SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to ________
Commission File Number: 000-25887
---------
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 36-3681151
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation organization)
TEN NORTH DEARBORN STREET
CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip Code)
(312) 683-7100
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No|_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
================================================================================
CLASS OUTSTANDING AS OF MAY 10, 2000
- --------------------------------------------------------------------------------
Common, no par value 4,590,332
================================================================================
PRIVATEBANCORP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page Number
-----------
Selected Financial Data .......................................................1
PART I
Item 1. Financial Statements.................................................3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........21
PART II
Item 1. Legal Proceedings...................................................23
Item 2. Changes in Securities and Use of Proceeds...........................23
Item 3. Defaults upon Senior Securities.....................................23
Item 4. Submission of Matters to a Vote of Security Holders.................24
Item 5. Other Information...................................................24
Item 6. Exhibits and Reports on Form 8-K....................................24
Signature Page................................................................25
Exhibit Index.................................................................26
i
SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
information of the Company at or for the periods indicated. This information
should be used in conjunction with the unaudited consolidated financial
statements and related notes included pursuant to Item 1 of this report.
QUARTER ENDED
-----------------------------------------------------------------
3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
----------- ------------ ------------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
Interest income:
Loans, including fees ....................... $ 9,475 $ 7,737 $ 7,006 $ 6,218 $ 5,636
Federal funds sold and interest-bearing
deposits .................................. 387 115 134 33 48
Securities .................................. 1,385 1,088 1,189 1,294 1,570
--------- --------- --------- --------- ---------
Total interest income .................... $ 11,247 $ 8,940 $ 8,329 $ 7,545 $ 7,254
--------- --------- --------- --------- ---------
Interest expense:
Interest-bearing demand deposits ............ 191 178 144 140 142
Savings and money market deposit
accounts .................................. 3,098 2,152 2,000 1,719 1,800
Other time deposits ......................... 2,766 2,066 1,852 1,729 1,752
Funds borrowed .............................. 296 257 170 360 144
--------- --------- --------- --------- ---------
Total interest expense .................... $ 6,351 $ 4,653 $ 4,166 $ 3,948 $ 3,838
--------- --------- --------- --------- ---------
Net interest income ....................... 4,896 4,287 4,163 3,597 3,416
Provision for loan losses ..................... 311 437 273 213 285
--------- --------- --------- --------- ---------
Net interest income after provision for
loan losses .............................. 4,585 3,850 3,890 3,384 3,131
--------- --------- --------- --------- ---------
Non-interest income:
Banking and trust services .................. 627 535 504 512 396
Securities gains ............................ 95 (1) 8 4 46
--------- --------- --------- --------- ---------
Total non-interest income ..................... $ 722 $ 534 $ 512 $ 516 $ 442
--------- --------- --------- --------- ---------
Non-interest expense:
Salaries and employee benefits .............. 1,877 1,753 1,309 1,088 1,115
Occupancy ................................... 613 437 401 373 352
Data processing ............................. 163 96 135 116 131
Marketing ................................... 304 263 144 132 153
Amortization of goodwill .................... 113 -- -- -- --
Professional fees ........................... 575 404 487 226 178
Insurance ................................... 68 82 53 38 41
Towne Square Financial Corporation
acquisition ............................... -- -- 1,300 -- --
Other expense ............................... 324 181 517 406 285
--------- --------- --------- --------- ---------
Total non-interest expense ................ 4,037 3,216 4,237 2,379 2,255
--------- --------- --------- --------- ---------
Income before income taxes ................ 1,270 1,168 165 1,521 1,318
Income tax provision ........................ 421 191 366 409 291
--------- --------- --------- --------- ---------
Net income ................................ $ 849 $ 977 $ (201) $ 1,112 $ 1,027
========= ========= ========= ========= =========
PER SHARE DATA:
Basic earnings .............................. $ 0.18 $ 0.21 $ (0.05) $ 0.32 $ 0.30
Diluted earnings ............................ 0.18 0.20 (0.05) 0.30 0.28
Dividends ................................... 0.025 0.025 0.025 0.025 0.025
Book value (at end of period) ............... 10.57 10.26 10.11 8.68 8.71
1
QUARTER ENDED
-----------------------------------------------------------------
3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
----------- ------------ ------------- ------------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities .............................. $ 89,924 $ 71,134 $ 77,269 $ 89,026 $ 105,136
Total loans ................................... 521,188 397,277 352,236 335,306 307,766
Total assets .................................. 656,981 518,697 449,838 438,169 431,055
Total deposits ................................ 578,557 453,092 386,157 375,032 384,454
Funds borrowed ................................ 23,328 15,000 15,000 31,000 10,000
Total stockholders' equity .................... 48,498 47,080 46,351 29,966 30,054
Trust assets under administration ............. 799,000 729,904 699,000 666,636 637,400
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(1) ...................... 3.59% 3.85% 3.87% 3.61% 3.57%
Net interest spread(2) ...................... 2.97 3.11 3.17 3.08 3.02
Non-interest income to average assets ....... 0.49 0.44 0.45 0.48 0.43
Non-interest expense to average assets ...... 2.72 2.65 3.70 2.19 2.18
Net overhead ratio(3) ....................... 2.23 2.21 3.25 1.72 1.75
Efficiency ratio(4)(7) ...................... 69.2 57.5 57.5 57.2 54.9
Return on average assets(5)(7) .............. 0.57 0.98 1.04 1.02 0.97
Return on average equity(6)(7) .............. 7.20 10.06 10.17 14.82 13.84
Dividend payout ratio ....................... 13.52 11.75 NM 7.76 8.40
Asset Quality Ratios:
Non-performing loans to total loans ......... 0.30 0.21 0.20 0.24 0.12
Allowance for loan losses to:
total loans ............................... 1.09 1.14 1.16 1.16 1.20
non-performing loans ...................... 360 548 579 485 1,024
Net charge-offs to average total loans ...... 0.003 0.002 0.11 0.002 --
Non-performing assets to total assets ....... 0.24 0.16 0.16 0.18 0.08
Balance Sheet Ratios:
Loans to deposits ........................... 90.08 87.68 91.22 89.41 80.05
Average interest-earning assets to
average interest-bearing liabilities ...... 114.0 116.7 115.6 115.3 114.2
Capital Ratios:
Total equity to total assets ................ 7.38 9.08 10.30 6.83 6.97
Total risk-based capital ratio .............. 9.56 13.96 15.22 10.77 11.21
Tier 1 risk-based capital ratio ............. 7.56 12.84 14.09 9.63 10.05
Leverage ratio .............................. 6.76 10.77 11.19 7.63 7.53
- ----------------
(1) Net interest income divided by average interest-earning assets.
(2) Yield on average interest-earning assets less rate on average interest-
bearing liabilities.
(3) Non-interest expense less non-interest income divided by average total
assets.
(4) Non-interest expense divided by the sum of net interest income (tax
equivalent) plus non-interest income.
(5) Net income divided by average total assets.
(6) Net income divided by average common equity.
(7) 1999 performance ratios excluding special charges relating to the Towne
Square Financial Corporation acquisition and St. Louis start-up costs
incurred in the third quarter and fourth quarter, respectively.
