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 June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to ________
Commission File Number: 000-25887
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE
(State or other jurisdiction of 36-3681151
incorporation or organization) (I.R.S. Employer Identification Number)
TEN NORTH DEARBORN STREET
CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip Code)
(312) 683-7100
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate 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 AUGUST 3, 2001
- --------------------------------------------------------------------------------
Common, no par value 4,718,524
================================================================================
PRIVATEBANCORP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
Number
------
Selected Financial Data..........................................................................................2
PART I
Item 1. Financial Statements....................................................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................29
PART II
Item 1. Legal Proceedings......................................................................................32
Item 2. Changes in Securities and Use of Proceeds..............................................................32
Item 3. Defaults upon Senior Securities........................................................................32
Item 4. Submission of Matters to a Vote of Security Holders....................................................32
Item 5. Other Information......................................................................................32
Item 6. Exhibits and Reports on Form 8-K.......................................................................32
Signatures......................................................................................................33
SELECTED FINANCIAL DATA
The following table summarizes certain selected unaudited consolidated
financial information of PrivateBancorp, Inc. at or for the periods indicated.
This information should be read in conjunction with the unaudited consolidated
financial statements and related notes included pursuant to Item 1 of this
report.
QUARTER ENDED
-------------------------------------------------------------
06/30/01 03/31/01 12/31/00 09/30/00 06/30/00
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
Interest income:
Loans, including fees...................... $12,963 $13,061 $13,451 $13,540 $12,167
Federal funds sold and interest-bearing
deposits................................ 31 177 236 357 78
Securities................................. 3,327 3,202 2,714 1,813 1,543
------- ------- ------- ------- -------
Total interest income................... $16,321 $16,440 $16,401 $15,710 $13,788
------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand deposits........... 255 220 228 231 218
Savings and money market deposit accounts.. 2,861 3,552 3,773 3,543 3,297
Other time deposits........................ 4,479 4,431 4,263 4,368 3,239
Funds borrowed............................. 1,545 1,507 1,557 1,236 1,027
Trust Preferred interest expense........... 475 269 -- -- --
------- ------- ------- ------- -------
Total interest expense.................. $ 9,615 $ 9,979 $ 9,821 $ 9,378 $ 7,781
------- ------- ------- ------- -------
Net interest income........................ 6,706 6,461 6,580 6,332 6,007
Provision for loan losses.................. 738 339 334 383 662
------- ------- ------- ------- -------
Net interest income after provision for
loan losses............................. 5,968 6,122 6,246 5,949 5,345
------- ------- ------- ------- -------
Non-interest income:
Banking, trust services and other income... 938 894 951 745 751
Securities gains........................... 353 186 -- -- --
------- ------- ------- ------- -------
Total non-interest income............... $ 1,291 $ 1,080 $ 951 $ 745 $ 751
------- ------- ------ ------ -------
Non-interest expense:
Salaries and employee benefits............. 1,855 2,434 2,268 2,211 1,818
Severance charge........................... -- -- -- 562 --
Occupancy expense, net..................... 960 888 807 803 764
Data processing............................ 268 304 249 218 190
Marketing.................................. 265 349 357 241 300
Amortization of goodwill................... 206 206 206 206 206
Professional fees.......................... 752 538 484 480 596
Insurance.................................. 88 93 81 84 70
Other expense.............................. 1,015 481 438 422 508
------- ------- ------- ------- -------
Total non-interest expense................. $ 5,409 $ 5,293 $ 4,890 $ 5,227 $ 4,452
------- ------- ------- ------- -------
Income before income taxes................. 1,850 1,909 2,307 1,467 1,644
Income tax provision....................... 492 576 797 499 546
------- ------- ------- ------- -------
Net income.................................... $ 1,358 $ 1,333 $ 1,510 $ 968 $ 1,098
======= ======= ======= ======= =======
PER SHARE DATA:
Basic earnings................................ $ 0.29 $0.29 $0.33 $0.21 $0.24
Diluted earnings.............................. 0.28 0.28 0.32 0.20 0.23
Dividends..................................... 0.025 0.025 0.025 0.025 0.025
Book value (at end of period)................. 12.35 12.15 11.73 11.04 10.73
2
QUARTER ENDED
-------------------------------------------------------------
06/30/01 03/31/01 12/31/00 09/30/00 06/30/00
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities.............................. $224,505 $210,840 $172,194 $132,814 $96,969
Total loans................................... 666,710 626,900 599,429 584,919 583,522
Total assets.................................. 944,887 873,693 829,509 763,815 723,023
Total deposits................................ 750,494 695,571 670,246 633,007 598,881
Funds borrowed................................ 106,128 90,397 96,879 71,258 68,544
Long-term debt-Trust Preferred Securities..... 20,000 20,000 -- -- --
Total stockholders' equity.................... 57,826 56,946 54,249 51,066 49,545
Trust assets under administration............. $711,957 $693,176 $777,800 $785,738 $761,829
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(1)..................... 3.25% 3.35% 3.60% 3.59% 3.81%
Net interest spread(2)..................... 2.79 2.84 3.00 3.00 3.22
Non-interest income to average assets...... 0.57 0.52 0.48 0.39 0.44
Non-interest expense to average assets..... 2.39 2.55 2.48 2.76 2.62
Net overhead ratio(3)...................... 1.82 2.03 2.00 2.37 2.18
Efficiency ratio (excluding special
charges)(4)(7).......................... 64.5 67.8 63.0 63.9 63.8
Return on average assets (excluding
special charges)(5)(7).................. 0.60 0.64 0.77 0.71 0.65
Return on average equity (excluding
special charges)(6)(7).................. 9.46 9.86 11.35 10.55 9.04
Dividend payout ratio...................... 8.62 8.79 7.66 11.97 10.51
Asset Quality Ratios:
Non-performing loans to total loans........ 0.37% 0.47% 0.24% 0.10% 0.17%
Allowance for loan losses to:
total loans............................. 1.03 1.03 1.02 1.02 1.02
non-performing loans.................... 282 218 423 1,058 610
Net charge-offs (recoveries) to average
total loans............................. 0.18 (0.01) 0.15 0.23 0.28
Non-performing assets to total assets...... 0.26 0.34 0.17 0.07 0.13
Balance Sheet Ratios:
Loans to deposits.......................... 88.8% 90.1% 89.4% 92.4% 97.4%
Average interest-earning assets to average
interest-bearing liabilities............ 110.4 110.0 111.5 111.5 112.3
Capital Ratios:
Total equity to total assets............... 6.12% 6.52% 6.53% 6.69% 6.85%
Total risk-based capital ratio............. 10.98 11.00 8.15 8.51 8.73
Tier 1 risk-based capital ratio............ 9.17 9.14 6.47 6.72 6.84
Leverage ratio............................. 7.26 7.60 5.54 5.54 5.94
Ratio of Earnings to Fixed Charges: (8)
Including deposit interest................. 1.19x 1.19x 1.23x 1.16x 1.21x
Excluding deposit interest................. 1.92 2.07 2.48 2.19 2.60
- ---------------------------------------
3
- ---------------------------------------
(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) Earnings before special charges divided by average total assets.
(6) Earnings before special charges divided by average common equity.
(7) 2000 performance ratios exclude a third quarter one-time severance and
recruitment of new executive officers charge.
PRE-TAX AFTER-TAX
------- ---------
One-time charges..... $ 562 $ 377
Performance ratios for the third quarter of 2000, including the special
charges described above, are as follows:
09/30/00
--------
Efficiency ratio........................ 71.6%
Return on average assets................ 0.51
Return on average equity................ 7.60
(8) 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.
