- ---------- ----------
Net interest income after
provision for loan loss ........... 6,663 6,189 5,872 6,056
---------- ---------- ---------- ----------
Non-Interest income
Banking, wealth management services and
other income .................... 1,149 902 1,024 953
Securities gains, net ................. 1,191 365 353 186
---------- ---------- ---------- ----------
Total non-interest income ............. 2,340 1,267 1,377 1,139
---------- ---------- ---------- ----------
Non-Interest expense
Salaries and employee
benefits ........................ 2,519 2,303 1,855 2,434
Severance ............................. -- -- -- --
Goodwill .............................. 206 206 206 206
Occupancy expense ..................... 1,325 985 960 888
Other non-interest expense ............ 2,576 1,847 2,378 1,758
---------- ---------- ---------- ----------
Total non-interest expense ............ 6,626 5,341 5,399 5,286
---------- ---------- ---------- ----------
Income before income taxes ............ 2,377 2,115 1,850 1,909
Provision for income taxes ............ 459 524 492 576
---------- ---------- ---------- ----------
Net income ............................ $ 1,918 $ 1,591 $ 1,358 $ 1,333
========== ========== ========== ==========
Key Statistics
Earnings before one-time
charges per diluted share ....... $ 0.40 $ 0.34 $ 0.29 $ 0.29
One-time charges (per diluted share) .. -- -- -- --
Diluted earnings per share ............ 0.39 0.32 0.28 0.28
Basic earnings per share .............. 0.40 0.34 0.29 0.29
Return on average total assets
(before one-time charges) ....... 0.70% 0.64% 0.60% 0.64%
Return on average total
equity (before one-time charges) 12.18% 10.46% 9.46% 9.86%
Net interest margin ................... 3.28% 3.17% 3.21% 3.32%
Yield on average earning assets ....... 6.57% 7.16% 7.67% 8.37%
Cost of average paying liabilities .... 3.59% 4.40% 4.92% 5.55%
Efficiency Ratio excluding
one-time charges (tea) ......... 60.9% 60.6% 64.5% 67.8%
Common Stock Information
Book value per share .................. $ 12.97 $ 13.07 $ 12.35 $ 12.15
Dividends paid per share .............. 0.030 0.030 0.025 0.025
Outstanding shares at end of period ... 4,804,280 4,750,124 4,680,668 4,685,768
2000
-------------------------------------------------------
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
Federal funds sold and
interest bearing deposits ........ 236 357 78 387
Securities ............................ 2,714 1,813 1,543 1,385
---------- ---------- ---------- ----------
Total interest income ................. 16,401 15,710 13,788 11,247
Interest expense ...................... 9,821 9,378 7,781 6,351
---------- ---------- ---------- ----------
Net interest income ................... 6,580 6,332 6,007 4,896
Provision for loan loss ............... 334 383 662 311
---------- ---------- ---------- ----------
Net interest income after
provision for loan loss ........... 6,246 5,949 5,345 4,585
---------- ---------- ---------- ----------
Non-Interest income
Banking, wealth management services and
other income .................... 951 745 751 630
Securities gains, net ................. -- -- -- 92
---------- ---------- ---------- ----------
Total non-interest income ............. 951 745 751 722
---------- ---------- ---------- ----------
Non-Interest expense
Salaries and employee
benefits ........................ 2,268 2,211 1,818 1,877
Severance ............................. -- 562 -- --
Goodwill .............................. 206 206 206 113
Occupancy expense ..................... 807 803 764 613
Other non-interest expense ............ 1,609 1,445 1,664 1,434
---------- ---------- ---------- ----------
Total non-interest expense ............ 4,890 5,227 4,452 4,037
---------- ---------- ---------- ----------
Income before income taxes ............ 2,307 1,467 1,644 1,270
Provision for income taxes ............ 797 499 546 421
---------- ---------- ---------- ----------
Net income ............................ $ 1,510 $ 968 $ 1,098 $ 849
========== ========== ========== ==========
Key Statistics