2
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31,1999
-------------- ----------------- -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks ......................... $ 16,629 $ 14,940 $ 8,220
Short-term investments .......................... 10,632 29,243 7,759
--------- --------- ---------
Total cash and cash equivalents ............... 27,261 44,183 15,979
--------- --------- ---------
Available-for-sale securities, at fair value .... 89,924 71,134 105,136
--------- --------- ---------
Loans ........................................... 521,188 397,277 307,766
Allowance for loan losses ....................... (5,670) (4,510) (3,695)
--------- --------- ---------
Net loans ....................................... 515,518 392,767 304,071
--------- --------- ---------
Goodwill ........................................ 12,237 -- --
--------- --------- ---------
Bank premises and equipment, net ................ 3,211 2,028 1,528
--------- --------- ---------
Accrued interest receivable ..................... 3,945 2,870 2,685
--------- --------- ---------
Other assets .................................... 4,885 5,715 1,656
--------- --------- ---------
Total assets .................................... $ 656,981 $ 518,697 $ 431,055
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing ........................... $ 51,451 $ 36,771 $ 28,178
Interest-bearing .............................. 36,926 33,400 31,794
Savings and money market deposit accounts ....... 277,747 204,068 180,871
Brokered deposits ............................... 5,000 21,696 --
Other time deposits ............................. 207,433 157,157 143,611
--------- --------- ---------
Total deposits ................................ 578,557 453,092 384,454
Funds borrowed .................................. 23,328 15,000 10,000
Accrued interest payable ........................ 1,614 1,056 995
Other liabilities ............................... 4,984 2,469 5,552
--------- --------- ---------
Total liabilities ............................... $ 608,483 $ 471,617 $ 401,001
--------- --------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized .... -- -- --
Common stock, without par value, $1 stated
value; 12,000,000 shares authorized; 4,590,332;
4,590,332; and 3,451,824 shares issued and
outstanding as of March 31, 2000, December 31,
1999, and March 31, 1999, respectively ........ $ 4,590 $ 4,590 $ 3,451
Surplus ......................................... 39,761 39,761 22,600
Retained earnings ............................... 8,159 7,425 5,854
Accumulated other comprehensive income .......... (2,292) (2,812) (58)
Deferred compensation ........................... (695) (759) (843)
Loans to officers ............................... (1,025) (1,125) (950)
--------- --------- ---------
Total stockholders' equity ...................... 48,498 47,080 30,054
--------- --------- ---------
Total liabilities and stockholders' equity ...... $ 656,981 $ 518,697 $ 431,055
========= ========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
3
PRIVATEBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
--------- ---------
INTEREST INCOME
Loans, including fees ............................. $ 9,475 $ 5,636
Federal funds sold and interest bearing deposits .. 387 48
Securities ........................................ 1,385 1,570
------- -------
Total interest income ........................... 11,247 7,254
------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand ......................... 191 142
Savings and money market deposit accounts ....... 3,098 1,800
Other time ...................................... 2,766 1,752
Funds borrowed .................................... 296 144
------- -------
Total interest expense ............................ 6,351 3,838
------- -------
Net interest income ............................... 4,896 3,416
Provision for loan losses ......................... 311 285
------- -------
Net interest income after provision for loan losses 4,585 3,131
------- -------
NON-INTEREST INCOME
Banking and trust services ........................ 627 396
Securities gains and other income ................. 95 46
------- -------
Total non-interest income ....................... 722 442
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits .................... 1,877 1,115
Occupancy expense, net ............................ 613 352
Professional fees ................................. 575 178
Goodwill amortization ............................. 113 --
Other non-interest expense ........................ 859 610
------- -------
Total non-interest expense ...................... 4,037 2,255
------- -------
Income before income taxes ........................ 1,270 1,318
Income tax provision .............................. 421 291
------- -------
NET INCOME ........................................ $ 849 $ 1,027
======= =======
Basic earnings per share .......................... $ 0.18 $ 0.30
Diluted earnings per share ........................ $ 0.18 $ 0.28
The accompanying notes to consolidated financial statements are
an integral part of these statements.
4
PRIVATEBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
COMPRE- DEFERRED TOTAL
COMMON RETAINED HENSIVE COMPEN- LOANS TO STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME SATION OFFICERS EQUITY
------ ------- -------- ----------- -------- -------- -------------
Balance, December 31, 1998.... $3,431 $22,274 $4,913 $ 150 $(544) $ (950) $29,274
Net income.................. -- -- 1,027 -- -- -- 1,027
Net decrease in fair value of
Securities classified as
available-for-sale, net of
income taxes and
reclassification adjustments -- -- -- (208) -- -- (208)
------ ------- ------ ------- ----- ------- -------
Total comprehensive income.... -- -- 1,027 (208) -- -- 819
------ ------- ------ ------- ----- ------- -------
Cash dividends declared ($0.025 --
per share).................. -- -- (86) -- -- (86)
Issuance of common stock...... 20 326 -- -- -- -- 346
Awards granted................ -- -- -- -- (346) -- (346)
Amortization of deferred
compensation................ -- -- -- -- 47 -- 47
------ ------- ------ ------- ----- ------- -------
Balance, March 31, 1999....... $3,451 $22,600 $5,854 $ (58) $(843) $ (950) $30,054
====== ======= ====== ======= ===== ======= =======
Balance, December 31, 1999.... $4,590 $39,761 $7,425 $(2,812) $(759) $(1,125) $47,080
Net income.................... -- -- 849 -- -- -- 849
Net increase in fair value of
securities classified as
available-for-sale, net of
income taxes and
reclassification adjustments -- -- -- 520 -- -- 520
------ ------- ------ ------- ----- ------- -------
Total comprehensive income.... -- -- 849 520 -- -- 1,369
------ ------- ------ ------- ----- ------- -------
Cash dividends declared --
($0.025 per share).......... -- -- (115) -- -- (115)
Issuance of common stock...... -- -- -- -- -- -- --
Awards granted................ -- -- -- -- -- -- --
Amortization of deferred
compensation................ -- -- -- -- 64 -- 64
Repayment of loans to officers -- -- -- -- -- 100 100
------ ------- ------ ------- ----- ------- -------
Balance, March 31, 2000....... $4,590 $39,761 $8,159 $(2,292) $(695) $(1,025) $48,498
====== ======= ====== ======= ===== ======= =======
The accompanying notes to consolidated financial statements are
an integral part of these statements.
5
PRIVATEBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................... $ 849 $ 1,027
---------- -------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization........................................ 167 136
Goodwill amortization................................................ 113 --
Johnson Bank Illinois fair value accretion, net...................... (83) --
Amortization of deferred compensation................................ 64 47
Provision for loan losses............................................ 311 285
Gain on sale of securities........................................... (92) (46)
Decrease in deferred income taxes.................................... 387 --
(Increase) in accrued interest receivable............................ (316) (421)
(Decrease) Increase in accrued interest payable...................... (52) 273
Decrease (Increase) in other assets.................................. 652 (28)
Increase in other liabilities........................................ 2,507 4,232
---------- -------
Total adjustments.................................................. 3,658 4,478
---------- -------
Net cash provided by operating activities.......................... 4,507 5,505
---------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities.......... 11,770 14,917
Purchase of securities available-for-sale............................ (9,681) (3,456)
Johnson Bank Illinois acquisition, net of cash received.............. (15,753) --
Net loan principal advanced.......................................... (37,530) (25,801)
Bank premises and equipment expenditures............................. (1,116) (75)
---------- -------
Net cash used in investing activities.............................. (52,310) (14,415)
---------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits....................................... 33,908 19,461
Dividends paid....................................................... (115) (86)
Net decrease in funds borrowed....................................... (2,912) (10,000)
---------- -------
Net cash provided by financing activities.......................... 30,881 9,375
---------- -------
Net (decrease) increase in cash and cash equivalents................... (16,922) 465
Cash and cash equivalents at beginning of year......................... 44,183 15,514
---------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 27,261 $15,979
========== =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
6
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial information of PRIVATEBANCORP, Inc. (the
"Company") and Subsidiary, The PrivateBank and Trust Company (the "Bank" or
"PrivateBank"), included herein is unaudited; however, such information reflects
all adjustments (consisting only of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation for the interim
periods. The financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
The annualized results of operations for the three months ended March 31,
2000, are not necessarily indicative of the results expected for the full year
ending December 31, 2000. The accompanying consolidated financial statements are
unaudited and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes for the year ended December 31, 1999 included in
the Company's Annual Report on Form 10-K (File No. 000-25887).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the reported
period. Actual results could differ from these estimates.