4
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31, JUNE 30,
2001 2000 2000
----------- ------------ --------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks................................. $ 28,515 $ 28,637 $ 18,341
Short-term investments.................................. 7,305 11,876 5,076
-------- -------- --------
Total cash and cash equivalents...................... 35,820 40,513 23,417
-------- -------- --------
Available-for-sale securities, at fair value............ 224,505 172,194 96,969
Loans, net of unearned discount......................... 666,710 599,429 583,522
Allowance for loan losses............................... (6,896) (6,108) (5,951)
-------- -------- --------
Net loans............................................... 659,814 593,321 577,571
-------- -------- --------
Goodwill................................................ 11,217 11,629 12,031
Bank premises and equipment, net........................ 4,260 4,138 3,814
Accrued interest receivable............................. 5,992 5,524 4,264
Other assets............................................ 3,279 2,190 4,957
-------- -------- --------
Total assets............................................ $944,887 $829,509 $723,023
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing.................................. $ 65,373 $ 61,789 $ 49,950
Interest-bearing..................................... 44,436 51,301 34,062
Savings and money market deposit accounts............... 302,258 300,107 257,822
Brokered deposits....................................... 95,740 43,842 60,755
Other time deposits..................................... 242,687 213,207 196,292
-------- -------- --------
Total deposits....................................... 750,494 670,246 598,881
Funds borrowed.......................................... 106,128 96,879 68,544
Long term debt - Trust Preferred Securities............. 20,000 -- --
Accrued interest payable................................ 2,666 3,552 2,439
Other liabilities....................................... 7,773 4,583 3,614
-------- -------- --------
Total liabilities....................................... $887,061 $775,260 $673,478
-------- -------- --------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized............ -- -- --
Common stock, without par value, $1 stated value;
12,000,000 shares authorized; 4,680,668, 4,623,532,
and 4,615,832 shares issued and outstanding as of
June 30, 2001, December 31, 2000 and June 30, 2000,
respectively......................................... $ 4,681 $ 4,624 $ 4,616
Surplus................................................. 40,590 40,107 40,048
Retained earnings....................................... 13,845 11,388 9,142
Accumulated other comprehensive income (loss)........... 616 (118) (2,294)
Deferred compensation................................... (956) (802) (942)
Loans to officers....................................... (950) (950) (1,025)
-------- -------- --------
Total stockholders' equity.............................. 57,826 54,249 49,545
-------- -------- --------
Total liabilities and stockholders' equity.............. $944,887 $829,509 $723,023
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
5
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
2001 2000 2001 2000
-------- -------- -------- --------
INTEREST INCOME
Loans, including fees.......................................... $12,963 $12,167 $26,024 $21,642
Federal funds sold and interest bearing deposits............... 31 78 208 465
Securities..................................................... 3,327 1,543 6,529 2,928
------- ------- ------- -------
Total interest income....................................... 16,321 13,788 32,761 25,035
------- ------- ------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand..................................... 255 218 475 409
Savings and money market deposit accounts................... 2,861 3,297 6,408 6,395
Other time.................................................. 4,479 3,239 8,915 6,005
Funds borrowed................................................. 1,545 1,027 3,052 1,323
Trust Preferred Securities interest expense.................... 475 -- 744 --
------- ------- ------- -------
Total interest expense......................................... 9,615 7,781 19,594 14,132
------- ------- ------- -------
Net interest income............................................ 6,706 6,007 13,167 10,903
Provision for loan losses...................................... 738 662 1,077 973
------- ------- ------- -------
Net interest income after provision for loan losses............ 5,968 5,345 12,090 9,930
NON-INTEREST INCOME
Banking, trust services and other income....................... 938 720 1,832 1,347
Net securities gains........................................... 353 31 539 126
------- ------- ------- -------
Total non-interest income................................... 1,291 751 2,371 1,473
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits................................. 1,855 1,818 4,289 3,695
Occupancy expense, net......................................... 960 764 1,848 1,377
Professional fees.............................................. 752 596 1,290 1,171
Goodwill amortization.......................................... 206 206 412 319
Other non-interest expense..................................... 1,636 1,068 2,863 1,927
------- ------- ------- -------
Total non-interest expenses................................. 5,409 4,452 10,702 8,489
------- ------- ------- -------
Income before income taxes..................................... 1,850 1644 3,759 2,914
Income tax provision........................................... 492 546 1,068 967
------- ------- ------- -------
Net income..................................................... $ 1,358 $ 1,098 $ 2,691 $ 1,947
======= ======= ======= =======
Basic earnings per share....................................... $ 0.29 $ 0.24 $ 0.58 $ 0.42
Diluted earnings per share..................................... 0.28 0.23 0.56 0.41
The accompanying notes to consolidated financial statements are an integral
part of these statements.
6
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER LOANS TOTAL
COMMON RETAINED COMPREHENSIVE DEFERRED TO STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME COMPENSATION OFFICERS EQUITY
----- ------- -------- ------ ------------ -------- ------
Balance, January 1,
2000................ $4,590 $39,761 $7,425 $(2,812) $ (759) $(1,125) $47,080
Net income............. -- -- 1,947 -- -- -- 1,947
Net decrease in fair
value of Securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments......... -- -- -- 518 -- -- 518
------ ------- ------ ------- ------- ------- -------
Total comprehensive
income.............. -- -- 1,947 518 -- -- 2,465
------ ------- ------ ------- ------- ------- -------
Cash dividends
declared ($0.05 per
share).............. -- -- (230) -- -- -- (203)
Issuance of common
stock............... 26 287 -- -- -- -- 313
Awards granted......... -- -- -- -- (313) -- (313)
Amortization of
deferred
compensation........ -- -- -- -- 130 -- 130
Repayment of loans to
officers............ -- -- -- -- -- 100 100
------ ------- ------ ------- ------- ------- -------
Balance, June 30, 2000. $4,616 $40,048 $9,142 $(2,294) $ (942) $(1,025) $49,545
====== ======= ====== ======= ======= ======= =======
Balance, January 1,
2001................ $4,624 $40,107 $11,388 $(118) $(802) $(950) $54,249
Net income............. -- -- 2,691 -- -- -- 2,691
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and
reclassification
adjustments......... -- -- -- 734 -- -- 734
------ ------- ------ ------- ------- ------- -------
Total comprehensive
income.............. -- -- 2,691 734 -- -- 3,425
------ ------- ------ ------- ------- ------- -------
Cash dividends
declared ($0.05 per
share).............. -- -- (234) -- -- -- (234)
Issuance of common
stock............... 57 483 -- -- (364) -- 176
Awards granted......... -- -- -- -- 93 -- 93
Amortization of
deferred
compensation........ -- -- -- -- 117 -- 117
Repayment of loans to
officers............ -- -- -- -- -- -- --
------ ------- ------ ------- ------- ------- -------
Balance, June 30, 2001. $4,681 $40,590 $13,845 $ 616 $ (956) $ (950) $57,826
====== ======= ======= ======= ======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 2,691 $ 1,947
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization............................................... 673 371
Goodwill amortization....................................................... 412 319
Johnson Bank Illinois fair value accretion, net............................. (145) (175)
Amortization of deferred compensation....................................... 117 130
Provision for loan losses................................................... 1,077 973
Net gain on sale of securities.............................................. (539) (92)
(Decrease) Increase in deferred loan fees................................... (163) 225
(Increase) in accrued interest receivable................................... (468) (635)
(Decrease) Increase in accrued interest payable............................. (886) 772
(Increase) Decrease in other assets......................................... (1,467) 854
Increase in other liabilities............................................... 3,188 1,137
--------- ---------
Total adjustments........................................................... 1,799 3,879
--------- ---------
Net cash provided by operating activities................................... 4,490 5,826
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities.................... 62,966 14,738
Purchase of securities available-for-sale...................................... (113,626) (20,072)
Johnson Bank Illinois acquisition, net of cash received........................ -- (15,753)
Capitalization of The PrivateBank (St. Louis).................................. -- (8,000)
Net loan principal advanced.................................................... (67,311) (100,423)
Bank premises and equipment expenditures....................................... (752) (1,391)
--------- ---------
Net cash used in investing activities....................................... (118,723) (130,901)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits................................................. 80,256 54,237
Issuance of common stock....................................................... 269 --
Issuance of Trust Preferred Securities......................................... 20,000 --
Dividends paid................................................................. (234) (230)
Net increase in funds borrowed................................................. 9,249 50,302
--------- ---------
Net cash provided by financing activities................................... 109,540 104,309
--------- ---------
Net (decrease) in cash and cash equivalents.................................... (4,693) (20,766)
Cash and cash equivalents at beginning of year................................. 40,513 44,183
--------- ---------
Cash and cash equivalents at end of period..................................... $ 35,820 $ 23,417
========= =========
The accompanying notes to consolidated financial statements are
an integral part of these statements.
8
PRIVATEBANCORP, INC. AND SUBSIDIARIES
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial information of PRIVATEBANCORP, Inc. (the
"Company") and its Subsidiaries, The PrivateBank and Trust Company (the "Bank"
or "PrivateBank (Chicago)") and The PrivateBank (St. Louis), included herein is
unaudited; however, such information reflects all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation for the interim periods. The financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X.
The annualized results of operations for the quarter and the six months
ended June 30, 2001 are not necessarily indicative of the results expected for
the full year ending December 31, 2001. 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, 2000
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- --------- --------- ---------
Net Income............................................... $1,358 $1,098 $2,691 $1,947
Average common shares outstanding........................ 4,682 4,601 4,665 4,596
Average common shares equivalent(1)...................... 173 151 154 171
Weighted average common shares and common share
equivalents........................................... 4,855 4,752 4,819 4,767
Net income per average common share - basic.............. $ 0.29 $ 0.24 0.58 $ 0.42
Net income per average common share - diluted............ $ 0.28 $ 0.23 0.56 $ 0.41
- ---------------------------------------
(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.
