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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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 000-25887
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3681151
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Ten North Dearborn Street Chicago, Illinois 60602
(Address of principal executive offices)
(312) 683-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
9.50% Cumulative Trust Preferred Securities
(and the Guarantee with respect thereto)
Indicate by checkmark whether the Registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting common equity of the Registrant held by
non-affiliates of the Registrant was approximately $107,273,278 based on the
closing price of the common stock of $20.10 on June 30, 2002, as reported by the
NASDAQ National Market.
As of February 28, 2003, the Registrant had outstanding 7,738,164 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III.
FORM 10-K
TABLE OF CONTENTS
PAGE
NUMBER
PART I
Item 1. Business........................................................................................... 2
Item 2. Properties......................................................................................... 22
Item 3. Legal Proceedings.................................................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders................................................ 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 24
Item 6. Selected Financial Data............................................................................ 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......................................... 46
Item 8. Financial Statements and Supplementary Data........................................................ 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............. 48
PART III
Item 10. Directors and Executive Officers................................................................... 49
Item 11. Executive Compensation............................................................................. 49
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 49
Item 13. Certain Relationships and Related Transactions..................................................... 49
Item 14. Controls and Procedures............................................................................ 50
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 50
Index to Consolidated Financial Statements........................................................................ F-1
1
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.
As the financial industry has consolidated, and smaller, independent
banks have been acquired by national, multi-bank holding companies, 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 have been accustomed to
dealing directly with senior bank executives. These clients 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. The St. Louis-based bank also focuses on clients who are seeking a higher
level of service and a broad array of personalized banking and wealth management
products and services. The PrivateBank (St. Louis) clients consist of
individuals, small to medium-size businesses, commercial real estate investors
and professionals.
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). Using the European tradition of
"private banking" as our model, we provide our clients with traditional
individual and corporate banking services, including a variety of loan and
deposit products, and wealth management services. Our goal is to be the primary
source of financial products and services for our clients. We strive to develop
a valued relationship with our clients, using an experienced team of managing
directors, to serve each client's individual and corporate banking needs, and by
tailoring our products and services to consistently meet those 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. On
December 30, 2002, we purchased a controlling interest in a Chicago-based
investment adviser, Lodestar Investment Counsel, LLC.
Since year-end 1995 to December 31, 2002, we have grown our asset base
at a compound annual rate of 35% to $1.5 billion. During the same period, loans
have grown at a compound annual rate of 34% to $965,600, deposits at a compound
annual rate of 32% to $1.2 billion and trust assets under administration at a
compound annual rate of 22% to $757.8 million. Diluted earnings per share (EPS)
have grown at a compound annual rate of 30% to $1.42 (adjusted to reflect the
3-for-2 stock dividend effective January 17, 2003) since year-end 1995.
THE PRIVATEBANK APPROACH
.. We are a client-driven organization and believe we have developed a unique
approach to private banking designed to provide our clients with superior
service. 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
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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, who is 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. The purpose of this
approach is to give our clients a sense of security and continuity of
personal service in their banking relationship. On the basis of this trust
and confidence, we then 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. 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 Trust Plus Online Access, Private NetBanking,
and Business NetBanking directly through the Internet. Clients can also connect
to PrivateLine Access directly through the telephone. 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 clients to access deposit and loan information, initiate stop payments,
initiate bill payments, establish repetitive wire transfers and authorize
transactions that clear through the Automated Clearing House (ACH). Private
NetBanking and Business NetBanking are 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 Private NetBanking and Business NetBanking 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-delivery systems providing the quality of service to which our
clients are accustomed.
.. Affluent Target Client. In the Chicago and St. Louis metropolitan areas, we
target affluent individuals, professionals, owners of closely-held
businesses, and commercial real estate investors with annual incomes in
excess of $150,000 and their business interests, because we believe that
they have significant unmet demand for personalized financial services. 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. 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. Although we generally
target individuals with high annual incomes and net
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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.
.. Customized Financial Services. In taking a long-term relationship approach
with 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 banking products, we believe that it is our personalized
service that distinguishes us from our competitors. 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 many other 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. Generally, we use an "on call" approach, rather than structured
meetings, to approve credit. As the amount and the complexity of the credit
increases, we often use a more traditional approval process.
.. Network of Comprehensive Financial Services. 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, use
our subsidiary, Lodestar, 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, which relies on our
development, maintenance, and expansion of our superior management group,
entails five 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. In particular, we seek to develop our
wealth management business through our existing clients.
.. 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, particularly in the wealth
management area. Key to this strategy is attracting quality people. 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
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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.
.. Acquisition of Asset Management Firms. We intend to 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. As part of this ongoing strategy, we acquired a
controlling interest in Lodestar, a Chicago-based investment advisor, in
December 2002.
.. Expanding into New Product Lines and Services. 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.
.. Expanding into New Markets. We believe that 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 with over 1 million people in the Midwest 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. We organized The PrivateBank (St. Louis)
as a federal savings bank to create flexibility in pursuing these
geographic expansion opportunities.
THE PRIVATEBANK (CHICAGO) AND THE PRIVATEBANK (ST. LOUIS)
We offer banking services to our clients at a personal level. We
believe this is not the same as personal banking service. We define private
banking as offering banking products and services to our clients when they want
it, how they want it and where they want it. We tailor our products and services
to fit our clients instead of making our clients fit our products and services.
Our services fall into four general categories:
.. 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. In certain circumstances, we
also provide 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.
5
.. Wealth Management. Our services include investment management, personal
trust and estate services, custodial services, retirement accounts and
brokerage and investment services. Our trust personnel work with our
clients to define objectives, goals and strategies for their investment
portfolios. We assist the client with the selection of an outside
investment manager and work to tailor the investment program accordingly.
During 1999, we introduced PrivateBank Counselor, an asset allocation
program that combines outside professional portfolio management with an
investment plan that our wealth management personnel tailor to the
individual client's personal financial goals. 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). In December 2002, we acquired a controlling interest in Lodestar
Investment Counsel, a Chicago-based investment adviser. We expect that this
acquisition will provide additional sources of revenue in our wealth
management segment.
.. 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 also use 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 as well as domestic and international wire transfers and foreign
currency exchange. 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.
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 our asset
quality. 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 to our clients. When extending credit, our decisions are
based upon our client's ability to repay the loan from non-speculative sources.
The quality and integrity of the borrower is crucial in the loan approval
process. We monitor the performance of our loan portfolio through regular
contacts with our clients, continual portfolio review, careful monitoring of
delinquency reports and reliance on our loan review function.
We have retained an independent, outside resource to perform our loan
review function, which 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 the loan reviewer'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, 2002, The PrivateBank (Chicago)'s legal lending limit
was $25.5 million and The PrivateBank (St. Louis)'s legal lending limit was
$1.25 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
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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 gain a better understanding of our overall portfolio and credit
culture.
Our chief credit officer, or his designee, 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 the loan/investment committee 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
credit officers as required by the loan policy. 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. As a thrift,
The PrivateBank (St. Louis) is required to maintain a specific percentage of its
loan portfolio in qualified residential real estate loans. To address this
regulatory requirement, from time to time, The PrivateBank (St. Louis) intends
to purchase qualifying loans from The PrivateBank (Chicago) in exchange for
loans generated in the St. Louis market that do not meet the criteria for
qualified-thrift-loans. We expect to price sales of loans between the banks so
as to allow each bank to achieve equal risk rewards from a yield perspective.
Prior to purchasing any loans, the chief credit officer of The PrivateBank
(Chicago) will apply the same credit policies and procedures as are followed for
any other loan approval. Likewise, The PrivateBank (St. Louis) will apply the
same lending discipline to loans purchased from The PrivateBank (Chicago) as it
does for externally generated loans.
The following table sets forth our loan portfolio by category as of
December 31, 2002 and 2001:
DECEMBER 31, PERCENTAGE OF DECEMBER 31, PERCENTAGE OF
2002 TOTAL LOANS 2001 TOTAL LOANS
------------ ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
Commercial real estate.................. $ 452,703 47% $ 310,869 40%
Commercial.............................. 165,993 17% 163,279 21%
Construction............................ 123,204 13% 92,528 12%
Home equity............................. 80,776 8% 59,795 8%
Residential real estate................. 72,289 8% 89,889 11%
Personal................................ 70,676 7% 64,411 8%
------------ ------------- ------------ -------------
Total loans............................. $ 965,641 100% $ 780,771 100%
============ ============= ============ =============
Commercial Real Estate Loans. Our commercial real estate portfolio is
comprised primarily of loans secured by multi-family housing units located in
the Chicago metropolitan area. Other types of commercial real estate collateral
include: commercial properties owned by clients housing their manufacturing,
warehousing or service businesses, investments in small retail centers, and
investments in other business properties.
Risks inherent in real estate lending are related to the market value
of the property taken as collateral, the underlying cash flows and
documentation. It is important to accurately assess property values through
careful review of appraisals. Some examples of risky commercial real estate
lending include loans secured by properties with widely fluctuating market
values or income properties occupied by renters with unstable sources of income,
and not perfecting liens on property taken as collateral. We mitigate these
risks by understanding real estate values in areas in which we lend,
investigating the sources of cash flow servicing the debt on the property and
adhering to our 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
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typically structure mini-permanent and permanent financing as adjustable rate
mortgages, or ARMs. 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 addresses
selection of appraisers, appraisal standards, environmental issues and specific
requirements for different types of properties, and has been approved by our
board loan/investment committee.
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. In
general, lines of credit 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 generally 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 loan is underwritten to ensure that it has 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.
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INVESTMENT ACTIVITIES
The objective of our investment policy is to maximize income consistent
with asset/liability objectives, liquidity, asset quality and regulatory
constraints. 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.
We invest primarily in direct obligations of the United States,
obligations of agencies of the United States, bank-qualified tax-exempt
obligations of state and local political subdivisions, mortgage-backed pools,
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 by 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 Investment Committee has responsibility for the oversight of
management of our investment portfolio as well as the implementation of our
investment strategy. 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 currently 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.
As currently structured, 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. The Investment Committee
meets periodically with our Asset-Liability Committee to discuss our investment
policies.
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;
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.. investment agency accounts;
.. guardianship administration;
.. Section 1031 exchanges; and
.. custodial accounts.
The average account value of trusts administered by us was
approximately $2.1 million as of December 31, 2002. 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. Trust assets
under administration totaled $758.0 million at December 31, 2002. This is the
result of continued new business, which more than offset declines in existing
account balances due to deterioration in the equity markets throughout the year.
The acquisition of Lodestar Investment Counsel added $482.0 million of assets
under management as of December 31, 2002. On a consolidated basis, the Wealth
Management Area had approximately $1.2 billion in assets under management at
December 31, 2002. The following table indicates the breakdown of our trust
assets under administration at December 31, 2002 by account classification and
related gross revenue for the twelve months ended December 31, 2002 (not
including Lodestar):
AT OR FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 2002
-----------------------------
ACCOUNT TYPE MARKET VALUE REVENUE
------------ -------------- -------
(IN THOUSANDS)
Personal trust--managed.......................... $ 247,530 $ 1,295
Agency--managed.................................. 181,599 907
Custody.......................................... 277,598 580
Employee benefits--managed....................... 51,148 74
---------- ---------
Total....................................... $ 757,875 $ 2,856
We have chosen to outsource some of the investment management aspects
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 the breadth and depth of our
wealth management area. To that end, The PrivateBank (Chicago) acquired Lodestar
Investment Counsel, a Chicago-based investment adviser with $482 million of
assets under management at December 31, 2002. Lodestar manages equity, balanced,
and fixed income accounts primarily for high net-worth individuals, retirement
plans and charitable organizations with investable assets in excess of $1.0
million, and shares a similar focus on highly personalized client service.
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
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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.
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 delivery of the superior levels of personal service and
responsiveness desired by our clients. 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. For private
banking services, we compete with the private banking departments of major
Chicago and St. Louis-area financial institutions, some suburban banks, and
brokerage houses. For residential mortgage lending, we compete with banks,
savings and loans, mortgage brokers and numerous other financial services firms
offering mortgage loans in our market areas. Several of our competitors are
national or international in scope.
Some of our competitors are not subject to the same degree of
regulation as that imposed on bank holding companies, federally insured state
chartered banks, national banks and federal savings banks and may be able to
price loans and deposits more aggressively. 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, 2002, we had approximately 184 full-time equivalent
employees and an additional 6 full-time employees including our controlling
interest in Lodestar Investment Counsel, LLC. The salaries of all of our
employees are paid by either The PrivateBank (Chicago) or The PrivateBank (St.
Louis), with the exception of Messrs. Mandell and Svec and Lisa M. O'Neill, our
Director of Financial Reporting, a portion of whose salaries are paid by
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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.
AVAILABLE INFORMATION
Our Internet address is www.privatebankandtrust.com. We make available
at this address, free of charge, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC.
13
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.
Under the Federal Reserve's capital guidelines, bank holding companies
are required to maintain a minimum
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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, 2002, we had regulatory capital in excess of the
Federal Reserve's minimum requirements. Our total risk-based capital ratio at
December 31, 2002 was 8.29% and our leverage ratio was 5.47%.
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. The Federal Reserve, as a matter of policy, may require a
bank holding company to be well-capitalized at the time of filing an acquisition
application and upon consummation of the acquisition. 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, bank holding companies are allowed to
acquire banks across state lines subject to various requirements of the Federal
Reserve. 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
15
holding companies.
Under a longstanding policy of the Federal Reserve, we are expected to
act as a source of financial strength to our banking subsidiaries and to commit
resources to support them. The Federal Reserve takes the position that in
implementing this policy, it may require us to provide financial support when we
otherwise would not consider ourselves able to do so.
In addition to the restrictions on dividends imposed by the Federal
Reserve, Delaware law also places limitations on our ability to pay dividends.
For example, we may not pay dividends to our stockholders if, after giving
effect to the dividend, we would not be able to pay our debts as they become
due. Because a major source of our revenue could be dividends that 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 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, in addition to several other mandates, 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.
16
Dividends. The Illinois Banking Act provides that an Illinois bank may
not pay dividends of an amount greater than its current net profits after
deducting losses and bad debts while such bank continues to operate a banking
business. For the purpose of determining the amount of dividends that an
Illinois bank may pay, bad debts are defined as debts upon which interest is
past due and unpaid for a period of six months or more unless such debts are
well-secured and in the process of collection.
In addition to the foregoing, the ability of PrivateBancorp and The
PrivateBank (Chicago) to pay dividends may be affected by the various minimum
capital requirements and the capital and non-capital standards established under
the Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"),
as described below.
Federal Reserve System. The PrivateBank (Chicago) is subject to Federal
Reserve regulations requiring depository institutions to maintain
noninterest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations generally
require 3% reserves on the first $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 2002, and must therefore provide an annual report as required by
FDICIA.
17
As of December 31, 2002, 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
2002, The PrivateBank (Chicago) paid deposit insurance premiums in the aggregate
amount of $148,350. During 2001, The PrivateBank (St. Louis) paid deposit
insurance premiums in the aggregate amount of $38,017.
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 USA PATRIOT Act of 2001, enacted in response to the
September 11, 2001 terrorist attacks, requires bank regulations to consider a
financial institutions compliance with the BSA when reviewing applications.
Finalized rulings regarding customer identification procedures are expected to
be released in 2003 by the United States Treasury Department for this Act.
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:
18
.. 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.
Impact of the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (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 for 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 or 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.
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,
19
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).
20
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We
intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and we are including this statement for purposes
of these safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe our future plans, strategies and expectations,
can generally be identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Our ability to
predict results or the actual effect of future plans or strategies is inherently
uncertain and actual results may differ materially from the results discussed in
forward-looking statements. Factors which might cause such a difference include,
but are not limited to, further decline in market rates of interest and
fluctuations in loan and deposit pricing; greater than anticipated deterioration
in asset quality due to a prolonged economic downturn in the greater Chicago and
St. Louis metropolitan areas or nationally, or other unanticipated
circumstances; legislative or regulatory changes; adverse developments in our
loan or investment portfolios; significant increases in competition;
difficulties in identifying attractive acquisition opportunities or strategic
partners to complement our private banking approach; and the possible dilutive
effect of potential acquisitions or expansion. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
EXECUTIVE OFFICERS
The following persons serve as executive officers of PrivateBancorp:
Ralph B. Mandell (62), a director since 1989, is a co-founder of
PrivateBancorp and The PrivateBank (Chicago). A Managing Director of The
PrivateBank (Chicago) and a director of The PrivateBank (St. Louis), he has
served as Chairman and Chief Executive Officer of PrivateBancorp and The
PrivateBank (Chicago) since 1994 and assumed the additional title of President
of both entities in March 1999. From inception until 1994, Mr. Mandell had the
title of Co-Chairman. Prior to starting The PrivateBank (Chicago) and
PrivateBancorp, Mr. Mandell was the Chief Operating Officer of First United
Financial Services, Inc., from 1985 to 1989, and served as its President from
1988 to 1989. First United, a company that was traded on the NASDAQ National
Market, was sold to First Chicago Corporation in 1987. He also served as
President of Oak Park Trust & Savings Bank from 1985 until 1988. Prior thereto,
Mr. Mandell had served as Executive Vice President of Oak Park Trust & Savings
Bank since 1979.
Gary S. Collins (44) has been a Managing Director of The PrivateBank
(Chicago) since 1991. As a specialist in real estate lending, Mr. Collins has
spent more than 20 years managing diverse real estate transactions and the full
range of mortgage financing. Before joining the bank in 1991, he held senior
positions at several Chicago metropolitan area financial institutions, including
First Chicago Bank of Oak Park, First Colonial Bancshares and Avenue Bank of Oak
Park.
Richard C. Jensen (57), 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 (44) has been a Managing Director of The PrivateBank
(Chicago) since 1996. He serves as head of credit marketing and manager of the
Oak Brook office. Prior to joining the bank, he served as a regional manager
with Firstar Bank Illinois and its predecessor from 1990 to 1996, and as head of
a commercial banking division at American National Bank and Trust Company in
Chicago from 1987 to 1990, where he was employed from 1980 to 1990.
Kathleen Jackson (51) was named director of wealth management, Managing
Director and senior trust officer in August 2002. Ms. Jackson began her career
in 1978 as an agent with Aetna Life and Casualty. She left Aetna in the
mid-1980's to work in a variety of entrepreneurial endeavors advising financial
services companies on marketing and sales strategies. In 1993, she joined
Experian, a lending provider of direct marketing resources, as director of
marketing. Two years later she joined Bank One Investment Management Company,
Chicago (formerly
21
First Chicago NBD Investment Management Company) as national sales manager. She
was promoted to senior managing director of product management in 1998. In 1999,
she joined The Chicago Trust Company, then a wholly owned subsidiary of
Alleghany Asset Management, as senior vice president responsible for P & L,
strategy and overall leadership of the $2 billion personal trust and investment
services business.
James A. Ruckstaetter (56) has been a Managing Director since 1999 and
the Chief Credit Officer of The PrivateBank (Chicago) since January, 2002. His
diverse experience includes credit and loan administration, commercial lending
and residential real estate 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 Vice President
Relationship Manager at Bank of America.
Gary L. Svec (37), has been the Secretary/Treasurer and Chief Financial
Officer of PrivateBancorp since August 2000. Prior to joining the company,
Mr. Svec served as Vice President and as Investment and Asset/Liability
Specialist for Betzold, Berg, Nussbaum & Heitman, Inc., working with the firm's
financial institutions clients, from August 1995 to August 2000. He also served
as Chief Financial Officer of Betzold Berg Investment Management from
August 1995 to August 1998. From 1988 until July 1995, Mr. Svec was employed by
Crowe, Chizek & Company as an auditor, tax advisor and consultant to their
financial institutions group. Mr. Svec is a certified public accountant.