NOTE 2 -- EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per
share (in thousands except per share data):
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
------ ------
NET INCOME $ 849 $1,027
Average common shares outstanding.................................... 4,590 3,437
Average common shares equivalent1................................... 187 246
Weighted average common shares and common share equivalents.......... 4,777 3,683
Net income per average common share - basic.......................... 0.18 0.30
Net income per average common share - diluted........................ 0.18 0.28
NOTE 3 - NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Related Hedging Activities", amended by SFAS No. 137
"Accounting for Derivative Instrument and Hedging Activities--Deferral of the
Effective Date of SFAS No. 133--an Amendment of SFAS No. 133," will, on January
1, 2001, require all derivatives to be recorded at fair value in the balance
sheet, with changes in fair value recorded in the income statement. If
derivatives are documented and effective as hedges, the change in the derivative
fair value will be offset by an equal change in the fair value of the hedged
item. All hedge ineffectiveness will be recognized immediately in earnings. The
Statement may be adopted early at the start of a calendar quarter. The Company
does not plan to adopt the Statement early and adoption is not expected to have
a material impact since the Company does not have derivative instruments or
hedging activity.
- --------
1 Common shares equivalent result from stock options being treated as if
they had been exercised and are computed by application of the treasury stock
method.
7
Effective January 1, 2000, Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", allows mortgage loans that are securitized to be classified as
trading, available for sale, or in certain circumstances, held to maturity.
Since the Company has not securitized loans, this Statement does not currently
impact the Company.
NOTE 4 - OPERATING SEGMENTS
The Company has aligned its operations into three major lines of business:
Private Banking Services, Trust Services and Holding Company Activities. For
purposes of making operating decisions and assessing performance, management
treats the Bank, the Trust Department and the Holding Company as three operating
segments. The Company's major business segments are analyzed on an internal
management reporting basis. The Company's investment portfolio is included in
total assets of PrivateBank and reported in the results of Private Banking
Services. The business segments summarized below and in the following tables are
primarily managed with a focus on various performance objectives including total
assets, total deposits, borrowings, gross loans, total capital and net income.
Indirect costs are allocated to the Trust Business from the Bank based on Trust
full time equivalent employees as a percentage of total Bank employees.
PRIVATE BANKING SERVICES
The Bank, through its main offices located in downtown Chicago as well as
five Illinois full-service suburban branches and a loan production office
located in St. Louis, Missouri, provides personal and commercial banking
services primarily to affluent individuals, professionals, entrepreneurs and
their business interests. PrivateBank'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.
PrivateBank offers a full range of real estate lending products including fixed
and floating rate permanent and mini-permanent mortgages and construction loans.
Personal loans include installment loans and lines of credit, home equity loans
and a wide variety of home mortgage loans.
Individual banking services include interest bearing checking, money market
deposit accounts, certificates of deposit, ATM/debit cards and investment
brokerage accounts. Additionally, PrivateBank offers secured and unsecured
personal loans and lines of credit. Through PrivateBank's affiliation with
Mesirow Financial, Inc. and Sterling Investment Services, Inc., clients have
access to insurance products and securities brokerage services. PrivateBank also
offers domestic and international wire transfers and foreign currency exchange.
PRIVATE BANKING SERVICES
----------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(in thousands)
Total gross loans............ $521,664 $308,089
Total assets................. 657,241 431,435
Total deposits............... 579,526 385,230
Total borrowings............. 10,828 10,000
Total capital................ 59,940 29,154
Net income................... 1,111 1,179
8
TRUST SERVICES
PrivateBank's trust services include investment management, personal trust
and estate services, custodial services, retirement accounts and brokerage and
investment services. Investment management professionals work with trust clients
to define objectives, goals and strategies of the clients' investment
portfolios. PrivateBank assists its clients with the selection of an investment
manager. Trust and estate account administrators work with clients and their
attorneys to establish estate plans. Consistent with the PrivateBank approach,
Trust Services emphasizes a high level of personal service, including prompt
collection and reinvestment of interest and dividend income, weekly valuation,
tracking of tax information, customized reporting and ease of security
settlement.
TRUST SERVICES
---------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(in thousands)
Trust assets under administration....... $799,000 $637,422
Net income (loss)....................... 53.0 (29.0)
HOLDING COMPANY ACTIVITIES
Holding Company Activities consist of parent company only matters. The
holding company's most significant asset represents its net investment in
PrivateBank. Holding Company Activities are reflected primarily in operating
expenses. Recurring holding company operating expenses consist of amortization
of restricted stock awards, other salary expense and miscellaneous professional
fees.
HOLDING COMPANY
ACTIVITIES
---------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(in thousands)
Total assets............................ $ 60,977 $ 29,993
Total borrowings........................ 12,500 --
Interest expense........................ 113 --
Total capital........................... 48,498 30,054
Net loss................................ (315.0) (123.4)
The following table identifies the significant differences between the sum
of the reportable segments and the reported consolidated results for total
assets:
TOTAL ASSETS
---------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
(in thousands)
Sum of reportable segments................ $718,218 $461,428
Adjustments............................... (61,237) (30,373)
-------- --------
Consolidated PrivateBancorp, Inc.......... $656,981 $431,055
======== ========
The adjustments to total assets presented in the table above represent the
elimination of the net investment in PrivateBank in consolidation, the
elimination of the Company's cash that is maintained in an account at
PrivateBank, the reclassification of the unearned discount of loans and the
reclassification related to deferred taxes.
9
NOTE 5 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments as
of March 31, 2000, have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 1999.
NOTE 6 - OTHER COMPREHENSIVE INCOME
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 March
31, 2000 and 1999, on a gross basis (in thousands):
MARCH 31, 2000
---------------------------------
BEFORE TAX NET OF
TAX (BENEFIT) TAX
AMOUNT EXPENSE AMOUNT
------ ------- ------
Unrealized gains on securities available-for-sale--
Unrealized holding gains.............................. $ 870 $288 $ 582
Less: reclassification adjustment for gain
included in net income.............................. 92 30 62
----- ------ -------
Net unrealized gain................................... $ 778 $258 $ 520
===== ==== =====
MARCH 31, 1999
---------------------------------
BEFORE TAX NET OF
TAX (BENEFIT) TAX
AMOUNT EXPENSE AMOUNT
------ ------- ------
Unrealized (losses) on securities available-for-sale--
Unrealized holding (losses)........................... $(267) $(59) $(208)
Less: reclassification adjustment for gain
included in net income.............................. -- -- --
----- ---- -----
Net unrealized (losses)............................... $(267) $(59) $(208)
===== ==== =====
NOTE 7 - CAPITAL TRANSACTIONS
During the third quarter of 1999, the Company completed its initial public
offering of 1,035,000 shares of its common stock. The initial public offering
price was $18 per share, and the Company received aggregate net proceeds of
approximately $16.7 million after deducting underwriting commissions and
offering expenses and including the underwriters' overallotment shares.
