SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] 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 by checkmark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
================================================================================
CLASS OUTSTANDING AS OF MAY 12, 2003
- --------------------------------------------------------------------------------
Common, no par value 7,768,134
================================================================================
PRIVATEBANCORP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
Number
------
Selected Financial Data....................................................... 2
Part I ..................................................................... 5
Item 1. Financial Statements........................................ 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................37
Item 4. Controls and Procedures.....................................40
Part II .....................................................................41
Item 1. Legal Proceedings...........................................41
Item 2. Changes in Securities and Use of Proceeds...................41
Item 3. Defaults upon Senior Securities.............................41
Item 4. Submission of Matters to a Vote of Security Holders.........41
Item 5. Other Information...........................................41
Item 6. Exhibits and Reports on Form 8-K............................41
Signatures....................................................................43
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
---------------------------------------------------------------
03/31/03 12/31/02 09/30/02 06/30/02 03/31/02
---------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
INTEREST INCOME:
Loans, including fees........................ $ 15,167 $ 14,043 $ 13,704 $ 12,665 $ 12,148
Federal funds sold and interest-bearing
deposits.................................. 25 63 38 8 17
Securities................................... 5,379 5,507 4,557 4,886 4,206
---------- ----------- ----------- ----------- -----------
Total interest income........................ 20,571 19,613 18,299 17,559 16,371
---------- ----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest-bearing demand deposits.......... 128 129 168 168 171
Savings and money market deposit accounts. 1,709 1,923 1,923 1,763 1,719
Other time deposits....................... 3,940 4,037 3,976 3,810 4,323
Funds borrowed............................ 1,312 1,226 1,304 1,353 1,309
Trust preferred interest expense.......... 485 485 485 485 485
---------- ----------- ----------- ----------- -----------
Total interest expense................. 7,574 7,800 7,856 7,579 8,007
---------- ----------- ----------- ----------- -----------
Net interest income....................... 12,997 11,813 10,443 9,980 8,364
Provision for loan losses................. 956 914 828 1,609 511
---------- ----------- ----------- ----------- -----------
Net interest income after provision for
loan losses............................ 12,041 10,899 9,615 8,371 7,853
---------- ----------- ----------- ----------- -----------
NON-INTEREST INCOME:
Banking, wealth management services and
other income........................... 2,701 1,975 1,763 1,802 1,542
Securities (losses) gains, net............ (55) (313) 280 274 (230)
Trading losses on swap.................... (230) (282) (662) -- --
---------- ----------- ----------- ----------- -----------
Total non-interest income.............. 2,416 1,380 1,381 2,076 1,312
---------- ----------- ----------- ----------- -----------
NON-INTEREST EXPENSE:
Salaries and employee benefits............ 4,778 3,903 3,393 3,469 3,214
Occupancy expense, net.................... 1,419 1,319 1,227 1,206 1,139
Data processing........................... 393 393 433 374 308
Marketing................................. 486 557 351 374 365
Amortization of other intangibles......... 42 -- -- -- --
Professional fees......................... 1,284 774 997 1,027 891
Insurance................................. 168 137 118 106 93
Other expense............................. 849 851 569 557 462
---------- ----------- ----------- ----------- -----------
Total non-interest expense................ 9,419 7,934 7,088 7,113 6,472
---------- ----------- ----------- ----------- -----------
Minority interest expense................. 38 -- -- -- --
Income before income taxes................ 5,000 4,345 3,908 3,334 2,693
---------- ----------- ----------- ----------- -----------
Income tax provision...................... 1,397 1,125 875 724 549
---------- ----------- ----------- ----------- -----------
Net income................................... $ 3,603 $ 3,220 $ 3,033 $ 2,610 $ 2,144
========== =========== =========== =========== ===========
PER SHARE DATA:
Basic earnings............................... $ 0.47 $ 0.43 $ 0.41 $ 0.35 $ 0.29
Diluted earnings............................. 0.44 0.41 0.39 0.33 0.28
Dividends.................................... 0.040 0.027 0.027 0.020 0.020
Book value (at end of period)................ 12.29 11.56 10.71 9.71 8.80
All previously reported share and per share data has been restated to reflect
the 3-for-2 stock split which occurred on January 17, 2003.