9
NOTE 3 - NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 141 applies to all business combinations completed after June 30,
2001. All future business combinations must be recorded using the purchase
method of accounting. As the Company contemplates further acquisitions as part
of its growth strategy, this Statement will likely have an impact on the
Company's future financial statements.
SFAS No. 142 supercedes APB Opinion No. 17 "Intangible Assets" and
addresses the mandatory accounting of intangible assets and goodwill. Adoption
of this Statement is required beginning January 1, 2002 in relation to all of
the Company's goodwill and intangible assets. Early application of this standard
is not permitted. The Statement discontinues the regular amortization of
goodwill and a transitional impairment test of goodwill is required as of
January 1, 2002. An annual impairment test of goodwill is required every year
thereafter. Impairment losses from goodwill recognized in the initial
application of this Statement are to be reported as resulting from a change in
accounting principal. Impairment losses in subsequent years should be recorded
as operating expenses. Goodwill at June 30, 2001 totaled $11.2 million and is
currently being amortized using a straight-line method over fifteen years.
Goodwill amortization for the six months ended June 30, 2001 totaled $412,000.
Although the assessmnent to be required by SFAS No. 142 upon adoption has not
yet been completed, under current accounting rules, the Company is also required
to write down the value of goodwill if that goodwill becomes impaired and, to
date, the Company has not incurred any goodwill impairment. Any future
acquisitions completed by the Company will also be subject to this Statement.
The Company does not own any other intangible assets.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Related Hedging Activities", amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of SFAS No. 133 -- an Amendment of SFAS No. 133," and SFAS No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," effective on January 1, 2001, standardize the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the balance sheet and measure them at fair value. Changes in fair
value of these instruments must be recorded in the income statement unless
specific hedge accounting criteria are met. Adoption of this standard did not
have a material impact since the Company does not hold derivative instruments or
engage in hedging activity.
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 140 ("FAS No. 140"), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", a replacement of FASB Statement No. 125. The new statement, while
largely including the provisions of FAS 125, revises the standards for
accounting for securitizations and requires certain disclosures. FAS No. 140 is
effective for all transfers of financial assets occurring after March 31, 2001
and for disclosures relating to securitization transactions for fiscal years
ending after December 15, 2000. The adoption of FAS 140 did not have a material
impact on the Company.
NOTE 4 - OPERATING SEGMENTS
The Company manages its operations in four lines of business: The
PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management and
Holding Company Activities. 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
for 2000 consisted of a loan production office of The PrivateBank (Chicago)
10
and those activities are reflected in the segment reporting for The PrivateBank
(Chicago). The PrivateBank (Chicago)'s commercial lending products include lines
of credit for working capital, term loans for equipment and letters of credit to
support the commitments made by its clients. Non-credit products include
lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, other cash management products and insurance. The
PrivateBank (Chicago) offers a full range of real estate lending products
including fixed and floating rate permanent and mini-permanent mortgages,
construction and commercial real estate loans. Personal loans include
installment loans and lines of credit, home equity loans and a wide variety of
home mortgage loans.
Individual banking services include interest bearing checking, money market
accounts, certificates of deposit, ATM/debit cards and investment brokerage
accounts. Additionally, The PrivateBank (Chicago) offers secured and unsecured
personal loans and lines of credit. Through The PrivateBank (Chicago)'s
affiliations with Mesirow Financial, Inc. and Sterling Investment Services,
Inc., clients have access to insurance products and securities brokerage
services. The PrivateBank (Chicago) also offers domestic and international wire
transfers and foreign currency exchange.
THE PRIVATEBANK (CHICAGO)
---------------------------
JUNE 30,
---------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Total gross loans.................. $ 623,588 $ 578,627
Total assets....................... 893,168 713,875
Total deposits..................... 714,297 598,571
Total borrowings................... 93,378 48,044
Total capital...................... 74,209 61,573
Year-to-date net income............ 3,969 2,713
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)
---------------------------
JUNE 30,
---------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Total gross loans................... $ 43,666 $ 4,894
Total assets........................ 51,644 8,593
Total deposits...................... 36,683 596
Total borrowings.................... 7,500 --
Total capital....................... 6,870 7,962
Year-to-date net loss............... (288) (38)
11
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 information,
customized reporting and ease of security settlement.
WEALTH MANAGEMENT
---------------------------
JUNE 30,
---------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Trust assets under administration... $ 712,000 $ 762,000
Trust fee revenue................... 1,398 1,090
Year-to-date net income............. 300 87
The following table indicates the break-down of our trust assets under
administration at June 30, 2001 by account classification and related gross
revenue for the six months ended June 30, 2001:
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, 2001
---------------------------
MARKET VALUE REVENUE
-------------- ----------
ACCOUNT TYPE (IN THOUSANDS)
------------
Personal trust-managed............... $ 263,449 $ 760
Agency-managed....................... 107,709 317
Custody.............................. 307,089 295
Employee benefits-managed............ 33,753 26
--------- -------
Total............................. $ 712,000 $ 1,398
========= =======
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 which are accounted for as long-term debt and also
qualify as Tier 1 and Tier 2 capital. The Tier 1 qualifying amount is limited to
25.0% 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.
12
HOLDING COMPANY ACTIVITIES
--------------------------
JUNE 30,
--------------------------
2001 2000
---------- -----------
(IN THOUSANDS)
Total assets....................... $ 83,082 $ 70,375
Total borrowings................... 5,250 20,500
Long term debt - Trust Preferred
Securities...................... 20,000 --
Interest expense................... 1,036 371
Total capital...................... 57,827 49,545
Year-to-date net loss.............. (1,290) (814)
The following table identifies the significant differences between the sum
of the reportable segments and the reported consolidated results for total
assets:
TOTAL ASSETS
----------------------------
JUNE 30,
----------------------------
2001 2000
------------ -----------
(IN THOUSANDS)
Sum of reportable segments.......... $ 1,027,894 $ 792,843
Adjustments......................... (83,007) (69,820)
----------- ----------
Consolidated PrivateBancorp, Inc.... $ 944,887 $ 723,023
=========== ==========
The adjustments to total assets presented in the table above represent the
elimination of the net investment in banking subsidiaries in consolidation, the
elimination of the Company's cash that is maintained in a subsidiary bank
account, the reclassification of the unearned discount of loans and the
reclassification related to current and deferred taxes.
NOTE 5 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENT
The carrying values and estimated fair values of financial instruments as
of June 30, 2001, have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 2000.
NOTE 6 -- OTHER COMPREHENSIVE INCOME
Change in the fair value of securities available-for-sale is presented on a
net basis on the Consolidated Statement of Changes in Stockholders' Equity. The
following table discloses the changes in other comprehensive income for the six
months ended June 30, 2001 and 2000, on a gross basis (in thousands):
JUNE 30, 2001
---------------------------------------------
BEFORE TAX NET OF
TAX (BENEFIT) TAX
AMOUNT EXPENSE AMOUNT
----------- --------- ----------
Net unrealized gains on securities
available-for-sale--
Net unrealized holding gains...................... $1,564 $ 444 $1,120
Less: reclassification adjustment for gain
included in net income......................... 539 153 386
------ ------ ------
Net unrealized gains.............................. $1,025 $ 291 $ 734
====== ====== ======
13
JUNE 30, 2000
---------------------------------------------
BEFORE TAX NET OF
TAX (BENEFIT) TAX
AMOUNT EXPENSE AMOUNT
----------- --------- ----------
Net unrealized gains on securities
available-for-sale--
Net unrealized holding gains...................... $ 877 $ 298 $ 579
Less: reclassification adjustment for gain
included in net income......................... 92 31 61
------ ------ ------
Net unrealized gains.............................. $ 785 $ 267 $ 518
====== ====== ======
NOTE 7 -- CAPITAL TRANSACTIONS
The PrivateBank (St. Louis) was capitalized on June 23, 2000 with $8.0
million of borrowed funds drawn from the Company's revolving credit facility.
See Note 9. 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.
NOTE 8 - ACQUISITIONS
On February 11, 2000, the Company completed its acquisition of Johnson Bank
Illinois, a unit of Johnson International, Inc., Racine, Wisconsin. At closing,
Johnson Bank Illinois had total assets of approximately $113 million and total
deposits of approximately $77 million. The purchase price was $20 million, of
which $15 million was paid in cash and the remainder was paid in the form of a
LIBOR-based, floating rate subordinated note issued to Johnson International in
the principal amount of $5 million. See Note 9.