During March and April 1999, the Company's Board of Directors and
stockholders approved an increase in the number of authorized shares to
12,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
Board also approved a change in the per share stated value of the common stock
from $2.50 to $1.00 per share. Such change in authorized shares and change in
stated value became effective prior to the effectiveness of the registration
statement relating to the Company's initial public offering. On June 24, 1999,
to effect a two-for-one stock split, the Company's Board of Directors declared a
one-for-one stock dividend on its common stock payable on June 28, 1999, to
stockholders of record as of the close of business on June 25, 1999. All
references to number of shares, per share amounts and stock option data in the
consolidated financial statements have been adjusted to reflect the stock split
on a retroactive basis.
10
NOTE 8 - ACQUISITIONS
On August 3, 1999, in a stock for stock transaction the Company completed
its acquisition of Towne Square Financial Corporation, a company in the process
of forming a de novo bank. At closing, the Company issued 91,668 shares of
common stock and recorded a one-time $1.3 million charge that is non-deductible
for tax purposes.
On November 18, 1999, the Company announced that it had filed an
application to charter a federal savings bank, to be known as The PrivateBank
(St. Louis). Pending regulatory approval of this new subsidiary, the Bank has
opened a loan production office in St. Louis in order to develop credit
business.
On February 11, 2000, the Company completed its acquisition of Johnson Bank
Illinois, a unit of Johnson International, Inc., Racine, Wisconsin. At closing,
Johnson Bank Illinois had total assets of approximately $113 million and total
deposits of approximately $77 million. The purchase price was $20 million. $15
million was paid in cash and the remainder was paid in the form of a
LIBOR-based, floating rate subordinated note issued to Johnson International in
the principal amount of $5 million. The interest rate on the subordinated note
is set each quarter based on the 90-day LIBOR rate. The note is payable in full
on or before February 11, 2007, and provides for certain rate escalation
beginning after two years.
The cash portion of the purchase price was funded $7.5 million out of the
remaining proceeds of the Company's initial public offering and $7.5 million
from the borrowings under a new, two-year, $18 million revolving credit facility
entered into at closing with a commercial bank. The interest rate on borrowings
under this revolving line is based on, at the borrower's option, either the
lender's prime rate or a Eurodollar-based rate. The initial rate of interest on
the subordinated note is 6.60% and on the bank borrowings is 7.20%.
At closing, Johnson Bank Illinois was merged into the Bank. The two
acquired offices, located on Chicago's North Shore in Lake Forest and Winnetka,
became additional offices of the Bank. With the completion of the acquisition,
the Bank now operates six banking offices in the greater Chicago area.
The transaction was accounted for as a purchase. All assets and liabilities
were adjusted for fair value as of the effective date of the merger creating
goodwill in the amount of $12.3 million, which was pushed-down to the Bank, and
is being amortized on the straight line basis over 15 years. Premiums and
discounts related to the Johnson Bank Illinois transaction were recorded on the
balance sheet as fair value adjustments and amounted to $20,045 and $2,344,041,
respectively.
The following table summarizes the unaudited pro forma financial results
for the first quarters 2000 and 1999 as if Johnson Bank Illinois had been
acquired on January 1, 1999.
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Net interest income after provision for
loan losses.............................. $5,015 $3,275
Total non-interest income.................. 1,058 566
Total non-interest expense................. 4,628 2,852
Income taxes............................... 620 174
Net income................................. 824 815
Diluted earnings per share................. $0.17 $ 0.22
The pro forma information is not necessarily indicative of the actual
results of operations which would have occurred had the acquisition of Johnson
Bank Illinois been consummated on January 1, 1999, nor is it indicative of
future operating results.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
PRIVATEBANCORP, Inc. was organized as a Delaware corporation in 1989 to
serve as the holding company for a de novo bank desinged to provide highly
personalized financial services primarily to affluent individuals,
professionals, entrepreneurs and their business interests. Through the Company's
banking subsidiary, The PrivateBank and Trust Company, the Company provides its
clients with traditional personal and commercial banking services, lending
programs, and trust and asset management services. Using the European tradition
of "private banking" as the model, PrivateBank strives to develop a unique
relationship with clients, utilizing a team of managing directors to serve the
client's individual and corporate banking needs, and tailoring products and
services to meet such needs. PrivateBank's managing directors are strategically
located in seven Midwestern United States locations. Currently, the Company has
six Chicago-area offices: Downtown Chicago, Wilmette, Illinois, Oak Brook,
Illinois, St. Charles, Illinois, Lake Forest, Illinois, and Winnetka, Illinois.
The Company also recently opened a loan production office in St. Louis,
Missouri.
The flagship downtown Chicago location opened in 1991. The Company expanded
to Wilmette in north suburban Cook County in 1994 and the Oak Brook facility in
west suburban DuPage County was established in 1997. The Company established the
St. Charles office in January 2000, in connection with its purchase of Towne
Square Financial Corporation (a company in the process of forming a de novo
bank) on August 3, 1999. On November 18, 1999, the Company announced that it had
filed an application to charter a new federal savings bank, to be known as The
PrivateBank (St. Louis). Pending regulatory approval of this new subsidiary, the
Company has opened a loan production office of PrivateBank in order to develop
credit business in St. Louis. The Company currently estimates that the St. Louis
banking office will become fully operational late in the second quarter of 2000
and will until then incur additional start-up costs associated with chartering
and opening the new bank. On February 11, 2000, the Company consummated its
acquisition of Johnson Bank Illinois, adding additional locations of PrivateBank
in Lake Forest and Winnetka, Illinois on Chicago's North Shore.
For financial information regarding the Company's three separate lines of
business, Private Banking Services, Trust Services and Holding Company
Activities, see "Note 4--Operating Segments" to the consolidated financial
statements of the Company included in this report.
The profitability of the Company's operations depends on net interest
income, provision for possible loan losses, non-interest income, and
non-interest expense. Net interest income is the difference between the income
the Company receives on its loan and investment portfolios and its cost of
funds, which consists of interest paid on deposits and borrowings. The provision
for possible loan losses reflects the cost of credit risk in the loan portfolio.
Non-interest income consists primarily of trust fee income, and to a lesser
extent, net securities gains and fees for ancillary banking services.
Noninterest expense includes salaries and employee benefits as well as
occupancy, data processing, marketing, professional fees, insurance, and other
expenses.
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 and our asset/liability management procedures in coping with such
changes. The provision for loan losses is dependent on increases in the loan
portfolio, management's assessment of the collectability of the loan portfolio,
loss experience, as well as economic and market factors. The Company earns trust
fees for managing and administering investment funds for a variety of
individuals, families and fiduciary relationships.
Non-interest income consists primarily of trust fee income, and to a lesser
extent, net securities gains and fees for ancillary banking services.
Non-interest income from fees and deposit service charges are below peer group
levels. This is largely the result of the profile of the Company's typical
client. The clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, the Company does
not earn high service charge income typical of community banks.