On January 27, 2003, Mr. Svec announced his intent to resign his position at
PrivateBancorp.
William A. Goldstein (63), is the Chief Executive Officer of Lodestar
Investment Counsel, LLC, an investment advisory firm recently acquired by the
Company, and has over 39 years of experience in the investment industry. Mr.
Goldstein was appointed to the Board of Directors of The PrivateBank (Chicago)
in January 2003 following completion of the acquisition and is also considered
an executive officer of the Company. Prior to founding Lodestar in 1989, he was
a Principal in the founding of Burton J. Vincent, Chesley & Co. where he served
as Executive Vice President and Director. In 1983 the firm was acquired by
Prescott, Ball & Turben (a subsidiary of Kemper Corporation). There Mr.
Goldstein was Chairman and Director of Prescott Asset Management, and President
of Selected Special Shares, a publicly traded mutual fund.
ITEM 2. PROPERTIES
We currently have seven physical banking locations and recently added
the space of Lodestar Investment Counsel, LLC. 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 35,579 square
feet comprising the entire second, 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. The Company purchased this building from Towne
Square Realty in June of 2002. The branch currently pays rent to the Holding
company.
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
22
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.
On December 31, 2002, The PrivateBank and Trust Company acquired a
controlling interest in an asset management company, Lodestar Investment
Counsel, LLC. Lodestar leases approximately 4,759 square feet in a building
located at 208 South Lasalle Street in downtown Chicago. The lease expires on
December 31, 2007.
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.
23
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 February 28, 2003, we had approximately 278 holders of record 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 (on a
split-adjusted basis).
HIGH LOW
--------- ---------
2002
First Quarter............................. $ 16.3333 $ 12.8000
Second Quarter............................ 21.9667 16.3333
Third Quarter............................. 20.9267 15.4633
Fourth Quarter............................ 26.5533 20.5733
2001
First Quarter............................. $ 10.6267 $ 6.2067
Second Quarter............................ 11.1533 9.0000
Third Quarter............................. 12.6667 10.0000
Fourth Quarter............................ 13.3333 10.5933
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 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.
2002
First Quarter....................................... $ 0.020
Second Quarter...................................... 0.020
Third Quarter....................................... 0.027
Fourth Quarter...................................... 0.027
2001
First Quarter....................................... $ 0.017
Second Quarter...................................... 0.017
Third Quarter....................................... 0.020
Fourth Quarter...................................... 0.020
EQUITY COMPENSATION PLAN INFORMATION
Information regarding our equity compensation plans are included in our
Proxy Statement under the heading "Equity Compensation Plan Information" and is
incorporated herein by reference.
24
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, 2002 consolidated
financial statements that have been audited by Ernst & Young 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,
--------------------------------------------------------------
2002(1) 2001 2000 1999 1998
----------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
INTEREST INCOME:
Loans, including fees........................................ $ 52,560 $ 50,975 $ 48,633 $ 26,597 $ 19,619
Federal funds sold and interest-bearing deposits............. 126 244 1,058 330 2,181
Securities................................................... 19,156 14,377 7,455 5,141 3,492
----------- ---------- --------- --------- ---------
Total interest income................................... 71,842 65,596 57,146 32,068 25,292
----------- ---------- --------- --------- ---------
INTEREST EXPENSE:
Interest-bearing demand deposits............................. 636 923 869 604 487
Savings and money market deposit accounts.................... 7,328 11,365 13,711 7,671 6,651
Time deposits................................................ 16,014 17,291 14,635 7,399 6,155
Funds borrowed............................................... 5,325 6,327 4,116 931 19
Long term debt - trust preferred securities.................. 1,939 1,731 -- -- --
----------- ---------- --------- --------- ---------
Total interest expense................................... 31,242 37,637 33,331 16,605 13,312
----------- ---------- --------- --------- ---------
Net interest income..................................... 40,600 27,959 23,815 15,463 11,980
Provision for loan losses.................................... 3,862 3,179 1,690 1,208 362
----------- ---------- --------- --------- ---------
Net interest income after provision for loan losses..... 36,738 24,780 22,125 14,255 11,618
----------- ---------- --------- --------- ---------
NON-INTEREST INCOME:
Banking, trust services and other income..................... 7,081 4,028 3,077 1,947 1,280
Securities gains............................................. 11 2,095 92 57 40
Trading losses............................................... (943) -- -- -- --
----------- ---------- --------- --------- ---------
Total non-interest income.................................. 6,149 6,123 3,169 2,004 1,320
----------- ---------- --------- --------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits............................... 13,979 9,111 8,174 5,156 4,077
Severance charge............................................. -- -- 562 -- --
Occupancy expense, net....................................... 4,891 4,158 2,987 1,563 1,379
Data processing.............................................. 1,509 1,295 820 478 508
Marketing.................................................... 1,648 1,208 1,202 692 567
Professional fees............................................ 3,689 2,939 2,135 1,295 561
Goodwill amortization........................................ -- 824 731 -- --
Insurance.................................................... 455 354 303 214 134
Towne Square Financial Corporation acquisition............... -- -- -- 1,300 --
Other expense................................................ 2,436 2,763 1,692 1,389 863
----------- ---------- --------- --------- ---------
Total non-interest expense.............................. 28,607 22,652 18,606 12,087 8,089
----------- ---------- --------- --------- ---------
Income before income taxes.............................. 14,280 8,251 6,688 4,172 4,849
Income tax provision......................................... 3,273 2,051 2,263 1,257 1,839
----------- ---------- --------- --------- ---------
Net income.............................................. $ 11,007 $ 6,200 $ 4,425 $ 2,915 $ 3,010
=========== ========== ========= ========= =========
PER SHARE DATA (2):
Basic earnings............................................... $ 1.49 $ 0.88 $ 0.64 $ 0.49 $ 0.61
Diluted earnings............................................. $ 1.42 0.85 0.62 0.46 0.57
Dividends.................................................... 0.09 0.07 0.07 0.07 0.05
Book value (at end of period)................................ 11.56 8.65 7.82 6.84 5.69
SELECTED FINANCIAL CONDITION DATA (AT END OF PERIOD):
Total securities(3).......................................... $ 487,020 $ 332,933 $ 172,194 $ 71,134 $ 116,891
Total loans.................................................. 965,641 780,771 598,724 397,277 281,965
Total assets................................................. 1,543,414 1,176,768 829,509 518,697 416,308
Total deposits............................................... 1,205,271 850,495 670,246 453,092 364,994
Funds borrowed............................................... 209,954 231,488 96,879 15,000 20,000
Total stockholders' equity................................... 89,092 62,304 54,249 47,080 29,274
Trust assets under administration............................ 1,239,779 722,713 777,800 729,904 611,650
25
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL RATIOS AND OTHER DATA:(3)
Performance Ratios:
Net interest margin(4)....................................... 3.44% 3.27% 3.63% 3.79% 3.64%
Net interest spread(5)....................................... 3.25 2.87 3.02 3.15 2.98
Non-interest income to average assets........................ 0.47 0.64 0.45 0.45 0.37
Non-interest expense to average assets (10).................. 2.17 2.37 2.64 2.71 2.29
Net overhead ratio(6)(10).................................... 1.70 1.73 2.19 2.26 1.91
Efficiency ratio(7)(10)...................................... 57.63 63.17 66.76 65.76 60.82
Return on average assets(8)(10).............................. 0.83 0.65 0.63 0.65 0.85
Return on average equity(9)(10).............................. 15.17 10.59 8.81 7.66 11.27
Dividend payout ratio........................................ 6.27 8.39 10.43 13.78 8.74
Asset Quality Ratios:
Non-performing loans to total loans........................ 0.14% 0.41% 0.24% 0.21% 0.36%
Non-accrual loans to total loans............................. 0.08 0.09 0.00 0.00 0.00
Allowance for probable loan losses to:
Total loans.................................................. 1.20 1.06 1.02 1.14 1.21
Non-performing loans......................................... 828 262 423 548 336
Net charge-offs to average total loans....................... 0.07 0.15 0.18 .03 --
Non-performing assets to total assets........................ 0.09 0.27 0.17 0.16 0.24
Balance Sheet Ratios:
Loans to deposits............................................ 80.1% 91.8% 89.3% 87.7% 77.3%
Average interest-earning assets to average interest-
bearing liabilities......................................... 107.9 109.8 112.2 116.3 116.4
Capital Ratios:
Average equity to average assets............................. 5.50% 6.13% 7.13% 8.51% 7.03%
Total risk-based capital ratio............................... 8.29 9.71 8.15 13.96 11.53
Tier 1 risk-based capital ratio.............................. 6.91 8.18 6.47 12.84 10.40
Leverage ratio............................................... 5.47 6.64 5.54 10.77 7.88
Ratio of Earnings to Fixed Charges(11):
Including deposit interest................................... 1.46x 1.22x 1.20x 1.25x 1.36x
Excluding deposit interest................................... 2.97 2.02 2.62 5.48 256.21
(1) Audited by Ernst & Young LLP. Prior year results audited by Arthur Andersen
LLP.
(2) Per share data has been adjusted to reflect the 3-for-2 dividend of our
common stock effective January 17, 2003.
(3) For all periods, the entire securities portfolio was classified "Available
for Sale."
(4) Net interest income divided by average interest-earning assets.
(5) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(6) Non-interest expense less non-interest income divided by average total
assets.
(7) Non-interest expense divided by the sum of net interest income, on a tax
equivalent basis, plus non-interest income.
(8) Net income divided by average total assets.
(9) Net income divided by average common equity.
(10) 2000 performance ratios presented in the table above include a third
quarter one-time severance and recruitment of new executive officers
charge, and 1999 performance ratios include one-time charges related to the
Towne Square Financial Corporation acquisition and St. Louis start-up costs
incurred in the third and fourth quarter, respectively, in the following
amounts (in thousands):
PRE-TAX AFTER-TAX
------- ---------
Severance charges................................ $ 562 $ 377
Towne Square Corporation acquisition............. 1,433 1,382
St. Louis start-up costs......................... 324 214
26
2000 and 1999 performance ratios excluding the special charges described
above are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999
---- ----
Non-interest expense to average assets......... 2.56% 2.32%
Net overhead ratio............................. 2.11 1.87
Efficiency ratio............................... 64.75 57.52
Return on average assets....................... 0.68 1.01
Return on average equity....................... 9.56 11.86
(11) 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.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
PrivateBancorp was organized as a Delaware corporation in 1989 to serve
as the holding company for a Chicago-based de novo (start-up) bank. Our flagship
downtown Chicago location opened in 1991. We expanded to Wilmette in north
suburban Cook County in 1994 and the Oak Brook facility in west suburban DuPage
County was established in 1997. We established the St. Charles office in January
2000, in connection with our purchase of Towne Square Financial Corporation (a
company which was in the process of forming a de novo, or start-up bank) on
August 3, 1999. On February 11, 2000, we consummated our acquisition of Johnson
Bank Illinois adding two additional locations of 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. In December 2002, The
PrivateBank and Trust Company acquired a controlling interest in Lodestar
Investment Counsel, a Chicago-based investment advisor with $482.0 million of
assets under management at December 31, 2002. Lodestar manages equity, balanced,
and fixed income accounts primarily for high net-worth individuals, retirement
plans and charitable organizations with investable assets in excess of $1.0
million, and shares a similar focus on highly personalized client service.
Since year-end 1995 to December 31, 2002, we have grown our asset base
at a compound annual rate of 35% to $1.5 billion. During the same period, loans
have grown at a compound annual rate of 34% to $965,600, deposits at a compound
annual rate of 32% to $1.2 billion and trust assets under administration at a
compound annual rate of 22% to $757.8 million. Diluted earnings per share (EPS)
have grown at a compound annual rate of 30% to $1.42 (split-adjusted) 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, 2002, included on page F-11.
The profitability of our operations depends on our net interest income,
provision for loan losses, non-interest income, and non-interest expense. Net
interest income is dependent on the amounts and yields of interest-earning
assets as compared to the amounts and rates on interest-bearing liabilities. Net
interest income is sensitive to changes in market rates of interest as well as
to the execution of our asset/liability management strategy. The provision for
loan losses is affected by changes in the loan portfolio, management's
assessment of the collectability of the loan portfolio, loss experience, as well
as economic and market factors.
Non-interest income consists primarily of net security gains and Wealth
Management fee income, and to a lesser extent, fees for ancillary banking
services. Non-interest income from fees and deposit service charges are below
peer group levels. This is largely the result of the profile of our typical
client. Our clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, we do not earn
high service charge income typical of many retail banks.
Non-interest expenses are heavily influenced by the growth of
operations. Our growth directly affects the majority of our expense categories.
CRITICAL ACCOUNTING POLICIES
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
critical accounting policies set out in the notes to consolidated financial
statements, beginning on page F-8. 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 FAS No. 142, which requires that
28
goodwill is no longer amortized but is tested annually for impairment.
CONSOLIDATED RESULTS OF OPERATIONS
NET INCOME
Our net income for the year ended December 31, 2002 was $11.0 million,
or $1.42 per diluted share, compared to $6.2 million, or $0.85 per diluted
share, for the year ended December 31, 2001. Our 2002 earnings per share
increased 67% as compared to the prior year earnings per share. Net income for
the year ended December 31, 2001 was $6.2 million, or $0.85 per diluted share,
compared to $4.4 million, or $0.62 per diluted share, for the year ended
December 31, 2000. Excluding one-time charges, our earnings were $4.8 million,
or $0.66 per diluted share, in 2000. Our 2001 earnings per share increased 29%
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 $0.05 per diluted
share, comprised of severance packages for two departing executives as well as
amounts incurred to secure their replacements.
The increase in earnings from operations is primarily attributable to
growth in the balance sheet, particularly in loans and investment securities,
funded by growth in deposits and improvement in our net interest margin.
Increased fee income, mainly from income from the sale of residential real
estate loans in the secondary market, also contributed to the improvement in
income.
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 issuance costs of trust preferred securities. The volume of
non-interest bearing funds, largely comprised of demand deposits and capital,
also affects the net interest margin.
Net interest income was $40.6 million for the year ended December 31,
2002, compared to $28.0 million for 2001, an increase of 45%. 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
2002 is primarily attributable to growth in earning assets. Average earning
assets for 2002 were $1.3 billion compared to $908.6 million for 2001, an
increase of 43%. Our net interest margin was 3.44% for the year ended December
31, 2002, compared to 3.27% for the prior year. Increased volumes of interest
earning assets at lower rates were offset by reduced interest rates on
liabilities. While our cost of funds was significantly less during 2002 than
2001, 2.68% compared to 4.55%, respectively, our loans repriced less quickly, we
received 7.61% in loan interest in 2001 compared to 6.12% in 2002. The effect of
non-interest bearing funds was 0.19% at December 31, 2002 compared to 0.41% at
December 31, 2001.
Net interest income was $28.0 million for the year ended December 31,
2001, compared to $23.8 million for
29
2000, an increase of 17%. 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.
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 compared to traditional deposits.
For 2003, we expect our net interest margin to improve if market
interest rates increase relative to 2002 levels. Alternatively, if market
interest rates decrease, we expect our net interest margin to continue to
experience pressure. 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.
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,
----------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
AVERAGE AVERAGE
BALANCE (1) INTEREST RATE BALANCE (1) INTEREST RATE
----------- ---------- ---------- ----------- ---------- ----------
Federal funds sold and other short-term
investments ............................ $ 2,822 $ 126 4.47% $ 4,862 $ 244 5.02%
Investment securities(2)
Investment securities(taxable) ........ 272,076 13,282 4.88% 162,192 10,901 6.68%
Investment securities(non-taxable) .... 119,408 8,768 7.34% 71,315 5,253 7.37%
Loans, net of unearned discount(3) ...... 858,783 52,560 6.07% 670,235 50,975 7.61%
----------- ---------- ---------- ----------- ---------- ----------
Total earning assets .................. $ 1,253,089 74,736 5.93% $ 908,605 $ 67,373 7.41%
=========== ========== =========== ==========
Deposits--interest bearing:
Interest-bearing demand accounts ...... $ 57,242 $ 636 1.11% $ 44,231 $ 923 2.09%
Savings and money market deposits ..... 410,522 7,328 1.78% 326,198 11,365 3.48%
Time deposits ......................... 537,296 16,014 2.97% 318,510 17,291 5.43%
----------- ---------- ---------- ----------- ----------
Total interest-bearing deposits ....... 1,005,060 23,978 2.39% 688,939 29,579 4.29%
Funds borrowed ........................ 136,292 5,325 3.85% 120,585 6,327 5.25%
Long term debt - trust preferred
securities ........................... 20,000 1,939 9.70% 17,918 1,731 9.66%
----------- ---------- ---------- ----------- ----------
Total interest bearing liabilities .. $ 1,161,352 $ 31,242 2.68% $ 827,442 $ 37,637 4.55%
=========== ========== =========== ==========
Tax equivalent net interest income ...... $ 43,494 $ 29,736
========== ==========
Non-interest-bearing demand accounts..... $74,743 $ 53,230
Net interest spread...................... 3.25% 2.87%
Net interest margin...................... 3.44% 3.27%
YEAR ENDED DECEMBER 31,
------------------------------------
2000
------------------------------------
AVERAGE
BALANCE (1) INTEREST RATE
----------- ---------- ----------
Federal funds sold and other short-term
investments ............................ $ 17,032 $ 1,058 6.11%
Investment securities(2)
Investment securities(taxable) ........ 77,043 5,725 7.32%
Investment securities(non-taxable) .... 37,101 2,615 7.05%
Loans, net of unearned discount(3) ...... 540,297 48,633 8.92%
----------- ---------- ----------
Total earning assets .................. $ 671,473 $ 58,031 8.57%
=========== ==========
Deposits--interest bearing:
Interest-bearing demand accounts ...... $ 37,415 $ 869 2.32%
Savings and money market deposits ..... 267,597 13,711 5.12%
Time deposits ......................... 235,049 14,635 6.23%
----------- ----------
Total interest-bearing deposits ....... 540,061 29,215 5.39%
Funds borrowed ........................ 58,500 4,116 6.96%
Long term debt - trust preferred
securities ........................... -- -- --
----------- ---------- ----------
Total interest bearing liabilities .. $ 598,221 $ 33,331 5.55%
=========== ==========
Tax equivalent net interest income ...... $ 24,700
==========
Non-interest-bearing demand accounts..... $ 48,940
Net interest spread...................... 3.02%
Net interest margin...................... 3.63%
(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 $2,894,000, $1,777,000, and $885,000, in the years ending
2002, 2001 and 2000, 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.