The cash portion of the purchase price was funded with $7.5 million out of
the remaining proceeds of the Company's 1999 initial public offering and $7.5
million from borrowings under the Company's revolving credit facility with a
commercial bank entered into at closing. See Note 9.
At closing, Johnson Bank Illinois was merged into The PrivateBank
(Chicago). The two acquired offices, located on Chicago's North Shore in Lake
Forest and Winnetka, became additional offices of The PrivateBank (Chicago). The
Johnson Bank Illinois transaction was accounted for as a purchase. All assets
and liabilities were adjusted to fair value as of the effective date of the
merger creating goodwill in the amount of $12.3 million, which was pushed down
to The PrivateBank (Chicago), and is being amortized on the straight line basis
over 15 years. Premiums and discounts related to the Johnson Bank Illinois
transaction were recorded on the balance sheet as fair value adjustments and
amounted to $20,045 and $2,344,041, respectively.
14
NOTE 9 -- FUNDS BORROWED
A summary of all funds borrowed and outstanding at June 30, 2001, December
31, 2000 and June 30, 2000 is presented in the table below:
CURRENT JUNE 30, DECEMBER 31, JUNE 30,
RATE(1) MATURITY 2001 2000 2000
------- -------- ---- ---- ----
(DOLLARS IN THOUSANDS)
FUNDS BORROWED:
Borrowings under revolving line of
credit............................. 4.93% 02/11/02 $ 250 $ 18,000 $ 15,500
Subordinated note..................... 4.57 02/11/07 5,000 5,000 5,000
FHLB floating rate advanced(2)........ 6.77 05/01/01 -- 10,000 10,000
FHLB fixed advance.................... 6.50 10/23/05 25,000 25,000 --
FHLB fixed advance.................... 6.49 11/13/01 2,000 2,000 --
FHLB fixed advance.................... 6.21 12/05/03 30,000 30,000 30,000
FHLB fixed advance.................... 5.91 06/21/02 500 500 --
FHLB fixed advance.................... 5.89 12/20/02 1,000 1,000 --
FHLB fixed advance.................... 5.40 08/27/00 -- -- 4,000
FHLB fixed advance.................... 5.33 07/22/02 1,000 -- --
FHLB fixed advance.................... 5.21 01/22/02 1,000 -- --
FHLB fixed advance.................... 5.02 03/06/02 1,000 -- --
FHLB fixed advance.................... 4.30 02/01/02 25,000 -- --
FHLB fixed advance.................... 4.21 05/13/02 1,000 -- --
Fed funds purchased................... 4.16 Daily 10,000 2,700 2,400
Demand repurchase agreements.......... 3.00 Daily 3,378 2,679 1,644
-------- -------- --------
Total funds borrowed............... $106,128 $ 96,879 $ 68,544
======== ======== ========
- ---------------------------------------
(1) Reflects the rate in effect as of June 30, 2001, or at maturity, if the advance matured prior to June 30, 2001.
(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, 2000, the Company entered into a two-year, $18.0 million
revolving credit facility with a commercial bank. The interest rate on
borrowings under this revolving line resets quarterly, and is based on, at our
option, either the lender's prime rate or three-month LIBOR plus 120 basis
points. 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 4.93% on June 26, 2001. The collateral for
this borrowing consists of the common stock of The PrivateBank (Chicago) and The
PrivateBank (St. Louis), which is held in custody by the lender. Upon issuing
$20.0 million of trust preferred securities on February 8, 2001, the Company
repaid the $18.0 million outstanding under the revolving credit facility. In
June 2001, the Company increased the borrowings on the credit facility to
$250,000 for general business purposes.
On February 11, 2000, the Company entered into a subordinated note issued
to Johnson International, Inc. in the principal amount of $5.0 million. The
interest on the subordinated note is reset each quarter based on the three-month
LIBOR rate. The note is payable in full on or before February 11, 2007, and
provides for certain rate escalation beginning after February 11, 2002. The
initial rate of interest on the subordinated note was 6.60% and most recently
reset to 4.57% on May 11, 2001. 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.
15
NOTE 10 -- 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 I capital as allowed by the Federal Reserve.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
PrivateBancorp, Inc. ("the Company") was organized as a Delaware
corporation in 1989 to serve as the holding company for a Chicago-based de novo
bank designed to provide highly personalized financial services primarily to
affluent individuals, professionals, entrepreneurs and their business interests.
Through the Company's banking subsidiaries, The PrivateBank and Trust Company
("The PrivateBank (Chicago)") and The PrivateBank (St. Louis), the Company
provides its clients with traditional personal and commercial banking services,
lending programs, and wealth management services. Using the European tradition
of "private banking" as the model, the Company strives to develop a unique
relationship with clients, utilizing a team of managing directors to serve the
clients' individual and corporate banking needs, and tailoring products and
services to meet such needs. Currently, the Company has seven Chicago-area
offices: Downtown Chicago, Wilmette, Illinois, Oak Brook, Illinois, St. Charles,
Illinois, Lake Forest, Illinois, Winnetka, Illinois, and Geneva, Illinois.
During 2000, the Company expanded to the St. Louis market where it opened a new
federal savings bank, The PrivateBank (St. Louis). Managing directors are
strategically located at all of these locations.
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 February 11, 2000, the Company consummated its
acquisition of Johnson Bank Illinois, adding additional locations of The
PrivateBank (Chicago) in Lake Forest and Winnetka, Illinois on Chicago's North
Shore. During the second quarter 2000, the Company received regulatory approval
to establish a new banking subsidiary and on June 23, 2000, the Company
capitalized The PrivateBank (St. Louis). The PrivateBank (St. Louis) became
fully operational in June 2000. In May 2001, The PrivateBank (Chicago) opened a
new office in Geneva, Illinois.
For financial information regarding the Company's four separate lines of
business, The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth
Management and Holding Company Activities, see "Note 4 -- Operating Segments" to
the unaudited consolidated financial statements of the Company included in this
report.
The profitability of the Company's operations depends on net interest
income, provision for 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 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. Non-interest expense
includes salaries and employee benefits as well as occupancy, data processing,
marketing, professional fees, insurance, goodwill 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 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 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 who tends 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 many retail banks.
Non-interest expenses are heavily influenced by the growth of operations.
Growth in the Company directly affects the majority of the Company's expense
categories. Profitability and expense ratios were negatively impacted in 2000
due to the start-up operation in St. Charles, the acquisition of Johnson Bank
Illinois, and the opening of The PrivateBank (St. Louis). For the remainder of
2001 we expect to continue to be impacted to some extent by the start-up nature
of operations in St. Louis and to a lesser extent, by the new office in Geneva,
Illinois. The St. Charles office was first profitable in late 2000 and it is
expected that The PrivateBank (St. Louis) will not begin to operate profitably
until the last quarter of 2001.
17
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
NET INCOME
Net income for the second quarter ended June 30, 2001, was $1,358,000, up
24% compared to second quarter 2000 net income of $1,098,000. Earnings increased
to $0.28 per diluted share in the second quarter 2001 compared to $0.23 per
diluted share in the second quarter 2000. Net income for the six months ended
June 30, 2001 increased 38.2% to $2,691,000, or $0.56 per diluted share,
compared to $1,947,000, or $0.41 per diluted share, for the same period last
year. The increase in net income on a year to date basis as compared to the same
period in 2000 highlights the impact of strong balance sheet and revenue growth.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees
on earning assets and interest expense on deposits and borrowings. Net interest
margin represents 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 $6.7 million during the three months ended June
30, 2001 compared to $6.0 million for the second quarter 2000, an increase of
12%. Average earning assets during the second quarter 2001 were $864.0 million,
an increase of 33.3% over the prior year second quarter. The Company's net
interest margin (tax equivalent net interest income as a percentage of earning
assets) was 3.25% for the three months ended June 30, 2001, compared to 3.81%
for the prior year period. The continuing decline in market interest rates
during the quarter resulted in compression of net interest margin as compared to
the first quarter of 2001 and the prior year second quarter. During the third
quarter of 2001, the Company expects to continue to experience declines in net
interest margin if market rates of interest continue to decline. As interest
rates decline, the portion of the Company's loan portfolio that is based on
floating rates will re-price downward. Likewise, deposits and floating rate
borrowings will re-price downward, which will reduce the rates earned on assets.