12
Non-interest expense includes salaries and employee benefits as well as
occupancy, data processing, marketing, professional fees, insurance and other
expenses. Non-interest expenses are heavily influenced by the growth of
operations. Growth in the number of client relationships directly affects the
majority of the Company's expense categories. Profitability and expense ratios
have been negatively impacted in 2000 due to the start-up operation of St.
Charles, the St. Louis initiative and the acquisition of Johnson Bank Illinois.
It is expected that results for the remainder of 2000 will continue to be
impacted to some extent by the start-up nature of operations in St. Charles, St.
Louis and in the new offices acquired through the Johnson Bank Illinois
transaction. The Company currently estimates that the St. Charles office will
first become profitable early in 2001, and that the St. Louis bank will not
begin to operate profitably until the last quarter of 2001.
On June 30, 1999, the Company priced its initial public offering of 900,000
shares of its common stock at $18 per share. The shares are listed on the Nasdaq
National Market System under the symbol PVTB. The closing date of the offering
was July 6, 1999, when the Company received net proceeds of approximately $14.4
million (after deduction of offering expenses). Offering expenses payable by the
Company were approximately $665,000. On July 26, 1999, an additional 135,000
shares were sold pursuant to the underwriters' exercise of their over allotment
option for additional net proceeds of $2.3 million.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Income for the first quarter 2000 was $849,000, or $0.18 per diluted share,
compared to first quarter 1999 net income of $1,027,000, or $0.28 per diluted
share. At March 31, 2000, shares outstanding increased to 4,590,332 compared to
3,451,824 outstanding at March 31, 1999. The increase in shares outstanding is
due primarily to the Company's initial public offering in June 1999. First
quarter 2000 net income includes the financial results of the former Johnson
Bank Illinois locations subsequent to their acquisition on February 11, 2000.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowings. The related 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. The volume
of non-interest bearing funds, largely comprised of demand deposits and capital,
also affects the net interest margin.
Net interest income was $4.9 million and $3.4 million during the three
months ended March 31, 2000 and 1999, respectively, an increase of 43%. Average
earning assets during the period were $572.5 million, an increase of 41% over
the prior year first quarter. The Company's net interest margin (tax equivalent
net interest income as a percentage of earning assets) was 3.59% for the three
months ended March 31, 2000, compared to 3.66% for the prior year period.
Although rising interest rates have improved the yield on average earning
assets, interest expense on deposits and other borrowed funds has
correspondingly increased, resulting in reduced net interest margin levels
between periods.
The Company is likely to experience margin pressure during 2000 due to the
rising interest rate environment. Increases in interest rates paid on deposits
and other funding sources are likely to exceed the effect of higher rates earned
on assets. To fund anticipated loan growth for the remainder of 2000,
PrivateBank expects to continue to rely on growth in traditional deposit
products supplemented by short-term borrowings and brokered deposits.
13
The following table presents a summary of the Company's net interest income
and related net interest margin, calculated on a tax equivalent basis (dollars
in thousands):
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------------------------- --------------------------------
AVERAGE INTEREST RATE AVERAGE INTEREST RATE
-------- -------- ---- -------- -------- ----
Short-term investments..................... $ 27,376 $ 387 5.68% $ 4,167 $ 48 4.67%
Investment securities(1)................... 92,515 1,605 6.98% 112,724 1,807 6.50%
Loans, net of unearned discount............ 452,576 9,475 8.42% 288,322 5,636 7.93%
-------- ------- -------- ------
Total earning assets....................... $572,467 $11,467 8.06% $405,213 $7,491 7.50%
======== ======= ======== ======
Interest bearing deposits.................. $486,015 $ 6,055 5.01% $344,311 $3,694 4.35%
Funds borrowed............................. 16,201 296 7.35% 10,485 144 5.57%
-------- ------- -------- ------
Total interest bearing liabilities......... $502,215 6,351 5.09% $354,796 3,838 4.39%
======== ------- ======== ------
Tax equivalent net interest income ........ $ 5,116 $3,653
======= ======
Net interest spread........................ 2.97% 3.11%
Net interest margin........................ 3.59% 3.66%
(1) Interest income on tax advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
approximately $220,000 and $237,000 in the first three months of 2000 and
1999, respectively.
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. 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.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO 1999
(DOLLARS IN THOUSANDS)
CHANGE CHANGE CHANGE TOTAL
DUE TO RATE DUE TO VOLUME DUE TO MIX CHANGE
----------- ------------- ---------- ------
Short-term investments............... $ 10 $ 269 $ 60 $ 339
Investment securities................ 135 (327) (10) (202)
Loans, net of unearned discount...... 351 3,239 249 3,839
----- ------ ---- ------
Total interest income............. $ 496 $3,181 $299 $3,976
----- ------ ---- ------
Interest bearing deposits............ 565 1,533 263 2,361
Funds borrowed....................... 46 79 27 152
----- ------ ---- ------
Total interest expense............ 611 1,612 290 2,513
----- ------ ---- ------
Net interest income.................. $(115) $1,569 $ 9 $1,463
----- ------ ---- ------
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $311,000 for the first quarter
of 2000, compared to $285,000 for the comparable period in 1999. Net charge-offs
for the three months ended March 31, 2000 and 1999 were $15,000 and $0,
respectively.
The Company provides for an adequate allowance for loan losses that are
probable and inherent in the portfolio. Increases in the provision for loan
losses reflect the latest assessment of the inherent losses in the loan
portfolio. A discussion of the allowance for loan losses and the factors on
which provisions are based begins on page 17.
14
NON-INTEREST INCOME
- -------------------
Non-interest income for the quarter grew to $722,000, reflecting an
increase of $280,000 or 63% higher than in the first quarter of 1999. The
increase year over year is partially attributable to the recognition of $92,000
of gains related to the sale of investment securities during the first quarter
of 2000. The sale was driven by the Company's realignment of its available for
sale investment securities portfolio following the acquisition of Johnson Bank
Illinois. Additionally, trust assets under administration increased to $799.0
million at March 31, 2000 compared to $637.4 million at March 31, 1999, an
increase of 25%. Trust income increased by $123,000 to $539,000 for the quarter
ended March 31, 2000, reflecting an increase of 30 % over the prior year
quarter.
The completion of the Johnson Bank Illinois acquisition increased trust
assets under administration by approximately $50.0 million and expanded the
Company's trust services beyond the Chicago office with the addition of trust
staff to its suburban offices.
NON-INTEREST EXPENSE
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
------ ------
(IN THOUSANDS)
Salaries and employee benefits................. $1,877 $1,115
Occupancy...................................... 613 352
Professional fees.............................. 575 178
Marketing...................................... 304 153
Data processing................................ 163 131
Postage, telephone and delivery................ 116 87
Office supplies................................ 113 48
Insurance...................................... 68 42
Goodwill....................................... 113 --
Other expense.................................. 95 149
------ ------
Total non-interest expense..................... $4,037 $2,255
====== ======
Non-interest expense for the first quarter of 2000 increased by 79% or $1.8
million as compared to the year earlier quarter. The increase from the prior
year level is due to expenses incurred in connection with the Company's
expansion initiatives. Non-interest expense for the first quarter 2000 includes
operating expenses of $322,000 and $351,000 related to the St. Charles and the
St. Louis offices, respectively. The Company expects start-up operating expenses
to continue in 2000. Additionally, the first quarter 2000 results reflect the
addition of the two new locations acquired through the Johnson Bank Illinois
transaction which increased operating expenses by $337,000 as of March 31, 2000.