Earnings before one-time
charges per diluted share ....... $ 0.32 $ 0.28 $ 0.23 $ 0.18
One-time charges (per diluted share) .. -- 0.08 -- --
Diluted earnings per share ............ 0.33 0.21 0.24 0.18
Basic earnings per share .............. 0.32 0.20 0.23 0.18
Return on average total assets
(before one-time charges) ....... 0.77% 0.71% 0.65% 0.57%
Return on average total
equity (before one-time charges) 11.35% 10.55% 9.04% 7.20%
Net interest margin ................... 3.60% 3.59% 3.81% 3.59%
Yield on average earning assets ....... 8.82% 8.77% 8.61% 8.06%
Cost of average paying liabilities .... 5.82% 5.77% 5.39% 5.09%
Efficiency Ratio excluding
one-time charges (tea) ......... 63.0% 63.9% 63.8% 69.2%
Common Stock Information
Book value per share .................. $ 11.73 $ 11.04 $ 10.73 $ 10.57
Dividends paid per share .............. 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
F-30
PRIVATEBANCORP, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
Selected Quarterly Financial Data (unaudited)(continued)
2001
-------------------------------------------------------
Fourth Third Second First
---------- ----------- ----------- -----------
(dollars in thousands except ratios and per share data)
Number of shares used to compute:
Basic earnings per share ........... $4,773,572 $ 4,714,506 $4,681,655 $ 4,648,061
Diluted earnings per share ......... 4,951,338 4,929,171 4,855,083 4,783,400
Capital Ratios
Total equity to total assets ....... 5.29% 5.96% 6.12% 6.52%
Total risk-based capital ratio ..... 9.71% 10.55% 10.98% 10.97%
Tier-1 risk based capital ratio .... 8.18% 8.88% 9.17% 9.12%
Leverage ratio ..................... 6.64% 6.99% 7.26% 7.60%
Selected Financial Condition
Data (at end of period)
Total securities ................... $ 332,933 $ 279,319 $ 224,505 $ 210,840
Total loans ........................ 780,771 715,977 666,262 625,700
Total assets ....................... 1,176,768 1,041,975 944,887 873,693
Total deposits ..................... 850,495 801,146 750,494 695,571
Funds borrowed ..................... 231,488 137,956 106,128 90,397
Total stockholders' equity ......... 62,304 62,087 57,826 56,946
Credit Quality
Ending allowance for loan losses ... $ 8,306 $ 7,558 $ 6,896 $ 6,455
Non-performing assets:
Loans delinquent over 90 days ...... 2,504 3,766 938 2,847
Nonaccrual loans ................... 664 2,658 1,504 117
Other real estate .................. -- 62 -- --
---------- ----------- ---------- -----------
Total non-performing assets ........ $ 3,168 $ 6,486 $ 2,442 $ 2,964
========== =========== ========== ===========
Loans charged-off .................. 521 199 332 --
Recoveries ......................... 12 16 35 8
---------- ----------- ---------- -----------
Net charge-offs .................... $ 509 $ 183 $ 297 $ (8)
========== =========== ========== ===========
Provision for loan losses .......... $ 1,257 $ 845 $ 738 $ 339
========== =========== ========== ===========
Key Ratios:
Net charge-offs to average loans ... 0.27% 0.11% 0.18% (0.01%)
Total non-performing loans to total
loans ....................... 0.41% 0.91% 0.37% 0.47%
Total non-performing assets to total
assets ...................... 0.27% 0.62% 0.26% 0.34%
Loan Loss Reserve Summary
Balance at beginning of period ..... $ 7,558 $ 6,896 $ 6,455 $ 6,108
Johnson Bank acquisition ........... -- -- -- --
Provision .......................... 1,257 845 738 339
Net charge-offs .................... 509 183 297 (8)
---------- ----------- ---------- -----------
Ending allowance ................... $ 8,306 $ 7,558 $ 6,896 $ 6,455
========== =========== ========== ===========
Net loan charge-offs:
Commercial real estate ............. $ -- $ -- $ -- $ --
Residential real estate ............ -- -- -- --
Commercial ......................... 438 185 276 (3)
Personal ........................... 71 (2) 21 (5)
Home equity ........................ -- -- -- --
Construction ....................... -- -- -- --
---------- ----------- ---------- -----------
Total net loan charge-offs ......... $ 509 $ 183 $ 297 $ (8)