Net interest income on a tax equivalent basis was $13.8 and $11.3
million for the six months ended June 30, 2001 and 2000, respectively. Net
interest margin was 3.30% for the six months ended June 30, 2001 compared to
3.68% for the prior year period. The decrease in net interest margin during the
six months ended June 30, 2001 as compared to the six months ended June 30, 2000
is attributable to the decreases in market rates during the year as well as to
the issuance of $20.0 million of trust preferred securities on February 8, 2001.
These securities bear interest at a fixed rate of 9.50%. The effect of the trust
preferred issuance will be to compress net interest margin in a falling interest
rate environment.
18
The following tables present 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 JUNE 30,
--------------------------------------------------------------------------
2001 2000
------------------------------------- ----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
Short-term investments............ $ 2,724 $ 31 4.46% $ 5,103 $ 78 6.08%
Investment securities(1).......... 212,536 3,711 6.98% 98,938 1,763 7.13%
Loans, net of unearned discount(2) 648,759 12,963 7.96% 544,207 12,167 8.91%
-------- -------- -------- --------
Total earning assets.............. $864,019 $ 16,705 7.71% $648,248 $ 14,008 8.61%
======== ======== ======== ========
Interest-bearing deposits......... $651,838 $ 7,595 4.67% $515,103 $ 6,754 5.26%
Funds borrowed.................... 110,708 1,545 5.52% 62,361 1,027 6.52%
Long-term debt - Trust Preferred
Securities..................... 20,000 475 9.50% -- -- --
-------- -------- ------- -------
Total interest-bearing liabilities $782,546 9,615 4.92% $577,464 7,781 5.39%
======== -------- ======== -------
Tax equivalent net interest income $ 7,090 $ 6,227
======== =======
Net interest spread............... 2.79% 3.22%
Net interest margin............... 3.25% 3.81%
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------------------
2001 2000
------------------------------------ -------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
Short-term investments............ $ 7,498 $ 208 5.51% $ 16,240 $ 465 5.67%
Investment securities(1).......... 200,363 7,177 7.16% 95,725 3,366 7.04%
Loans, net of unearned discount(2) 624,220 26,024 8.35% 498,155 21,642 8.65%
-------- -------- -------- -------
Total earning assets.............. $832,081 $ 33,409 8.04% $610,120 $25,473 8.32%
======== ======== ======== =======
Interest-bearing deposits......... 638,487 15,797 4.99% $500,580 $12,809 5.13%
Funds borrowed.................... 100,967 3,052 6.01% 39,345 1,323 6.65%
Long-term debt - Trust Preferred --
--------
Securities(3).................. 15,801 744 9.37% -- --
-------- -------- -------- -------
Total interest-bearing liabilities $755,255 19,593 5.22% $539,925 14,132 5.24%
======== -------- ======== -------
Tax equivalent net interest income $ 13,816 $11,341
======== =======
Net interest spread............... 2.82% 3.08%
Net interest margin............... 3.30% 3.68%
- ---------------------------------------
(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 $384,000 and $219,000 in the second quarter of 2001 and
2000, respectively, and $649,000 and $439,000 for the six months ended
2001 and 2000, respectively.
(2) Nonaccrual 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.
(3) The trust preferred securities pay a 9.50% fixed rate of interest.
The yield above is based on the interest period from February 8, 2001
to June 30, 2001.
19
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 period's rate. Rate variances are
computed using the changes in rate multiplied by the previous period's volume.
THREE MONTHS ENDED JUNE 30, 2001
COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
CHANGE CHANGE
DUE TO DUE TO CHANGE TOTAL
RATE VOLUME DUE TO MIX CHANGE
---- ------ ---------- ------
(DOLLARS IN THOUSANDS)
Short-term investments................ $ (21) $ (36) $ 10 $ (47)
Investment securities................. (37) 2,019 (34) 1,948
Loans, net of unearned discount....... (1,289) 2,323 (238) 796
------- ------- ------- -------
Total interest income.............. (1,247) 4,306 (262) 2,697
------- ------- ------- -------
Interest-bearing deposits............. (758) 1,793 (194) 841
Funds borrowed........................ (155) 786 (113) 518
Long-term debt - Trust Preferred
Securities......................... -- -- 475 475
------- ------- ------- -------
Total interest expense............. (913) 2,579 168 1,834
------- ------- ------- -------
Net interest income................... $ (434) $ 1,727 $ (430) $ 863
======= ======= ======= =======
SIX MONTHS ENDED JUNE 30, 2001
COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
CHANGE CHANGE
DUE TO DUE TO CHANGE TOTAL
RATE VOLUME DUE TO MIX CHANGE
---- ------ ---------- ------
(DOLLARS IN THOUSANDS)
Short-term investments................ $ (13) $ (246) $ 2 $ (257)
Investment securities................. 57 3,653 101 3,811
Loans, net of unearned discount....... (741) 5,407 (284) 4,382
------- ------- ------- -------
Total interest income.............. (697) 8,814 (181) 7,936
------- ------- ------- -------
Interest-bearing deposits............. (348) 3,508 (172) 2,988
Funds borrowed........................ (125) 2,032 (178) 1,729
Long-term debt - Trust Preferred
Securities......................... -- -- 744 744
------- ------- ------- -------
Total interest expense............. (473) 5,540 394 5,461
------- ------- ------- -------
Net interest income................... $ (224) $ 3,274 $ (575) $ 2,475
======= ======= ======= =======
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $738,000 for the second quarter
of 2001, compared to $662,000 for the comparable period in 2000. The Company's
provision for loan losses was $1.1 million for the six months ended June 30,
2001 compared to $973,000 for the comparable period in 2000. Increases in the
provision for loan losses compared to the prior year periods are related to the
growth in the loan portfolio.
20
The Company maintains an adequate allowance for loan losses that are
probable and inherent in the portfolio. The provision for loan losses is the
result of management's 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 24.
NON-INTEREST INCOME
Non-interest income for the quarter grew to $1.3 million, reflecting an
increase of $540,000 or 71.9% higher compared to the first quarter of 2000.
Banking income, comprised of service charges on deposits and other products,
increased to $212,000 from $168,200 a year ago quarter, which represents a 26.0%
increase. The increase in service charge income during the second quarter 2001
as compared to the prior year quarter is due to the implementation of a new
service fee structure that became effective in December 2000. Trust assets under
administration decreased 6.6% to $712.0 million at June 30, 2001 compared to
$762.0 million at June 30, 2000, attributable primarily to market declines
affecting portfolio equity values. Despite the decline in the level of trust
assets under administration, trust fee revenue increased by $157,000 to $708,000
for the quarter ended June 30, 2001, an increase of 29.0% over the prior year
quarter. The increase reflects a continued change in the mix of trust accounts
to more profitable account arrangements.
The increase in non-interest income is also attributable to gains on
securities. Net securities gains totaled $353,000 during the second quarter of
2001, compared to none in the second quarter of 2000. During the second quarter
2001, the Company was able to take advantage of volatility in the financial
markets while repositioning its investment portfolio for protection in the
declining market rate environment.
Non-interest income increased approximately $898,000 or 61.0% to $2.4
million for the first half of 2001, as compared to $1.5 million for the
comparable period in 2000. Trust income increased by $308,000 to $1.4 million
for the six months ended June 30, 2001, reflecting an increase of 28.3% over the
six months ended June 30, 2000. Banking services income increased by
approximately $179,000 to $434,000 for the six months ended June 30, 2001 as
compared to $256,000 for the six months ended June 30, 2000. Net securities
gains for the six months ended June 30, 2001 were $539,000 compared to $126,000
for the comparable prior year period. During the six months ended June 30, 2001,
the Company was able to take advantage of market interest rate volatility to
achieve interest rate risk management objectives, realize gains on investments
and purchase investment securities with enhanced return opportunities.
NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Salaries and employee benefits........ $ 1,855 $ 1,818 $ 4,289 $ 3,695
Occupancy............................. 960 764 1,848 1,377
Professional fees..................... 752 596 1,290 1,171
Marketing............................. 265 300 614 609
Data processing....................... 268 190 572 353
Postage, telephone and delivery....... 200 167 381 283
Office supplies and printing.......... 110 122 192 235
Insurance............................. 88 70 181 138
Goodwill.............................. 206 206 412 319
Other expense......................... 705 219 923 309
-------- -------- -------- -------
Total non-interest expense............ $ 5,409 $ 4,452 $ 10,702 $ 8,489
======== ========= ========= =======
Non-interest expense increased to $5.4 million in the second quarter of
2001 from $4.5 million in the second quarter of 2000, an increase of 21.5%. This
increase is due to higher operating expenses associated with being fully
operational in St. Louis. The Company's efficiency ratio was 64.5% for the
second quarter 2001 as compared to the 63.8% for the second quarter 2000. On a
tax-equivalent basis, this ratio indicates that in the second quarter of 2001,
the Company spent 64.5 cents to generate each dollar of revenue, compared to
63.8 cents in the second quarter of
21
2000. During 2001, we expect to continue to incur operating expenses in excess
of revenues for The PrivateBank (St. Louis) and for the new office established
in Geneva, Illinois. As a result, the Company expects the efficiency ratio to
remain high until business development efforts at the new offices generate
revenue sufficient to offset the related operating expenses.
Salaries and benefits increased 2.0% during the second quarter 2001 as
compared to the year ago quarter, reflecting the Company's increased level of
full-time equivalent employees to 143 people at June 30, 2001 as compared to 133
people at June 30, 2000. The increase is due primarily to the full effect of the
Johnson Bank Illinois acquisition and the opening and staffing of The
PrivateBank (St. Louis), and the addition of two senior officers responsible for
establishing the Geneva office.
Occupancy expense increased to $960,000 during the second quarter 2001,
reflecting an increase of 25.7% over the prior year quarter. Occupancy expense
during the second quarter 2001 reflects the addition of a new floor of office
space in the downtown Chicago office dedicated specifically to the Wealth
Management Department, the addition of new office space in Geneva, Illinois, as
well as depreciation of certain fixed assets, software and equipment. In
connection with the renovation of the Company's information technology platform,
the Company has purchased and capitalized new equipment and software that is
being depreciated over a period of 3 to 5 years, which has had the effect of
increasing occupancy expense during the second quarter 2001.
Data processing expenses increased to $268,000 during the quarter, a 41.1%
increase over the prior year quarter. The opening of The PrivateBank (St. Louis)
in June 2000 requires additional data processing support on a monthly basis.
Additionally, the second quarter 2001 results reflect data processing costs
associated with the opening of the Geneva office.
Postage, telephone and delivery increased to $200,000 during the second
quarter 2001, an increase of 19.8% over the prior year quarter. The addition of
The PrivateBank (St. Louis) and the Geneva office to The PrivateBank (Chicago)
increased the delivery costs related to the processing of transactions, which
are sent daily to a third-party processing area. In addition, postal rates
increased effective January 1, 2001.
Office supplies and printing costs decreased to $110,000 during the second
quarter 2001, a 9.8% decline as compared to the prior year quarter. During the
second quarter 2000, the Company incurred one-time supplies and printing costs
associated with the opening of The PrivateBank (St. Louis).
Insurance expense increased to $88,000, an increase of 25.7% over the prior
year quarter. The additions of a new office and employees as well as the
establishment of The PrivateBank (St. Louis) have all contributed to increased
levels of insurance costs during the second quarter 2001.
Included in other non-interest expense during the second quarter ended June
30, 2001 were non-recurring charges in the amount of $561,000 related to the
resolution of certain items associated with prior systems conversions.
Non-interest expense increased to $10.7 million for the first six months of
2001 from $8.5 for the first six months of 2000, an increase of 26.1%. This
increase is due to expenses incurred in connection with the Company's expansion
initiatives, namely the opening of two new offices through the Johnson Bank
Illinois acquisition, the expansion of the St. Louis office and the opening of
the Geneva office. The Company's efficiency ratio remained level at 66.1% for
the first six months of 2001 as compared to 66.2% for the first six months of
2000
Salaries and benefits increased 16.1% during the first six months of 2001
as compared to last year, reflecting the Company's increased level of full-time
equivalent employees to 143 people at June 30, 2001 as compared to 133 people at
June 30, 2000. The increase 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.
Occupancy expense increased to $1.9 million for the first six months of
2001, from $1.4 million for the first six months of 2000, reflecting an increase
of 34.2%. The rental of an additional floor in the downtown Chicago office, the
addition of office space in Geneva and the depreciation of certain fixed assets,
software and equipment comprise this increase.
22
During the six months ended June 30, 2001, professional fees increased by
$119,000 over the prior year's first six months. The 10.2% increase in
professional fees reflects increased legal, accounting and information-system
consultation services.
Office supplies and printing expenses decreased 18.3% for the first six
months of 2000 from the year-ago period's level of $235,000 to $192,000,
reflecting an improvement in cost controls. Data processing fees increased from
$353,000 for the first six months of 2000 to $572,000 for the first six months
of 2001, an increase of 62.0%, attributable to increased demand from new branch
offices.
INCOME TAXES
The following table shows the Company's income before income taxes,
applicable income taxes and effective tax rate for the six months ended June 30,
2001 and 2000, respectively (in thousands):
SIX MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
------- -------
Income before taxes.......... $ 3,759 $ 2,914
Income tax provision......... 1,068 967
Effective tax rate........... 28.4% 33.2%
The lower effective tax rate for the second quarter 2001 as compared to the
prior year quarter is partially attributable to an increase in the amount of
federally tax exempt municipal investment securities held in the Company's
securities portfolio. Tax-exempt municipal securities increased from $37.4
million at December 31, 2000 to $78.0 million at June 30, 2001. 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.
23
FINANCIAL CONDITION
Total assets were $944.9 million at June 30, 2001, an increase of $115.4
million, or 13.9% over $829.5 million at December 31, 2000, and an increase of
$221.9 million, or 30.7% over $723.0 million at June 30, 2000. The balance sheet
growth during the six months ended June 30, 2001 was accomplished mainly through
loan growth throughout the Company and growth in the investment securities
portfolio. The growth in assets was funded through excess liquidity, growth in
deposits and an increase in long-term debt that resulted from the issuance of
$20.0 million of trust preferred securities.
LOANS
Total loans increased to $666.7 million, an increase of $67.3 million, or
11.2%, from $599.4 million at December 31, 2000 and an increase of $83.2
million, or 14.3%, from $583.5 million at June 30, 2000.
The PrivateBank (St. Louis) had loans outstanding of $43.7 million as of
June 30, 2001, growth of $18.5 million since December 31, 2000. The remaining
loan growth experienced by the Company since December 31, 2000 of $48.8 million
was generated by The PrivateBank (Chicago). All of The PrivateBank (Chicago)
offices posted strong gains in loan volume.
The following table sets forth the Company's loan portfolio net of unearned
discount by category (in thousands) at the following dates:
JUNE 30, DECEMBER 31, JUNE 30,
2001 2000 2000
---- ---- ----
LOANS
Commercial real estate........ $240,200 $206,464 $200,088
Residential real estate....... 90,466 86,052 92,006
Commercial.................... 134,626 137,343 153,416
Personal(1)................... 117,230 108,427 99,191
Construction.................. 84,188 61,143 38,821
-------- -------- --------
Total loans................ $666,710 $599,429 $583,522
======== ======== ========
- ---------------------------------------
(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 committees of the boards of directors of the banks on a monthly
basis. The Company maintains an allowance for loan losses sufficient to absorb
credit losses inherent in the loan portfolio. Additions to the allowance for
loan losses, which are charged to earnings through the provision for loan
losses, are made in the amount determined necessary to maintain an adequate
allowance 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 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
allowance for loan losses as a percentage of total loans was 1.03% at June 30,
2001, 1.02% at December 31, 2000 and 1.02% at June 30, 2000. The Company
believes that the allowance for loan losses is adequate to provide for estimated
probable credit losses inherent in the loan portfolio.
Net charge-offs totaled $297,000 for the quarter ended June 30, 2001 versus
net charge-offs of $381,000 in the year earlier period. The provision for loan
losses was $738,000 in the second quarter of 2001, versus $662,000 in the second
quarter of 2000. 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.
24
Following is a summary of changes in the allowance for loan losses for the
six months ended June 30, 2001 and 2000 (in thousands):
JUNE 30, JUNE 30,
2001 2000
--------- --------
Balance, January 1.............................................. $ 6,108 $ 4,510
Johnson Bank Illinois acquisition allowance for loan loss....... -- 864
Provisions charged to earnings.................................. 1,077 973
Loans recovered (charged-off)................................... (289) (396)
------- -------
Balance, June 30................................................ $ 6,896 $ 5,951
======= =======
NONPERFORMING LOANS
Nonaccrual loans were $1.5 million at June 30, 2001 as compared to $24,000
at December 31, 2000 and $635,000 at June 30, 2000.
Nonperforming loans include nonaccrual loans and accruing loans which are
90 days or more delinquent. Loans in this category include those with
characteristics such as past maturity more than 90 days, those that have recent
adverse operating cash flow or balance sheet trends, or loans that have general
risk characteristics that management believes might jeopardize the future timely
collection of principal and interest payments. The balance in this category at
any reporting period can fluctuate widely based on the timing of cash
collections, renegotiations and renewals. Nonperforming loans were $2.4 million
at June 30, 2001, compared to $1.4 million at December 31, 2000 and $991,000 at
June 30, 2000. Nonperforming loans were .37%, .24% and .17% of total loans at
June 30, 2001, December 31, 2000 and June 30, 2000, respectively. Nonperforming
loans were .26%, .17% and .13% of total assets at June 30, 2001, December 31,
2000 and June 30, 2000, respectively.
Subsequent to June 30, 2001, the Company designated approximately $700,000
of loans that were performing as of June 30, 2001 to nonaccrual status based on
recent developments that became available in late July, 2001. Collection efforts
continue and the Company has not yet determined the extent of losses to be
incurred.
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities at June 30,
2001 and December 31, 2000, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
---------------------------------------------------------
JUNE 30, 2001
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----------- ---------- ----------
U.S. Government Agency Obligations....... $ 369 $ 29 $ -- $ 398
U.S. Government Agency Mortgage Backed
Securities and Collateralized
Mortgage Obligations.................. 80,811 672 (164) 81,319
Corporate Collateralized Mortgage
Obligations........................... 24,900 82 -- 24,982
Tax Exempt Municipal Securities.......... 77,864 661 (521) 78,004
Taxable Municipal Securities............. -- -- -- --
Federal Home Loan Bank Stock............. 36,381 -- -- 36,381
Other.................................... 3,247 174 -- 3,421
-------- -------- ------- --------
Total.................................... $223,572 $ 1,618 $ (685) $224,505
======== ======== ======= ========
25
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
---------------------------------------------------------
DECEMBER 31, 2000
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----------- ---------- ----------
U.S. Government Agency Obligations....... $ 4,326 $ 73 $ -- $ 4,399
U.S. Government Agency Mortgage Backed
Securities and Collateralized
Mortgage Obligations.................. 83,858 680 (191) 84,347
Corporate Collateralized Mortgage
Obligations........................... 10,189 -- (66) 10,123
Tax Exempt Municipal Securities.......... 37,378 187 (921) 36,644
Taxable Municipal Securities............. 1,083 58 -- 1,141
Federal Home Loan Bank Stock............. 35,175 -- -- 35,175
Other.................................... 365 -- -- 365
-------- ---- ------- --------
Total.................................... $172,374 $998 $(1,178) $172,194
======== ==== ======= ========
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. At June 30, 2001, net unrealized gains of $933,000 resulted in an
increase in reported stockholders' equity. This was an increase of $1.1 million
from net unrealized losses of $118,000 recorded as part of equity at December
31, 2000. The increase in unrealized gains in the first six months of 2001
reflects the effect of declining interest rates on tax exempt municipal
securities, corporate collateralized mortgage obligations, and other various
securities in the portfolio. Additionally, the Company benefited from changes
made to the investment portfolio as a result of asset/liability management
strategies.
Securities available for sale increased to $224.5 million at June 30, 2001,
up 30.4% from 172.2 million at December 31, 2000. The growth in the investment
security portfolio since December 31, 2000 resulted from the continued
implementation of the Company's asset/liability management strategy. Tax exempt
municipal securities increased by $41.4 million, allowing the Company to provide
for net interest margin protection in a falling interest-rate environment.
Corporate collateralized mortgage obligations increased $14.9 million in the
first six months of 2001.
DEPOSITS AND FUNDS BORROWED
The following table presents the balances of deposits by category and each
category as a percentage of total deposits at June 30, 2001, December 31, 2000
and June 30, 2000:
JUNE 30, DECEMBER 31, JUNE 30,
2001 2000 2000
-------------------- ---------------------- ---------------------
PERCENT PERCENT PERCENT
BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Demand...................... $ 65,373 8.7% $ 61,789 9.2% $ 49,950 8.3%
Savings..................... 9,413 1.3% 8,242 1.2% 7,402 1.3%
Interest-bearing demand..... 44,436 5.9% 51,301 7.7% 34,062 5.7%
Money market................ 298,078 39.7% 297,043 44.3% 250,420 41.8%
Certificates of deposit..... 237,454 31.6% 208,029 31.0% 196,311 32.8%
Brokered deposits........... 95,740 12.8% 43,842 6.6% 60,755 10.1%
-------- ----- -------- ----- -------- -----
Total deposits........... $750,494 100.0% $670,246 100.0% $598,900 100.0%
======== ===== ======== ===== ======== =====
26
Total deposits of $750.5 million at June 30, 2001 represent an increase of
$80.3 million or 12.0% as compared to total deposits of $670.2 million as of
December 31, 2000. Noninterest-bearing deposits increased by 5.8% to $65.4
million at June 30, 2001 as compared to $61.8 million at December 31, 2000.
Interest-bearing demand deposits decreased by 13.4% to $44.4 million as compared
to $61.8 million at December 31, 2000. Money market accounts increased by $1.0
million to $298.1 million at June 30, 2001 as compared to $297.0 million at
December 31, 2000. Certificates of deposits increased by $29.4 million to $237.5
million at June 30, 2001 as compared to $208.0 million at December 31, 2000.
Brokered deposits increased by 118.4% to $95.7 million at June 30, 2001 as
compared to $43.8 million at December 31, 2000. The Company continued to utilize
brokered deposits during the second quarter 2001 as a source of funding for
growth in the loan and investment portfolios.
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) and
from the Federal Home Loan Bank of Des Moines (FHLB) for short- or long-term
purposes under a variety of programs. The Company has periodically used the
services of the FHLB for short-term funding needs and other correspondent
services. During 2001, the Company has continued to utilize FHLB advances to
fund liquidity of the banks.
A summary of all funds borrowed and outstanding at June 30, 2001, December
31, 2000 and June 30, 2000 is presented in the table below:
CURRENT JUNE 30, DECEMBER 31, JUNE 30,
RATE(1) MATURITY 2001 2000 2000
------- -------- ---- ---- ----
(DOLLARS IN THOUSANDS)
FUNDS BORROWED:
Borrowings under revolving line of
credit............................. 4.93% 02/11/02 $ 250 $ 18,000 $ 15,500
Subordinated note..................... 4.57 02/11/07 5,000 5,000 5,000
FHLB floating rate advanced(2)........ 6.77 05/01/01 -- 10,000 10,000
FHLB fixed advance.................... 6.50 10/23/05 25,000 25,000 --
FHLB fixed advance.................... 6.49 11/13/01 2,000 2,000 --
FHLB fixed advance.................... 6.21 12/05/03 30,000 30,000 30,000
FHLB fixed advance.................... 5.91 06/21/02 500 500 --
FHLB fixed advance.................... 5.89 12/20/02 1,000 1,000 --
FHLB fixed advance.................... 5.40 08/27/00 -- -- 4,000
FHLB fixed advance.................... 5.33 07/22/02 1,000 -- --
FHLB fixed advance.................... 5.21 01/22/02 1,000 -- --
FHLB fixed advance.................... 5.02 03/06/02 1,000 -- --
FHLB fixed advance.................... 4.30 02/01/02 25,000 -- --
FHLB fixed advance.................... 4.21 05/13/02 1,000 -- --
Fed funds purchased................... 4.16 Daily 10,000 2,700 2,400
Demand repurchase agreements.......... 3.00 Daily 3,378 2,679 1,644
-------- -------- --------
Total funds borrowed............... $106,128 $ 96,879 $ 68,544
======== ======== ========
- ---------------------------------------
(1) Reflects the rate in effect as of June 30, 2001, or at maturity, if the advance matured prior to June 30, 2001.
(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.
27
CAPITAL RESOURCES
During the first quarter 2001, the Company completed the issuance of $20.0
trust preferred securities which qualify as Tier 1 capital up to 25.0% of total
Tier 1 capital with the remaining amount treated as Tier 2 capital. At June 30,
2001, $19.1 million of the trust preferred securities was treated as Tier 1
capital. Stockholders' equity rose to $57.8 million at June 30, 2001, an
increase of $3.6 million from the 2000 year-end level, due to an increase in
year-to-date 2001 net income and to an increase in Accumulated Other
Comprehensive Gains, reflecting a $734,000 increase (net of tax) in the fair
value of the available-for-sale investment portfolio at June 30, 2001 as
compared to the fair value at December 31, 2000.
The Company and its banking subsidiaries are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings and other factors, and the regulators can lower classifications in
certain areas. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
The prompt corrective action regulations provide five classifications,
including 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 the Company's consolidated measures of capital
at June 30, 2001, December 31, 2000 and June 30, 2000:
JUNE 30, DECEMBER 31, JUNE 30,
2001 2000 2000
------- ----------- ---------
Leverage ratio.................... 7.26% 5.54% 5.94%
Tier 1 risk-based capital ratio... 9.17% 6.47% 6.84%
Total risk-based capital ratio.... 10.98% 8.15% 8.73%
Total equity to total assets...... 6.12% 6.53% 6.85%
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 June 30, 2001, the Company and each of the banking subsidiaries
continued to exceed the minimum levels of all regulatory capital requirements,
and were each considered "well capitalized" under all regulatory standards.
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 six
months of 2001 compared to a net inflow of $5.8 million a year earlier. Net cash
outflows from investing activities were $118.7 million in the first six months
of 2001 compared to a net cash outflow of $130.9 million a year earlier. Cash
inflows from financing activities in the first six months of 2001 were $109.5
million compared to a net inflow of $104.3 million in the first six months of
2000.
28
In the event of short-term liquidity needs, the banking subsidiaries may
purchase federal funds from correspondent banks. Membership in the Federal Home
Loan Bank System gives the banking subsidiaries the ability to borrow funds from
the FHLB for short- or long-term purposes under a variety of programs. During
2001, the Company has continued to utilize brokered deposits as an alternative
source of funding. Brokered deposits represented 12.8% of total deposits at June
30, 2001 compared to 6.6% of total deposits at December 31, 2000.
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 Company's 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 the
Board of Directors. The investment policy complements 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 tables illustrate the estimated interest rate sensitivity
and periodic and cumulative gap positions calculated as of June 30, 2001 and
December 31, 2000:
JUNE 30, 2001
--------------------------------------------------------------------
TIME TO MATURITY OR REPRICING
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OVER 5
0-90 DAYS 91-365 DAYS 1-5 YEARS YEARS TOTAL
--------- ----------- --------- ----- -----
INTEREST-EARNING ASSETS
Loans.............................. $390,118 $ 60,717 $182,609 $ 33,266 $666,710
Investments........................ 34,902 25,722 49,600 113,347 223,571
Federal funds sold................. 7,305 -- -- -- 7,305
-------- -------- -------- -------- --------
Total interest-earning assets...... $432,325 $ 86,439 $232,209 $146,613 $897,586
======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand............ $ -- $ -- $ -- $ 44,436 $ 44,436
Savings and money market........... 195,535 102,543 -- 4,180 302,258
Time deposits...................... 117,473 140,590 47,336 33,028 338,427
Funds borrowed..................... 18,628 27,500 60,000 20,000 126,128
-------- -------- -------- -------- --------
Total interest-bearing liabilities. $331,636 $270,633 $107,336 $101,644 $811,249
======== ======== ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA)........ $432,325 $518,764 $750,973 $897,586
Rate sensitive liabilities (RSL)... $331,636 $602,269 $709,605 $811,249
GAP (GAP=RSA-RSL).................. $100,689 $(83,505) $ 41,368 $ 86,337
RSA/RSL............................ 130.36% 86.13% 105.83% 110.64%
RSA/Total assets................... 45.75% 54.90% 79.48% 94.99%
RSL/Total assets................... 35.10% 63.74% 75.10% 85.86%
GAP/Total assets................... 10.66% 8.84% 4.38% 9.14%
GAP/Total RSA...................... 23.29% 16.10% 5.51% 9.62%
29
DECEMBER 31, 2000
--------------------------------------------------------------------
TIME TO MATURITY OR REPRICING
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
OVER 5
0-90 DAYS 91-365 DAYS 1-5 YEARS YEARS TOTAL
--------- ----------- --------- ----- -----
INTEREST-EARNING ASSETS
Loans................................ $340,187 $ 50,032 $174,428 $ 34,782 $599,429
Investments.......................... 1,882 6,578 65,078 98,836 172,374
Federal funds sold................... 11,876 -- -- -- 11,876
-------- --------- -------- -------- --------
Total interest-earning assets........ $353,945 $ 56,610 $239,506 $133,618 $783,679
======== ========= ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand.............. $ -- $ -- $ -- $ 51,301 $ 51,301
Savings and money market............. 192,462 104,510 72 3,063 300,107
Time deposits........................ 112,398 119,823 23,260 1,568 257,049
Funds borrowed....................... 38,379 2,000 56,500 -- 96,879
-------- --------- -------- -------- --------
Total interest-bearing liabilities... $343,239 $ 226,333 $ 79,832 $ 55,932 $705,336
======== ========= ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA).......... $353,945 $ 410,555 $650,061 $783,679
Rate sensitive liabilities (RSL)..... $343,239 $ 569,572 $649,404 $705,336
GAP (GAP=RSA-RSL).................... $ 10,706 $(159,017) $ 657 $ 78,343
RSA/RSL.............................. 103.12% 72.08% 100.10% 111.11%
RSA/Total assets..................... 42.67% 49.49% 78.37% 94.48%
RSL/Total assets..................... 41.38% 68.66% 78.29% 85.03%
GAP/Total assets..................... 1.29% 19.17% 0.08% 9.44%
GAP/Total RSA........................ 3.02% 38.73% 0.10% 10.00%
The following table shows the impact of an immediate 200 basis point change
in interest rates as of June 30, 2001 and December 31, 2000. The effects are
determined through the use of a simulation model based on the Company's earning
asset and interest-bearing liability portfolios, assuming the size of these
portfolios remains constant from the balance sheet date throughout the two-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.
JUNE 30, 2001 DECEMBER 31, 2000
------------------------- ------------------------
+200 BASIS -200 BASIS +200 BASIS -200 BASIS
POINTS POINTS POINTS POINTS
---------- ---------- ---------- ----------
Percentage change in net interest income due to
an immediate 200 basis point change in
interest rates over a two-year time horizon.... -7.2% 8.0% -9.6% 9.3%
This table shows that if there had been an instantaneous parallel shift in
the yield curve of +200 basis points on June 30, 2001 and December 31, 2000, the
Company would suffer a decline in net interest income of 7.2% and 9.6%,
respectively over each two-year period. Conversely, a shift of -200 basis points
would increase net interest income 8.0% over a two-year horizon based on June
30, 2001 balances, as compared to 9.3% measured on the basis of the December 31,
2000 portfolio.
Changes in the effect on net interest income from a 200 basis point
movement at June 30, 2001, compared to December 31, 2000 are due to the timing
and nature of the repricing of rate sensitive assets to rate sensitive
liabilities. In each period, the increase in net interest income in the reduced
rate environment and the decrease in interest income in an increased rate
environment is due to our negatively gapped balance sheet with a two-year
horizon. The
30
difference in the effect on net interest income at June 30, 2001 as compared to
December 31, 2000 are due to the differences in the timing, balances, and
current rates versus simulated rates of repricing assets and liabilities.
Additionally, Management constantly monitors the interest rate environment
and the Company's near term gap, ninety days or less. As shown in the Company's
gap analysis, the Company is asset sensitive for this time period and would
likely benefit from an increase in rates.
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; an inability to achieve expected revenues to the
full extent expected or within the expected time frame at the St. Louis,
Missouri and Geneva, Illinois offices; significant increases in competition; 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.
31
PART II
ITEM 1. LEGAL PROCEEDINGS
Although the Company's subsidiaries may be involved from time to time in
routine litigation incidental to their respective businesses, currently there
are no material pending legal proceedings to which either the Company or its
subsidiaries is a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on April 26, 2001.
(b) At the Annual Meeting of Stockholders, the following matters were
submitted to and approved by a vote of Stockholders:
(1) The election of five Class III directors for a term ending at the
Annual Meeting of Stockholders to be held in 2004:
Directors Votes For Votes Withheld
--------- --------- --------------
Robert F. Coleman 4,083,084 17,894
James M. Guyette 4,033,884 67,094
Philip M. Kayman 4,083,084 17,894
Thomas F. Meagher 4,083,084 17,894
William J. Podl 4,083,084 17,894
(2) Ratification of the appointment of Arthur Andersen LLP as the
Company's independent auditors for the fiscal year ending
December 31, 2001:
Votes For Votes Against Abstentions
--------- ------------- -----------
4,066,963 31,875 2,140
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 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.)
Exhibit 3.2 - [Intentionally left blank]
32
Exhibit 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.)
Exhibit 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.)
Exhibit 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.
(b) Filings on Form 8-K.
(1) Current Report on Form 8-K dated April 23, 2001, filed with the
SEC on April 23, 2001.
33
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/ Gary L. Svec
-----------------------------
Gary L. Svec,
Chief Financial Officer
(principal financial officer)
By: /s/ Lisa M. O'Neill
-----------------------------
Lisa M. O'Neill,
Controller
(principal accounting officer)
Date: August 14, 2001
34
EXHIBIT INDEX
Exhibit No. Description
---------- -----------
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.