Salaries and benefits increased by approximately $762,000 reflecting the
Company's increased level of full time equivalent employees to 115 people versus
76 at March 31, 1999. The increase is due primarily to an increased number of
employees, including the senior officers responsible for opening the St. Charles
and St. Louis offices, as well as the addition of employees related to the
Johnson Bank Illinois acquisition.
During the quarter ended March 31, 2000, the Company recognized
approximately $96,000 of consulting costs related to the Johnson Bank Illinois
data processing system conversion. In addition, the Company recognized
approximately $82,000 of legal expenses associated primarily with the
establishment of the St. Louis office and the associated regulatory application
process. The Company recognized additional professional fees of approximately
$55,000 regarding computer networking and related information system
consultation. The Company will continue to incur consulting expenses in the
remainder of 2000 related to various information technology projects.
15
The addition of four new locations has increased occupancy expense by
$140,000 and depreciation expense by $60,000. Marketing expenses related to the
four new locations totaled approximately $98,000 during the first quarter of
2000. Office supplies increased by approximately $45,000 related to the four new
locations. Postage, telephone and delivery expenses have increased by
approximately $16,000 due to the Company's expansion. Insurance expense has
increased by approximately $27,000 due to overall growth and expansion of the
Company. Goodwill expense of $113,000 was recognized during the quarter in
connection with the acquisition.
INCOME TAXES
The following table shows the Company's income before income taxes,
applicable income taxes and effective tax rate for the three months ended March
31, 2000 and 1999, respectively (in thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
------ ------
Income before taxes....................... $1,270 $1,318
Income tax provision...................... 421 291
Effective tax rate........................ 33.2% 22.1%
The effective income tax rate varies from statutory rates principally due
to certain interest income which is tax-exempt for federal and state purposes,
and certain expenses which are disallowed for tax purposes. During February
1999, the Company initiated a tax-advantaged investment program and increased
the Company's municipal bond portfolio as a percentage of total investments.
This tax strategy had the effect of lowering the Company's effective tax rate
during the first quarter 1999 and throughout the entire year. The effective tax
rate for 1999 was 30.1%. During the first quarter 2000, the Johnson Bank
Illinois acquisition caused the Company's effective tax rate to increase since
the acquired investment portfolio did not include federally tax-exempt municipal
securities.
FINANCIAL CONDITION
Total assets were $657.0 million at March 31, 2000, an increase of $225.9
million, or 52.4% over the $431.1 million a year earlier, and $138.3 million, or
26.6% over the $518.7 million at December 31, 1999. The balance sheet growth was
created mainly through the acquisition of Johnson Bank Illinois and loan growth.
At closing, Johnson Bank Illinois had assets of approximately $113.0
million and liabilities of approximately $103.0 million. At closing, the Company
recorded $12.3 million of goodwill which is being amortized over an estimated
useful life of 15 years.
LOANS
Total loans increased $213.4 million, or 69.3%, from $307.8 million at
March 31, 1999, and $123.9 million, or 31.2%, from $397.3 million at December
31, 1999.
16
The following table sets forth the Company's loan portfolio net of unearned
discount by category (in thousands):
MARCH 31, DECEMBER 31, MARCH 31,
2000 1999 1999
--------- ------------ ---------
GROSS LOANS:
Commercial real estate.............. $167,809 $146,368 $108,599
Residential real estate............. 83,573 72,972 62,208
Commercial.......................... 137,660 67,026 53,834
Personal(1)......................... 100,921 81,893 64,982
Construction........................ 31,225 29,018 18,143
-------- -------- --------
Total gross loans................. $521,188 $397,277 $307,766
======== ======== ========
- ----------
(1) Includes home equity loans and overdraft lines.
ALLOWANCE FOR LOAN LOSSES
Loan quality is continually monitored by management and reviewed by the
loan/investment committee of the Board of Directors of the Bank 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 Company maintains an allowance for loan losses sufficient to absorb
credit losses inherent in the loan portfolio. The allowance for loan losses
represents the Company's estimate of probable losses in the portfolio at each
balance sheet date and is supported by all available and relevant information.
The allowance for the loan losses contains provisions for probable losses that
have been identified relating to specific borrowing relationships as well as
probable losses inherent in the loan portfolio and credit undertakings that are
not specifically identified. The Company believes that the allowance for loan
losses is adequate to provide for estimated probable credit losses inherent in
the loan portfolio.
The allowance for loan losses as a percentage of total loans was 1.1% as of
March 31, 2000, 1.1% as of December 31, 1999 and 1.2% as of March 31, 1999. In
management's judgment, an adequate allowance for loan losses has been
established. Management judges the adequacy of the allowance by formally
reviewing and analyzing potential problem credits, which entails assessing
current and historical loss experience, loan portfolio trends, prevailing
economic and business conditions, specific loan review and other relevant
factors.
Following is a summary of changes in the allowance for loan losses for the
three months ended March 31, 2000 and 1999 (in thousands):
2000 1999
------ ------
Balance, January 1...................................... $4,510 $3,410
Johnson Bank Illinois acquisition allowance for
loan loss............................................ 864 --
Provision charged to operations......................... 311 285
Loans charged-off (net)................................. (15) --
------ ------
Balance, March 31....................................... $5,670 $3,695
====== ======
NONACCRUAL AND NONPERFORMING LOANS
Nonaccrual loans were $1.2 million as of March 31, 2000, $600,000 as of
December 31, 1999 and zero as of March 31, 1999. Management does not believe
that the increase in nonaccrual loans represents a decline in the overall
quality of the loan portfolio at this time. The increase in nonaccrual loans as
of March 31, 2000 compared to December 31, 1999 is primarily attributable to a
commercial credit in the amount of $395,000 which was placed on nonaccrual
status during the quarter.
17
Nonperforming loans include nonaccrual loans and accruing loans which are
90 days or more delinquent. Nonperforming loans were $1.6 million as of March
31, 2000, compared to $823,000 at December 31, 1999 and $361,000 at March 31,
1999. Nonperforming loans were .30%, .21% and .12% of total loans as of March
31, 2000, December 31, 1999 and March 31, 1999, respectively. Nonperforming
loans were .24%, .16% and .08% of total assets as of March 31, 2000, December
31, 1999 and March 31, 1999, respectively.
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities as of March
31, 2000 and December 31, 1999, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
--------------------------------------------------------
MARCH 31, 2000
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Treasury............................. $ 1,001 $-- $ (1) $ 1,000
U.S. Government Agency Obligation......... 42,933 1 (532) 42,402
Municipals................................ 37,017 4 (2,927) 34,094
Other(1).................................. 12,734 -- (306) 12,428
------- --- ------- -------
$93,685 $ 5 $(3,766) $89,924
======= === ======= =======
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
--------------------------------------------------------
DECEMBER 31, 1999
--------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U.S. Government Agency Obligation......... $26,695 $-- $ (708) $25,987
Municipals................................ 37,116 9 (3,511) 33,614
Other(1).................................. 11,933 -- (400) 11,533
------- --- ------- -------
$75,744 $ 9 $(4,619) $71,134
======= === ======= =======
- ----------
(1) Represents corporate and equity securities.
All securities are classified as available-for-sale and may be sold as part
of the Company's 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. As of March 31, 2000, net unrealized losses resulted in a $2.3 million
decrease in equity. This was a decrease of $0.5 million from net unrealized
losses of $2.8 million recorded as part of equity at December 31, 1999.
Securities available-for-sale increased 26.4% to $89.9 million as of March
31, 2000, from $71.1 million as of December 31, 1999. The general increase in
investment securities is the result of the acquisition of the Johnson Bank
Illinois portfolio. Following the acquisition of Johnson Bank Illinois, the
Company sold approximately $9.7 million of the former Johnson Bank Illinois
investment securities portfolio as part of the Company's realignment of its
available-for-sale investment securities portfolio. The sale resulted in the
recognition of $92,000 of investment security gains. Additionally, $1.0 million
of U.S. Treasury securities were acquired in connection with the Johnson Bank
Illinois acquisition.
U.S. government agency securities and collateralized mortgage obligations
increased 58.8% to $42.4 million as of March 31, 2000, from $26.7 million as of
December 31, 1999. The increase in U.S. government agency securities resulted
primarily from the Johnson Bank Illinois acquisition. Municipal securities
remain relatively unchanged as of March 31, 2000 as compared to December 31,
1999. The decrease in unrealized losses of $849,000 is primarily due to
18
the change in value of the Company's municipal investment securities. During the
first quarter 2000, long-term interest rates decreased causing the values of the
Company's municipal investment securities to increase relative to the December
31, 1999 fair values. Corporate and equity securities increased slightly due to
the Johnson Bank Illinois acquisition. Management does not consider any of these
changes to represent a change in the management philosophy of the investment
portfolio.
DEPOSITS AND FUNDS BORROWED
Total deposits of $578.6 million as of March 31, 2000 represent an increase
of $125.5 million or 27.7% from $453.1 million as of December 31, 1999, and a
50.5% increase from $384.5 million as of March 31, 1999. Non-interest-bearing
deposits were $51.5 million as of March 31, 2000, approximately $14.7 million
more than the $36.8 million reported as of December 31, 1999, and $23.3 million
more than at March 31, 1999. Interest-bearing demand deposits increased 10.6% to
$36.9 million as of March 31, 2000 compared to December 31, 1999, and a 16.1%
increase over March 31, 1999. Savings and money market deposit accounts
increased by approximately $73.7 million to $277.7 million at March 31, 2000 as
compared to December 31, 1999, and $96.8 million more than the amount reported
as of March 31, 2000. Other time deposits increased by approximately $50.2
million to $207.4 million as compared with the December 31, 1999 balance of
$157.2 million, and $63.8 million greater than the March 31, 1999 balance of
$143.6 million. Brokered deposits decreased from $16.7 million at December 31,
1999 to $5.0 million as of March 31, 2000. There were no brokered deposits as of
March 31, 1999.
The Company's membership in the Federal Home Loan Bank System gives it the
ability to borrow funds from the Federal Home Loan Bank of Chicago (FHLB) for
short- or long-term purposes under a variety of programs. The Company has
periodically used services of the FHLB for short-term funding needs and other
correspondent services.
As of March 31, 2000, the Company had $8.0 million of FHLB borrowings
outstanding as follows:
DEBT TYPE AMOUNT CONTRACTUAL RATE MATURITY
------------- ---------- ---------------- --------
Fixed advance $2,000,000 5.83% 5/22/00
Fixed advance 2,000,000 5.40% 8/ 8/02
Fixed advance 4,000,000 5.40% 8/27/04
FHLB borrowings totaled $15.0 million and $10.0 million as of December 31,
1999 and March 31, 1999, respectively.
As of March 31, 2000, repurchase agreements of approximately $2.6 million,
acquired in connection with the Johnson Bank Illinois transaction, were
outstanding.
On February 11, 2000, to effect the Johnson Bank Illinois acquisition, the
Company borrowed $7.5 million under a new, two-year, $18.0 million revolving
credit facility at an initial rate of 7.20%. 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 Eurodollar based rate. The Company also entered into a
subordinated note issued to Johnson International in the principal amount of
$5.0 million as part of the $20.0 million purchase price. The interest rate on
the subordinated note is set each quarter based on the 90-day LIBOR rate. The
initial rate of interest on the subordinated note is 6.60%.
CAPITAL RESOURCES
Stockholders' equity rose to $48.5 million, an increase of $1.4 million
from the 1999 year-end level, due to first quarter 2000 net income and to an
increase in Accumulated Other Comprehensive Income. The change in the fair value
of the available-for-sale investment portfolio increased stockholders' equity by
$0.5 million net of tax as of March 31, 2000 as compared to December 31, 1999.
The Company and the Bank 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
19
classifications are also subject to qualitative judgments by regulators about
components, risk weightings and other factors, and the regulators can lower
classifications in certain areas. Failure to meet various capital requirements
can initiate regulatory action that could have a direct material effect on the
financial statements.
The prompt corrective action regulations provide five classifications,
including well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If the Bank is
adequately 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 capital at
March 31, 2000 and December 31, 1999:
MARCH 31, 2000 DECEMBER 31, 1999 MARCH 31,1999
-------------- ----------------- -------------
Leverage ratio................................. 6.76% 10.77% 7.53%
Tier 1 risk-based capital ratio................ 7.56% 12.84% 10.05%
Total risk-based capital ratio................. 9.56% 13.96% 11.21%
Total equity to total assets................. 7.38% 9.08% 6.97%
At March 31, 2000, the Company continued to exceed the minimum levels of
all regulatory capital requirements, and was considered "adequately-capitalized"
under regulatory standards. At March 31, 2000, the Company's total risk based
capital ratio fell to 9.56%. This was the result of the recognition of $12.3
million of goodwill from the Johnson Bank Illinois transaction. With the
exception of the total risk-based capital ratio, the Company exceeded the
well capitalized levels of all regulatory capital requirements, and the Bank was
considered "well-capitalized" under all regulatory standards, including total
risk based capital ratio.
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%.
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations
and its existing commitments, to withstand fluctuations in deposit levels, to
fund its operations and to provide for clients' credit needs. The liquidity of
the Company principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of deposits and
borrowings and its ability to borrow funds in the money or capital markets.
Net cash inflows provided by operations were $4.5 million in the first
three months of 2000 compared to a net inflow of $5.5 million a year earlier.
Net cash outflows from investing activities were $52.3 million in the first
three months of 2000 compared to a net cash outflow of $14.4 a year earlier.
Cash inflows from financing activities in the first three months of 2000 were
$30.9 million compared to a net inflow of $9.4 million in the first three months
of 1999.
In the event of short-term liquidity needs, the Bank may purchase federal
funds from correspondent banks. The Company's membership in the Federal Home
Loan Bank System gives it the ability to borrow funds from the FHLB for short-
or long-term purposes under a variety of programs.
20
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT POLICY
As a continuing part of its financial strategy, the Company attempts to
manage the impact of fluctuations in market interest rates on its 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 the Board of Directors and is monitored by
management. The Company's asset/liability policy sets standards within which it
is 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 the reporting requirements to its Board of
Directors. The investment policy compliments the asset/liability policy by
establishing criteria by which the Company may purchase securities. These
criteria include approved types of securities, brokerage sources, terms of
investment, quality standards, and diversification.
The Company measures the impact of interest rate changes on its 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.