30
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,
---------------------------------------------------------------------------------------
2002 COMPARED TO 2001 2001 COMPARED TO 2000
------------------------------------------------ -----------------------------------
CHANGE CHANGE CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO DUE TO TOTAL DUE TO DUE TO DUE TO
RATE VOLUME MIX CHANGE RATE VOLUME MIX
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Federal funds sold and other short-
term investments ...................... $ (23) $ (101) $ 7 $ (117) $ (186) $ (744) $ 116
Investment securities (taxable) ........ (2,983) 7,385 (2,021) 2,381 (461) 6,233 (595)
Investment securities (non-taxable) .... (16) 3,543 (12) 3,515 119 2,412 106
Loans, net of unearned discount ........ (9,919) 14,235 (2,730) 1,586 (7,078) 11,590 (2,170)
--------- --------- --------- --------- --------- --------- ---------
Total interest income .................. (12,941) 25,062 (4,756) 7,365 (7,606) 19,491 (2,543)
--------- --------- --------- --------- --------- --------- ---------
Interest bearing deposits .............. (13,117) 13,562 (6,046) (5,601) (5,941) 8,025 (1,720)
Funds borrowed ......................... (1,592) 812 (221) (1,001) (995) 4,345 (1,139)
Trust Preferred Securities ............. 7 201 1 209 -- 1,731-
--------- --------- --------- --------- --------- --------- ---------
Total interest expense ................. (14,702) 14,575 (6,266) (6,393) (6,936) 12,370 (1,128)
--------- --------- --------- --------- --------- --------- ---------
Net interest income .................... $ (1,761) 10,487 (1,510) 13,758 $ (670) $ 7,121 $ (1,415)
========= ========= ========= ========= ========= ========= =========
TOTAL
CHANGE
---------
Federal funds sold and other short-
term investments ...................... $ (814)
Investment securities (taxable) ........ 5,177
Investment securities (non-taxable) .... 2,637
Loans, net of unearned discount ........ 2,342
---------
Total interest income .................. 9,342
---------
Interest bearing deposits .............. 364
Funds borrowed ......................... 2,211
Trust Preferred Securities ............. 1,731
---------
Total interest expense ................. 4,306
---------
Net interest income .................... $ 5,036
=========
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 36.
Our provision for loan losses was $3.9 million for the year ended
December 31, 2002, compared to $3.2 million for the comparable period in 2001.
Net charge-offs for the year ended December 31, 2002 were $583,000 and net
charge-offs for the year ended December 31, 2001 were $981,000. Our provision
for loan loss was $1.7 million in 2000 and we recognized $956,000 of net
charge-offs during 2000.
NON-INTEREST INCOME
Non-interest income increased slightly, by $26,000 or 0.42%, to $6.1
million for the year ended December 31, 2002. The relatively flat growth in
non-interest income in 2002 is attributable primarily to the recognition of net
investment securities gains of $11,000 during 2002 which included a charge of
$1.0 million related to an other than temporary impairment write-down on the
Company's interest-only collateralized mortgage obligation ("CMO") portfolio due
to accelerated mortgage prepayments experienced during the second half of the
year. The remaining carrying value of the Company's interest-only collateralized
mortgage obligation ("CMO") portfolio at December 31, 2002 was $1.1 million. The
fair market value adjustment on a previously disclosed $25.0 million 10-year for
3-month LIBOR interest rate swap resulted in trading losses of $943,000 for the
year ended December 31, 2002. Banking service charge income increased by
$444,000 over the prior year. Trust fee revenue increased 8% to $2.9 million in
2002 compared to $2.7 million in 2001. Trust assets under administration
increased 66% to $1.2 billion at year-end 2002, compared to $722.7 million at
December 31, 2001, primarily due to the acquisition of a controlling interest in
the assets of Lodestar Investment Counsel. Lodestar's assets under
administration at December 31, 2002 were $482.0 million. Trust assets for The
PrivateBank (Chicago), not including Lodestar, were $757.9 million at December
31, 2002.
31
The following table presents the breakdown of banking, trust services
and other income for the periods presented:
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Trust services ................................... $ 2,878 $ 2,671 $ 2,292
Residential real estate secondary market fees .... 2,248 319 --
Banking and other services ....................... 1,354 910 877
BOLI ............................................. 601 128 --
--------- --------- ---------
Total banking, trust services & other income...... $ 7,081 $ 4,028 $ 3,169
========= ========= =========
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 was 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. Trust 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 EXPENSE
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Salaries and employee benefits ................... $ 13,979 $ 9,111 $ 8,174
Severance charge.................................. -- -- 562
Occupancy......................................... 4,891 4,158 2,987
Data processing................................... 1,509 1,295 820
Marketing......................................... 1,648 1,208 1,202
Professional fees................................. 3,689 2,939 2,135
Goodwill amortization............................. -- 824 731
Insurance......................................... 455 354 303
Other expense..................................... 2,436 2,763 1,692
--------- --------- ---------
Total non-interest expense ...................... $ 28,607 $ 22,652 $ 18,606
========= ========= =========
Non-interest expense increased $6.0 million or 26% to $28.6 million for
the year ended December 31, 2002 compared to $22.6 million for 2001. The growth
in non-interest expense during 2002 represents the continued focus on expansion
at the Company. Increases in expenses for salaries and benefits, occupancy,
professional services, data processing and insurance reflect the impact of
growing our personnel, expanding to new locations and broadening the types of
products we offered in 2002.
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. Increases in expenses for salaries and benefits, occupancy,
professional services, data processing and insurance reflect the impact of our
personnel growth, the opening of our new banking office in Geneva, and
broadening our array of products in 2001. 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
32
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.
The following table shows our operating efficiency over the last three
years:
DECEMBER 31,
---------------------------------
2002 2001 2000 (1)
--------- --------- ---------
Non-interest expense to average assets............ 2.17% 2.37% 2.56%
Net overhead ratio(2)............................. 1.70 1.73 2.11
Efficiency ratio(3)............................... 57.63 63.17 64.75
- ----------
(1) Excludes the one-time severance charge incurred in 2000 in the amount of
$562,000.
(2) Non-interest expense less non-interest income divided by average total
assets.
(3) Non-interest expense divided by the sum of net interest income, on a tax
equivalent basis, plus non-interest income.
Our efficiency ratio (on a tax-equivalent basis), which measures the
percentage of net revenue that is expended as non-interest expense for the year
ended December 31, 2002 improved slightly to 57.6% as compared to an efficiency
ratio of 63.2% for the year ended December 31, 2001.
The improvement in our efficiency ratio during 2002 as compared to
prior years demonstrates that our business development efforts at our new
offices are generating revenue sufficient to offset the related operating
expenses. On a tax-equivalent basis, this ratio indicates that during 2002, we
spent 57.6 cents to generate each dollar of revenue, compared to 63.2 cents in
the prior year. The PrivateBank (St. Louis) became profitable during the fourth
quarter of 2001. Our newest location in Geneva is not yet profitable as the
costs of business development continued to exceed the related operating expenses
in 2002. However, the location has exceeded its growth targets for loans and
deposits during 2002. 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.
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, within one year
of the acquisition date.
Salary and employee benefit expense increased 53% to $13.9 million for
the year ended December 31, 2002 from $9.1 million for the year ended
December 31, 2001. During 2002, we added 29 full time equivalent employees to
our organization, an increase of 18% to 190 full-time equivalent employees from
160.5 at December 31, 2001. This includes the addition of 14 Managing Directors
and Associate Managing Directors.
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 also experienced personnel growth during 2001.
Professional fees, which include legal, accounting, consulting services
and investment management fees, increased 26% to $3.7 million for the year ended
December 31, 2002 from $2.9 for 2001. The increase between years is primarily
due to higher legal, accounting and information-system consultation services as
well as consulting services related to the remodeling of four floors at the
downtown Chicago location. During the fourth quarter of 2002, the bank also
commenced the implementation of a new telephone system. In addition, the
increase in wealth management-related business has resulted in increased
investment management fees paid to third parties during the years ended
December 31, 2002 and 2001.
During 2002, expenditures for information technology totaled $1.9
million, up from $1.1 million at December 31, 2001, representing investments in
software and hardware to upgrade the overall information technology
infrastructure. The new infrastructure has improved information systems
performance as well as strengthened the
33
organization's Business Continuity Strategy. The Information Technology Steering
Committee, established in 2001, monitored and provided oversight for our
information technology strategic plan.
In 2002, we also hired additional Information Technology staff, which
has provided greater technical support to the organization and ensured that the
new technological infrastructure is fully leveraged. Information technology
expenditures will continue in 2003 but are not expected to exceed technology
initiatives undertaken during 2002.
The other expense category of non-interest expense consists primarily
of postage, telephone, delivery, office supplies, training and other
miscellaneous expenses. During 2002 these expenses decreased slightly relative
to 2001 by 12%. During 2001 these expenses increased relative to 2000 by 63% due
to the continued implementation of our expansion strategy. These expenses have
stabilized during 2002.
INCOME TAXES
The following table shows our income before income taxes, applicable
income taxes and effective tax rate for the years ended December 31, 2002, 2001,
and 2000, respectively.
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Income before taxes............................... $ 14,280 $ 8,251 $ 6,688
Income tax provision.............................. 3,273 2,051 2,263
Effective tax rate................................ 22.9% 24.9% 33.8%
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 2002 as compared to 2001 reflects the
impact of growth in tax-exempt municipal securities. The average balance of
municipal securities was $119.4 million, $71.3 million, and $37.1 million for
the years ended December 31, 2002, 2001 and 2000, respectively. Decreases in the
effective tax rate for the year ended December 31, 2001 as compared to 2000
reflect a higher amount of interest income that was tax exempt in 2001 relative
to 2000.
34
FINANCIAL CONDITION
TOTAL ASSETS
Total assets were $1.5 billion at December 31, 2002, an increase of
$366.6 million, or 31%, from $1.2 billion at December 31, 2001. The balance
sheet growth during 2002 was accomplished mainly through loan growth throughout
the company and growth in the investment securities portfolio. The growth in
assets experienced during 2002 was funded primarily through growth in deposits,
including brokered deposits.
LOANS
Total loans increased to $965.6 million at December 31, 2002, an
increase of $184.8 or 24%, from $780.8 at December 31, 2001. The primary source
of loan growth for 2002 was increased volume in the commercial real estate and
construction loan categories. The historically low market interest rates also
impacted the increased demand for home equity loans. The PrivateBank (St. Louis)
had loans outstanding of $104.7 million as of December 31, 2002, growth of $31.2
million since December 31, 2001. The remaining loan growth of $153.6 million
experienced by the Company since December 31, 2001 was generated by the
PrivateBank (Chicago). All of the PrivateBank (Chicago) offices posted strong
gains in loan volume during 2002.
The following table sets forth the loan portfolio by category as of
December 31 for the previous five fiscal years:
YEAR ENDED DECEMBER 31,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Commercial real estate .... $ 452,703 $ 310,869 $ 206,464 $ 146,368 $ 94,392
Commercial ................ 165,993 163,279 137,343 67,026 46,800
Residential real estate ... 72,289 89,889 85,347 72,927 54,171
Personal .................. 70,676 64,411 62,414 57,497 44,094
Home equity ............... 80,776 59,795 46,013 24,396 20,100
Construction .............. 123,204 92,528 61,143 29,018 22,408
--------- --------- --------- --------- ---------
Total loans ........... $ 965,641 $ 780,771 $ 598,724 $ 397,277 $ 281,965
========= ========= ========= ========= =========
The following table classifies the loan portfolio, by category, at
December 31, 2002, 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 .. $ 275,542 $ 124,948 $ 52,213 $ 452,703 $ 112,615 $ 64,546
Commercial .............. 149,188 14,176 2,629 165,993 16,805 --
Residential real estate . 28,833 34,979 8,477 72,289 10,961 32,495
Personal ................ 60,120 1,299 9,257 70,676 10,556 --
Home equity ............. 80,776 -- -- 80,776 -- --
Construction ............ 123,182 9 13 123,204 22 --
--------- ---------- ---------- --------- --------- -------------
Total loans ........... $ 717,641 $ 175,411 $ 72,589 $ 965,641 $ 150,959 $ 97,041
========= ========== ========== ========= ========= =============
(1) Includes adjustable rate mortgage products.
35
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,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Balance at beginning of period .............. $ 8,306 $ 6,108 $ 4,510 $ 3,410 $ 3,050
Johnson Bank acquisition - loan loss reserve -- -- 864 -- --
Loans charged-off:
Commercial real estate ...................... -- -- -- -- --
Commercial .................................. (658) (939) (723) -- --
Residential real estate ..................... -- -- -- -- --
Personal .................................... (92) (113) (249) (108) (2)
Home equity ................................. -- -- -- -- --
Construction ................................ -- -- -- -- --
--------- --------- --------- --------- ---------
Total loans charged-off ................... (750) (1,052) (972) (108) (2)
--------- --------- --------- --------- ---------
Loans Recovered:
Commercial .................................. 117 43 8 -- --
Personal .................................... 49 28 8 -- --
--------- --------- --------- --------- ---------
Total loans recovered ..................... 167 71 16 -- --
--------- --------- --------- --------- ---------
Provision for loan losses ................... 3,862 3,179 1,690 1,208 362
--------- --------- --------- --------- ---------
Balance at end of period .................... $ 11,585 $ 8,306 $ 6,108 $ 4,510 $ 3,410
========= ========= ========= ========= =========
Average total loans ......................... $ 858,783 $ 669,114 $ 541,436 $ 332,502 $ 234,486
========= ========= ========= ========= =========
Net charge-offs to average total loans ...... 0.07% 0.15% 0.18% .03% --
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 that we deemed
relevant in determining the level of the allowance for loan losses.
DECEMBER 31,
----------------------------------------------------------------------------------------------------
2002 2001 2000 1999
---------------------- ---------------------- ---------------------- ----------------------
% OF % OF % OF % OF
LOANS TO LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ----------- -------- ----------- -------- ----------- -------- -----------
Commercial real estate . $ 3,483 47% $ 2,407 40% $ 1,575 35% $ 1,154 37%
Commercial ............. 1,962 17% 1,923 21% 1,727 23% 930 17%
Residential real estate 344 8% 500 11% 429 14% 423 18%
Personal ............... 583 7% 676 8% 658 10% 568 15%
Home equity ............ 569 8% 475 8% 412 8% 237 6%
Construction ........... 1,540 13% 1,225 12% 810 10% 369 7%
Unallocated ............ 3,104 -- 1,100 -- 497 -- 829 --
-------- ----------- -------- ----------- -------- ----------- -------- -----------
Total ................ $ 11,585 100% $ 8,306 100% $ 6,108 100% $ 4,510 100%
======== =========== ======== =========== ======== =========== ======== ===========
DECEMBER 31,
----------------------
1998
----------------------
% OF
LOANS TO
AMOUNT TOTAL LOANS
-------- -----------
Commercial real estate . $ 732 33%
Commercial ............. 693 17%
Residential real estate 277 19%
Personal ............... 545 16%
Home equity ............ 201 7%
Construction ........... 236 8%
Unallocated ............ 726 --
-------- -----------
Total ................ $ 3,410 100%
======== ===========
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.
36
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 1.20%
as of December 31, 2002, compared to 1.06% as of December 31, 2001. Net
charge-offs for the years ended December 31, 2002 and 2001 were $583,000 and
$981,000, respectively. Net charge-offs to average total loans were 0.07% for
2002 compared to 0.15% for 2001.
NON-PERFORMING LOANS
The following table classifies our non-performing loans as of the dates
shown:
DECEMBER 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Nonaccrual loans ........................... $ 749 $ 664 $ 24 $ 600 $ --
Loans past due 90 days or more ............. 650 2,504 1,421 223 1,016
-------- -------- -------- -------- --------
Total non-performing loans ............... 1,399 3,168 1,445 823 1,016
-------- -------- -------- -------- --------
Total non-performing assets .............. $ 1,399 $ 3,168 $ 1,445 $ 823 $ 1,016
======== ======== ======== ======== ========
Non-accrual loans to total loans ........... 0.08% 0.09% 0.00% 0.15% --
Total non-performing loans to total loans .. 0.14% 0.41% 0.24% 0.21% 0.36%
Total non-performing assets to total assets. 0.09% 0.27% 0.17% 0.16% 0.24%
It is our policy to discontinue the accrual of interest income on any
loan for which there exists reasonable doubt as to the payment of interest or
principal. Nonaccrual loans are returned to an accrual status when the financial
position of the borrower indicates there is no longer any reasonable doubt as to
the payment of principal or interest.
Other than those loans reflected in the table above, we had no
significant loans for which the terms had been renegotiated or restructured, or
for which there were serious doubts as to the ability of the borrower to comply
with repayment terms. We did not have any other real estate owned as of any of
the dates shown.
Potential Problem Loans. In addition to those loans reflected in the
table above, we have identified some loans through our problem loan
identification process which exhibit a higher than normal credit risk. Loans in
this category include those with characteristics such as past maturity more than
90 days, those that have recent adverse operating cash flow or balance sheet
trends, or loans that have general risk characteristics that management believes
might jeopardize the future timely collection of principal and interest
payments. The balance in this category at any reporting period can fluctuate
widely based on the timing of cash collections, renegotiations and renewals. The
principal amount of loans in this category as of December 31, 2002 was $650,000.
At December 31, 2002, there were no significant loans which were classified by
any bank regulatory agency that are not included above as nonaccrual, past due
or restructured.
Nonaccrual loans were $749,000 as of December 31, 2002 compared to
$664,000 at December 31, 2001. Included in nonaccrual loans is a single $430,000
loan relationship at The PrivateBank (Chicago).
Nonperforming loans include nonaccrual loans and accruing loans that
are 90 days or more delinquent. Nonperforming loans were $1.4 million as of
December 31, 2002, compared to $3.2 million at December 31, 2001. Nonperforming
loans were 0.14%, and 0.41% of total loans at December 31, 2002 and December 31,
2001, respectively. Nonperforming assets were 0.09% and 0.27% of total assets as
of December 31, 2002 and December 31, 2001, respectively.
37
Loan Concentrations. Loan concentrations are considered to exist when
there are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
conditions. Other than loans made to borrowers residing in the Chicago and
St. Louis metropolitan areas and our involvement in lending secured by real
estate, we had no concentrations of loans exceeding 10% of total loans at
December 31, 2002 or December 31, 2001.
INVESTMENT SECURITIES
Investments are comprised of federal funds sold, debt securities and,
to a lesser extent, equity investments. Federal funds sold are overnight
investments in which, except for cash reserves, all remaining funds are
invested. Our debt securities portfolio is primarily comprised of U.S.
government agency obligations, municipal bonds, mortgage-backed pools and
collateralized mortgage obligations.
All securities are classified as available-for-sale and may be sold as
part of our asset/liability management strategy in response to changes in
interest rates, liquidity needs or significant prepayment risk. Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital. At December 31, 2002, reported stockholders' equity reflected
unrealized securities gains net of tax of $8.8 million. This represented an
improvement of $8.5 million from unrealized securities gains net of tax of
$323,000 at December 31, 2001.
Securities available-for-sale increased to $487.0 million at
December 31, 2002, up 46% from $332.9 million as of December 31, 2001. The
growth in the investment security portfolio since December 31, 2001 resulted
from the continued implementation of our asset/liability management strategy.
The Company held no U.S. government agency obligations in 2002 or 2001.
U.S. government agency mortgage backed securities and collateralized mortgage
obligations increased by $57.0 million from December 31, 2001 to December 31,
2002. Corporate collateralized mortgage obligations decreased by $4.8 million
to $18.7 million. The net decrease in collateralized CMO's reflects the
write-down of specific CMO's due to accelerated mortgage prepayments experienced
during the second half of the year. Tax-exempt municipal securities increased to
$134.8 million at December 31, 2002 as compared to the year-end 2001 amount of
$106.9 million, an increase of $28.0 million, providing net interest margin
protection in a falling interest-rate environment. Investments in Federal Home
Loan Bank Stock increased by $62.6 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 $3.8 million and $5.8 million
outstanding as of December 31, 2002 and 2001, respectively.
The following table presents the components of our available-for-sale
investment securities portfolio for the years presented:
DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
(IN THOUSANDS)
Available-for-Sale
U.S. government agency obligations ................... $ -- $ -- $ 4,399
U.S. government agency mortgage backed securities and
collateralized mortgage obligations ................. 158,394 101,376 84,347
Corporate collateralized mortgage obligations ........ 18,675 23,462 10,123
Tax exempt municipal securities ...................... 134,836 106,925 36,644
Taxable municipal securities ......................... 4,697 6,051 1,141
Federal Home Loan Bank stock ......................... 155,606 92,964 35,175
Other ................................................ 14,812 2,155 365
--------- --------- ---------
Total ................................................ $ 487,020 $ 332,933 $ 172,194
========= ========= =========
38
The following tables show the effective maturities of investment
securities (based upon the amortized cost), by category, as of December 31,
2002, and the weighted average yield (computed on a tax equivalent basis) for
each range of maturities of securities, by category, as of December 31, 2002.
For the mortgage backed securities and collateralized mortgage obligations
categories, the effective maturity and weighted average yield are based upon
mortgage prepayment estimates. Actual mortgage prepayments may vary due to
changes in interest rates, economic conditions and other factors.
WITHIN FROM ONE TO FROM FIVE AFTER
ONE YEAR FIVE YEARS TO TEN YEARS TEN YEARS
-------------- -------------- -------------- --------------
(IN THOUSANDS)
U.S. government agency obligations ............ $ -- $ -- $ -- $ --
U.S. government agency mortgage backed
securities and collateralized
mortgage obligation .......................... 57,321 78,546 14,852 4,791
Corporate collateralized mortgage Obligations . 11,750 6,416 -- --
Tax exempt municipal securities(2) ............ 338 1,762 9,896 114,508
Taxable municipal securities .................. -- -- 964 3,619
Federal Home Loan Bank stock(1) ............... -- -- -- --
Other ......................................... -- 10,795 -- 2,176
-------------- -------------- -------------- --------------
Total ......................................... $ 69,409 $ 97,519 $ 25,712 $ 125,094
============== ============== ============== ==============
SECURITIES WITH
NO STATED
MATURITY TOTAL
------------------ --------------
U.S. government agency obligations ............ $ -- $ --
U.S. government agency mortgage backed
securities and collateralized
mortgage obligation .......................... -- 155,510
Corporate collateralized mortgage Obligations . -- 18,166
Tax exempt municipal securities(2) ............ 126,504
Taxable municipal securities .................. -- 4,583
Federal Home Loan Bank stock(1) ............... 155,606 155,606
Other ......................................... 308 13,279
------------------ --------------
Total ......................................... $ 155,914 $ 473,648
================== ==============
WITHIN FROM ONE TO FROM FIVE AFTER
ONE YEAR FIVE YEARS TO TEN YEARS TEN YEARS
-------------- -------------- -------------- --------------
(IN THOUSANDS)
U.S. government agency obligations............. -- -- -- --
U.S. government agency mortgage
backed securities and collateralized
mortgage obligations.......................... 5.29% 4.58% 5.51% 5.54%
Corporate collateralized mortgage obligations.. 5.46 5.21 -- --
Tax exempt municipal securities(2)............. 5.69 6.78 6.75 7.28
Taxable municipal securities................... -- -- 6.10 7.66
Federal Home Loan Bank stock(1)................ -- -- -- --
Other.......................................... 5.32 9.71
-------------- -------------- -------------- --------------
Total.......................................... 5.33% 4.74% 6.01% 7.26%
============== ============== ============== ==============
SECURITIES WITH
NO STATED
MATURITY TOTAL
------------------ --------------
U.S. government agency obligations............ -- --
U.S. government agency mortgage
backed securities and collateralized
mortgage obligations.......................... -- 4.96%
Corporate collateralized mortgage obligations.. -- 5.37%
Tax exempt municipal securities(2)............. -- 7.23%
Taxable municipal securities................... -- 7.33%
Federal Home Loan Bank stock(1)................ 5.00 5.00%
Other.......................................... 1.33 5.95%
------------------ --------------
Total.......................................... 4.99% 5.64%
================== ==============
(1) The Company is required to maintain a ratio of 20:1 of FHLB borrowings to
FHLB stock. As of December 31, 2002, the Company had $77.8 million dollars
in advances from the FHLB ($66.3 million from the FHLB of Chicago and $11.5
million from the FHLB of Des Moines, IA). The remaining $151.0 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.
(2) The weighted average yield reflects a tax-equivalent adjustment based on a
marginal federal corporate tax rate of 35%.
DEPOSITS AND FUNDS BORROWED
Total deposits of $1.2 billion as of December 31, 2002 represented an
increase of $354.5 million, or 42%, from $850.5 million as of December 31, 2001.
Overall, each deposit category as a percentage of total deposits remained
relatively constant in 2002 as compared to 2001, with the exception of continued
growth in brokered deposits. During 2002, we continued to utilize brokered
deposits as an alternative source of liquidity as compared to traditional core
deposits. We expect to continue to rely on brokered deposits in 2003 as a source
of liquidity. Non-interest-bearing deposits were $89.0 million as of December
31, 2002, a $15.9 million increase over the $73.1 million reported as of
December 31, 2001. Interest-bearing demand deposits increased $12.8 million to
$64.9 million at December 31, 2002 compared to $52.1 million at December 31,
2001. Savings and money market deposit accounts increased by $126.0 million to
$488.9 million at December 31, 2002 as compared to $363.0 million at December
31, 2001. Other time deposits increased by approximately $59.3 million to $282.6
million as compared to $223.4 million at year-end 2001. Brokered deposits,
increased to $279.8 million at December 31, 2002 from $138.9 million at December
31, 2001.
39
The following table presents the balances of deposits by category and
each category as a percentage of total deposits at December 31, 2002 and 2001.
DECEMBER 31,
-----------------------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ----------------------------- -----------------------------
PERCENT PERCENT PERCENT
BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL
------------- ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
Demand .................. $ 88,986 7% $ 73,146 9% $ 61,789 9%
Savings ................. 6,344 1% 12,158 1% 8,242 1%
Interest-bearing demand . 64,893 5% 52,061 6% 51,301 8%
Money market ............ 482,597 40% 350,829 41% 297,043 44%
Brokered deposits ....... 279,806 23% 138,911 17% 43,842 7%
Other time deposits ..... 282,645 24% 223,390 26% 208,029 31%
------------- ------------- ------------- ------------- ------------- -------------
Total deposits ........ $ 1,205,271 100% $ 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,
---------------------
2002 2001
--------- ---------
(IN THOUSANDS)
Three months or less .......... $ 162,619 $ 162,036
Over three through six months . 57,568 65,897
Over six through twelve months 132,036 87,043
Over twelve months ............ 146,646 17,055
--------- ---------
Total ....................... $ 498,869 $ 332,031
========= =========
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.
The scheduled maturities of time deposits (including brokered deposits)
as of December 31, 2002, for the years 2003 through 2007 and thereafter, are as
follows:
For year ending December 31,
2003................................ $ 473,794
2004................................ 66,138
2005................................ 4,445
2006................................ 2,605
2007 and thereafter................. 15,469
---------
Total ............................ $ 562,451
=========
40
We continued to utilize brokered deposits as a source of funding for
growth in our loan and investment portfolios in 2002. In the past we have issued
certain brokered deposits that included call option provisions, which can
provide us with the opportunity to repay the certificates of deposit on a
specified date prior to the contractual maturity date. As of December 31, 2002,
there were no outstanding brokered deposits containing call provisions. The
following table presents the maturity and rate of our brokered deposits, net of
unamortized prepared brokered commissions as of December 31, 2002.
Brokered Deposits net of unamortized prepaid brokered commissions
at December 31, 2002 (in thousands)
MATURITY DATE RATE (1) AMOUNT
- ------------- --------- ---------
11/13/07 3.400% $ 7,000
10/18/04 2.300% 7,668
8/30/04 2.500% 25,000
4/21/04 2.100% 10,000
4/19/04 2.250% 5,000
12/31/03 1.800% 953
10/17/03 2.050% 3,000
10/17/03 1.850% 6,699
10/17/03 2.050% 5,000
9/5/03 3.800% 2,394
7/24/03 2.400% 17,425
7/21/03 2.450% 15,312
7/17/03 2.250% 20,000
6/27/03 7.050% 4,548
6/23/03 7.200% 2,594
4/21/03 2.200% 11,063
4/16/03 2.000% 10,000
2/24/03 2.350% 5,037
2/19/03 2.000% 10,000
1/31/03 1.850% 13,867
1/30/03 2.150% 20,000
1/27/03 2.650% 10,000
1/20/03 2.750% 19,970
1/17/03 1.900% 12,858
1/16/03 2.500% 10,000
1/10/03 2.600% 25,000
---------
Total brokered deposits $ 280,388
Unamortized prepaid broker commissions (582)
---------
Total brokered deposits, net of unamortized
prepaid brokered commissions $ 279,806
=========
(1) Represents the coupon rate of each brokered deposit.
41
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:
FUNDS BORROWED: CURRENT RATE MATURITY 12/31/02 12/31/01 12/31/00
----------------------------------- ------------ ------------ ------------ ------------ ------------
Subordinated note 3.75% 2/11/07 $ 5,000 $ 5,000 $ 5,000
FHLB fixed advance(1) 6.50% 10/23/05 26,616 24,886 25,000
FHLB fixed advance 6.21% 12/05/03 30,000 30,000 30,000
FHLB fixed advance 1.73% 11/07/03 6,000 -- --
FHLB fixed advance 2.21% 07/17/03 1,000 -- --
FHLB fixed advance 2.74% 07/17/03 1,000 -- --
FHLB fixed advance 2.46% 06/16/03 500 -- --
FHLB fixed advance 2.70% 05/08/03 1,000 -- --
Borrowing under revolving line of
credit facility 3.50% 4/11/03 25,000 -- --
FHLB fixed advance 2.98% 03/10/03 1,000 -- --
FHLB fixed advance 2.38% 01/13/03 1,000 -- --
FHLB fixed advance 5.89% 12/20/02 -- 1,000 1,000
FHLB fixed advance 2.39% 11/12/02 -- 5,000 --
FHLB fixed advance 5.33% 07/22/02 -- 1,000 --
FHLB fixed advance 5.91% 06/21/02 -- 500 500
FHLB fixed advance 4.21% 05/13/02 -- 1,000 --
FHLB fixed advance 5.02% 03/06/02 -- 1,000 --
FHLB fixed advance 3.10% 02/11/02 -- 5,000 18,000
FHLB fixed advance 4.30% 02/01/02 -- 25,000 --
FHLB fixed advance 5.21% 01/22/02 -- 1,000 --
FHLB fixed advance 6.49% 11/30/01 -- -- 2,000
FHLB floating rate advance(2) 6.77% 5/1/01 -- -- 10,000
FHLB open line advance 1.48% daily 9,700 25,000 --
Fed funds purchased 1.49% daily 98,000 103,000 2,700
Demand repurchase agreements (3) 1.40% daily 4,138 3,102 2,679
------------ ------------ ------------
Total funds borrowed $ 209,954 $ 231,488 $ 96,879
============ ============ ============
(1) This FHLB advance is subject to a fair value hedge utilizing an interest
rate swap with a fair value of $2.9 million. The contractual par amount on
the advance is $25.0 million.
(2) The rate on this FHLB floating rate advance is set at one-month LIBOR minus
five basis points.
(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 2002, we decreased our use 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 2003
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 $77.8
million at December 31, 2002 compared to $120.4 million at December 31, 2001.
42
At December 31, 2002 and 2001, we had $3.3 million in FHLB letters of
credit outstanding. We pay 0.125% per annum for FHLB letters of credit. The
following table shows the maximum availability for and usage of FHLB advances
and letters of credit for The PrivateBank (Chicago) and The PrivateBank (St.
Louis).
MAXIMUM
DATE AVAILABILITY USAGE
- ---- ------------- -------------
(IN THOUSANDS)
As of December 31, 2002-
The PrivateBank (Chicago) ....... $ 69,072 67,998
The PrivateBank (St. Louis) ..... 14,738 11,500
As of December 31, 2001-
The PrivateBank (Chicago) ....... $ 109,146 $ 108,298
The PrivateBank (St. Louis) ..... 16,295 10,500
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, 2002 and 2001, we had
approximately $149.0 million and $166.2 million, respectively, of securities
collateralizing such public deposits. Deposits requiring pledged assets are not
considered to be core deposits, and the assets that are pledged as collateral
for these deposits are not deemed to be liquid assets.
On February 11, 2002, the Company renewed the term on an $18.0 million
revolving credit facility with a commercial bank originally entered into on
February 11, 2000. On April 11, 2002, the loan agreement was amended and the
revolving line was increased to $25.0 million. Effective December 31, 2002, the
revolving line was increased to $35.0 million. The interest rate on borrowings
under this revolving line resets quarterly, and is based on, at our option,
either the lender's prime rate or three-month LIBOR plus 120 basis points with a
floor of 3.50%. The Company has elected to pay interest based on the three-month
LIBOR rate plus 120 basis points. The initial rate of interest on the revolver
was 7.20%, and most recently reset to 3.50% on December 31, 2002. The collateral
for this borrowing consists of the common stock of The PrivateBank (Chicago) and
The PrivateBank (St. Louis), which is held in custody by the lender. As of
December 31, 2002, the outstanding balance was $25.0 million.
On February 11, 2000, the Company entered into a subordinated note
issued to Johnson International, Inc. and subsequently sold to a third party, 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. On February 11, 2002, the interest rate
increased from LIBOR +50 basis points to LIBOR +200 basis points. This pricing
is in effect until February 11, 2004, at which point the pricing increases to
LIBOR +350 until maturity on February 11, 2007. The average rate of interest on
the subordinated note was 3.56% during 2002 compared to 4.86% during 2001 and
most recently reset to 3.75% on December 31, 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.
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 a 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 interest rate risk through the use of derivative
financial instruments. We use derivative financial instruments as risk
management.
43
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 associated with
this fair value hedge was $2.9 million on December 31, 2002. As market interest
rates continued to decline to historic lows in the second half of 2002, the
value of the Company's long-term tax-exempt bank-qualified municipal bond
portfolio increased. In order to protect this gain should rates rise, the
Company entered into a $25 million swap agreement whereby we sold the 10-year
swap and bought 3-month LIBOR to act as an economic hedge to a portion of our
long municipal bonds. At December 31, 2002 the market value of the interest rate
swap associated with this economic hedge was a liability of $1.1 million. The
loss on the swap is recognized in earnings and resulted from declines in market
rates of interest since the third quarter 2002.
During 2002, we continued to actively manage 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 2002, we continued to
replace specific investment securities with alternative investment securities
with greater risk reward parameters on a selective basis. 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, 2002 rose to $89.1 million, an
increase of $26.8 million from the 2001 year-end level of $62.3 million, due
primarily to the increase in net income from the year ended December 31, 2002 as
well as the increase in the fair value of investment securities classified as
available for sale net of tax and increases in shares issued.
We are subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings and other factors, and
the regulators can lower classifications in certain areas. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If a banking subsidiary is not
"well capitalized," regulatory approval is required to accept brokered deposits.
If undercapitalized, capital distributions are limited as is asset growth and
expansion and plans for capital restoration are required.
The following table reflects various consolidated measures of our
capital at December 31, 2002 and 2001:
DECEMBER 31,
-----------------
2002 2001
---- ----
Leverage ratio.......................... 5.47% 6.64%
Tier 1 risk-based capital ratio......... 6.91 8.18
Total risk-based capital ratio.......... 8.29 9.71
Total equity to total assets............ 5.77 5.29
44
As of December 31, 2002, all of the Company's $20.0 million of trust
preferred securities are 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.
A portion of 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, 2002, we continued to exceed the minimum
levels of all regulatory capital requirements, and were considered "adequately
capitalized" under regulatory standards. At December 31, 2002, our total
risk-based capital ratio was 8.29%. With the exception of the total risk-based
capital ratio, we exceeded the "well-capitalized" levels of our regulatory
capital requirements. At December 31, 2002, The PrivateBank (Chicago) and The
PrivateBank (St. Louis) were considered "well-capitalized" under all applicable
regulatory standards, including total risk-based capital ratio.
LIQUIDITY
Liquidity measures our ability to meet maturing obligations and our
existing commitments, to withstand fluctuations in deposit levels, to fund our
operations and to provide for our clients' credit needs. Our liquidity
principally depends on our cash flows from our operating activities, investment
in and maturity of assets, changes in balances of deposits and borrowings and
our ability to borrow funds in the money or capital markets. Liquidity
management involves planning to meet anticipated funding needs at a reasonable
cost. Liquidity management is guided by policies, formulated and monitored by
our senior management and the banks' asset/liability committees, which take into
account the marketability of assets, the sources and stability of funding and
the level of unfunded commitments. Our principal sources of funds are deposits,
short-term borrowings and capital contributions by PrivateBancorp to the banks
funded by proceeds from draws on our line of credit or through new capital.
Our core deposits, the most stable source of liquidity due to the
nature of long-term relationships generally established with our clients, are
available to provide long-term liquidity. At December 31, 2002, 56% of our total
assets were funded by core deposits, even with December 31, 2001 levels. 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.
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. During 2002 and 2001 we expanded our
brokered deposits program in order to fund liquidity of The PrivateBank
(Chicago). In 2003 we expect to continue to rely on brokered deposits together
with increased Federal Home Loan Bank advances as alternative methods of funding
loan growth. We will first look toward internally generated deposits as funding
sources, but plan to supplement our funding needs with non-traditional funding
sources as needed. The PrivateBank (St. Louis) also purchases brokered deposits
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,
as well as available-for-sale securities. Net liquid assets represent the sum of
the liquid asset categories less the amount of assets pledged to secure public
funds. At December 31, 2002, net liquid assets at The PrivateBank (Chicago) were
$300.6 million as compared to $240.3 million at December 31, 2001. At December
31, 2002, net liquid assets at The PrivateBank (St. Louis) were $22.1 million as
compared to $18.2 million at December 31, 2001.
45
Net cash inflows provided by operations were $17.4 million for the year
ended December 31, 2002 compared to a net inflow of $9.6 million a year earlier.
Net cash outflows from investing activities were $338.5 million for the year
ended December 31, 2002, compared to a net cash outflow of $363.0 million a year
earlier. Cash inflows from financing activities for the year ended December 31,
2002 were $333.0 million compared to a net inflow of $335.7 million in 2001.
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 $10
million under the $35.0 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, 2002 was 0.85 and was within the guidelines of our policy. We have
continued to maintain our gap position near the low end set by our policy
guidelines and expect to continue to operate in this manner as long as the
general rate structure of the economy and our business opportunities remain
consistent. Therefore, generally speaking, a short-term rise in interest rates
will hurt our earnings, while a short-term drop in interest rates would help our
earnings.
Interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously. There are other factors that are
difficult to measure and predict that would influence the effect of interest
rate fluctuations on our income statement. For example, a rapid drop in interest
rates might cause our loans to repay at a more rapid pace and certain
mortgage-related investments to prepay more quickly than projected. This could
mitigate some of the benefits of falling rates that are expected when negatively
gapped. Conversely, a rapid rise in rates could give us an opportunity to
increase our margins and stifle the rate of repayment on our mortgage-related
loans which would
46
increase our returns.
The following tables illustrate the estimated interest rate sensitivity
and periodic and cumulative gap positions calculated as of December 31, 2002 and
2001.