========== =========== ========== ===========
2000
-------------------------------------------------------
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
Diluted earnings per share ......... 4,749,636 4,823,982 4,752,269 4,777,351
Capital Ratios
Total equity to total assets ....... 6.54% 6.69% 6.85% 7.38%
Total risk-based capital ratio ..... 8.15% 8.51% 8.73% 9.56%
Tier-1 risk based capital ratio .... 6.47% 6.72% 6.84% 7.56%
Leverage ratio ..................... 5.54% 5.54% 5.94% 6.76%
Selected Financial Condition
Data (at end of period)
Total securities ................... $ 172,194 $ 132,814 $ 96,969 $ 89,924
Total loans ........................ 598,724 584,919 583,522 521,188
Total assets ....................... 829,509 763,815 723,023 656,981
Total deposits ..................... 670,246 633,007 598,881 578,557
Funds borrowed ..................... 96,879 71,258 68,544 23,328
Total stockholders' equity ......... 54,249 51,066 49,545 48,498
Credit Quality
Ending allowance for loan losses ... $ 6,108 $ 5,991 $ 5,951 $ 5,670
Non-performing assets:
Loans delinquent over 90 days ...... 1,421 242 340 355
Nonaccrual loans ................... 24 324 635 1,222
Other real estate .................. -- -- -- --
---------- ----------- ---------- -----------
Total non-performing assets ........ $ 1,445 $ 566 $ 975 $ 1,577
========== =========== ========== ===========
Loans charged-off .................. 225 346 381 20
Recoveries ......................... 8 2 -- 5
---------- ----------- ---------- -----------
Net charge-offs .................... $ 217 $ 344 $ 381 $ 15
========== =========== ========== ===========
Provision for loan losses .......... $ 334 $ 383 $ 662 $ 311
========== =========== ========== ===========
Key Ratios:
Net charge-offs to average loans ... 0.15% 0.23% 0.28% 0.013%
Total non-performing loans to total
loans ....................... 0.24% 0.10% 0.17% 0.3%
Total non-performing assets to total
assets ...................... 0.17% 0.07% 0.13% 0.24%
Loan Loss Reserve Summary
Balance at beginning of period ..... $ 5,991 $ 5,951 $ 5,670 $ 4,510
Johnson Bank acquisition ........... -- -- -- 864
Provision .......................... 334 383 662 311
Net charge-offs .................... 217 343 381 15
---------- ----------- ---------- -----------
Ending allowance ................... $ 6,108 $ 5,991 $ 5,951 $ 5,670
========== =========== ========== ===========
Net loan charge-offs:
Commercial real estate ............. $ -- $ -- $ -- $ --
Residential real estate ............ -- -- -- --
Commercial ......................... -- 343 361 8
Personal ........................... 217 -- 20 7
Home equity ........................ -- -- -- --
Construction ....................... -- -- -- --
---------- ----------- ---------- -----------
Total net loan charge-offs ......... $ 217 $ 343 $ 381 $ 15
========== =========== ========== ===========
F-31
EXHIBIT INDEX
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1 Amended and Restated Certificate of Incorporation of
PrivateBancorp, Inc. (Filed as an exhibit to the Company's Form
S-1 Registration Statement (File No. 333-77147) and incorporated
herein by reference).
3.2 [Intentionally left blank]
3.3 Amended and Restated By-laws of PrivateBancorp, Inc. (Filed as an
exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000 and incorporated herein by
reference).
4.1 Subordinated Note of PrivateBancorp Inc., dated February 11,
2000, principal amount of $5 million due February 11, 2007,
issued to Johnson International, Inc. (Filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and incorporated herein by reference).
4.2 Certain instruments defining the rights of the holders of
long-term debt of the Company and certain of its subsidiaries,
none of which authorize a total amount of indebtedness in excess
of 10% of the total assets of the Company and its subsidiaries on
a consolidated basis, have not been filed as Exhibits. The
Company hereby agrees to furnish a copy of any of these
agreements to the SEC upon request.