The following table illustrates the estimated interest rate sensitivity and
periodic and cumulative gap positions calculated as of March 31, 2000:
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
0-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS TOTAL
--------- ----------- --------- ------------ --------
INTEREST-EARNING ASSETS
Loans................................. $285,892 $ 42,853 $175,753 $ 16,690 $521,188
Investments........................... 5,428 3,773 26,026 54,697 89,924
Federal funds sold.................... 10,632 -- -- -- 10,632
-------- --------- -------- -------- --------
Total interest-earning assets......... $301,952 $ 46,626 $201,779 $ 71,387 $621,744
======== ========= ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand............... $ -- $ -- $ -- $ 36,926 $ 36,926
Savings and money market.............. 171,725 103,569 -- 2,453 277,747
Time deposits......................... 112,236 89,534 7,106 3,557 212,433
Funds borrowed........................ 19,228 4,100 -- -- 23,328
-------- --------- -------- -------- --------
Total interest-bearing liabilities.... $303,189 $ 197,203 $ 7,106 $ 42,936 $550,434
======== ========= ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA)......... $301,952 $ 348,578 $550,357 $621,744
Rate sensitive liabilities (RSL).... $303,189 $ 505,392 $507,498 $550,434
GAP (GAP=RSA-RSL)................ $ (1,237) $(151,814) $ 42,859 $ 71,310
RSA/RSL............................... 99.6% 69.7% 108.4% 113.0%
RSA/Total assets...................... 46.0% 53.1% 83.8% 94.6%
RSL/Total assets...................... 46.1% 76.2% 77.2% 83.8%
GAP/Total assets...................... 0.2% 23.1% (6.5)% (10.9)%
GAP/Total RSA......................... 0.2% 24.4% (6.9)% (11.5)%
21
The following table illustrates the estimated interest rate sensitivity and
periodic and cumulative gap positions calculated as of March 31, 1999:
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
0-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS TOTAL
--------- ----------- --------- ------------ --------
INTEREST-EARNING ASSETS
Loans................................. $163,231 $ 22,535 $107,224 $ 14,732 $307,722
Investments........................... 9,717 27,096 30,736 37,682 105,231
Federal funds sold.................... 7,759 -- -- -- 7,759
-------- --------- -------- -------- --------
Total interest-earning assets......... $180,707 $ 49,631 $137,960 $ 52,414 $420,712
======== ========= ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand............... $ -- $ -- $ -- $ 27,390 $ 27,390
Savings and money market.............. 138,109 42,263 -- 499 180,871
Time deposits......................... 100,815 39,452 3,344 -- 143,611
Funds borrowed........................ 10,000 -- -- -- 10,000
-------- --------- -------- -------- --------
Total interest-bearing liabilities.... $248,924 $ 81,715 $ 3,344 $ 27,889 $361,872
======== ========= ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA)......... $180,707 $ 230,338 $368,298 $420,712
Rate sensitive liabilities (RSL).... $248,924 $ 330,639 $333,983 $361,872
GAP (GAP=RSA-RSL)................ $(68,217) $(100,310) $ 34,315 $ 58,840
RSA/RSL............................... 72.6% 69.7% 110.3% 116.3%
RSA/Total assets...................... 41.9% 53.4% 85.4% 97.6%
RSL/Total assets...................... 57.7% 76.7% 77.4% 84.0%
GAP/Total assets...................... 15.8% 23.3% 8.0% 13.7%
GAP/Total RSA......................... 16.2% 23.8% 8.2% 14.0%
The Company measures the impact of interest rate changes on its 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.
The following table shows the impact of an immediate 200 basis point change
in interest rates, assessed through the use of a simulation model, that attempts
to measure the effect of rising and falling interest rates over the next
two-year horizon in a rapidly changing rate environment.
MARCH 31, 2000 MARCH 31, 1999
--------------------------- ----------------------------
+200 BASIS -200 BASIS +200 BASIS -200 BASIS
POINTS POINTS POINTS POINTS
---------- ---------- ---------- ----------
Percentage change in net interest income due
to an immediate 200 basis point change in
interest rates over a two-year time horizon.... -3.8% 9.3% -8.7% 10.3%
This table shows that if there was an instantaneous parallel shift in the
yield curve of +200 basis points, the Company would suffer a decline in net
interest income of 3.8% and 8.7% over a two-year horizon based on its net
earning asset portfolio as of March 31, 2000 and March 31, 1999, respectively.
Conversely, a like shift of -200 basis points would increase net interest income
by 9.3% over a two-year horizon based on March 31, 2000 balances, down from
10.3% measured on the basis of the March 31, 1999 portfolio.
22
Changes in the effect on net interest income from a 200 basis point
movement as of March 31, 2000 as compared to March 31, 1999 reflect the addition
of assets and liabilities from the Johnson Bank Illinois acquisition. As these
assets and liabilities are more fixed rate in nature, changing rates over a
two-year horizon show a reduced effect at March 31, 2000 as compared to March
31, 1999. In addition, management's likely reaction to changes in interest rates
is incorporated in assumptions made in these calculations. Differences in these
assumptions between the reporting periods have also had the effect of reducing
the impact of a changing interest rate environment.
The preceding sensitivity analysis is based on numerous assumptions
including: the nature and timing of interest rate levels including the shape of
the yield curve, prepayments on loans and securities, changes in deposit levels,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how client
preferences or competitor influences might change.
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. The Company
intends 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 is including this statement for purposes of
these safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, can generally be identified by use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar expressions.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company include, but are
not limited to, fluctuations in market rates of interest and loan and deposit
pricing; a deterioration of general economic conditions in the Company's market
areas; legislative or regulatory changes; adverse developments in the Company's
loan or investment portfolios; lower than expected business levels or higher
than anticipated costs relating to the Company's newly established St. Charles,
Illinois and St. Louis, Missouri offices; significant increases in competition;
an inability to realize cost savings in the newly acquired operations of Johnson
Bank Illinois or to achieve enhanced revenues to the full extent expected or
within the expected time frame; unanticipated delays or costs relating to the
establishment of PrivateBank (St. Louis); and the possible dilutive effect of
potential acquisitions or expansions. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or its
subsidiary is a party other than ordinary routine litigation incidental to their
respective businesses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10.1 - Sublease Agreement dated as of December 13, 1999, by
and between PrivateBancorp, Inc., Union Planters Bank, National
Association and St. Louis Brentwood Associates, L.P.
Exhibit 27 - Financial Data Schedule.
(b) Filings on Form 8-K.
(1) Current Report on Form 8-K dated January 31, 2000, filed with the
SEC on January 31, 2000.
Item 5. Other Events -- The Company announced its earnings
results for the quarter ended December 31, 1999.
(2) Current Report on Form 8-K dated February 11, 2000, filed with
the SEC on February 17, 2000.
Item 5. Other Events -- The Company announced the completion of
its acquisition of Johnson Bank Illinois on February 11, 2000.
24
SIGNATURES
Pursuant to the requirements 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.
PRIVATEBANCORP, INC.
(Registrant)
By: /s/ Ralph B. Mandell
----------------------------------------
Ralph B. Mandell,
Chairman, President and
Chief Executive Officer
By: /s/ Donald A. Roubitchek
----------------------------------------
Donald A. Roubitchek,
Chief Financial Officer
(principal financial officer)
By: /s/ Lisa M. O'Neill
----------------------------------------
Lisa M. O'Neill,
Controller
(principal accounting officer)
Date: May 15, 2000
25
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Sublease Agreement dated as of December 13, 1999, by and
between PrivateBancorp, Inc., Union Planters Bank, National
Association and St. Louis Brentwood Associates, L.P.
27 Financial Data Schedule
26