DECEMBER 31, 2002
TIME TO MATURITY OR REPRICING
(DOLLARS IN THOUSANDS)
91-365 OVER 5
0-90 DAYS DAYS 1-5 YEARS YEARS TOTAL
INTEREST-EARNING ASSETS
Loans $ 635,664 $ 77,465 $ 175,066 $ 79,197 $ 967,392
Investments 163,621 21,138 26,576 261,208 472,543
Short-term investments 258 - - - 258
--------- ----------- ----------- ----------- -----------
Total interest-earning assets $ 799,543 $ 98,603 $ 201,642 $ 340,405 $ 1,440,193
========= =========== =========== =========== ===========
INTEREST-BEARING LIABILITIES
Interest-bearing demand $ - $ - $ - $ 64,892 $ 64,892
Savings and money market 486,819 1,262 - 859 488,940
Time deposits 191,238 205,474 91,872 73,868 562,452
Funds borrowed 143,838 31,500 53,000 - 228,338
--------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities $ 821,895 $ 238,236 $ 144,872 $ 139,619 $ 1,344,622
========= =========== =========== =========== ===========
CUMULATIVE
Rate sensitive assets (RSA) $ 799,543 $ 898,146 $ 1,099,788 $ 1,440,193
Rate sensitive liabilities (RSL) 821,895 1,060,131 1,205,003 1,344,622
GAP (GAP=RSA-RSL) (22,352) (161,985) (105,215) 95,571
RSA/RSL 97.28% 84.72% 91.27% 107.11%
RSA/Total assets 51.80% 58.19% 71.26% 93.31%
RSL/Total assets 53.25% 68.69% 78.07% 87.12%
GAP/Total assets 1.45% 10.50% 6.82% 6.19%
GAP/Total RSA 2.80% 18.04% 9.57% 6.64%
DECEMBER 31, 2001
TIME TO MATURITY OR REPRICING
(DOLLARS IN THOUSANDS)
91-365 OVER 5
0-90 DAYS DAYS 1-5 YEARS YEARS TOTAL
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
Short-term investments 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/Total RSA 2.74% 36.69% 9.01% 8.54%
47
The following table shows the impact of an immediate 200 basis point
change in interest rates as of December 31, 2002 and December 31, 2001. 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, 2002 DECEMBER 31, 2001
--------------------------- ---------------------------
+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................. 2.9% -10.5% 3.0% -4.7%
This table shows that if there had been an instantaneous parallel shift
in the yield curve of -200 basis points on December 31, 2002 and December 31,
2001, we would suffer a decline in net interest income of -10.5% and -4.7%,
respectively over each one-year period. Conversely, a shift of +200 basis points
would increase net interest income 2.9% over a one-year horizon based on
December 31, 2002 balances, as compared to 3.0% measured on the basis of the
December 31, 2001 portfolio.
Changes in the effect on net interest income from a 200 basis point
movement at December 31, 2002, compared to December 31, 2001 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,
2002 as compared to December 31, 2001 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
Effective May 23, 2002, we changed our independent public accountants
from Arthur Andersen LLP to Ernst
48
& Young LLP. This change was previously reported in our current report on Form
8-K, as filed with the Securities and Exchange Commission on May 24, 2002.
On May 23, 2002, the Audit Committee of the Board of directors of the
Company approved a change in auditors. The Board of Directors ratified the Audit
Committee's engagement of Ernst & Young LLP to serve as the Company's
independent public accountants, effective immediately. Andersen had been the
Company's independent public accountants since 1991.
Andersen's reports on the consolidated financial statements of the
Company and its subsidiaries for the two fiscal years ended December 31, 2001
did not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's two fiscal years ended December 31, 2001 and the
subsequent interim period through May 23, 2002, there were no disagreements
between the Company and Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Andersen's satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their reports on the Company's consolidated financial statements for such
years; and there were no reportable events as described in Item 304 (a)(1)(v) of
Regulation S-K.
The Company provided Andersen with a copy of the foregoing disclosures.
A copy of Andersen's letter, dated May 24, 2002, stating its agreement with such
statements was filed with the SEC as an exhibit to the Company's Current Report
on Form 8-K dated May 24, 2002.
During the Company's two fiscal years ended December 31, 2001 and the
subsequent interim period through May 23, 2002, the Company did not consult with
Ernst & Young LLP with respect to the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding directors of the Company is included in the
Company's Proxy Statement for its 2003 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.
49
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this annual report, the
Company's Chief Executive Officer and Chief Financial Officer carried out an
evaluation under their supervision, with the participation of other members of
management as they deemed appropriate, of the effectiveness of the design and
the operation of the Company's disclosure controls and procedures as
contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective, in all
material respects, in timely alerting them to material information relating to
the Company (and its consolidated subsidiaries) required to be included in the
periodic reports the Company is required to file and submit to the SEC under the
Exchange Act.
There have been no significant changes to the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date that the internal controls were most recently evaluated.
There were no significant deficiencies or material weaknesses identified in that
evaluation and, therefore, no corrective actions were taken.
PART IV
ITEM. 15. 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.
(a)(3) EXHIBITS
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).
50
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
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 Lease Agreement dated August 31, 1995 between 208 South LaSalle
Associates, L.P. and Lodestar Financial Services, Inc.+
10.10 First Amendment to lease dated February 15, 2000 between
LaSalle-Adams, L.L.C. and Lodestar Financial Services, Inc.+
10.11 Second Amendment to lease dated August 12, 2002 between
LaSalle-Adams, L.L.C. and Lodestar Investment Counsel, Inc.+
10.12 Pledge Agreement dated as of May 28, 1998 by and between the
Ralph B. Mandell Revocable Trust UTA dated June 5, 1997 and
PrivateBancorp, Inc. (Included as Exhibit B to Stock Purchase
Agreement filed as Exhibit 10.6 to the Company's Form S-1
Registration Statement (File No. 333-77147) and incorporated
herein by reference).
10.13 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).*
10.14 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).*
10.15 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).
10.16 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 ).*
10.17 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).*
10.18 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).
10.19 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).
10.20 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).
10.21 Amendment No. 1 to Loan Agreement dated as of February 11, 2002
between PrivateBancorp, Inc. and LaSalle Bank National
Association. (Filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002 and
incorporated herein by reference).
10.22 Amendment No. 2 to Loan Agreement dated as of April 11, 2002
between PrivateBancorp, Inc. and LaSalle Bank National
Association. (Filed as an exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002 and
incorporated herein by reference).
51
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
10.23 Amendment No. 3 to Loan Agreement dated as of December 24, 2002
between PrivateBancorp, Inc. and LaSalle Bank National
Association.+
10.24 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).*
10.25 Employment Agreement by and between William Goldstein and
Lodestar Investment Counsel LLC, dated as of December 30, 2002.+
12.1 Calculation of Ratio of Earnings to Fixed Charges.+
21.1 Subsidiaries of the Registrant.+
23.1 Consent of Ernst & Young LLP.+
24.1 Powers of Attorney (set forth on signature page).
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.+
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.+
+ Filed herewith.
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit.
(b) REPORTS ON FORM 8-K
The following Current Reports on Form 8-K were filed by the Company
during the last quarter of fiscal 2002:
Form 8-K dated October 17, 2002.
Form 8-K dated October 21, 2002.
Form 8-K dated December 30, 2002.
52
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 3, 2003 PRIVATEBANCORP, INC.
By: /s/ RALPH B. MANDELL
-------------------------
Ralph B. Mandell,
Chairman, President and Chief
Executive Officer
53
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 3, 2003
- ---------------------- Executive Officer and Director
Ralph B. Mandell
/s/ CAREN L. REED Director March 3, 2003
- -------------------
Caren L. Reed
/s/ GARY L. SVEC Chief Financial Officer March 3, 2003
- ------------------
Gary L. Svec
/s/ LISA M. O'NEILL Controller March 3, 2003
- ---------------------
Lisa M. O'Neill
/s/ DONALD L. BEAL Director March 3, 2003
- --------------------
Donald L. Beal
/s/ NAOMI T. BORWELL Director March 3, 2003
- ----------------------
Naomi T. Borwell
/s/ WILLIAM A. CASTELLANO Director March 3, 2003
- ---------------------------
William A. Castellano
/s/ ROBERT F. COLEMAN Director March 3, 2003
- -----------------------
Robert F. Coleman
/s/ JOHN E. GORMAN Director March 3, 2003
- --------------------
John E. Gorman
/s/ ALVIN J. GOTTLIEB Director March 3, 2003
- -----------------------
Alvin J. Gottlieb
54
/s/ JAMES M. GUYETTE Director March 3, 2003
- ----------------------
James M. Guyette
/s/ RICHARD C. JENSEN Director March 3, 2003
- -----------------------
Richard C. Jensen
/s/ PHILIP M. KAYMAN Director March 3, 2003
- ----------------------
Philip M. Kayman
/s/ WILLIAM R. LANGLEY Director March 3, 2003
- ------------------------
William R. Langley
/s/ THOMAS F. MEAGHER Director March 3, 2003
- -----------------------
Thomas F. Meagher
/s/ WILLIAM J. PODL Director March 3, 2003
- ---------------------
William J. Podl
/s/ MICHAEL B. SUSMAN Director March 3, 2003
- -----------------------
Michael B. Susman
55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PRIVATEBANCORP, INC.
Page
----
Report of Ernst & Young LLP, Independent Public Accountants....................................................... F-2
2001 Report of Arthur Andersen LLP, Independent Public Accountants................................................ F-3
Consolidated Balance Sheets as of December 31, 2002 and 2001...................................................... F-4
Consolidated Statements of Income for the years ended December 31, 2002, 2001, and 2000........................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2002,
2001, and 2000............................................................................................... F-6
Consolidated Statements of Cash Flow for the years ended December 31, 2002, 2001, and 2000........................ F-7
Notes to Consolidated Financial Statements........................................................................ F-8
Selected Quarterly Financial Data (unaudited)..................................................................... F-34
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
PrivateBancorp, Inc.
We have audited the accompanying consolidated balance sheet of PrivateBancorp,
Inc. and subsidiaries as of December 31, 2002, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
year then ended. 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 audit. The financial statements of
PrivateBancorp, Inc. as of December 31, 2001, and for the two years in the
period ended December 31, 2001, were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
statements in their report dated January 17, 2002.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PrivateBancorp,
Inc. and subsidiaries as of December 31, 2002, and the consolidated results of
their operations and their cash flows for the year ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill.
January 20, 2003
F-2
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
Note: This is a duplicate of the opinion issued by former auditors Arthur
Andersen LLP on 2001 financials. This opinion was not reissued for the
2002 audit.
F-3
PRIVATEBANCORP, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
(In thousands, except per share data)
DECEMBER 31,
--------------------------
2002 2001
----------- -----------
ASSETS
Cash and due from banks................................................................... $ 34,529 $ 22,283
Fed Funds sold and other short-term investments........................................... 258 518
----------- -----------
Total cash and cash equivalents...................................................... 34,787 22,801
----------- -----------
Loans held for sale....................................................................... 14,321 11,335
Available-for-sale securities, at fair value.............................................. 487,020 332,933
Loans net of unearned discount............................................................ 965,641 780,771
Allowance for loan losses............................................................ (11,585) (8,306)
----------- -----------
Net loans............................................................................ 954,056 772,465
----------- -----------
Goodwill and other intangibles............................................................ 21,742 10,805
Premises and equipment, net............................................................... 6,851 3,814
Accrued interest receivable............................................................... 9,427 7,262
Other assets.............................................................................. 15,210 15,353
----------- -----------
Total assets......................................................................... $ 1,543,414 $ 1,176,768
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing.................................................................. $ 88,986 $ 73,146
Interest-bearing..................................................................... 64,893 52,061
Savings and money market deposit accounts................................................. 488,941 362,987
Brokered deposits......................................................................... 279,806 138,911
Other time deposits....................................................................... 282,645 223,390
----------- -----------
Total deposits....................................................................... 1,205,271 850,495
----------- -----------
Funds borrowed............................................................................ 209,954 231,488
Trust preferred securities................................................................ 20,000 20,000
Accrued interest payable.................................................................. 4,986 2,112
Other liabilities......................................................................... 14,111 10,369
----------- -----------
Total liabilities.................................................................... $ 1,454,322 $ 1,114,464
=========== ===========
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized.............................................. -- --
Common stock, without par value, $1 stated value; 12,000,000 shares
authorized; 7,704,203 and 7,206,420 shares issued and outstanding as of
December 31, 2002 and December 31, 2001, respectively.................................... 7,704 7,206
Surplus................................................................................... 45,367 39,114
Retained earnings......................................................................... 27,784 17,468
Accumulated other comprehensive income.................................................... 8,826 323
Deferred compensation..................................................................... (589) (857)
Loans to officers......................................................................... -- (950)
----------- -----------
Total stockholders' equity........................................................... 89,092 62,304
----------- -----------
Total liabilities and stockholders' equity........................................... $ 1,543,414 $ 1,176,768
=========== ===========
Note: All previously reported share and per share data has been restated to
reflect the 3-for-2 stock split which occurred on January 17, 2003. The
accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2002 2001 2000
---------- ------------- ------------
INTEREST INCOME
Loans, including fees........................................................ $ 52,560 $ 50,975 $ 48,633
Federal funds sold and interest bearing deposits............................. 126 244 1,058
Securities:
Taxable................................................................ 13,282 10,901 5,725
Exempt from Federal Income taxes....................................... 5,874 3,476 1,730
---------- ------------- ------------
Total interest income............................................... 71,842 65,596 57,146
---------- ------------- ------------
INTEREST EXPENSE
Deposits:
Interest-bearing demand................................................ 636 923 869
Savings and money market deposit accounts.............................. 7,328 11,365 13,711
Time deposits.......................................................... 16,014 17,291 14,635
Funds borrowed............................................................... 5,325 6,327 4,116
Trust preferred securities................................................... 1,939 1,731 --
---------- ------------- ------------
Total interest expense................................................. 31,242 37,637 33,331
---------- ------------- ------------
Net interest income.................................................... 40,600 27,959 23,815
Provision for loan losses.................................................... 3,862 3,179 1,690
---------- ------------- ------------
Net interest income after provision for loan losses.................... 36,738 24,780 22,125
========== ============= ============
NON-INTEREST INCOME
Banking, wealth management services and other income................... 7,081 4,028 3,077
Securities net gains................................................... 11 2,095 92
Trading losses on interest rate swap................................... (943) -- --
---------- ------------- ------------
Total non-interest income........................................... 6,149 6,123 3,169
---------- ------------- ------------
NON-INTEREST EXPENSE
Salaries and employee benefits......................................... 13,979 9,111 8,174
Severance charge....................................................... -- -- 562
Occupancy expense, net................................................. 4,891 4,158 2,987
Professional fees...................................................... 3,689 2,939 2,135
Marketing.............................................................. 1,648 1,208 1,202
Data processing........................................................ 1,509 1,295 820
Goodwill amortization.................................................. -- 824 731
Insurance.............................................................. 455 354 303
Other.................................................................. 2,436 2,763 1,692
---------- ------------- ------------
Total non-interest expense.......................................... 28,607 22,652 18,606
---------- ------------- ------------
Income before income taxes............................................. 14,280 8,251 6,688
Income tax provision................................................... 3,273 2,051 2,263
---------- ------------- ------------
Net income.......................................................... $ 11,007 $ 6,200 $ 4,425
========== ============= ============
Basic earnings per share..................................................... $ 1.49 $ 0.88 $ 0.64
Diluted earnings per share................................................... $ 1.42 $ 0.85 $ 0.62
Note: All previously reported share and per share data has been restated to
reflect the 3-for-2 stock split which occurred on January 17, 2003. The
accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(In thousands)
ACCUMULATED
OTHER LOANS
COMMON RETAINED COMPREHENSIVE DEFERRED TO TOTAL
STOCK SURPLUS EARNINGS INCOME COMPENSATION OFFICERS EQUITY
--------- --------- --------- ------------- ------------- --------- ---------
Balance 1/1/00 $ 6,885 $ 37,466 $ 7,425 $ (2,812) $ (759) $ (1,125) $ 47,080
Net income 4,425 4,425
Change in unrealized gain on
available-for-sale securities,
net of tax 2,694 2,694
------------------------------------------------------------------------------------------
Total Comprehensive Income - - 4,425 2,694 - - 7,119
------------------------------------------------------------------------------------------
Dividends declared ($.07 per
share) (462) (462)
Issuance of Stock 50 330 380
Awards granted, net of forfeitures (270) (270)
Amortization of deferred
compensation 227 227
Repayment of loans to officers 175 175
------------------------------------------------------------------------------------------
Balance 12/31/00 $ 6,935 $ 37,796 $ 11,388 $ (118) $ (802) $ (950) $ 54,249
==========================================================================================
Balance 1/1/01 $ 6,935 $ 37,796 $ 11,388 $ (118) $ (802) $ (950) $ 54,249
Net income 6,200 6,200
Change in unrealized gain on
available-for-sale securities,
net of tax 441 441
------------------------------------------------------------------------------------------
Total Comprehensive Income - - 6,200 441 - - 6,641
------------------------------------------------------------------------------------------
Dividends declared ($.07 per
share) (520) (520)
Issuance of Stock 271 1,318 1,589
Awards granted, net of forfeitures (331) (331)
Amortization of deferred
compensation 400 276 676
------------------------------------------------------------------------------------------
Balance 12/31/01 $ 7,206 $ 39,114 $ 17,468 $ 323 $ (857) $ (950) $ 62,304
==========================================================================================
Balance 1/1/02 $ 7,206 $ 39,114 $ 17,468 $ 323 $ (857) $ (950) $ 62,304
Net income 11,007 11,006
Change in unrealized gain on
available-for-sale securities,
net of tax 8,503 8,503
------------------------------------------------------------------------------------------
Total Comprehensive Income - - 11,007 8,503 - - 19,509
------------------------------------------------------------------------------------------
Dividends declared ($.09 per
share) (691) (691)
Issuance of Stock 498 6,253 6,751
Awards granted, net of forfeitures (38) (38)
Amortization of deferred
compensation 306 306
Repayment of loans to officers 950 950
------------------------------------------------------------------------------------------
Balance 12/31/02 $ 7,704 $ 45,367 $ 27,784 $ 8,826 $ (589) $ - $ 89,092
==========================================================================================
Note: All previously reported share and per share data has been restated to
reflect the 3-for-2 stock split which occurred on January 17, 2003. The
accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 2001AND 2000
(In thousands)
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES ...................................
Net income ........................................................ $ 11,007 $ 6,200 $ 4,425
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 1,444 1,649 1,030
Goodwill amortization ............................................. -- 824 731
Johnson Bank Illinois fair value accretion, net ................... (89) (291) (304)
Amortization of deferred compensation ............................. 306 276 227
Provision for loan losses ......................................... 3,862 3,179 1,690
Gain on sale of securities ........................................ (11) (2,095) (92)
Trading losses on interest rate swap .............................. 943 -- --
Net proceeds on loans held for sale ............................... (2,986) (10,629) (705)
Increase in deferred loan fees .................................... 1,040 315 259
Increase in accrued interest receivable ........................... (2,165) (1,739) (1,894)
Increase (decrease) in accrued interest payable ................... 2,874 (1,440) 1,886
(Increase) decrease in other assets ............................... (2,507) 7,607 2,502
Increase in other liabilities ..................................... 3,710 5,705 2,107
---------- ---------- ----------
Total adjustments ............................................. 6,421 3,361 7,437
---------- ---------- ----------
Net cash provided by operating activities ..................... 17,428 9,561 11,862
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities ....... 123,296 148,419 48,075
Purchase of securities available-for-sale ......................... (265,432) (306,395) (124,624)
Johnson Bank Illinois acquisition, net of cash received ........... -- -- (15,763)
Capitalization of The PrivateBank (St. Louis) ..................... -- -- (8,000)
Investment in Lodestar Investment Counsel, LLC .................... (5,427) -- --
Net loan principal advanced ....................................... (186,405) (193,784) (129,615)
Investment in Bank Owned Life Insurance ........................... -- (10,000) --
Premises and equipment expenditures ............................... (4,492) (1,236) (2,341)
---------- ---------- ----------
Net cash used in investing activities ......................... (338,460) (362,996) (232,268)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits .................................... 354,788 180,261 125,606
Proceeds from participated loans .................................. -- -- 12,862
Proceeds from exercise of stock options ........................... 1,235 1,258 109
Issuance of Trust Preferred Securities ............................ -- 20,000 --
Dividends paid .................................................... (691) (520) (462)
Repayment of loans to officers .................................... 950 -- 175
Net (decrease) increase in funds borrowed ......................... (23,264) 134,724 78,446
---------- ---------- ----------
Net cash provided by financing activities ..................... 333,018 335,723 216,736
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ................... 11,986 (17,712) (3,670)
Cash and cash equivalents at beginning of year ......................... 22,801 40,513 44,183
---------- ---------- ----------
Cash and cash equivalents at end of year ............................... $ 34,787 $ 22,801 $ 40,513
========== ========== ==========
CASH PAID DURING YEAR FOR:
Interest .......................................................... $ 28,368 $ 39,076 $ 30,835
Income taxes ...................................................... 1,325 1,757 1,800
The accompanying notes to consolidated financial statements are
an integral part of these statements.
F-7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
a. NATURE OF OPERATIONS
PrivateBancorp, Inc. (the "Company") was incorporated under the laws
of the State of Delaware on November 7, 1989. The Company is a bank holding
company with two bank subsidiaries, The PrivateBank and Trust Company (The
PrivateBank (Chicago)), which was formed as a de novo, or start up bank, on
February 6, 1991, and The PrivateBank (The PrivateBank (St. Louis)), which was
formed as a de novo, or start up, federal savings bank on June 26, 2001. 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). On
December 30, 2002, The PrivateBank (Chicago) acquired a controlling interest in
Lodestar Investment Counsel LLC, a Chicago-based investment advisor with $482
million of assets under management at December 31, 2002. Lodestar manages
equity, balanced, and fixed income accounts primarily for high net-worth
individuals, retirement plans and charitable organizations with investable
assets in excess of $1.0 million, and shares a similar focus on highly
personalized client service.
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), which includes Lodestar Investment Counsel, and The
PrivateBank (St. Louis). Significant intercompany accounts and transactions have
been eliminated in the preparation of these statements.
c. STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold and other
short-term investments. Generally, federal funds are sold for one-day periods,
but not longer than 30 days. Short-term investments mature in less than 30 days.
d. SECURITIES
Available for sale securities are intended to be invested for an
indefinite period but may be sold in response to events we expect to occur in
the foreseeable future. Securities available-for-sale are reported at fair
value, with unrealized gains and losses, net of taxes, reported as adjustments
to other comprehensive income in a separate component of stockholders' equity.
Any decline in fair value of securities that is deemed other than temporary is
charged against current period earnings. At December 31, 2002 and 2001, all
securities were classified as available for sale.
Premium amortization and discount accretion on securities are included
in interest income on securities using the effective interest rate method. The
specific identification method is used to record gains and losses on security
transactions.
e. LOANS
Loans are generally reported at the principal amount outstanding, net
of unearned income. Loan origination and commitment fees, offset by certain
direct loan origination costs, are deferred and the net amount amortized as an
adjustment of the related loan's yield. The Company is generally amortizing
these amounts over the contractual life of the related loans.
F-8
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 in the
current year but not collected is reversed and charged against interest income
at the time the related loan is placed on nonaccrual status. Unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest payments received on impaired loans are recorded as reductions of
principal if principal payment is doubtful.
f. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is determined by management based on
factors such as past loan loss experience, known and inherent risks in the loan
portfolio, the estimated value of any underlying collateral, prevailing economic
conditions and other factors and estimates which are subject to change over
time. Management adjusts the allowance for loan losses by recording a provision
for loan losses in an amount sufficient to maintain the allowance at a level
commensurate with the risks in the loan portfolio. Loans are charged off when
deemed to be uncollectible by management.
g. LOANS HELD FOR SALE
Loans are classified as held for investment purposes or held for sale
when the Company enters into interest rate lock agreements with the potential
borrowers. Loans originated and intended for sale in the secondary market are
classified as held for sale and reported at the lower of aggregate 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 or,
in the case where a firm commitment has been made to sell the loan, the firm
committed price. Gains and losses on the disposition of loans held for sale are
determined on the specific identification method.
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 FAS No. 133, "Accounting for Derivative
Instruments and Related Hedging Activities" and its related amendments on
January 1, 2001. FAS No. 133 requires all derivative instruments to be
recognized as either assets or liabilities in the balance sheet at fair value.
The accounting for changes in the fair value of a derivative instrument depends
on whether it has been designated and qualifies as part of a hedging
relationship and further, on the type of hedge relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument based on the exposure being
hedged, as a fair value or cash flow hedge. 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.
The Company entered into a $25 million swap during the third quarter
of 2002, swapping the 10-year rate for
F-9
3-month LIBOR to act as an economic hedge of a portion of the Company's
available-for-sale municipal securities portfolio. The December 31, 2002 fair
market value adjustment on this swap resulted in the trading loss of $943,000
with a corresponding derivative liability of the same amount. This swap does not
qualify for hedge accounting treatment, therefore, the market-to-market
adjustment flows through earnings.
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. At December 31, 2002, the range of estimated useful lives of depreciable
assets was between 3 and 39.5 years.
k. INCOME TAXES
In accordance with FAS 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. All
previously reported share and per share data in this report has been restated to
reflect the 3-for-2 stock split which occurred on January 17, 2003.
m. COMPREHENSIVE INCOME
Components of comprehensive income are reported in the Consolidated
Statement of Stockholders' Equity that is displayed with the same prominence as
other financial statements.
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
During 2001, the PrivateBank (Chicago) recorded approximately $12.2
million in goodwill in connection with the Johnson Bank Illinois acquisition.
During 2002, the Company recorded $8.4 million of goodwill and $2.5 million in
customer intangibles in connection with the Lodestar Investment Counsel
acquisition. Intangible assets are amortized over an estimated useful life of 15
years. Effective January 1, 2002, the Company adopted FAS No. 142, which
requires that goodwill and intangible assets that have indefinite lives no
longer be amortized but be reviewed for impairment annually, or more frequently
if certain indicators arise. Prior to the adoption of FAS No. 142, goodwill was
being amortized using the straight-line method over a period of 15 years.
Goodwill at December 31, 2002 totaled $19.2 million, an $8.4 million increase
from December 31, 2001 due to the acquisition of Lodestar Investment Counsel,
LLC. The Company did not incur any goodwill impairment in 2002 in adopting FAS
142. Amortization expense on intangible assets is expected to total $167,000
each year in 2003, 2004, 2005, 2006 and 2007.
F-10
The following table shows the proforma effects of applying FAS No. 142
to the 2001 and 2000 periods (in thousands, except per share data):
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ------------ ------------
(in thousands)
Reported net income ................................... $ 11,007 $ 6,200 $ 4,425
Add: Goodwill amortization (net of tax) ............... -- 544 482
------------ ------------ ------------
Adjusted net income ................................... $ 11,007 $ 6,744 $ 4,907
============ ============ ============
Basic earnings per share:
Reported basic earnings per share ..................... $ 1.49 $ 0.88 $ 0.64
Add: Goodwill amortization (net of tax) ............... -- .08 .10
------------ ------------ ------------
Adjusted basic earnings per share ..................... $ 1.49 $ 0.96 $ 0.74
============ ============ ============
Diluted earnings per share:
Reported diluted earnings per share ................... $ 1.42 $ 0.85 $ 0.62
Add: Goodwill amortization (net of tax) ............... -- .07 .10
------------ ------------ ------------
Adjusted diluted earnings per share ................... $ 1.42 $ 0.92 $ 0.72
============ ============ ============
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. STOCK-BASED COMPENSATION
The Company accounts for its stock options in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB No. 25). Under APB No. 25, as the exercise price of the Company's
employees' stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized. Compensation expense for
restricted shares granted is ratably recognized over the period of service,
usually the vesting period, based on the fair value of the stock on the date of
grant.
Pursuant to FAS No. 123, Accounting for Stock-Based Compensation (FAS
No. 123), pro forma net income and pro forma earnings per share are presented in
the following table as if the fair value method of accounting for stock-based
compensation plans had been utilized.
2002 2001 2000
----------- ----------- -----------
(dollars in thousands)
Net income--
As reported................... $ 11,007 $ 6,200 $ 4,425
Pro forma..................... 10,551 5,493 3,824
Basic earnings per share--
As reported................... $ 1.49 $ 0.88 $ 0.64
Pro forma..................... 1.43 0.78 0.55
Diluted earnings per share--
As reported................... $ 1.42 $ 0.85 $ 0.62
Pro forma..................... 1.36 0.75 0.54
Note: The pro forma results above may not be representative of the effect
reported in net income for futures years.
In determining the fair value of each option grant for purposes of the
above pro forma disclosures, the Company used an option pricing model with the
following assumptions for grants in 2002, 2001 and 2000, respectively: dividend
yield of 0.35%, 0.55%, and 1.10% for 2002, 2001 and 2000, respectively;
risk-free interest rate of 5.07% for 2002 and 2001 and 5.9% for 2000; 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
F-11
expected volatility of approximately 50% and 54% for 2002
and 2001, respectively.
r. ADVERTISING COSTS
All advertising costs incurred by the Company are expensed in the
period in which they are incurred.
s. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (FAS) Nos. 141, Business Combinations
and No. 142, Goodwill and Other Intangible Assets. FAS 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.
FAS No. 142 supercedes APB Opinion No. 17 Intangible Assets and
addresses the mandatory accounting of intangible assets and goodwill. Adoption
of this Statement was required beginning January 1, 2002 in relation to all of
the Company's goodwill and intangible assets. The Statement discontinues the
regular amortization of goodwill and a transitional impairment test of goodwill
was 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 principal. Impairment losses in subsequent years should be
recorded as operating expenses.
In August 2001, the FASB issued FAS No. 144, Accounting for the
Impairment or Disposal of Long-lived Assets. FAS No. 144 supersedes FAS 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 adopted
the Statement in the first quarter of 2002 with no material effect on the
Company's results of operations.
In October 2002, the FASB issued FAS No. 147, Acquisitions of Certain
Financial Institutions (FAS No. 147), which provides guidance on the accounting
for the acquisition of a financial institution and supersedes the specialized
accounting guidance provided in FAS No. 72, Accounting for Certain Acquisitions
of Banking or Thrift Institutions. FAS No. 147 became effective upon issuance
and requires companies to cease amortization of unidentified intangible assets
associated with certain branch acquisitions and reclassify these assets to
goodwill. FAS No. 147 also modifies FAS No. 144 to include in its scope
long-term customer-relationship intangible assets and thus subject those
intangible assets to the same undiscounted cash flow recoverability test and
impairment loss recognition and measurement provisions required for other
long-lived assets.
While FAS No. 147 may affect how future business combinations, if
undertaken, are accounted for and disclosed in the financial statements, the
issuance of the new guidance had no effect on the Company's results of
operations, financial position, or liquidity as the Company does not have any
assets subject to the specialized accounting guidance provided in FAS No. 72 or
FAS No. 147.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies that a guarantor is required to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
the Company as of December 31, 2002, and require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
recognition requirements of FIN 45 are to be applied prospectively to guarantees
issued or modified after December 31, 2002. Significant guarantees that have
been entered into by the Company are disclosed in Note 14 to the consolidated
financial statements. The Company does not expect the requirements of FIN 45 to
have a material impact on its results of operations, financial position, or
liquidity.
F-12
In December 2002, the FASB issued FAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure (FAS No. 148), which
provides guidance on how to transition from the intrinsic value method of
accounting for stock-based employee compensation under APB No. 25 to FAS No.
123's fair value method of accounting, if a company so elects. The statement
also amends the disclosure provisions of FAS No. 123 and APB No. 25 to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While FAS No. 148 does not amend FAS No. 123 to require companies to
account for employee stock options using the fair value method, the disclosure
provisions of FAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of FAS No. 123 or the intrinsic value method of APB
No. 25. Although the recognition provisions of FAS No. 148 are not applicable to
the Company at this time, as it continues to account for stock-based
compensation using the intrinsic value method, the Company has provided the
required disclosures in Note 1 to the consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling
interest, and results of operations of a VIE need to be included in a company's
consolidated financial statements. Because the Company does not have any
interest in VIEs, the Company does not expect the adoption of FIN 46 to have a
material impact on its results of operations, financial position, or liquidity.
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.
During the second quarter of 2002, the PrivateBank (Chicago)
introduced an Index Powered Certificate of Deposit product ("IPCD") with a
five-year term. This non-fee based, FDIC-insured product is a five-year
certificate of deposit with a yield based on the performance of the S&P 500. The
PrivateBank (Chicago) balance sheet reflects the goodwill and intangibles of
$21.7 million at December 31, 2002 compared with $10.8 million at December 31,
2001.
F-13
THE PRIVATEBANK (CHICAGO)
-----------------------------------
DECEMBER 31,
2002 2001 2000
--------- ----------- ---------
(in millions)
Total assets................... $ 1,390.3 $ 1,077.7 $ 800.6
Total deposits................. 1,101.0 800.6 655.9
Total borrowings............... 150.0 183.4 65.0
Total gross loans.............. 863.0 708.3 574.9
Total capital.................. 124.3 82.9 69.3
Net interest income............ 39.0 27.8 23.5
Net income..................... 13.5 9.2 7.1
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,
2002 2001 2000
------- ------- ---------
(in millions)
Total assets............................ $ 149.9 $ 96.6 $ 28.2
Total deposits.......................... 105.1 50.2 14.7
Total borrowings........................ 30.0 38.1 3.5
Total gross loans....................... 104.7 73.5 25.2
Total capital........................... 13.4 7.6 7.1
Net interest income (1)................. 4.0 1.8 0.4
Year-to-date net income (loss) (1)...... 0.8 (0.5) (0.9)
(1) For 2000, results are reported beginning June 23, 2000, when the subsidiary
bank was established, through December 31, 2000.
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 trust clients with the
selection of an outside portfolio manager to direct account investments. Trust
and estate account administrators work with clients and their attorneys to
establish estate plans. Consistent with the Company's philosophy, Wealth
Management emphasizes a high level of personal service, including prompt
collection and reinvestment of interest and dividend income, weekly valuation,
tracking of tax
F-14
information, customized reporting and ease of security settlement.
WEALTH MANAGEMENT
-----------------------------------
DECEMBER 31,
-----------------------------------
2002 2001 2000
---------- --------- ----------
(in thousands)
Wealth Management assets under
administration ................ $ 1,239.8 $ 722.7 $ 777.8
Trust fee revenue .............. 2.9 2.7 2.3
Net income (loss) .............. 0.4 0.5 (0.1)
HOLDING COMPANY ACTIVITIES
Holding Company Activities consist of parent company only matters. The
Holding Company's most significant assets are its net investments in its two
banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis).
During the first quarter 2001, the Holding Company issued $20.0 million of
subordinated debentures that are accounted for as long-term debt and also
qualify as Tier 1 and Tier 2 capital (See Note 17). The Tier 1 qualifying amount
is limited to 25% of Tier 1 capital under Federal Reserve regulations. The
excess amount qualifies as Tier 2 capital. Holding Company Activities are
reflected primarily by interest expense on borrowings and operating expenses.
Recurring holding company operating expenses consist of compensation
(amortization of restricted stock awards, other salary expense) and
miscellaneous professional fees. In May of 2002, PrivateBancorp, Inc. acquired
an office building located in St. Charles, Illinois, for $1.8 million from Towne
Square Realty. The St. Charles location of The PrivateBank (Chicago) continues
to lease space in the building and pays rent to the Holding Company at the same
terms and conditions as was paid to the prior owner.
HOLDING COMPANY ACTIVITIES
--------------------------
DECEMBER 31,
2002 2001 2000
------- -------- -------
(in millions)
Total assets ............................... $ 141.3 $ 92.4 $ 77.9
Total capital .............................. 89.1 62.3 54.2
Total borrowings ........................... 30.0 10.0 23.0
Long term debt--Trust Preferred Securities . 20.0 20.0 --
Interest expense ........................... 2.5 2.1 1.2
Net loss ................................... (3.7) (2.5) (1.9)
The following tables reconciles the significant differences between
the sum of the reportable segments and the reported consolidated balance of
total assets:
TOTAL ASSETS
----------------------
DECEMBER 31,
2002 2001
---------- ----------
(in millions)
Sum of reportable segments ........... $ 1,681.5 $ 1,266.7
Adjustments ......................... (138.1) (89.9)
========== ==========
Consolidated PrivateBancorp, Inc. .... $ 1,543.4 $ 1,176.8
========== ==========
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
F-15
and the reclassification related to deferred taxes.
NOTE 3--EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per
share (in thousands, except per share data):
WEIGHTED
AVERAGE PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
YEAR ENDED DECEMBER 31, 2002
Basic Earnings Per Share--
Income available to common stockholders . $ 11,007 7,371 $ 1.49
=========
Effect of Dilutive Stock Options ..................... -- 404
----------- -------------
Diluted Earnings Per Share--
Income available to common stockholders . $ 11,007 7,775 $ 1.42
=========== ============= =========
YEAR ENDED DECEMBER 31, 2001
Basic Earnings Per Share--
Income available to common stockholders . $ 6,200 7,057 $ 0.88
=========
Effect of Dilutive Stock Options ..................... -- 217
----------- -------------
Diluted Earnings Per Share--
Income available to common stockholders . $ 6,200 7,274 $ 0.85
=========== ============= =========
YEAR ENDED DECEMBER 31, 2000
Basic Earnings Per Share--
Income available to common stockholders . $ 4,425 6,916 $ 0.64
=========
Effect of Dilutive Stock Options ..................... -- 275
----------- -------------
Diluted Earnings Per Share--
Income available to common stockholders . $ 4,425 7,191 $ 0.62
=========== ============= =========
During 2002, the entire amount of unexercised option shares of 818,798
are included in the diluted earnings per share calculation. The 2001 diluted
earnings per share calculation includes all unexercised option shares as all
options of the Company were dilutive as of December 31, 2001. The exercise
prices for previously granted stock options ranged from $4.58 to $15.00 in 2002,
from $11.15 to $12.00 in 2001, and $9.04 to $9.67 in 2000.
NOTE 4--SECURITIES
The par value and amortized cost of securities as of December 31, 2002
and December 31, 2001 were as follows (in thousands):
INVESTMENT SECURITIES--AVAILABLE FOR SALE
DECEMBER 31, 2002
------------------------------------------------
GROSS GROSS
UNAMORTIZED UNACCRETED AMORTIZED
PAR VALUE PREMIUM DISCOUNT COST
--------- ----------- ---------- ---------
U.S. Government Agency Mortgage Backed
Securities and Collateralized Mortgage
Obligations .................................. $ 147,546 $ 7,967 $ (3) $ 155,510
Corporate Collateralized Mortgage Obligations . 17,902 264 -- 18,166
Tax Exempt Municipal Securities ............... 140,025 5,751 (19,272) 126,504
Taxable Municipal Securities .................. 4,615 -- (33) 4,582
Federal Home Loan Bank Stock .................. 155,606 -- -- 155,606
Other ......................................... 12,849 557 (126) 13,280
--------- ----------- ---------- ---------
$ 478,543 $ 14,539 $ (19,434) $ 473,648
========= =========== ========== =========
F-16
INVESTMENT SECURITIES--AVAILABLE FOR SALE
DECEMBER 31, 2001
------------------------------------------------
GROSS GROSS
UNAMORTIZED UNACCRETED AMORTIZED
PAR VALUE PREMIUM DISCOUNT COST
--------- ----------- ---------- ---------
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
========= =========== ========== =========
The amortized cost and the estimated fair value of securities as of
December 31, 2002 and December 31, 2001, were as follows (in thousands):
INVESTMENT SECURITIES--AVAILABLE- FOR- SALE
DECEMBER 31, 2002
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ---------- ---------
U.S. Government Agency Mortgage Backed
Securities and Collateralized Mortgage
Obligations .................................. $ 155,510 $ 3,132 $ (248) $ 158,394
Corporate Collateralized Mortgage Obligations . 18,166 509 -- 18,675
Tax Exempt Municipal Securities ............... 126,504 8,332 -- 134,836
Taxable Municipal Securities .................. 4,582 114 -- 4,697
Federal Home Loan Bank Stock .................. 155,606 -- -- 155,606
Other ......................................... 13,280 1,533 -- 14,812
--------- ----------- ---------- ---------
$ 473,648 $ 13,620 $ (248) $ 487,020
========= =========== ========== =========
INVESTMENT SECURITIES--AVAILABLE- FOR- SALE
DECEMBER 31, 2001
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ---------- ---------
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-17
The amortized cost and estimated fair value of securities at December
31, 2002, by expected maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because obligors may have the
right to call or prepay obligations with or without call or prepayment
penalties.
AMORTIZED ESTIMATED
COST FAIR VALUE
---------- -----------
Due within one year .................... $ 69,409 $ 71,105
Due after one year through five years .. 97,519 100,227
Due after five years through ten years . 25,712 26,390
Due after ten years .................... 125,094 133,384
Securities with no stated maturity ..... 155,914 155.914
----------- -----------
$ 473,648 $ 487,020
=========== ===========
During 2002 and 2001, securities were sold for total proceeds of
$88,965,364 and $131,289,933 respectively, resulting in net gains of
approximately $11,302 and $2,095,000, respectively. Gross gains and gross losses
for 2002 were $1,499,364 and $1,488,062, respectively. Taxes related to gross
gains and gross losses on investment securities for 2002 were $509,784 and
$505,941, respectively.
At December 31, 2002, securities carried at $184.9 million were
pledged to secure public funds, trust deposits and other collateralized deposits
for other purposes as required or permitted by law.
In the opinion of management, there were no investments in securities
at December 31, 2002, which constituted an unusual credit risk for the Company.
As market interest rates continued to decline to historic lows late in the third
quarter of 2002, in order to protect a portion of the portfolio appreciation
should rates rise, the Company entered into a $25 million swap. The Company
swapped the 10-year rate for 3-month LIBOR to act as an economic hedge to a
portion of the available-for-sale municipal securities in the portfolio. The
December 31, 2002 fair market value adjustment on this swap resulted in the
trading loss of $943,000. Net securities gains of $11,000 during the year
included a charge of $1.0 million related to an other-than-temporary impairment
write-down on the Company's interest-only collateralized mortgage obligation
(CMO) portfolio. At December 31, 2002, the remaining book value of the
interest-only CMO portfolio was $1.1 million.
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, 2002 and 2001 on a gross basis (in thousands):
DECEMBER 31, 2002
------------------------------------
AMOUNT TAX AMOUNT
BEFORE TAX EXPENSE NET OF TAX
---------- ---------- ----------
Change in unrealized gains on
securities available for sale ........... $ 12,893 $ 4,382 $ 8,511
Less: reclassification adjustment for gain
included in net income .................. 11 3 8
---------- ---------- ----------
Net unrealized gains ..................... $ 12,882 $ 4,379 $ 8,503
========== ========== ==========
DECEMBER 31, 2001
------------------------------------
AMOUNT TAX AMOUNT
BEFORE TAX EXPENSE NET OF TAX
---------- ---------- ----------
Change in unrealized gains on
securities available for sale ........... $ 2,682 $ 667 $ 2,015
Less: reclassification adjustment for gain
included in net income .................. 2,095 521 1,574
---------- ---------- ----------
Net unrealized gains ..................... $ 587 $ 146 $ 441
========== ========== ==========
F-18
NOTE 5--LOANS
Amounts outstanding by selected loan categories at December 31, 2002
and 2001, including net unamortized deferred loan fees of $3.1 million and $2.5
million, respectively, were as follows (in thousands):
2002 2001
------------ ------------
Real estate--
Residential ...... $ 72,289 $ 89,889
Commercial ...... 452,703 310,869
Construction ...... 123,204 92,528
Commercial .............. 165,993 163,279
Personal (1) ............ 151,452 124,206
------------ ------------
$ 965,641 $ 780,771
============ ============
(1) Includes Home Equity loans and overdrafts
As of December 31, 2002, $749,000 of loans were designated as
nonaccrual loans, of which, $375,000 is specifically reserved for. The average
balance of impaired loans amounted to $1.7 million in 2002 and $1.5 million in
2001. The gross interest income that would have been recorded if the non-accrual
loans had been current in accordance with their original terms was $104,233 in
2002, $108,913 in 2001, and $47,283 in 2000. Please refer to page 37 in this
form 10-K for additional disclosure on loans past due 90 days or more.
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):
2002 2001 2000
---------- ---------- ----------
Beginning balance ............................ $ 8,306 $ 6,108 $ 4,510
Johnson Bank acquisition - loan loss reserve . -- -- 864
Loans charged off ............................ (750) (1,052) (972)
Loans recovered .............................. 167 71 16
Provision for loan losses .................... 3,862 3,179 1,690
---------- ---------- ----------
Ending balance ............................... $ 11,585 $ 8,306 $ 6,108
========== ========== ==========
NOTE 7--PREMISES AND EQUIPMENT
Bank and building premises and equipment at December 31, 2002 and
2001, consisted of the following (in thousands):
2002 2001
---------- ----------
Land ...................................... $ 110 $ --
Building .................................. 1,640 --
Furniture, fixtures and equipment ......... 6,856 5,640
Leasehold improvements .................... 5,220 3,794
---------- ----------
13,826 9,434
Accumulated depreciation and amortization . (6,975) (5,620)
---------- ----------
$ 6,851 $ 3,814
========== ==========
Included in occupancy expense in the consolidated statements of income
is depreciation and amortization expense of $1.5, $1.6, and $1.0 million for
2002, 2001 and 2000, respectively.
F-19
Each of the banks leases their main banking facilities and certain
branch facilities under noncancellable operating lease agreements. The minimum
annual rental commitments under these leases, at December 31, 2002, are as
follows:
2003 ....................... $ 1,570,943
2004 ....................... 1,533,409
2005 ....................... 1,523,068
2006 ....................... 1,137,240
2007 ....................... 624,030
2008 and thereafter ........ 792,998
-----------
Total Rental Commitments ... $ 6,898,186
===========
Total rent expense included in the consolidated statements of income
was $1.9 million, $1.8 million, and $1.7 million for 2002, 2001 and 2000,
respectively.
NOTE 8--INCOME TAXES
The components of total income tax provision in the consolidated
statements of income for the years ended December 31, 2002, 2001, and 2000 are
as follows (in thousands):
2002 2001 2000
---------- ---------- ----------
Income tax provision--
Current--
Federal ........... $ 1,630 $ 2,226 $ 2,179
State ............. 108 -- --
---------- ---------- ----------
1,738 2,226 2,179
Deferred--
Federal ........... 1,535 (175) (164)
State ............. -- -- 248
---------- ---------- ----------
1,535 (175) 84
---------- ---------- ----------
Total ............. $ 3,273 $ 2,051 $ 2,263
========== ========== ==========
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, 2002, 2001 and 2000 is as follows
(in thousands):
2002 2001 2000
---------- ---------- ----------
Income tax provision at statutory federal income
tax rate ........................................ $ 4,855 $ 2,805 $ 2,274
Increase (decrease) in taxes resulting from:
Tax exempt income .......................... (1,865) (1,182) (586)
Bank owned life insurance .................. (204) (44) --
Zone academy bond credits .................. (237) -- --
State income taxes ......................... 10 -- 17
Other ...................................... 714 472 558
---------- ---------- ----------
Provision for income taxes ............ $ 3,273 $ 2,051 $ 2,263
========== ========== ==========
F-20
The net deferred tax liability is included in other liabilities in the
consolidated balance sheet as of December 31, 2002. Conversely, the net deferred
tax asset as of December 31, 2001 is included in other assets in the
consolidated balance sheet. Deferred tax assets and liabilities result from
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 balances as of December 31, 2002 and 2001 are as follows (in
thousands):
2002 2001
---------- ----------
Gross deferred tax assets--
Allowance for loan losses .................................. $ 3,611 $ 2,482
Leasehold improvements ..................................... 588 490
Trading swap fair value adjustment ......................... 321 --
Amortization of restricted stock ........................... 262 238
Unrealized loss on securities available for sale ........... -- 5
Illinois net deduction carryforward ........................ 652 161
Valuation allowance on Illinois net deduction carryforward . (652) (161)
Other ...................................................... 256 267
---------- ----------
Gross deferred tax assets, net of valuation allowance ............ 5,038 3,482
---------- ----------
Gross deferred tax liabilities--
Federal Home Loan Bank Stock Dividends ..................... (3,886) (1,018)
Unrealized gain on securities available for sale ........... (4,547) (171)
Goodwill amortization ...................................... (280) --
Other ...................................................... (259) (311)
---------- ----------
Gross deferred tax liabilities ................................... (8,972) (1,500)
---------- ----------
Net deferred tax (liability) asset ............................... $ (3,934) $ 1,982
========== ==========
NOTE 9--ACQUISITIONS
On December 30, 2002, The PrivateBank (Chicago) acquired Lodestar
Investment Counsel, a Chicago-based investment advisor with $482 million of
assets under management at December 31, 2002. Lodestar manages equity, balanced,
and fixed income accounts primarily for high net-worth individuals, retirement
plans and charitable organizations with investable assets in excess of $1.0
million, and shares a similar focus on highly personalized client service.
The consideration paid by the Company included cash and stock. The
Company issued 282,437 shares of common stock outstanding following completion
of the acquisition and related transactions. All assets and liabilities were
adjusted to fair value as of the effective date of the acquisition creating
goodwill of $8.4 million and customer intangibles of $2.5 million.
F-21
NOTE 10--DEPOSITS AND FUNDS BORROWED
The maturity distribution of time deposits of $100,000 or greater and
a summary of all funds borrowed and outstanding and the rate in effect on such
borrowings at December 31, 2002, 2001 and 2000 is presented in the table below:
TIME DEPOSITS $100,000 AND GREATER: 12/31/02 12/31/01 12/31/00
------------------------------------- ---------- ---------- -----------
Three months or less $ 162,619 $ 162,036 $ 103,755
Over three through six months 57,568 65,897 55,623
Over six through twelve months 132,036 87,043 47,379
Over twelve months 146,646 17,055 18,627
---------- ---------- ----------
Total ............................... $ 498,869 332,031 $ 225,384
========== ========== ===========
FUNDS BORROWED: CURRENT RATE MATURITY 12/31/02 12/31/01 12/31/00
- ---------------------------------- ------------- -------- ------------- ----------- ----------
Subordinated note 3.75% 2/11/07 $ 5,000 $ 5,000 $ 5,000
FHLB fixed advance(1) 6.50% 10/23/05 26,616 24,886 25,000
FHLB fixed advance 6.21% 12/05/03 30,000 30,000 30,000
FHLB fixed advance 1.73% 11/07/03 6,000 -- --
FHLB fixed advance 2.21% 07/17/03 1,000 -- --
FHLB fixed advance 2.74% 07/17/03 1,000 -- --
FHLB fixed advance 2.46% 06/16/03 500 -- --
FHLB fixed advance 2.70% 05/08/03 1,000 -- --
Borrowing under revolving line of
credit facility 3.50% 4/11/03 25,000 -- --
FHLB fixed advance 2.98% 03/10/03 1,000 -- --
FHLB fixed advance 2.38% 01/13/03 1,000 -- --
FHLB fixed advance 5.89% 12/20/02 -- 1,000 1,000
FHLB fixed advance 2.39% 11/12/02 -- 5,000 --
FHLB fixed advance 5.33% 07/22/02 -- 1,000 --
FHLB fixed advance 5.91% 06/21/02 -- 500 500
FHLB fixed advance 4.21% 05/13/02 -- 1,000 --
FHLB fixed advance 5.02% 03/06/02 -- 1,000 --
FHLB fixed advance 3.10% 02/11/02 -- 5,000 18,000
FHLB fixed advance 4.30% 02/01/02 -- 25,000 --
FHLB fixed advance 5.21% 01/22/02 -- 1,000 --
FHLB fixed advance 6.49% 11/30/01 -- -- 2,000
FHLB floating rate advance(2) 6.77% 5/1/01 -- -- 10,000
FHLB open line advance 1.48% daily 9,700 25,000 --
Fed funds purchased 1.49% daily 98,000 103,000 2,700
Demand repurchase agreements (3) 1.40% daily 4,138 3,102 2,679
------------- ----------- ----------
TOTAL FUNDS BORROWED $ 209,954 $ 231,488 $ 96,879
============= =========== ==========
(1) This FHLB advance is subject to a fair value hedge utilizing an
interest rate swap with a fair value of $2.9 million. The contractual par
amount on the advance is $25.0 million.
(2) The rate on this FHLB floating rate advance is set at one-month LIBOR
minus five basis points.
(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, 2002, the Company renewed the term on an $18.0 million
revolving credit facility with a commercial bank originally entered into on
February 11, 2000. On April 11, 2002, the loan agreement was amended and the
revolving line was increased to $25.0 million. On December 24, 2002, the loan
agreement was amended to increase the revolving line was increased to $35.0
million and matures on April 11, 2003. The interest rate on borrowings under
this revolving line resets quarterly, and is based on, at our option, either the
lender's prime rate or three-month LIBOR plus 120 basis points with a floor of
3.50%. The Company has elected to pay interest based on the three-month LIBOR
rate plus 120 basis points. The initial rate of interest on the revolver was
7.20%, and most recently reset to 3.50% on December 31, 2002. The collateral for
this borrowing consists of the common stock of The PrivateBank (Chicago) and The
PrivateBank (St. Louis), which is held in custody by the lender. As of December
F-22
31, 2002, the outstanding balance was $25.0 million.
On February 11, 2000, the Company entered into a subordinated note
issued to Johnson International, Inc. and subsequently sold to a third party, 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. On February 11, 2002, the interest rate
increased from LIBOR +50 basis points to LIBOR +200 basis points. This pricing
is in effect until February 11, 2004, at which point the pricing increases to
LIBOR +350 until maturity on February 11, 2007. The average rate of interest on
the subordinated note was 3.56% during 2002 compared to 4.86% during 2001 and
most recently reset to 3.75% on December 31, 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.
The scheduled maturities of time deposits (including brokered
deposits) as of December 31, 2002, for the years 2003 through 2007 and
thereafter, are as follows:
For year ending December 31,
2003 $ 473,794
2004 66,138
2005 4,445
2006 2,605
2007 and thereafter 15,469
----------
Total $ 562,451
==========
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.
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. A portion of the preferred securities is
eligible for treatment as Tier 1 capital as allowed by the Federal Reserve.
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
F-23
contributions to the Plan as determined and approved by the bank's
Board of Directors. Total discretionary contributions to the Plan amounted to
$239,867, $112,387, and $100,634 in 2002, 2001 and 2000, 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, 2002, the Stock Incentive Plan allows
12,540 shares to be issued under the Plan either pursuant to the exercise of
stock options granted thereunder or as restricted stock awards. The option price
may not be less than the fair market value on the date of grant. All options
have a term of 10 years. Options other than those granted in 1998 are first
exercisable beginning at least two years following the date of grant. Options
granted in 1998 are first exercisable five years from the date of grant or up to
two years earlier if certain conditions for total stockholder return are met.
Since 1992, the Company has compensated non-employee directors with
annual option grants. The option price of the director options is fair market
value on the date of grant, and the exercise period is 10 years from the date of
grant.
In 1992, the Company granted compensation replacement options to
certain officers of the company who agreed to reduced cash compensation. The
option price is the fair market value on the date of grant. The compensation
replacement options are exercisable during a 10-year period from the date of
grant.
The following table summarizes the status of the Company's stock
option agreements and stock option program as of December 31, 2002 and 2001,
adjusted to reflect our 3-for-2 stock split effective January 17, 2003, and
changes during the years then ended:
2002 2001
----------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- -------- ----------------
Outstanding at beginning of year ....... 1,014,953 $ 7.99 1,091,037 $ 7.19
Granted ................................ 21,750 15.00 182,850 9.55
Exercised .............................. (212,796) 5.79 (238,647) 5.29
Forfeited .............................. (5,109) 9.02 (20,288) 10.63
--------- ---------
Outstanding at end of year ............. 818,798 $ 8.77 1,014,953 $ 7.99
========= =========
Options exercisable at year-end ........ 356,915 668,430
Weighted average fair value of options
granted during the year ............... $ 15.00 $ 9.55
The range of exercise prices and weighted average remaining
contractual life for stock options outstanding as of December 31, 2002, was
$4.58 to $15.00 and six years, respectively.
The following table presents the range of exercise prices for the
stock option grants outstanding at December 31, 2002.
EXERCISE PRICE RANGE STOCK OPTIONS OUTSTANDING
------------------------------ -------------------------
$4.58 - $6.25.................. 264,240
$7.29 - $9.67.................. 300,435
$11.15 - $15.00................ 254,123
c. RESTRICTED STOCK
In 2002 and 2001, the Company issued the following
restricted share grants:
F-24
GRANT DATE SHARES GRANTED PRICE
---------------- -------------- --------
2001:
January 2001 ... 450 8.50000
February 2001 .. 34,800 9.41666
April 2001 ..... 750 9.33333
June 2001 ...... 2,250 11.1533
December 2001 .. 1,500 11.3866
December 2001 .. 3,750 11.3866
GRANT DATE SHARES GRANTED PRICE
---------------- -------------- --------
2002:
January 2002.... 2,550 15.0000
During 2002, no restricted shares were forfeited. Restricted shares
carry voting and dividend rights. Sale of the shares is restricted prior to
vesting. Subject to continued employment, vesting occurs five years from the
date of grant. Shares issued under the plan are recorded at their fair market
value on the date of grant with a corresponding charge to deferred compensation.
The deferred compensation, a component of stockholders' equity, is being
amortized as compensation expense on a straight-line basis over the vesting
period. Included in salaries and employee benefits in the consolidated
statements of income is compensation expense for restricted shares of $306,026,
$275,771, and $227,000 for 2002, 2001 and 2000, 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, 2001 ... $ 11,529,908
Additions ............ 11,236,239
Collections .......... (7,935,626)
------------
Balance, December 31, 2002 ... $ 14,830,521
============
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.
In May 1998, Ralph B. Mandell, our Chairman, President and Chief
Executive Officer, purchased 72,720 shares of newly issued common stock at
$13.75 per share from the Company. The purpose of the transaction was to enhance
Mr. Mandell's interest in our long-term performance and further align his
interests with those of our stockholders. As part of the transaction, we loaned
Mr. Mandell approximately 95% of the purchase price on a full recourse basis.
The loan matured on December 30, 2002 when Mr. Mandell repaid the outstanding
loan balance in full. 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. Mr. Mandell
pledged all of the shares of common stock purchased in the transaction as
collateral for the loan he received from us, but he is entitled to vote, and
receive dividends on, the shares. The loan was repaid in full in December, 2002.
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
F-25
earns an administrative fee from the partnership.
During 2002, the PrivateBank (Chicago) acquired phone equipment and
related services with a total cost of $176,244 through an information technology
company, Worknet, Inc,. William Castellano, who is one of the Company's
directors, is an affiliate of that Company.
During 2002, 2001 and 2000, The PrivateBank (Chicago) incurred
professional fees for services provided by the law firm Spitzer, Addis, Susman &
Krull in the amount of approximately $309,378, $263,264, and $186,000,
respectively. Michael B. Susman, who is one of the Company's directors, is a
partner of that firm.
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.
As the swap qualifies as a fair value hedge, changes in the fair value
of the interest rate swap and the changes in the fair value of the advance from
the date of designation are recorded through income. The interest rate swap is
recorded in other assets of the consolidated balance sheet at its fair value of
$2.9 million.
In the third quarter of 2002, the Company entered into a $25 million
swap in order to protect a portion of the municipal investment security
portfolio appreciation should rates rise. The Company swapped the 10-year rate
for 3-month LIBOR to act as an economic hedge to a portion of the
available-for-sale municipal securities in the portfolio. The December 31, 2002
fair market value adjustment on this swap resulted in a trading loss of
$943,000, which is recorded in other liabilities on the consolidated balance
sheet.
Interest rate swaps are subject to credit risk for non-performance by
counterparties. Exposure to credit risk is mitigated by credit approvals, credit
limits and monitoring procedures.
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.
Exposure to credit risk is controlled through credit approvals, credit
limits, obtaining collateral 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
F-26
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, 2002 and 2001, the banks had the following
categories of credit-related financial instruments:
2002 2001
---------- ----------
(in thousands)
Commitments to extend credit ... $ 388,696 $ 224,144
Standby letters of credit ...... 37,936 19,950
Note: all commitments are floating and are shown at contract amount
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:
EXPIRING IN:
TOTAL 2003 2004-2005 2006-2007 >2008
---------- ---------- ---------- ---------- ----------
(in thousands)
Standby letters of credit ...... 37,936 27,592 5,430 4,914 --
Commitments to extend credit ... 388,696 211,925 126,058 17,376 33,337
---------- ---------- ---------- ---------- ----------
Total ..................... $ 426,632 $ 239,517 $ 131,488 $ 22,290 $ 33,337
========== ========== ========== ========== ==========
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.
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 held by the Company and its
subsidiaries at December 31, 2002 and 2001. This information is presented solely
for compliance with FAS 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
F-27
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.
F-28
DECEMBER 31, 2002 DECEMBER 31, 2001
---------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
--------- ---------- ---------- ----------
(in thousands)
Assets--
Cash and cash equivalents ......... $ 34,787 $ 34,787 $ 22,801 $ 22,801
Securities ........................ 487,020 487,020 332,933 332,933
Loans held for sale ............... 14,321 14,321 11,335 11,335
Net loans ......................... 954,056 988,352 772,465 780,705
Accrued interest receivable........ 9,427 9,427 7,262 7,262
Interest Rate Swap ................ 2,925 2,925 1,704 1,704
Bank Owned Life Insurance ......... 10,729 10,729 10,128 10,128
Liabilities--
Deposits with no stated maturity .. 642,820 642,820 480,486 480,486
Time deposits ..................... 562,451 535,576 370,009 370,935
---------- ---------- ---------- ----------
Total deposits .................... 1,205,271 1,205,272 850,495 851,421
Accrued interest payable .......... 4,986 4,986 2,112 2,112
Funds borrowed .................... 209,954 209,377 231,488 232,827
Long term debt - Trust Preferred
Securities ....................... 20,000 21,980 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.
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 SWAPS
The fair value of interest swaps executed by the Company is determined
based on the fair market value as quoted by broker-dealers.
F-29
f. BANK OWNED LIFE INSURANCE
The fair value of bank owned life insurance is equal to its cash
surrender 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,
2003, The PrivateBank (Chicago) could have declared approximately $30,295,618 in
dividends without requesting approval of the applicable federal or state
regulatory agency. As of January 1, 2003, The PrivateBank (St. Louis) could not
have declared dividends due to net losses in 2000 and 2001.
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 2002 and 2001, the average balances maintained to meet the
requirement were $6,122,000 and $3,037,720, 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 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, 2002, 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.
F-30
The following table presents selected capital information for the
Company (Consolidated), The PrivateBank (Chicago) and The PrivateBank (St.
Louis) as of December 31, 2002 and 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, 2002--
Total risk-based capital--
Consolidated .................. $ 94,109 8.29% $ 90,845 8.00%
The PrivateBank (Chicago) ..... 104,249 10.26 81,305 8.00 $ 101,631 10.00%
The PrivateBank (St. Louis) ... 14,230 12.05 9,445 8.00 11,807 10.00
Tier 1 risk-based capital--
Consolidated .................. $ 78,524 6.91 $ 45,422 4.00
The PrivateBank (Chicago) ..... 93,918 9.24 40,652 4.00 $ 60,978 6.00
The PrivateBank (St. Louis) ... 12,976 10.99 4,723 4.00 7,084 6.00
Tier 1 (leverage) capital--
Consolidated .................. $ 78,524 5.47 $ 57,455 4.00
The PrivateBank (Chicago) ..... 93,918 7.25 51,842 4.00 $ 64,802 5.00
The PrivateBank (St. Louis) ... 12,976 9.47 5,482 4.00 6,852 5.00
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
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.
F-31
NOTE 19--PRIVATEBANCORP, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL
STATEMENTS
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001
2002 2001
---------- ----------
(in thousands)
ASSETS
Cash and due from banks--bank subsidiaries .. $ 723 $ 361
Investment in bank subsidiaries ............. 135,901 90,499
Other assets ................................ 3,125 1,939
---------- ----------
Total assets ................................ $ 139,749 $ 92,799
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Funds borrowed .............................. $ 30,000 $ 10,000
Long term debt -- trust preferred
securities ................................. 20,000 20,000
Other liabilities ........................... 657 495
---------- ----------
Total liabilities ........................... 50,657 30,495
---------- ----------
Stockholders' equity ........................ 89,092 62,304
---------- ----------
Total liabilities and stockholders' equity .. $ 139,749 $ 92,799
========== ==========
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
OPERATING INCOME:
Interest income ....................................... -- $ -- $ 5
Interest expense ...................................... 2,553 2,127 1,230
-------- -------- --------
Net interest expense .................................. (2,553) (2,127) (1,225)
-------- -------- --------
NON INTEREST INCOME:
Other income .......................................... 115 12 6
-------- -------- --------
OPERATING EXPENSE:
Amortization of deferred compensation ................. 306 276 227
Other ................................................. 2,731 1,652 1,359
-------- -------- --------
Total .............................................. 3,037 1,928 1,586
-------- -------- --------
Loss before income taxes and equity in undistributed
net income of bank subsidiaries ...................... (5,475) (4,043) (2,805)
Income tax benefit .................................... (1,772) (1,547) (913)
-------- -------- --------
Loss before equity in undistributed net income of
bank subsidiaries .................................... (3,703) (2,496) (1,892)
-------- -------- --------
Equity in undistributed net income of bank subsidiaries 14,710 8,696 6,317
-------- -------- --------
Net income ............................................ $ 11,007 $ 6,200 $ 4,425
======== ======== ========
The Parent Company Only Statements of Changes in Stockholders' Equity
are the same as the Consolidated Statements of Changes in Stockholders' Equity.
F-32
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
---------- ---------- ----------
(in thousands)
Cash flows from operating activities:
Net income .............................................. $ 11,007 $ 6,200 $ 4,425
Adjustments to reconcile net income to net cash used in
operating activities--
Equity in net income of bank subsidiaries ............... (14,710) (8,696) (6,317)
Amortization of deferred compensation ................... 306 276 227
Decrease (increase) in other assets ..................... 275 (646) (407)
Increase in other liabilities ........................... 416 386 607
Other, net .............................................. 1,198 (269) --
---------- ---------- ----------
Total adjustments ................................... (12,515) (8,949) (5,890)
---------- ---------- ----------
Net cash used in operating activities ............... (1,508) (2,749) (1,465)
---------- ---------- ----------
Cash flows from investing activities:
Net capital investments in bank subsidiaries ............ (23,750) (5,000) (29,200)
Proceeds from bank subsidiary for Lodestar acquisition .. 5,589 -- --
Purchase of premises .................................... (1,750) -- --
---------- ---------- ----------
Net cash used in investing activities ................... (19,911) (5,000) (29,200)
Cash flows from financing activities:
Funds borrowed .......................................... 20,000 5,000 23,000
Issuance of Long term debt -- Trust Preferred
Securities . ........................................... -- 20,000 --
Repayment of funds borrowed ............................. -- (18,000) --
Proceeds from exercise of stock options ................. 1,522 1,259 110
Repayment of loan to executive officer .................. 950 -- 175
Dividends paid .......................................... (691) (520) (462)
---------- ---------- ----------
Net cash provided by financing activities ............... 21,781 7,739 22,823
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents .......... 362 (10) (7,842)
Cash and cash equivalents at beginning of year ................ 361 371 8,213
---------- ---------- ----------
Cash and cash equivalents at end of year ...................... $ 723 $ 361 $ 371
========== ========== ==========
Other cash flow disclosures:
Income taxes paid ....................................... $ 1,325 $ 1,757 $ 1,917
NOTE 20--CAPITAL TRANSACTIONS
During 2002, the Company contributed capital of $19.25 million to the
PrivateBank (Chicago) and $4.5 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
and was amended on December 24, 2002, and as amended, matures on April 11, 2003
and allows for up to $35.0 million in borrowings. 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-33
PRIVATEBANCORP, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following are the consolidated results of operations on a quarterly basis:
2002
----------------------------------------------------------
FOURTH THIRD SECOND FIRST
----------- ----------- ----------- -----------
(dollars in thousands except ratios and per share data)
SUMMARY INCOME STATEMENT
INTEREST INCOME
Loans, including fees ....................... $ 14,043 $ 13,704 $ 12,665 $ 12,148
Federal funds sold and
interest bearing deposits .............. 63 38 8 17
Securities .................................. 5,507 4,557 4,886 4,206
----------- ----------- ----------- -----------
Total interest income ....................... 19,613 18,299 17,559 16,371
Interest expense ............................ 7,800 7,856 7,579 8,007
----------- ----------- ----------- -----------
Net interest income ......................... 11,813 10,443 9,980 8,364
Provision for loan loss ..................... 914 828 1,609 511
----------- ----------- ----------- -----------
Net interest income after
provision for loan loss ................. 10,899 9,615 8,371 7,853
----------- ----------- ----------- -----------
NON-INTEREST INCOME
Banking, wealth management
services and other income .............. 1,975 1,763 1,802 1,542
Securities gains (losses), net .............. (313) 280 274 (230)
Trading losses on swap ...................... (282) (662) -- --
----------- ----------- ----------- -----------
Total non-interest income ................... 1,380 1,381 2,076 1,312
----------- ----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee
benefits .............................. 3,903 3,393 3,469 3,214
Goodwill .................................... -- -- -- --
Occupancy expense ........................... 1,319 1,227 1,206 1,139
Other non-interest expense .................. 2,712 2,468 2,438 2,119
----------- ----------- ----------- -----------
Total non-interest expense .................. 7,934 7,088 7,113 6,472
----------- ----------- ----------- -----------
Income before income taxes .................. 4,345 3,908 3,334 2,693
Provision for income taxes .................. 1,125 875 724 549
----------- ----------- ----------- -----------
Net income .................................. $ 3,220 $ 3,033 $ 2,610 $ 2,144
=========== =========== =========== ===========
KEY STATISTICS
Diluted earnings per share .................. 0.41 0.39 0.33 0.28
Basic earnings per share .................... 0.43 0.41 0.35 0.29
Return on average total assets .............. 0.88% 0.89% 0.82% 0.73%
Return on average total equity .............. 15.99% 15.86% 15.07% 13.35%
Net interest margin ......................... 3.56% 3.46% 3.53% 3.18%
Yield on average earning assets ............. 5.79% 5.90% 6.03% 6.02%
Cost of average paying liabilities .......... 2.42% 2.63% 2.69% 3.06%
Efficiency Ratio (tea) ...................... 57.3% 56.3% 55.4% 62.5%
COMMON STOCK INFORMATION
Book value per share ........................ $ 11.56 $ 10.71 $ 9.71 $ 8.80
Dividends paid per share .................... 0.027 0.027 0.020 0.020
Outstanding shares at end of pd. ............ 7,704,203 7,404,234 7,382,370 7,375,530
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 (losses), net .............. 1,191 365 353 186
Trading losses on swap ...................... -- -- -- --
----------- ----------- ----------- -----------
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
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
Diluted earnings per share .................. 0.26 0.22 0.19 0.19
Basic earnings per share .................... 0.27 0.22 0.19 0.19
Return on average total assets .............. 0.70% 0.64% 0.60% 0.64%
Return on average total equity .............. 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 2.42% .... 3.59% 4.40% 4.92% 5.55
Efficiency Ratio (tea) ...................... 60.9% 60.6% 64.5% 67.8%
COMMON STOCK INFORMATION
Book value per share ........................ $ 8.65 $ 8.71 $ 8.23 $ 8.10
Dividends paid per share .................... 0.020 0.020 0.017 0.017
Outstanding shares at end of pd. ............ 7,206,420 7,125,186 7,021,002 7,028,652
F-34
PRIVATEBANCORP, INC. AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)(CONTINUED)
2002
-------------------------------------------------------------
FOURTH THIRD SECOND FIRST
------------ ------------ ------------ ------------
(dollars in thousands except ratios and per share data)
NUMBER OF SHARES USED TO COMPUTE:
Basic earnings per share ............. 7,422,471 7,392,542 7,378,748 7,287,033
Diluted earnings per share ........... 7,912,101 7,809,603 7,808,900 7,613,646
Capital Ratios
Total equity to total assets ......... 5.77% 5.65% 5.38% 5.27%
Total risk-based capital ratio ....... 8.29% 9.10% 9.37% 9.93%
Tier-1 risk based capital ratio ...... 6.91% 7.61% 7.84% 8.37%
Leverage ratio ....................... 5.47% 5.91% 6.07% 6.25%
Selected Financial Condition
Data (at end of period)
Total securities ..................... $ 487,020 $ 403,192 $ 392,090 $ 388,728
Total loans .......................... 965,641 913,197 865,778 782,434
Total assets ......................... 1,543,414 1,404,326 1,332,008 1,231,208
Total deposits ....................... 1,205,271 1,163,327 1,074,475 981,865
Funds borrowed ....................... 209,954 125,422 154,499 155,523
Total stockholders' equity ........... 89,092 79,281 71,697 64,926
Credit Quality
Non-performing assets:
Loans delinquent over 90 days ........ 650 2,549 2,518 1,448
Nonaccrual loans ..................... 749 430 649 1,458
Other real estate .................... -- -- -- --
------------ ------------ ------------ ------------
Total non-performing assets .......... $ 1,399 $ 2,979 $ 3,167 $ 2,906
============ ============ ============ ============
Loans charged-off .................... 4 165 515 66
Recoveries ........................... 33 70 25 39
------------ ------------ ------------ ------------
Net charge-offs (recoveries) ........ $ (29) $ 95 $ 490 $ 27
============ ============ ============ ============
Provision for loan losses ............ $ 914 $ 828 $ 1,609 $ 511
============ ============ ============ ============
KEY RATIOS:
Net charge-offs to average loans ..... (0.01)% 0.04% 0.24% 0.01%
Total non-performing loans to total
loans ......................... 0.14% 0.33% 0.37% 0.37%
Total non-performing assets to total
assets ........................ 0.09% 0.21% 0.24% 0.24%
LOAN LOSS RESERVE SUMMARY:
Balance at beginning of period ....... $ 10,642 $ 9,909 $ 8,790 $ 8,306
Provision ............................ 914 828 1,609 511
Net charge-offs (recoveries) ......... (29) 95 490 27
------------ ------------ ------------ ------------
Ending allowance for loan losses ..... $ 11,585 $ 10,642 $ 9,909 $ 8,790
NET LOAN CHARGE-OFFS (RECOVERIES):
Commercial real estate ............... $ -- $ -- $ -- $ --
Residential real estate .............. -- -- -- --
Commercial ........................... (2) 46 481 18
Personal ............................. (27) 49 9 9
Home equity .......................... -- -- -- --
Construction ......................... -- -- -- --
------------ ------------ ------------ ------------
Total net loan charge-
offs (recoveries) ............... $ (29) $ 95 $ 490 $ 27
============ ============ ============ ============
2002
--------------------------------------------------------------
FOURTH THIRD SECOND FIRST
---------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS EXCEPT RATIOS AND PER SHARE DATA)
NUMBER OF SHARES USED TO COMPUTE:
Basic earnings per share ............. 7,160,358 7,071,759 7,022,483 6,972,092
Diluted earnings per share ........... 7,427,007 7,393,757 7,282,625 7,175,100
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
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 (recoveries) ........ $ 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
Provision ............................ 1,257 845 738 339
Net charge-offs (recoveries) ........ 509 183 297 (8)
---------- ------------- ------------ -------------
Ending allowance for loan losses ..... $ 8,306 $ 7,558 $ 6,896 $ 6,455
NET LOAN CHARGE-OFFS (RECOVERIES):
Commercial real estate ............... $ -- $ -- $ -- $ --
Residential real estate .............. -- -- -- --
Commercial ........................... 438 185 276 (3)
Personal ............................. 71 (2) 21 (5)
Home equity .......................... -- -- -- --
Construction ......................... -- -- -- --
---------- ------------- ------------ -------------
Total net loan charge-
offs (recoveries) ................... $ 509 $ 183 $ 297 $ (8)
========== ============= ============ =============
F-35
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Ralph Mandell, certify that:
1. I have reviewed this annual report on Form 10-K of PrivateBancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 3, 2003 /s/ RALPH B. MANDELL
---------------------
Ralph B. Mandell
Chairman, Chief Executive Officer and President
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Gary Svec, certify that:
1. I have reviewed this annual report on Form 10-K of PrivateBancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
d) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: March 3, 2003 /s/ GARY L. SVEC
-----------------------
Gary L. Svec
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS
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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 Lease Agreement dated August 31, 1995 between 208 South LaSalle
Associates, L.P. and Lodestar Financial Services, Inc.+
10.10 First Amendment to lease dated February 15, 2000 between
LaSalle-Adams,L.L.C. and Lodestar Financial Services, Inc.+
10.11 Second Amendment to lease dated August 12, 2002 between
LaSalle-Adams, L.L.C. and Lodestar Investment Counsel, Inc.+
10.12 Pledge Agreement dated as of May 28, 1998 by and between the
Ralph B. Mandell Revocable Trust UTA dated June 5, 1997 and
PrivateBancorp, Inc. (included as Exhibit B to Stock Purchase
Agreement filed as Exhibit 10.6 to the Company's Form S-1
Registration Statement (File No. 333-77147) and incorporated
herein by reference).
EXHIBIT NO. DESCRIPTION OF EXHIBITS
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10.13 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).*
10.14 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).*
10.15 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).
10.16 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 ).*
10.17 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).*
10.18 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).
10.19 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).
10.20 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).
10.21 Amendment No. 1 to Loan agreement dated as of February 11, 2002
between PrivateBancorp, Inc. and LaSalle Bank National Association
(Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 2002 and incorporated herein
by reference).
10.22 Amendment No. 2 to Loan agreement dated as of April 11, 2002
between PrivateBancorp, Inc. and LaSalle Bank National Association
(Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2002 and incorporated herein
by reference).
10.23 Amendment No. 3 to Loan agreement dated as of December 24, 2002
between PrivateBancorp, Inc. and LaSalle Bank National
Association.+
10.24 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).*
10.25 Employment Agreement by and between William Goldstein and Lodestar
Investment Counsel LLC, dated as of December 30, 2002.+
12.1 Calculation of Ratio of Earnings to Fixed Charges.+
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP.+
24.1 Powers of Attorney (set forth on signature page).
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.+
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.+
+ Filed herewith.
* Indicates management contracts or compensatory plans or arrangements
required to be filed as an exhibit.