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 (Filed as
an exhibit to the Company's Form S-1 Registration Statement (File
No. 333-77147) and incorporated herein by reference).
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 (Filed as an exhibit to the Company's Form S-1
Registration Statement (File No. 333-77147) and incorporated
herein by reference).
10.3 First Amendment to lease dated May 31, 2001 by and between
Columbia Lisle Limited Partnership and The PrivateBank and Trust
Company (Filed as an exhibit to the Company's Form 10-Q for the
quarter ended September 30, 2001 and incorporated herein by
reference).
10.4 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 (Filed as an exhibit
to the Company's Form S-1 Registration Statement (File No.
333-77147) and incorporated herein by reference).
10.5 Building Lease by and between Towne Square Realty, L.L.C. and The
PrivateBank and Trust Company dated August 6, 1999 (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).
10.6 First Amendment to lease dated January 1, 2002 by and between
Towne Square Realty, L.L.C. and The PrivateBank and Trust
Company. +
10.7 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. (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).
10.8 Lease Agreement by and between Shodeen Management Company as
agent for the beneficiaries of a land trust with Harris Bank St.
Charles, pursuant to Trust Agreement dated March 4, 1994, and
known as Trust No. 2321, and The PrivateBank and Trust Company
dated January 9, 2001, for banking facility located at 312
Crescent Place, Geneva, Illinois (Filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by reference).
10.9 Stock Purchase Agreement dated as of May 28, 1998 by and among
PrivateBancorp, Inc., Delaware Charter Guarantee and Trust Co.,
Trustee FOB Ralph B. Mandell, IRA and The Ralph B. Mandell
Revocable Trust UTA dated June 5, 1997 (Filed as an exhibit to
the Company's Form S-1 Registration
Exhibit No. Description of Exhibits
- ----------- -----------------------
Statement (File No. 333-77147) and incorporated herein by
reference).
10.10 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 10.9) (Filed as an exhibit to the
Company's Form S-1 Registration Statement (File No. 333-77147)
and incorporated herein by reference).
10.11 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).*
10.12 Employment Agreement by and between Ralph B. Mandell and
PrivateBancorp, Inc. dated July 1, 2001 (Filed as an exhibit to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 and incorporated herein by reference).*
10.13 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 (Filed as
an exhibit to the Company's Form S-1 Registration Statement (File
No. 333-77147) and incorporated herein by reference).
10.14 Form of Indemnification Agreement by and between PrivateBancorp,
Inc. and its directors and executive officers (Filed as an
exhibit to the Company's Form S-1 Registration Statement (File
No. 333-77147) and incorporated herein by reference).*
10.15 Agreement and Plan of Reorganization by and between
PrivateBancorp, Inc. and Towne Square Financial Corporation dated
as of June 24,1999 (Filed as an exhibit to the Company's Form S-1
Registration Statement (File No. 333-77147) and incorporated
herein by reference).
10.16 Stock Purchase Agreement dated as of October 4, 1999 by and among
PrivateBancorp, Inc., Johnson International, Inc. and Johnson
Bank Illinois (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).
10.17 Loan Agreement dated as of February 11, 2000, between
PrivateBancorp, Inc. and LaSalle Bank National Association (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).
10.18 Letter Agreement dated September 26, 2000 by and between
PrivateBancorp, Inc., The PrivateBank and Trust Company and
Donald A. Roubitchek (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).*
10.19 Employment Agreement by and between Richard C. Jensen and
PrivateBancorp, Inc. dated as of July 27, 2000 (Filed as an
exhibit to the Company's Form S-1 Registration Statement (File
No. 333-52676) and incorporated herein by reference ).*
12.1 Calculation of Ratio of Earnings to Fixed Charges.+
21.1 Subsidiaries of the Registrant (Filed as an exhibit to the
Company's Form S-1 Registration Statement (File No. 333-52676)
and incorporated herein by reference).
23.1 Consent of Arthur Andersen LLP.+
24.1 Powers of Attorney (set forth on signature page).
+ Filed herewith.
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit.