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 September 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 NOVEMBER 6, 2001
- --------------------------------------------------------------------------------
Common, no par value 4,763,684
================================================================================
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......................................................................................33
Item 2. Changes in Securities and Use of Proceeds..............................................................33
Item 3. Defaults upon Senior Securities........................................................................33
Item 4. Submission of Matters to a Vote of Security Holders....................................................33
Item 5. Other Information......................................................................................33
Item 6. Exhibits and Reports on Form 8-K.......................................................................33
Signatures......................................................................................................35
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
-------------------------------------------------------------
09/30/01 06/30/01 03/31/01 12/31/00 09/30/00
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
Interest income:
Loans, including fees...................... $12,832 $12,963 $13,061 $13,451 $13,540
Federal funds sold and interest-bearing
deposits................................ 23 31 177 236 357
Securities................................. 3,704 3,327 3,202 2,714 1,813
------- ------- ------- ------- -------
Total interest income................... $16,559 $16,321 $16,440 $16,401 $15,710
------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand deposits........... 239 255 220 228 231
Savings and money market deposit accounts.. 2,844 2,861 3,552 3,773 3,543
Other time deposits........................ 4,273 4,479 4,431 4,263 4,368
Funds borrowed............................. 1,637 1,545 1,507 1,557 1,236
Trust Preferred interest expense........... 475 475 269 -- --
------- ------- ------- ------- -------
Total interest expense.................. $ 9,468 $ 9,615 $ 9,979 $ 9,821 $ 9,378
------- ------- ------- ------- -------
Net interest income........................ 7,091 6,706 6,461 6,580 6,332
Provision for loan losses.................. 845 738 339 334 383
------- ------- ------- ------- -------
Net interest income after provision for
loan losses............................. 6,246 5,968 6,122 6,246 5,949
------- ------- ------- ------- -------
Non-interest income:
Banking, trust services and other income... 855 938 894 951 745
Securities gains........................... 365 353 186 -- --
------- ------- ------- ------- -------
Total non-interest income............... $ 1,220 $ 1,291 $ 1,080 $ 951 $ 745
------- ------- ------- ------- -------
Non-interest expense:
Salaries and employee benefits............. 2,303 1,855 2,434 2,268 2,211
Severance charge........................... -- -- -- -- 562
Occupancy expense, net..................... 985 960 888 807 803
Data processing............................ 303 268 304 249 218
Marketing.................................. 275 265 349 357 241
Amortization of goodwill................... 206 206 206 206 206
Professional fees.......................... 585 752 538 484 480
Insurance.................................. 88 88 93 81 84
Other expense.............................. 606 1,015 481 438 422
------- ------- ------- ------- -------
Total non-interest expense................. $ 5,351 $ 5,409 $ 5,293 $ 4,890 $ 5,227
------- ------- ------- ------- -------
Income before income taxes................. 2,115 1,850 1,909 2,307 1,467
Income tax provision....................... 524 492 576 797 499
------- ------- ------- ------- -------
Net income.................................... $ 1,591 $ 1,358 $ 1,333 $ 1,510 $ 968
======= ======= ======= ======= =======
PER SHARE DATA:
Basic earnings................................ $ 0.34 $ 0.29 $ 0.29 $ 0.33 $ 0.21
Diluted earnings.............................. 0.32 0.28 0.28 0.32 0.20
Dividends..................................... 0.030 0.025 0.025 0.025 0.025
Book value (at end of period)................. 13.07 12.35 12.15 11.73 11.04
2
QUARTER ENDED
-------------------------------------------------------------
09/30/01 06/30/01 03/31/01 12/31/00 09/30/00
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities.............................. $279,319 $224,505 $210,840 $172,194 $132,814
Total loans................................... 716,117 666,710 626,900 599,429 584,919
Total assets.................................. 1,041,975 944,887 873,693 829,509 763,815
Total deposits................................ 801,146 750,494 695,571 670,246 633,007
Funds borrowed................................ 137,956 106,128 90,397 96,879 71,258
Long-term debt-Trust Preferred Securities..... 20,000 20,000 20,000 -- --
Total stockholders' equity.................... 62,087 57,826 56,946 54,249 51,066
Trust assets under administration............. $684,842 $711,957 $693,176 $777,800 $785,738
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(1)..................... 3.19% 3.25% 3.35% 3.60% 3.59%
Net interest spread(2)..................... 2.79 2.79 2.84 3.00 3.00
Non-interest income to average assets...... 0.49 0.57 0.52 0.48 0.39
Non-interest expense to average assets..... 2.16 2.39 2.55 2.48 2.76
Net overhead ratio(3)...................... 1.67 1.82 2.03 2.00 2.37
Efficiency ratio (excluding one-time
charges)(4)(7).......................... 60.6 64.5 67.8 63.0 63.9
Return on average assets (excluding
one-time charges)(5)(7)................. 0.64 0.60 0.64 0.77 0.71
Return on average equity (excluding
one-time charges)(6)(7)................. 10.46 9.46 9.86 11.35 10.55
Dividend payout ratio...................... 8.94 8.62 8.79 7.66 11.97
Asset Quality Ratios:
Non-performing loans to total loans........ 0.90% 0.37% 0.47% 0.24% 0.10%
Allowance for loan losses to:
total loans............................. 1.06 1.03 1.03 1.02 1.02
non-performing loans.................... 118 282 218 423 1,058
Net charge-offs (recoveries) to average
total loans............................. 0.10 0.18 (0.01) 0.15 0.23
Non-performing assets to total assets...... 0.62 0.26 0.34 0.17 0.07
Balance Sheet Ratios:
Loans to deposits.......................... 89.4% 88.8% 90.1% 89.4% 92.4%
Average interest-earning assets to average
interest-bearing liabilities............ 110.2 110.4 110.0 111.5 111.5
Capital Ratios:
Total equity to total assets............... 5.96% 6.12% 6.52% 6.53% 6.69%
Total risk-based capital ratio............. 10.55 10.98 11.00 8.15 8.51
Tier 1 risk-based capital ratio............ 8.88 9.17 9.14 6.47 6.72
Leverage ratio............................. 6.99 7.26 7.60 5.54 5.54
Ratio of Earnings to Fixed Charges: (8)
Including deposit interest................. 1.22x 1.19x 1.19x 1.23x 1.16x
Excluding deposit interest................. 2.00 1.92 2.07 2.48 2.19
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 one-time charges divided by average total assets.
(6) Earnings before one-time 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 one-time
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)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000
------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks................................. $ 26,343 $ 28,637 $ 21,815
Short-term investments.................................. 2,959 11,876 4,060
---------- -------- --------
Total cash and cash equivalents...................... 29,302 40,513 25,875
---------- -------- --------
Available-for-sale securities, at fair value............ 279,319 172,194 132,814
Loans, net of unearned discount......................... 716,117 599,429 584,919
Allowance for loan losses............................... (7,558) (6,108) (5,991)
---------- -------- --------
Net loans............................................... 708,559 593,321 578,928
---------- -------- --------
Goodwill................................................ 11,011 11,629 11,835
Bank premises and equipment, net........................ 4,198 4,138 4,386
Accrued interest receivable............................. 7,006 5,524 5,158
Other assets............................................ 2,580 2,190 4,819
---------- -------- --------
Total assets............................................ $1,041,975 $829,509 $763,815
========== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing.................................. $ 68,789 $ 61,789 $ 55,831
Interest-bearing..................................... 45,711 51,301 37,747
Savings and money market deposit accounts............... 361,563 300,107 274,025
Brokered deposits....................................... 93,215 43,842 58,303
Other time deposits..................................... 231,868 213,207 207,101
---------- -------- --------
Total deposits....................................... 801,146 670,246 633,007
Funds borrowed.......................................... 137,956 96,879 71,258
Long term debt - Trust Preferred Securities............. 20,000 -- --
Accrued interest payable................................ 2,348 3,552 3,411
Other liabilities....................................... 18,438 4,583 5,073
---------- -------- --------
Total liabilities....................................... $ 978,888 $775,260 $712,749
---------- -------- --------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized............ -- -- --
Common stock, without par value, $1 stated value;
12,000,000 shares authorized; 4,750,124,
4,623,532, and 4,623,532 shares issued and outstanding
as of September 30, 2001, December 31, 2000 and
September 30, 2000, respectively..................... $ 4,750 $ 4,624 $ 4,624
Surplus................................................. 41,089 40,107 40,107
Retained earnings....................................... 15,294 11,388 9,994
Accumulated other comprehensive income (loss)........... 2,781 (118) (1,830)
Deferred compensation................................... (877) (802) (879)
Loans to officers....................................... (950) (950) (950)
---------- -------- --------
Total stockholders' equity.............................. 62,087 54,249 51,066
---------- -------- --------
Total liabilities and stockholders' equity.............. $1,041,975 $829,509 $763,815
========== ======== ========
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)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
INTEREST INCOME
Loans, including fees.......................................... $38,856 $35,182 $12,832 $13,540
Federal funds sold and interest bearing deposits............... 231 822 23 357
Securities..................................................... 10,233 4,741 3,704 1,813
------- ------- ------- -------
Total interest income....................................... 49,320 40,745 16,559 15,710
------- ------- ------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand..................................... 714 640 239 231
Savings and money market deposit accounts................... 9,252 9,938 2,844 3,543
Other time.................................................. 13,188 10,433 4,273 4,368
Funds borrowed................................................. 4,689 2,499 1,637 1,236
Long-term debt - Trust Preferred Securities.................... 1,219 -- 475 --
------- ------- ------- -------
Total interest expense......................................... $ 29,062 $ 23,510 $9,468 $9,378
------- ------- ------- -------
Net interest income............................................ 20,258 17,235 7,091 6,332
Provision for loan losses...................................... 1,922 1,356 845 383
------- ------- ------- -------
Net interest income after provision for loan losses............ 18,336 15,879 6,246 5,949
------- ------- ------- -------
NON-INTEREST INCOME
Banking, trust services and other income....................... 2,687 2,126 855 745
Net securities gains........................................... 904 92 365 --
------- ------- ------- -------
Total non-interest income................................... 3,591 2,218 1,220 745
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits................................. 6,592 5,906 2,303 2,211
Severance charge............................................... -- 562 -- 562
Occupancy expense, net......................................... 2,833 2,180 985 803
Professional fees.............................................. 1,875 1,651 585 480
Town Square acquisition........................................
Goodwill amortization.......................................... 618 525 206 206
Other non-interest expense..................................... 4,135 2,892 1,272 965
------- ------- ------- -------
Total non-interest expenses................................. 16,053 13,716 5,351 5,227
------- ------- ------- -------
Income before income taxes..................................... 5,874 4,381 2,115 1,467
Income tax provision........................................... 1,592 1,466 524 499
------- ------- ------- -------
Net income..................................................... $ 4,282 $ 2,915 $ 1,591 $ 968
======= ======= ======= =======
Basic earnings per share....................................... $0.91 $0.63 $0.34 $0.21
Diluted earnings per share..................................... $0.88 $0.61 $0.32 $0.20
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
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE DEFERRED LOANS 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............. -- -- 2,915 -- -- -- 2,915
Net decrease in fair
value of Securities
classified as
available-for-sale,
net of income taxes
and
reclassification
adjustments......... -- -- -- 982 -- -- 982
------ ------- ------- ------- ----- ------- -------
Total accumulated
comprehensive income -- -- 2,915 982 -- -- 3,897
------ ------- ------- ------- ----- ------- -------
Cash dividends
declared ($0.75 per
share).............. -- -- (346) -- -- -- (346)
Issuance of common
stock............... 34 346 -- -- -- -- 380
Awards granted......... -- -- -- -- (270) -- (270)
Amortization of
deferred
compensation........ -- -- -- -- 150 -- 150
Repayment of loans to
officers............ -- -- -- -- -- 175 175
------ ------- ------- ------- ----- ------- -------
Balance, September 30,
2000................ $4,624 $40,107 $ 9,994 $(1,830) $(879) $(950) $51,066
====== ======= ======= ======= ===== ===== =======
Balance, January 1,
2001................ $4,624 $40,107 $11,388 $ (118) $(802) $(950) $54,249
Net income............. -- -- 4,282 -- -- -- 4,282
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and
reclassification
adjustments......... -- -- -- 2,899 -- -- 2,899
------ ------- ------- ------- ----- ------- -------
Total accumulated
comprehensive income -- -- 4,282 2,899 -- -- 7,181
------ ------- ------- ------- ----- ------- -------
Cash dividends
declared ($0.08 per
share).............. -- -- (376) -- -- -- (376)
Issuance of common
stock............... 126 982 -- -- -- -- 1,108
Awards granted......... -- -- -- -- (271) -- (271)
Amortization of
deferred
compensation........ -- -- -- -- 196 -- 196
------ ------- ------- ------- ----- ------- -------
Balance, September 30,
2001................ $4,750 $41,089 $15,294 $ 2,781 $(877) $(950) $62,087
====== ======= ======= ======= ===== ===== =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 4,282 $ 2,915
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization............................................... 1,059 816
Goodwill amortization....................................................... 618 525
Johnson Bank Illinois fair value accretion, net............................. (218) (231)
Amortization of deferred compensation....................................... 196 150
Provision for loan losses................................................... 1,922 1,356
Net gain on sale of securities.............................................. (904) (92)
(Decrease) Increase in deferred loan fees.................................. 170 328
(Increase) in accrued interest receivable................................... (1,483) (1,529)
(Decrease) Increase in accrued interest payable............................. (1,205) 1,744
(Increase) Decrease in other assets......................................... (1,821) 51
Increase in other liabilities............................................... 13,853 2,595
-------- --------
Total adjustments........................................................... 12,187 5,713
-------- --------
Net cash provided by operating activities................................... 16,469 8,628
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities.................... 94,550 18,039
Purchase of securities available-for-sale...................................... (196,378) (57,801)
Johnson Bank Illinois acquisition, net of cash received........................ -- (15,763)
Capitalization of The PrivateBank (St. Louis).................................. -- (8,000)
Net loan principal advanced.................................................... (117,248) (102,143)
Bank premises and equipment expenditures....................................... (1,052) (2,396)
-------- --------
Net cash used in investing activities....................................... (220,128) (168,064)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits................................................. 130,910 88,366
Issuance of common stock....................................................... 838 109
Issuance of Trust Preferred Securities......................................... 20,000 --
Dividends paid................................................................. (376) (346)
Net increase in funds borrowed................................................. 41,076 52,999
-------- --------
Net cash provided by financing activities................................... 192,448 141,128
-------- --------
Net (decrease) in cash and cash equivalents.................................... (11,211) (18,308)
Cash and cash equivalents at beginning of year................................. 40,513 44,183
-------- --------
Cash and cash equivalents at end of period..................................... $ 29,302 $ 25,875
======== ========
NON-CASH TRANSACTIONS
(Repayment) Loan to executive officer for purchase of common stock ............ $ -- $ (175)
======== ========
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 nine months
ended September 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 September 30, 2001 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):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2001 2000 2001 2000
------ ------ ------ ------
Net Income............................................... $4,282 $2,915 $1,591 $ 968
Average common shares outstanding........................ 4,682 4,606 4,714 4,628
Average common shares equivalent(1)...................... 160 181 215 196
Weighted average common shares and common share
equivalents........................................... 4,842 4,787 4,929 4,824
Net income per average common share - basic.............. $ 0.91 $ 0.63 $ 0.34 $ 0.21
Net income per average common share - diluted............ $ 0.88 $ 0.61 $ 0.32 $ 0.20
- ---------------------------------------
(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 September 30, 2001 totaled $11.0 million and
is currently being amortized using a straight-line method over fifteen years.
Goodwill amortization for the nine months ended September 30, 2001 totaled
$618,000. Although the assessment to be required by SFAS No. 142 upon adoption
has not yet been completed, under current accounting rules, the Company is also
required to write down the value of goodwill if that goodwill becomes impaired,
and to date, the Company has not incurred any goodwill impairment. Any future
acquisitions completed by the Company will also be subject to this Statement.
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 an impact since the Company does not hold derivative instruments or engage
in hedging activity.
In September 2000, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", a replacement of SFAS No. 125. The
new statement, while largely including the provisions of SFAS 125, revises the
standards for accounting for securitizations and requires certain disclosures.
SFAS No. 140 is effective for all transfers of financial assets occurring after
March 31, 2001 and for disclosures relating to securitization transactions for
fiscal years ending after December 15, 2000. The adoption of SFAS 140 did not
have a material impact on the Company.
NOTE 4 - OPERATING SEGMENTS
For purposes of making operating decisions and assessing performance,
management regards The PrivateBank (Chicago), The PrivateBank (St. Louis),
Wealth Management and the Holding Company as four operating segments. The
Company's investment portfolios are included in total assets and reported in the
results of The PrivateBank (Chicago) and The PrivateBank (St. Louis). The
business segments summarized below and in the following tables are primarily
managed with a focus on various performance objectives including total assets,
total deposits, borrowings, gross loans, total capital and net income.
THE PRIVATEBANK (CHICAGO)
The PrivateBank (Chicago) through its main office located in downtown
Chicago as well as six full-service Chicago suburban locations, provides
personal and commercial banking services primarily to affluent individuals,
professionals, entrepreneurs and their business interests. Until June 23, 2000,
the date The PrivateBank (St. Louis) was established, operations in St. Louis
consisted of a loan production office of The PrivateBank (Chicago) and those
activities are reflected in the segment reporting for The PrivateBank (Chicago).
The PrivateBank (Chicago)'s
10
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)
---------------------------
SEPTEMBER 30,
---------------------------
2001 2000
--------- --------
(IN THOUSANDS)
Total gross loans.................. $659,043 $575,123
Total assets....................... 975,724 748,839
Total deposits..................... 758,641 627,191
Total borrowings................... 115,706 49,008
Total capital...................... 78,781 65,141
Year-to-date net income............ 6,321 4,616
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)
---------------------------
SEPTEMBER 30,
---------------------------
2001 2000
--------- --------
(IN THOUSANDS)
Total gross loans................... $ 58,011 $ 9,795
Total assets........................ 66,557 14,022
Total deposits...................... 42,609 6,288
Total borrowings.................... 17,000 --
Total capital....................... 6,682 7,591
Year-to-date net loss............... (509) (407)
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
-------------------------
SEPTEMBER 30,
-------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Trust assets under administration... $684,842 $785,738
Trust fee revenue................... 2,028 1,655
Year-to-date net income............. 389 85
The following table indicates the breakdown of our trust assets under
administration at September 30, 2001 by account classification and related gross
revenue for the nine months ended September 30, 2001:
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2001
----------------------------
MARKET VALUE REVENUE
------------ -------
ACCOUNT TYPE (IN THOUSANDS)
------------ --------------
Personal trust--managed.............. $246,283 $1,049
Agency--managed...................... 110,614 484
Custody............................. 299,666 436
Employee benefits--managed........... 28,279 59
-------- ------
Total............................ $684,842 $2,028
======== ======
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. (See Note 10.) 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
--------------------------
SEPTEMBER 30,
--------------------------
2001 2000
--------- -------
(IN THOUSANDS)
Total assets....................... $87,037 $73,334
Total borrowings................... 5,250 22,250
Long term debt - Trust Preferred
Securities...................... 20,000 --
Interest expense................... 1,568 785
Total capital...................... 62,087 51,066
Year-to-date net loss.............. (1,919) (1,379)
The following table reconciles the significant differences between the sum
of the reportable segments and the reported consolidated balance of total
assets:
TOTAL ASSETS
---------------------------
SEPTEMBER 30,
---------------------------
2001 2000
---------- --------
(IN THOUSANDS)
Sum of reportable segments.......... $1,129,318 $836,195
Adjustments......................... (87,343) (72,380)
---------- --------
Consolidated PrivateBancorp, Inc.... $1,041,975 $763,815
========== ========
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 September 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 accumulated comprehensive income
for the nine months ended September 30, 2001 and 2000, on a gross basis (in
thousands):
SEPTEMBER 30, 2001
-----------------------------------------
BEFORE TAX NET OF
TAX (BENEFIT) TAX
AMOUNT EXPENSE AMOUNT
------ --------- ------
Net unrealized gains on securities
available-for-sale--
Net unrealized holding gains...................... $4,881 $1,323 $3,558
Less: reclassification adjustment for net gain
included in net income......................... 904 245 659
------ ------ ------
Net unrealized gains.............................. $3,977 $1,078 $2,899
====== ====== ======
13
SEPTEMBER 30, 2001
-----------------------------------------
BEFORE TAX NET OF
TAX (BENEFIT) TAX
AMOUNT EXPENSE AMOUNT
------ --------- ------
Net unrealized gains on securities
available-for-sale--
Net unrealized holding gains...................... $1,580 $ 537 $1,043
Less: reclassification adjustment for net gain
included in net income......................... 92 31 61
------ ------ ------
Net unrealized gains.............................. $1,488 $ 506 $ 982
====== ====== ======
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 September 30, 2001,
December 31, 2000 and September 30, 2000 is presented in the table below:
CURRENT SEPTEMBER 30, DECEMBER 31, SEPTEMBER 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 $17,250
Subordinated note.................. 4.07 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 30,000
FHLB fixed advance................. 6.49 11/13/01 2,000 2,000 --
FHLB fixed advance................. 6.21 12/05/03 30,000 30,000 --
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................. 5.33 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................ 3.44 Daily 40,000 2,700 7,000
Demand repurchase agreements(3).... 2.18 Daily 5,206 2,679 2,008
-------- ------- -------
Total funds borrowed............ $137,956 $96,879 $71,258
======== ======= =======
- ---------------------------------------
(1) Reflects the rate in effect as of September 30, 2001, or at maturity, if
the advance matured prior to September 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 September 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, which amount remains
outstanding as of September 30, 2001.
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 4.07% on August 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, Oak Brook, St. Charles, Lake Forest,
Winnetka, 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 its 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 PrivateBank (St. Louis) is expected to begin to operate profitably
during 2002.
17
RESULTS OF OPERATIONS -
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
NET INCOME
Net income for the third quarter ended September 30, 2001, was $1,591,000,
up 64.4% compared to third quarter 2000 net income of $968,000. Earnings
increased 60.0% to $0.32 per diluted share in the third quarter 2001 compared to
$0.20 per diluted share in the third quarter 2000. Compared to third quarter
2000 earnings of $0.28 per diluted share adjusted to exclude the one-time
severance charge recorded in the third quarter 2000, diluted earnings per share
for the third quarter 2001 increased 14.3%. Net income for the nine months ended
September 30, 2001 increased 46.9% to $4,282,000, or $0.88 per diluted share,
compared to $2,915,000, or $0.61 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 is a result of our balance sheet growth as well as increases in
noninterest income, including security gains, which have offset the impact of
decreasing margins.
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 on a tax equivalent basis was $7.6 million during the
three months ended September 30, 2001 compared to $6.6 million for the third
quarter 2000, an increase of 16.1%. Average earning assets during the third
quarter 2001 were $940.4 million, an increase of 31.1% over the prior year third
quarter. Our net interest margin (tax equivalent net interest income as a
percentage of earning assets) was 3.19% for the three months ended September 30,
2001, compared to 3.59% 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 second quarter of 2001 and the prior year third
quarter. Our earning assets re-price at a faster rate than our interest bearing
liabilities due to our short-term asset sensitive interest rate position. During
the fourth quarter of 2001, we expect to continue to experience declines in net
interest margin as market rates of interest have continued to decline. As
interest rates decline, the portion of our 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.
In the event that interest rates stabilize, we expect that our net interest
margin will stabilize as well.
Net interest income on a tax equivalent basis was $21.4 and $17.9 million
for the nine months ended September 30, 2001 and 2000, respectively. Net
interest margin was 3.26% for the nine months ended September 30, 2001 compared
to 3.64% for the prior year period. The decrease in net interest margin during
the nine months ended September 30, 2001 as compared to the nine months ended
September 30, 2000 is attributable to the decreases in market rates during the
year as well as to the interest expense associated with 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 is
to compress net interest margin in a falling interest rate environment.
18
The following tables present a summary of our net interest income and
related net interest margin, calculated on a tax equivalent basis (dollars in
thousands):
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
2001 2000
---------------------------------- ---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ -------- ---- ----------- -------- ----
Short-term investments............ $ 2,429 $ 23 3.70% $ 21,561 $ 357 6.47%
Investment securities(1).......... 248,407 4,221 6.80% 113,900 2,033 7.19%
Loans, net of unearned
discount(2).................... 689,558 12,832 7.33% 582,614 13,540 9.16%
-------- ------- -------- -------
Total earning assets.............. $940,394 $17,076 7.18% $717,184 $15,930 8.77%
======== ======= ======== =======
Interest-bearing deposits......... $707,780 $ 7,356 4.12% $576,890 $ 8,141 5.60%
Funds borrowed.................... 125,623 1,637 5.10% 66,587 1,237 7.27%
Long-term debt - Trust Preferred
Securities..................... 20,000 475 9.50% -- --
-------- ------- -------- -------
Total interest-bearing liabilities $853,403 $ 9,468 4.39% $643,477 $ 9,378 5.77%
======== ------- ======== -------
Tax equivalent net interest income $ 7,608 $ 6,552
======= =======
Net interest spread............... 2.79% 3.00%
Net interest margin............... 3.19% 3.59%
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
2001 2000
---------------------------------- ---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------ -------- ---- ----------- -------- ----
Short-term investments............ $ 5,790 $ 231 5.26% $ 18,026 $ 822 5.99%
Investment securities(1).......... 216,554 11,398 7.02% 101,780 5,400 7.07%
Loans, net of unearned
discount(2).................... 646,238 38,856 7.98% 526,969 35,182 8.83%
-------- ------- -------- -------
Total earning assets.............. $868,582 $50,485 7.72% $646,775 $41,404 8.48%
======== ======= ======== =======
Interest-bearing deposits......... $661,838 $23,153 4.68% $526,162 $20,950 5.30%
Funds borrowed.................... 109,276 4,689 5.66% 48,501 2,560 6.93%
Long-term debt - Trust Preferred
Securities(3).................. 17,216 1,219 9.34% -- --
-------- ------- -------- -------
Total interest-bearing liabilities $788,330 $29,061 4.91% $574,663 $23,510 5.44%
======== ------- ======== -------
Tax equivalent net interest income $21,424 $17,894
======= =======
Net interest spread............... 2.81% 3.04%
Net interest margin............... 3.26% 3.64%
- ---------------------------------------
(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 $517,000 and $220,000 in the third quarter of 2001 and 2000,
respectively, and $1,166,000 and $659,000 for the nine 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
September 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 SEPTEMBER 30, 2001
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000
CHANGE CHANGE
DUE TO DUE TO CHANGE TOTAL
RATE VOLUME DUE TO MIX CHANGE
------ ------ ---------- ------
(DOLLARS IN THOUSANDS)
INTEREST INCOME/ EXPENSE FROM:
Short-term investments................ $ (151) $ (312) $ 129 $ (334)
Investment securities................. (112) 2,438 (138) 2,188
Loans, net of unearned discount....... (2,687) 2,469 (490) (708)
------- ------ ----- ------
Total interest income.............. (2,950) 4,595 (499) 1,146
------- ------ ----- ------
Interest-bearing deposits............. (2,152) 1,848 (481) (785)
Funds borrowed........................ (364) 1,082 (318) 400
Long-term debt - Trust Preferred
Securities......................... -- -- 475 475
------- ------ ----- ------
Total interest expense............. (2,516) 2,930 (324) 90
------- ------ ----- ------
Net interest income................... $ (434) $1,665 $(175) $1,056
======= ====== ===== ======
NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000
CHANGE CHANGE
DUE TO DUE TO CHANGE TOTAL
RATE VOLUME DUE TO MIX CHANGE
------ ------ ---------- ------
(DOLLARS IN THOUSANDS)
INTEREST INCOME/ EXPENSE FROM:
Short-term investments................ $ (98) $ (548) $ 55 $ (591)
Investment securities................. (38) 6,069 (33) 5,998
Loans, net of unearned discount....... (3,350) 7,877 (853) 3,674
------- ------ ----- ------
Total interest income.............. (3,486) 13,398 (831) 9,081
------- ------ ----- ------
Interest-bearing deposits............. (2,440) 5,378 (735) 2,203
Funds borrowed........................ (461) 3,150 (560) 2,129
Long-term debt - Trust Preferred
Securities......................... -- -- 1,219 1,219
------- ------ ----- ------
Total interest expense............. (2,901) 8,528 (76) 5,551
------- ------ ----- ------
Net interest income................... $ (585) $4,870 $(755) $ 3,530
======= ====== ===== ======
PROVISION FOR LOAN LOSSES
Our provision for loan losses was $845,000 for the third quarter of 2001,
compared to $383,000 for the comparable period in 2000. Our provision for loan
losses was $1.9 million for the nine months ended September 30, 2001 compared to
$1.4 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 as well as increases in nonperforming loans during 2001.
20
We maintain an allowance management deems adequate 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 increased to $1.2 million, reflecting
an increase of $475,000 or 63.8% compared to the third quarter of 2000. The
increase in non-interest income is attributable primarily to $365,000 of net
gains on the sale of investment securities. No securities were sold in the prior
year quarter. During the third quarter 2001, we continued to take advantage of
volatility in the financial markets while repositioning our investment portfolio
for protection in the declining market rate environment. Banking, wealth
management and other income increased $110,000 over the prior year quarter.
Trust assets under administration decreased to $684.8 million at September 30,
2001 compared to $785.7 million at September 30, 2000, a decrease of 12.8%,
attributable primarily to declines in equity valuations since the prior year
quarter, which was partially offset by increases in new business. Despite the
decline in the level of trust assets under administration, wealth management fee
revenue increased by $65,000 to $630,000 for the quarter ended September 30,
2001, an increase of 11.5% over the prior year quarter. The increase reflects a
continued change in the mix of wealth management accounts to more profitable
account arrangements.
Non-interest income increased approximately $1,373,000 or 61.9% to $3.6
million for the first three quarters of 2001, as compared to $2.2 million for
the comparable period in 2000. Wealth management income increased by $373,000 to
$2.0 million for the nine months ended September 30, 2001, reflecting an
increase of 22.5% over the nine months ended September 30, 2000. Banking
services income increased by approximately $235,000 to $659,000 for the nine
months ended September 30, 2001 as compared to $424,000 for the nine months
ended September 30, 2000. Net securities gains for the nine months ended
September 30, 2001 were $904,000 compared to $92,000 for the comparable prior
year period. During the nine months ended September 30, 2001, we were able to
continue 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 relative to
the securities that were sold.
NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
------ ------ ------ -------
(IN THOUSANDS) (IN THOUSANDS)
Salaries and employee benefits........ $2,303 $2,211 $ 6,592 $ 5,906
Severance charge...................... -- 562 -- 562
Occupancy............................. 985 803 2,833 2,180
Professional fees..................... 585 480 1,875 1,651
Marketing............................. 275 241 889 845
Data processing....................... 303 218 875 571
Postage, telephone and delivery....... 200 147 581 430
Office supplies and printing.......... 167 100 359 335
Insurance............................. 88 84 269 222
Goodwill.............................. 206 206 618 525
Other expense......................... 239 175 1,162 489
------ ------ ------- -------
Total non-interest expense............ $5,351 $5,227 $16,053 $13,716
====== ====== ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2001:
Non-interest expense increased to $5.4 million in the third quarter of 2001
from $4.7 million in the third quarter of 2000, an increase of 14.9%, adjusted
to exclude the prior year, one-time severance charge. In the quarter ended
September 30, 2000, we incurred a one-time charge of $562,000 pre-tax,
reflecting expenses associated with severance packages for former executives as
well as costs incurred to secure their replacements. The increase in non-
21
interest expense between quarters reflects the growth of the organization during
the twelve-month period ended September 30, 2001. Our efficiency ratio was 60.6%
for the third quarter 2001 as compared to 63.9% for the third quarter 2000,
excluding the effect of the one-time severance charge. On a tax-equivalent
basis, this ratio indicates that in the third quarter of 2001, we spent 60.6
cents to generate each dollar of revenue, compared to 63.9 cents in the third
quarter of 2000. During the remainder of 2001, we expect to continue to report
improvements in our operating efficiency ratio for 2001 as compared to 2000.
However, we 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, we expect the efficiency ratio to remain high until business
development efforts at the new offices generate revenue sufficient to offset the
related operating expenses.
Salaries and benefits increased $92,000, or 4.2% during the third quarter
2001 as compared to the year ago quarter, reflecting the increased level of
full-time equivalent employees to 145 people at September 30, 2001 as compared
to 134 people at September 30, 2000. The increase is due primarily to overall
growth in the organization including the addition of two senior officers
responsible for establishing the Geneva office.
Occupancy expense increased to $985,000 during the third quarter 2001,
reflecting an increase of 22.7% over the prior year quarter. Occupancy expense
during the third quarter 2001 reflects the addition of a new floor of office
space in the downtown Chicago office dedicated specifically to our Wealth
Management Area, the addition of a new office in Geneva, Illinois, as well as
depreciation of certain fixed assets, software and equipment. This quarter we
purchased and capitalized new equipment and software that is being depreciated
over a period of three to five years, which has had the effect of increasing
occupancy expense during the third quarter 2001.
Data processing expenses increased to $303,000 during the quarter, a 39.0%
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 third 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 third
quarter 2001, an increase of 36.1% over the prior year quarter. The addition of
the Geneva office 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. Telephone
utilization has increased during the third quarter 2001 as compared to the prior
year quarter due to growth in the organization.
Office supplies and printing costs increased to $167,000 during the second
quarter 2001, a 67.0% increase as compared to the prior year quarter. During the
third quarter, we recognized an accumulation of check printing charges, which
were not passed on to customers.
Insurance expense increased to $88,000, an increase of 4.8% over the prior
year quarter. The additions of additional rental office space and an increase in
the number of employees have contributed to increased levels of insurance costs
during the third quarter 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001:
Non-interest expense increased to $16.1 million for the first nine months
of 2001 from $13.7 million for the first nine months of 2000, an increase of
17.0%. This increase is due to expenses incurred in connection with our
expansion initiatives, namely the acquisition in early 2000 of two new offices
as a result of the Johnson Bank Illinois acquisition, the establishment of the
St. Louis office and the opening of the Geneva office. In the second quarter of
2001, our efficiency ratio decreased to 64.2% for the first nine months of 2001
as compared to 65.4% for the first nine months of 2000, excluding the effect of
the one-time severance charge recognized in 2000. The improvement in our
efficiency ratio highlights growth in net interest income (on a tax equivalent
basis) and non-interest income as compared to the prior year period, which more
than offset the increase in non-interest expense.
Salaries and benefits increased 11.6% during the first nine months of 2001
as compared to last year, reflecting the Company's increased level of full-time
equivalent employees to 145 people at September 30, 2001 as compared to 134
people at September 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.
22
Occupancy expense increased to $2.8 million for the first nine months of
2001, from $2.2 million for the first nine months of 2000, reflecting an
increase of 30.0%.
During the nine months ended September 30, 2001, professional fees
increased by $224,000 over the prior year's first nine months. The 13.6%
increase in professional fees reflects increased legal, accounting and
information-system consultation services.
Office supplies and printing expenses increased 7.2% for the first nine
months of 2001 from the year-ago period's level of $335,000 to $359,000. Data
processing fees increased from $571,000 for the first nine months of 2000 to
$875,000 for the first nine months of 2001, an increase of 53.2%, attributable
to increased demand from new branch offices.
Other non-interest expense increased by $673,000 to $1.2 million for the
nine months ended September 30, 2001 as compared to the prior year nine-month
period. This increase reflects non-recurring charges recognized in June 2001 in
the amount of $561,000 related to the resolution of certain items associated
with prior systems conversions.
INCOME TAXES
The following table shows our income before income taxes, applicable income
taxes and effective tax rate for the nine months ended September 30, 2001 and
2000, respectively (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
------ ------
Income before taxes.......... $5,874 $4,381
Income tax provision......... 1,592 1,466
Effective tax rate........... 27.1% 33.5%
The lower effective tax rate for the third 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 our securities
portfolio. Tax-exempt municipal securities increased from $37.4 million at
December 31, 2000 to $95.1 million at September 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 increased to $1.0 billion at September 30, 2001, an increase
of $212.5 million, or 25.6% over total assets of $829.5 million at December 31,
2000, and an increase of $278.2 million, or 36.4% over $763.8 million at
September 30, 2000. The balance sheet growth during the nine months ended
September 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 funds borrowed, increases in
deposits and an increase in long-term debt that resulted from the issuance of
$20.0 million of trust preferred securities in the first quarter of 2001.
LOANS
Total loans increased to $716.1 million, an increase of $116.7 million, or
19.5%, from $599.4 million at December 31, 2000 and an increase of $131.2
million, or 22.4%, from $584.9 million at September 30, 2000.
The PrivateBank (St. Louis) had loans outstanding of $58.0 million as of
September 30, 2001, growth of $32.8 million since December 31, 2000. The
remaining loan growth of $83.9 million experienced by the Company since December
31, 2000 was generated by The PrivateBank (Chicago). All of The PrivateBank
(Chicago) offices posted strong gains in loan volume during the first nine
months of 2001.
The following table sets forth our loan portfolio net of unearned discount
by category (in thousands) at the following dates:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000
------------- ------------ -------------
LOANS
Commercial real estate........... $273,970 $206,464 $198,773
Residential real estate.......... 91,844 86,052 87,156
Commercial....................... 141,066 137,343 144,321
Personal(1)...................... 116,775 108,427 103,567
Construction..................... 92,462 61,143 51,102
-------- -------- --------
Total loans................... $716,117 $599,429 $584,919
======== ======== ========
- ---------------------------------------
(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. We maintain 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 our 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 1.06% at September 30, 2001, 1.02% at
December 31, 2000 and 1.02% at September 30, 2000. Management 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 $183,000 for the quarter ended September 30, 2001
versus net charge-offs of $344,000 in the year earlier period. The provision for
loan losses was $845,000 in the third quarter of 2001, versus $383,000 in the
third quarter of 2000. Management judges the adequacy of the allowance by
formally reviewing and
24
analyzing potential problem credits, which entails assessing current and
historical loss experience, loan portfolio trends, prevailing economic and
business conditions, specific loan review and other relevant factors.
Following is a summary of changes in the allowance for loan losses for the
nine months ended September 30, 2001 and 2000 (in thousands):
2001 2000
------ ------
Balance, January 1.............................................. $6,108 $4,510
Johnson Bank Illinois acquisition allowance for loan loss....... -- 864
Provisions charged to earnings.................................. 1,922 1,356
Loans charged-off, net of recoveries............................ (472) (739)
------ ------
Balance, September 30........................................... $7,558 $5,991
====== ======
NONPERFORMING LOANS
The following table classifies our non-performing loans as of the dates shown:
9/30/01 6/30/01 3/31/01 12/31/00 9/30/00
------- ------- ------- -------- -------
Nonaccrual loans...................... $2,658 $1,504 $ 117 $ 24 $324
Loans past due 90 days or more........ 3,766 938 2,847 1,421 242
------ ------ ------ ------ ----
Total nonperforming loans............. 6,424 2,442 2,964 1,445 566
Other real estate owned............... 62 -- -- -- --
------ ------ ------ ------ ----
Total nonperforming assets............ $6,486 $2,442 $2,964 $1,445 $566
====== ====== ====== ====== ====
Total nonaccrual loans to total loans. .37% .23% .02% NM .06%
Total nonperforming loans to total
loans.............................. .90% .37% .47% .24% .10%
Total nonperforming assets to total
assets............................. .62% .26% .34% .17% .07%
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.
Nonaccrual loans were $2.7 million at September 30, 2001 as compared to
$24,000 at December 31, 2000. Nonaccrual loans increased by $1.2 million since
June 30, 2001. The increase relates primarily to a single credit relationship at
The PrivateBank (St. Louis). Loans delinquent over 90 days increased by $2.8
million since June 30, 2001. This increase relates primarily to the timing of
renegotiations and renewals and is not deemed to reflect deterioration of credit
quality. As of September 30, 2001, we had one loan that was converted to other
real estate owned in the amount of $62,000. Subsequent to September 30, 2001, we
sold the other real estate owned property with full recovery of the recorded
property value plus interest fees and collection costs.
25
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities at September
30, 2001 and December 31, 2000, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
--------------------------------------------------------
SEPTEMBER 30, 2001
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
U.S. Government Agency Obligations....... $ 313 $ 30 $ -- $ 343
U.S. Government Agency Mortgage Backed
Securities and Collateralized
Mortgage Obligations.................. 91,350 1,655 (28) 92,977
Corporate Collateralized Mortgage
Obligations........................... 24,270 761 -- 25,031
Tax Exempt Municipal Securities.......... 93,489 1,729 (139) 95,079
Taxable Municipal Securities............. 1,671 56 -- 1,727
Federal Home Loan Bank Stock............. 61,964 -- -- 61,964
Other.................................... 2,049 149 -- 2,198
-------- ------ ------- --------
Total.................................... $275,106 $4,380 $ (167) $279,319
======== ====== ======= ========
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
--------------------------------------------------------
DECEMBERR 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 our asset/liability management strategy in response to changes in interest
rates, liquidity needs or significant prepayment risk. Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital. At September 30, 2001, net unrealized gains of $2.8 million resulted in
an increase in reported stockholders' equity. This was an increase of $2.9
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 nine 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, we benefited from changes made to the
investment portfolio as a result of our continued implementation of our
asset/liability management strategies.
Securities available for sale increased to $279.3 million at September 30,
2001, up 62.2% 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 our asset/liability management strategy. Tax exempt
municipal securities increased by $58.4 million, providing net interest margin
protection in a falling interest-rate environment. Collateralized mortgage
obligations increased $23.5 million in the first nine months of 2001. The net
increase in collateralized
26
CMO's reflects sales of specific CMO's that posed a heightened risk of
prepayments and accelerated premium amortization in a lower market rate
environment. Purchases of new collateralized CMO's have included pools of
mortgages with built-in prepayment penalties and a lower risk of accelerated
premium amortization. Investments in Federal Home Loan Bank Stock increased by
$26.8 million as a result of purchases made to take advantage of the favorable
dividend yield in addition to the liquid nature of the investment.
DEPOSITS AND FUNDS BORROWED
The following table presents the balances of deposits by category and each
category as a percentage of total deposits at September 30, 2001, December 31,
2000 and September 30, 2000:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000
--------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL
------- -------- ------- -------- ------- --------
(DOLLARS IN THOUSANDS)
Demand.................. $ 68,789 8.6% $ 61,789 9.2% $ 55,831 8.8%
Savings................. 4,278 0.5% 8,242 1.2% 2,703 0.4%
Interest-bearing demand. 45,711 5.7% 51,301 7.7% 37,747 6.0%
Money market............ 357,285 44.6% 297,043 44.3% 271,322 42.9%
Certificates of deposit. 231,868 29.0% 208,029 31.0% 207,101 32.7%
Brokered deposits....... 93,215 11.6% 43,842 6.6% 58,303 9.2%
-------- ----- -------- ----- -------- -----
Total deposits....... $801,146 100.0% $670,246 100.0% $633,007 100.0%
======== ===== ======== ===== ======== =====
Total deposits of $801.1 million at September 30, 2001 represent an
increase of $130.9 million or 19.5% as compared to total deposits of $670.2
million as of December 31, 2000. Noninterest-bearing deposits increased by 11.3%
to $68.8 million at September 30, 2001 as compared to $61.8 million at December
31, 2000. Interest-bearing demand deposits decreased by 10.9% to $45.7 million
as compared to $51.3 million at December 31, 2000. Money market accounts
increased by $60.2 million to $357.3 million at September 30, 2001 as compared
to $297.0 million at December 31, 2000. Certificates of deposits increased by
$23.8 million to $231.9 million at September 30, 2001 as compared to $208.0
million at December 31, 2000. Brokered deposits increased by 112.6% to $93.2
million at September 30, 2001 as compared to $43.8 million at December 31, 2000.
We continued to utilize brokered deposits during the third quarter 2001 as a
source of funding for growth in the loan and investment portfolios. Certain
broker deposits include call option provisions, which provide us with the
opportunity to repay the certificates of deposit on a specified date prior to
the contractual maturity date. Given the current level of market interest rates,
we expect to call $11.2 million and $48.0 million of brokered deposits in the
fourth quarter of 2001 and the first quarter of 2002, respectively. We expect to
replace the retired brokered deposits with new broker deposits at lower interest
rates.
Our 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. We have periodically used the services of the FHLB
for short-term funding needs and other correspondent services. During 2001, we
have continued to utilize FHLB advances to fund growth and liquidity of the
banks.
A summary of all funds borrowed and outstanding at September 30, 2001,
December 31, 2000 and September 30, 2000 is presented in the table below:
27
CURRENT SEPTEMBER 30, DECEMBER 31, SEPTEMBER 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 $17,250
Subordinated note..................... 4.07 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 30,000
FHLB fixed advance.................... 6.49 11/13/01 2,000 2,000 --
FHLB fixed advance.................... 6.21 12/05/03 30,000 30,000 --
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.................... 5.33 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................... 3.44 Daily 40,000 2,700 7,000
Demand repurchase agreements(3)....... 2.18 Daily 5,206 2,679 2,008
-------- ------- -------
Total funds borrowed............... $137,956 $96,879 $71,258
======== ======= =======
- ---------------------------------------
(1) Reflects the rate in effect as of September 30, 2001, or at maturity, if
the advance matured prior to September 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.
The increase in funds borrowed as of September 30, 2001 as compared to
December 31, 2000, reflects an increase in our fed funds purchased position and
increases in FHLB fixed advances, offset by a decrease in our borrowings under a
revolving line of credit. The increases in funds borrowed have been utilized to
fund growth in loans and investment securities as well as liquidity at our
banks.
CAPITAL RESOURCES
During the first quarter 2001, we issued $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 September 30, 2001, $19.8 million
of the trust preferred securities was treated as Tier 1 capital. Stockholders'
equity rose to $62.1 million at September 30, 2001, an increase of $7.8 million
from the 2000 year-end level, due to an increase in year-to-date 2001 net income
and an increase in Accumulated Other Comprehensive Income, reflecting a $2.9
million increase (net of tax) in the fair value of the available-for-sale
investment portfolio at September 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
28
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 our consolidated measures of capital at
September 30, 2001, December 31, 2000 and September 30, 2000:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2001 2000 2000
------------- ------------ -------------
Leverage ratio........................ 6.99% 5.54% 5.54%
Tier 1 risk-based capital ratio....... 8.88% 6.47% 6.72%
Total risk-based capital ratio........ 10.55% 8.15% 8.51%
Total equity to total assets.......... 5.96% 6.53% 6.69%
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 September 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 our ability to meet maturing obligations and our
existing commitments, to withstand fluctuations in deposit levels, to fund our
operations and to provide for clients' credit needs. Our liquidity principally
depends on cash flows from operating activities, investment in and maturity of
assets, changes in balances of deposits and borrowings and our ability to borrow
funds in the money or capital markets.
Net cash inflows provided by operations were $16.1 million in the first
nine months of 2001 compared to a net inflow of $8.6 million a year earlier. Net
cash outflows from investing activities were $219.8 million in the first nine
months of 2001 compared to a net cash outflow of $168.1 million a year earlier.
Cash inflows from financing activities in the first nine months of 2001 were
$192.4 million compared to a net inflow of $141.1 million in the first nine
months of 2000.
In the event of short-term liquidity needs, our 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, we continued to utilize brokered deposits as an alternative source of
funding. Brokered deposits represented 11.6% of total deposits at September 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 our financial strategy, we attempt to manage the
impact of fluctuations in market interest rates on our net interest income. This
effort entails providing a reasonable balance between interest rate risk, credit
risk, liquidity risk and maintenance of yield. Asset/liability management policy
is established by our Board of Directors and is implemented by management. Our
asset/liability policy sets standards within which we are expected to operate.
These standards include guidelines for exposure to interest rate fluctuations,
liquidity, loan limits as a percentage of funding sources, exposure to
correspondent banks and brokers, and reliance on non-core deposits. The policy
also states the reporting requirements to the Board of Directors. The investment
policy complements the asset/liability policy by establishing criteria by which
we may purchase securities. These criteria include approved types of securities,
brokerage sources, terms of investment, quality standards, and diversification.
29
We measure the impact of interest rate changes on our income statement
through the use of gap analysis. The gap represents the net position of assets
and liabilities subject to repricing in specified time periods. During any given
time period, if the amount of rate sensitive liabilities exceeds the amount of
rate sensitive assets, a company would generally be considered negatively gapped
and would benefit from falling rates over that period of time. Conversely, a
positively gapped company would generally benefit from rising rates. The
following tables illustrate the estimated interest rate sensitivity and periodic
and cumulative gap positions calculated as of September 30, 2001 and December
31, 2000:
SEPTEMBER 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.............................. $414,617 $ 63,655 $180,833 $ 57,012 $716,117
Investments........................ 60,357 15,053 55,128 144,568 275,106
Federal funds sold................. 2,959 -- -- -- 2,959
-------- -------- -------- -------- --------
Total interest-earning assets...... $477,933 $ 78,708 $235,961 $201,580 $994,182
======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand............ $ -- $ -- $ -- $ 45,711 $ 45,711
Savings and money market........... 203,573 153,712 -- 4,278 361,563
Time deposits...................... 117,563 173,851 29,930 3,739 325,083
Funds borrowed..................... 52,456 28,500 77,000 -- 157,956
-------- -------- -------- -------- --------
Total interest-bearing liabilities. $373,592 $356,063 $106,930 $ 53,728 $890,313
======== ======== ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA)........ $477,933 $556,641 $792,602 $994,182
Rate sensitive liabilities (RSL)... 373,592 729,655 836,585 890,313
GAP (GAP=RSA-RSL).................. 104,341 (173,014) (43,983) 103,869
RSA/RSL............................ 127.93% 76.29% 94.74% 111.67%
RSA/Total assets................... 45.87 53.42 76.07 95.41
RSL/Total assets................... 35.85 70.03 80.29 85.44
GAP/Total assets................... 10.01 16.60 4.22 9.97
GAP/Total RSA...................... 21.83 31.08 5.55 10.45
30
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 September 30, 2001 and December 31, 2000. The effects
are determined through the use of a simulation model based on our earning asset
and interest-bearing liability portfolios, assuming the size of these portfolios
remains constant from the balance sheet date throughout the one-year measurement
period. The simulation assumes that assets and liabilities accrue interest on
their current pricing basis. Assets and liabilities then reprice based on their
terms and remain at that interest rate through the end of the measurement
period. The model attempts to illustrate the potential change in net interest
income if the foregoing occurred.
---------------------------------------------------
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------------ ----------------------
+200 -200
+200 BASIS -200 BASIS BASIS BASIS
POINTS POINTS POINTS POINTS
---------- ---------- ------ ------
Percentage change in net interest income due to
an immediate 200 basis point change in
interest rates over a one-year time horizon.... 6.9% -7.6% 3.7% -5.5%
This table shows that if there had been an instantaneous parallel shift in
the yield curve of -200 basis points on September 30, 2001 and December 31,
2000, we would suffer a decline in net interest income of -7.6% and -5.5%,
respectively over each one-year period. Conversely, a shift of +200 basis points
would increase net interest income 6.9% over a one-year horizon based on
September 30, 2001 balances, as compared to 3.7% measured on the basis of the
December 31, 2000 portfolio.
Changes in the effect on net interest income from a 200 basis point
movement at September 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 within the one year time frame. Although we are negatively gapped
within one year, the asset sensitive position of the balance sheet in the first
90 days of the simulation coupled with the timing of repricing within the 91 to
365 day bucket, lead to the increase in net interest income from a +200 basis
point move. The
31
difference in the effect on net interest income at September 30, 2001 as
compared to December 31, 2000 is due to the differences in the timing, balances,
and current rates versus simulated rates of repricing assets and liabilities.
Management's likely reaction to changes in interest rates is incorporated
in assumptions made in these calculations. Differences in these assumptions
between the reporting periods have also had the effect of reducing the impact of
a changing interest rate environment.
The preceding sensitivity analysis is based on numerous assumptions
including the nature and timing of interest rate levels including the shape of
the yield curve, prepayments on loans and securities, changes in deposit levels,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows and others. While assumptions are developed based upon
current economic and local market conditions, we cannot make any assurances as
to the predictive nature of these assumptions including how client preferences
or competitor influences might change.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. We intend
such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and are including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe our future plans, strategies and expectations, can generally be
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. Our ability to predict results or
the actual effect of future plans or strategies is inherently uncertain. Factors
which could have a material adverse effect on our operations and future
prospects include, but are not limited to, fluctuations in market rates of
interest and loan and deposit pricing; a deterioration of general economic
conditions in our market areas; legislative or regulatory changes; adverse
developments in our loan or investment portfolios; 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.
32
PART II
ITEM 1. LEGAL PROCEEDINGS
Although our 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
None.
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]
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.
Exhibit 10.1 First Amendment to lease between Columbia Lisle Limited
Partnership and the PrivateBank and Trust Company dated May 31, 2001.
Exhibit 10.2 Employment Agreement entered into July 1, 2001 by and
between PrivateBancorp, Inc. and Ralph B. Mandell.
(b) Filings on Form 8-K.
33
(1) Current Report on Form 8-K dated July 23, 2001, filed with the
SEC on July 23, 2001.
(2) Current Report on Form 8-K dated July 25, 2001, filed with the
SEC on July 25, 2001.
34
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: November 14, 2001
35
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.
10.1 First Amendment to lease between Columbia Lisle Limited Partnership
and the PrivateBank and Trust Company dated May 31, 2001.
10.2 Employment Agreement entered into July 1, 2001 by and between
PrivateBancorp, Inc. and Ralph B. Mandell.