2
QUARTER ENDED
---------------------------------------------------------------
03/31/03 12/31/02 09/30/02 06/30/02 03/31/02
---------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities(1).......................... $ 505,877 $ 487,020 $ 403,192 $ 392,090 $ 388,728
Total loans.................................. 1,018,196 965,641 913,197 865,778 782,434
Total assets................................. 1,628,995 1,543,414 1,404,326 1,332,008 1,231,208
Total deposits............................... 1,365,344 1,205,271 1,163,327 1,074,475 981,865
Funds borrowed............................... 124,933 209,954 125,422 154,499 155,523
Trust preferred securities................... 20,000 20,000 20,000 20,000 20,000
Total stockholders' equity................... 95,373 89,092 79,281 71,697 64,926
Wealth management assets under management.... 1,204,239 1,239,779 693,869 733,939 758,242
Lodestar assets under management............. 501,276 481,904 -- -- --
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(2)(8)................. 3.68% 3.56% 3.46% 3.53% 3.18%
Net interest spread(3).................... 3.53 3.37 3.27 3.34 2.96
Non-interest income to average assets..... 0.62 0.38 0.41 0.65 0.36
Non-interest expense to average assets.... 2.41 2.16 2.08 2.24 2.07
Net overhead ratio(4)..................... 1.80 1.78 1.68 1.59 1.71
Efficiency ratio(5)....................... 58.5 57.3 56.3 55.4 61.1
Return on average assets(6)............... 0.92 0.88 0.89 0.82 0.73
Return on average equity(7)............... 15.49 15.99 15.86 15.07 13.35
Dividend payout ratio..................... 8.62 6.14 6.51 5.66 6.88
Asset Quality Ratios:
Non-performing loans to total loans....... 0.35% 0.14% 0.33% 0.37% 0.37%
Allowance for loan losses to:
total loans............................ 1.22 1.20 1.17 1.14 1.12
non-performing loans................... 355 828 357 313 303
Net charge-offs (recoveries) to average
total loans............................ 0.03 (0.01) 0.04 0.24 0.01
Non-performing assets to total assets..... 0.22 0.09 0.21 0.24 0.24
Non-accrual loans to total loans.......... 0.15 0.08 0.05 0.07 0.19
Balance Sheet Ratios:
Loans to deposits......................... 74.6% 80.1% 78.5% 80.6% 79.7%
Average interest-earning assets to
average interest-bearing liabilities... 107.1 108.2 108.0 107.8 107.5
Capital Ratios:
Total equity to total assets.............. 5.85% 5.77% 5.65% 5.38% 5.27%
Total risk-based capital ratio............ 8.30 8.29 9.10 9.37 9.93
Tier 1 risk-based capital ratio........... 6.99 6.91 7.61 7.84 8.37
Leverage ratio............................ 5.27 5.47 5.91 6.07 6.25
<FN>
- ------------------
(1) The entire securities portfolio was classified as "available-for-sale"
for the periods presented.
(2) Net interest income, on a tax-equivalent basis, divided by average
interest-earning assets.
(3) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(4) Non-interest expense less non-interest income divided by average total
assets.
(5) Non-interest expense divided by the sum of net interest income (tax
equivalent) plus non-interest income.
(6) Net income divided by average total assets.
(7) Net income divided by average common equity.
(footnotes continued on next page)
3
(8) The company adjusts GAAP reported net interest income by the tax
equivalent adjustment amount to account for the tax attributes on
federally tax exempt municipal securities. For GAAP purposes, tax
benefits associated with federally tax exempt municipal securities are
reflected in income tax expense. The following table reconciles
reported net interest income to net interest income on a tax equivalent
basis for the periods presented:
</FN>
RECONCILIATION OF NET INTEREST INCOME TO NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
1Q03 4Q02 3Q02 2Q02 1Q02
------- ------- ------- ------- ------
Net interest income................................ $12,997 $11,813 $10,443 $ 9,980 $8,364
Tax equivalent adjustment to net interest income... 695 661 756 790 687
------- ------- ------- ------- ------
Net interest income, tax equivalent basis...... $13,692 $12,474 $11,199 $10,770 $9,051
======= ======= ======= ======= ======
4
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks.................................. $ 46,643 $ 34,529 $ 25,852
Federal funds sold and other short-term investments...... 7,415 258 3,558
----------- ----------- -----------
Total cash and cash equivalents....................... 54,058 34,787 29,410
----------- ----------- -----------
Loans held for sale...................................... 12,591 14,321 1,785
Available-for-sale securities, at fair value............. 505,877 487,020 388,728
Loans, net of unearned discount.......................... 1,018,196 965,641 782,434
Allowance for loan losses................................ (12,471) (11,585) (8,790)
----------- ----------- -----------
Net loans................................................ 1,005,725 954,056 773,644
----------- ----------- -----------
Goodwill................................................. 19,242 19,199 10,805
Premises and equipment, net.............................. 6,516 6,851 4,026
Accrued interest receivable.............................. 7,258 9,427 8,307
Other assets............................................. 17,728 17,753 14,503
----------- ----------- -----------
Total assets............................................. $ 1,628,995 $ 1,543,414 $ 1,231,208
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing................................... $ 88,243 $ 88,986 $ 62,359
Interest-bearing...................................... 73,699 64,893 54,214
Savings and money market deposit accounts................ 476,100 488,941 369,811
Brokered deposits........................................ 387,006 279,806 278,918
Other time deposits...................................... 340,296 282,645 216,563
----------- ----------- -----------
Total deposits........................................ 1,365,344 1,205,271 981,865
Funds borrowed........................................... 124,933 209,954 155,523
Trust preferred securities............................... 20,000 20,000 20,000
Accrued interest payable................................. 3,779 4,986 2,812
Other liabilities........................................ 19,566 14,111 6,082
----------- ----------- -----------
Total liabilities........................................ 1,533,622 1,454,322 1,166,282
----------- ----------- -----------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized............. -- -- --
Common stock, without par value, $1 stated value;
12,000,000 shares authorized; 7,762,014, 7,704,203,
and 7,375,530 shares issued and outstanding as of
March 31, 2003, December 31, 2002 and March 31, 2002,
respectively.......................................... 7,762 7,704 7,376
Additional paid-in-capital............................... 45,594 45,367 39,813
Retained earnings........................................ 31,076 27,784 19,465
Accumulated other comprehensive income................... 11,403 8,826 31
Deferred compensation.................................... (462) (589) (809)
Loans to officers........................................ -- -- (950)
----------- ----------- -----------
Total stockholders' equity............................... 95,373 89,092 64,926
----------- ----------- -----------
Total liabilities and stockholders' equity............... $ 1,628,995 $ 1,543,414 $ 1,231,208
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements. All previously reported share and per share
data has been restated to reflect the 3-for-2 stock split which occurred on
January 17, 2003.
5
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
------- -------
INTEREST INCOME
Loans, including fees........................................................ $15,167 $12,148
Taxable securities........................................................... 3,792 2,862
Securities exempt from federal income taxes.................................. 1,587 1,344
Federal funds sold and interest bearing deposits............................. 25 17
------- -------
Total interest income..................................................... 20,571 16,371
------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand................................................... 128 171
Savings and money market deposit accounts................................. 1,709 1,719
Brokered deposits and other time deposits................................. 3,940 4,323
Funds borrowed............................................................... 1,312 1,309
Trust preferred securities................................................... 485 485
------- -------
Total interest expense.................................................... 7,574 8,007
------- -------
Net interest income....................................................... 12,997 8,364
Provision for loan losses.................................................... 956 511
------- -------
Net interest income after provision for loan losses....................... 12,041 7,853
------- -------
NON-INTEREST INCOME
Banking, wealth management services and other income...................... 2,701 1,542
Securities losses, net.................................................... (55) (230)
Trading losses, net....................................................... (230) --
------- -------
Total non-interest income.............................................. 2,416 1,312
------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits............................................... 4,778 3,214
Occupancy expense, net....................................................... 1,419 1,139
Professional fees............................................................ 1,284 891
Amortization of other intangibles............................................ 42 --
Other non-interest expense................................................... 1,896 1,228
------- -------
Total non-interest expense................................................ 9,419 6,472
------- -------
Minority interest............................................................ 38 --
------- -------
Income before income taxes................................................... 5,000 2,693
------- -------
Income tax provision......................................................... 1,397 549
------- -------
Net income................................................................ $ 3,603 $ 2,144
======= =======
Basic earnings per share..................................................... $ 0.47 $ 0.29
Diluted earnings per share................................................... $ 0.44 $ 0.28
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 3-for-2 stock split which occurred
on January 17, 2003.
6
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN- RETAINED COMPREHENSIVE DEFERRED LOANS TO STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME COMPENSATION OFFICERS EQUITY
------ ------- ------- ------------- ------------ -------- ------------
BALANCE, JANUARY 1, 2002..... $7,206 $39,114 $17,468 $ 323 $(857) $(950) $62,304
Net income................... -- -- 2,144 -- -- -- 2,144
Net decrease in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............... -- -- -- (292) -- -- (292)
------ ------- ------- ------- ----- ----- -------
Total comprehensive income -- -- 2,144 (292) -- -- 1,852
------ ------- ------- ------- ----- ----- -------
Cash dividends declared
($0.02 per share)......... -- -- (147) -- -- -- (147)
Issuance of common stock..... 530 699 -- -- -- -- 869
Awards granted............... -- -- -- -- (39) -- (39)
Amortization of deferred
compensation.............. -- -- -- -- 87 -- 87
Repayment of loans to
officers.................. -- -- -- -- -- -- --
------ ------- ------- ------- ----- ----- -------
BALANCE, MARCH 31, 2002...... $7,736 $39,813 $19,465 $ 31 $(809) $(950) $64,926
====== ======= ======= ======= ===== ===== =======
BALANCE, JANUARY 1, 2003..... $7,704 $45,367 $27,784 $ 8,826 $(589) $ -- $89,092
Net income................... -- -- 3,603 -- -- -- 3,603
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............... -- -- -- 2,577 -- -- 2,577
------ ------- ------- ------- ----- ----- -------
Total comprehensive income -- -- 3,603 2,577 -- -- 6,180
------ ------- ------- ------- ----- ----- -------
Cash dividends declared
($0.04 per share)......... -- -- (311) -- -- -- (311)
Issuance of common stock..... 58 227 -- -- -- -- 285
Awards granted and
forfeited................. -- -- -- -- 119 -- 119
Amortization of deferred
compensation.............. -- -- -- -- 8 -- 8
------ ------- ------- ------- ----- ----- -------
BALANCE, MARCH 31, 2003...... $7,762 $45,594 $31,076 $11,403 $(462) $ -- $95,373
====== ======= ======= ======= ===== ===== =======
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 3-for-2 stock split which occurred
on January 17, 2003.
7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 3,603 $ 2,144
--------- ---------
Adjustments to reconcile net income to net cash provided by operating
activities
Depreciation and amortization............................................... 408 289
Johnson Bank Illinois purchase accounting fair value accretion, net......... (89) (73)
Amortization of deferred compensation, net of forfeitures................... 8 87
Provision for loan losses................................................... 956 511
Net losses on sale of securities............................................ 55 230
Trading losses on interest rate swap........................................ 230 --
Net proceeds on loans held for sale......................................... 1,729 9,550
Decrease in deferred loan fees.............................................. (132) (75)
Decrease (increase) in accrued interest receivable.......................... 2,169 (1,045)
(Decrease) increase in accrued interest payable............................. (1,207) 700
(Increase) decrease in other assets......................................... (5,511) 813
Increase (decrease) in other liabilities.................................... 9,585 (4,288)
--------- ---------
Total adjustments........................................................... 8,201 6,699
--------- ---------
Net cash provided by operating activities................................... 11,804 8,843
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities.................... 13,232 31,366
Purchase of securities available-for-sale...................................... (28,468) (87,834)
Net loan principal advanced.................................................... (52,403) (1,567)
Investment in Lodestar Investment Counsel, LLC................................. 36 --
Premises and equipment expenditures............................................ (86) (479)
--------- ---------
Net cash used in investing activities....................................... (67,689) (58,514)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits................................................. 160,084 131,374
Proceeds from exercise of stock options........................................ 404 830
Dividends paid................................................................. (311) (147)
Net decrease in funds borrowed................................................. (85,021) (75,777)
--------- ---------
Net cash provided by financing activities................................... 75,156 56,280
--------- ---------
Net increase in cash and cash equivalents...................................... 19,271 6,609
Cash and cash equivalents at beginning of year................................. 34,787 22,801
--------- ---------
Cash and cash equivalents at end of period..................................... $ 54,058 $ 29,410
========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 3-for-2 stock split which occurred
on January 17, 2003.
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 "The 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 three months ended March
31, 2003 are not necessarily indicative of the results expected for the full
year ending December 31, 2003. 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
March 31, 2003 consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes for the year ended December
31, 2002 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.
Certain reclassifications have been made to prior periods' consolidated
financial statements to place them on a basis comparable with the current
period's consolidated financial statements.
Pursuant to FAS No. 148, Accounting for Stock-Based Compensation (FAS
No. 148), pro forma net income and pro forma earnings per share are presented in
the following table as if the fair value method of accounting for stock-based
compensation plans had been utilized.
THREE MONTHS ENDED
MARCH 31,
--------------------
2003 2002
------ ------
(DOLLARS IN THOUSANDS)
Net income
As reported...................... $3,603 $2,144
Pro forma........................ 3,576 2,030
Basic earnings per share
As reported...................... $ 0.47 $ 0.29
Pro forma........................ 0.47 0.27
Diluted earnings per share
As reported...................... $ 0.44 $ 0.28
Pro forma........................ 0.44 0.27
Note: The pro forma results above may not be representative of the effect
reported in net income for future years.
In determining the fair value of each option grant for purposes of the
above pro forma disclosures, the Company used an option pricing model with the
following assumptions for grants made in 2002: dividend yield of 0.35%;
risk-free interest rate of 5.07%; expected lives of 10 years for the
9
Stock Incentive Plan options, for the compensation replacement options and for
the various director options; and expected volatility of approximately 50%. No
stock option grants have been made in 2003 as of the date of the filing of this
report.
NOTE 2--EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings
per share (in thousands except per share data):
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
------ ------
Net Income............................................ $3,603 $2,144
Average common shares outstanding..................... 7,601 7,287
Average common shares equivalent(1)................... 541 326
------ ------
Weighted average common shares and common share
equivalents........................................ 8,142 7,613
====== ======
Net income per average common share - basic........... $ 0.47 $ 0.29
Net income per average common share - diluted......... $ 0.44 $ 0.28
- ------------------
(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.
NOTE 3--NEW ACCOUNTING STANDARDS
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others. This interpretation expands the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees and requires the guarantor to recognize a
liability for the fair value of an obligation assumed under a guarantee. FIN 45
clarifies that a guarantor is required to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
the Company as of December 31, 2002, and require disclosure of the nature of the
guarantee, the maximum potential amount of future payments that the guarantor
could be required to make under the guarantee, and the current amount of the
liability, if any, for the guarantor's obligations under the guarantee. The
recognition requirements of FIN 45 are to be applied prospectively to guarantees
issued or modified after December 31, 2002. Significant guarantees that have
been entered into by the Company are disclosed in Note 14 to the audited
consolidated financial statements included in our report on Form 10-K for the
year ended December 31, 2002.
In December 2002, the FASB issued FAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure (FAS No. 148), which
provides guidance on how to transition from the intrinsic value method of
accounting for stock-based employee compensation under APB No. 25 to FAS No.
123's fair value method of accounting, if a company so elects. The statement
also amends the disclosure provisions of FAS No. 123 and APB No. 25 to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While FAS No. 148 does not amend FAS No. 123 to require companies to
account for employee stock options using the fair value method, the disclosure
provisions of FAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of FAS No. 123 or the intrinsic value method of APB
No. 25.
10
Although the recognition provisions of FAS No. 148 are not applicable to
the Company at this time, as it continues to account for stock-based
compensation using the intrinsic value method, the Company has provided the
required disclosures in Note 1 to these consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling
interest, and results of operations of a VIE need to be included in a company's
consolidated financial statements. Because the Company does not have any
interest in VIEs, the Company does not expect the adoption of FIN 46 to have a
material impact on its results of operations, financial position, or liquidity.
NOTE 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.
We apply the accrual basis of accounting for each reportable segment
and for transactions between reportable segments. During the first quarter of
2003, there were no changes in the measurement methods used to determine
reported segment profit or loss as compared to first quarter 2002. There are no
asymmetrical allocations to segments requiring disclosure.
The accounting policies of the segments are generally the same as those
described in Note 1 -- Basis of Presentation to the consolidated financial
statements included in this report.
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.
The PrivateBank (Chicago)'s commercial lending products include lines
of credit for working capital, term loans for equipment and letters of credit to
support the commitments made by its clients. Non-credit products include
lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, other cash management products and insurance. The
PrivateBank (Chicago) offers a full range of real estate lending products
including fixed and floating rate permanent and mini-permanent mortgages,
construction and commercial real estate loans. Personal loans include
installment loans and lines of credit, home equity loans and a wide variety of
home mortgage loans.
Individual banking services include interest-bearing checking, money
market accounts, certificates of deposit, ATM/debit cards and investment
brokerage accounts. Additionally, The PrivateBank (Chicago) offers secured and
unsecured personal loans and lines of credit. Through The PrivateBank
(Chicago)'s affiliations with Mesirow Financial, Inc. and Sterling Investment
Services, Inc., clients have access to insurance products and securities
brokerage services. The PrivateBank (Chicago) also offers domestic and
international wire transfers and foreign currency exchange. During the second
quarter of 2002, the PrivateBank (Chicago) introduced an Index Powered
Certificate of Deposit product ("IPCD") with a five-year term. This
non-fee-based, FDIC-insured product is a five-year certificate of deposit with a
yield based on the performance of the S&P 500. The PrivateBank (Chicago) balance
sheet
11
reflects goodwill of $19.2 million and intangibles of $2.5 million at
March 31, 2003, which remained relatively flat compared to December 31, 2002
balances.
THE PRIVATEBANK (CHICAGO)
----------------------------
MARCH 31,
----------------------------
2003 2002
---------- ----------
(IN THOUSANDS)
Total gross loans.................. $ 903,579 $ 701,105
Total assets....................... 1,459,706 1,134,858
Total deposits..................... 1,216,101 915,111
Total borrowings................... 93,697 120,523
Total capital...................... 130,599 88,869
Net interest income................ 10,601 8,035
Net income......................... 4,153 2,666
THE PRIVATEBANK (ST. LOUIS)
The PrivateBank (St. Louis), through its main office located in St.
Louis, Missouri, provides personal and commercial banking services primarily to
affluent individuals, professionals, entrepreneurs and their business interests.
The PrivateBank (St. Louis) offers a full range 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)
----------------------------
MARCH 31,
----------------------------
2003 2002
-------- -------
(IN THOUSANDS)
Total gross loans.................. $116,559 $82,278
Total assets....................... 180,177 96,661
Total deposits..................... 151,293 66,807
Total borrowings................... 12,486 21,000
Total capital...................... 13,987 8,249
Net interest income................ 1,012 890
Net income......................... 390 122
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,
12
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.
On December 30, 2002, The PrivateBank (Chicago) acquired a controlling
interest in Lodestar Investment Counsel, LLC, a Chicago-based investment adviser
with $501.3 million of assets under management at March 31, 2003. Lodestar
manages equity, balanced, and fixed income accounts primarily for high net-worth
individuals, retirement plans and charitable organizations with investable
assets generally in excess of $1.0 million, and emphasizes highly personalized
client service.
WEALTH MANAGEMENT
----------------------------
MARCH 31,
----------------------------
2003 2002
---------- --------
(IN THOUSANDS)
Wealth Management assets under
management.......................... $1,204,239 $758,242
Trust fee revenue...................... 759 724
Lodestar assets under management
revenue............................. 726 --
Net income............................. 75 123
The following table indicates the breakdown of our wealth management
assets under management at March 31, 2003 by account classification and related
gross revenue for the three months ended March 31, 2002:
AT OR FOR THE THREE MONTHS
ENDED MARCH 31, 2003
---------------------------
MARKET VALUE REVENUE
------------ -------
ACCOUNT TYPE (IN THOUSANDS)
- -------------------------------------
Personal trust--managed.............. $ 592,433 $ 889
Agency--managed...................... 172,455 280
Custody.............................. 338,391 261
Employee benefits--managed........... 100,960 55
----------- -------
Total............................. $ 1,204,239 $ 1,485
=========== =======
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 2002, in connection with the issuance of $20.0 million
of 9.50% trust preferred securities, 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 9). The Tier 1 qualifying amount
is limited to 25% of Tier 1 capital under Federal Reserve regulations. The
excess amount qualifies as Tier 2 capital. Holding Company Activities are
reflected primarily by interest expense on borrowings and operating expenses.
Recurring holding company operating expenses consist of compensation
(amortization of restricted stock awards, other salary expense) and
miscellaneous professional fees. In May of 2002, PrivateBancorp, Inc. acquired
an office building located in St. Charles, Illinois, for $1.8 million from Towne
Square Realty. The St. Charles location of The PrivateBank (Chicago) continues
to lease space in the building and pays rent to the Holding Company at the same
terms and conditions as was paid to the prior owner.
13
HOLDING COMPANY ACTIVITIES
--------------------------
MARCH 31,
--------------------------
2003 2002
-------- -------
(IN THOUSANDS)
Total assets....................... $149,311 $98,643
Total borrowings................... 33,750 14,000
Long-term debt - trust preferred
securities...................... 20,000 20,000
Interest expense................... 758 565
Total capital...................... 95,373 64,926
Net loss........................... (1,015) (767)
The following is a summary of certain operating information for
reportable segments for the periods presented and the reported consolidated
balances (in millions):
THE THE HOLDING
PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
1ST QUARTER 2003 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
- --------------------- ----------- ----------- ---------- ---------- --------------- ------------
Total assets......... $1,459.7 $180.2 $ -- $149.3 $(160.2) $1,629.0
Total deposits....... 1,216.1 151.3 -- (2.1) 1,365.3
Total borrowings(1).. 93.7 12.5 -- 53.8 (15.1) 144.9
Total gross loans.... 903.6 116.6 -- -- (2.1) 1,018.1
Total capital........ 130.6 14.0 -- 95.4 (144.6) 95.4
Net interest income.. 10.6 1.0 -- (0.8) 2.2 13.0
Net income........... 4.2 0.4 0.1 (1.0) (0.1) 3.6
Wealth Management
assets under
management........ -- -- 1,204.2 -- -- 1,204.2
Trust fee revenue.... -- -- 1.5 -- -- 1.5
THE THE HOLDING
PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
1ST QUARTER 2002 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
- --------------------- ----------- ----------- ---------- ---------- --------------- ------------
Total assets......... $1,134.9 $ 96.7 $ -- $ 98.6 $ (99.0) $1,231.2
Total deposits....... 915.1 66.8 -- -- -- 981.9
Total borrowings(1).. 120.5 21.0 -- 34.0 -- 175.5
Total gross loans.... 701.1 82.3 -- -- (1.0) 782.4
Total capital........ 88.9 8.2 -- 64.9 (97.1) 64.9
Net interest income.. 8.0 0.9 -- (0.6) 0.1 8.4
Net income........... 2.7 0.1 0.1 (0.8) -- 2.1
Wealth Management
assets under
management........ -- -- 758.2 -- -- 758.2
Trust fee revenue.... -- -- 0.7 -- (0.02) 0.7
<FN>
- ------------------
(1) Includes long-term debt-trust preferred securities for the Holding
Company Activities segment.
(2) The intersegment elimination for gross loans reflects the exclusion of
unearned income for management reporting purposes. The intersegment
elimination for total capital reflects the elimination of the net
investment in The PrivateBank (Chicago) and The PrivateBank (St. Louis)
in consolidation. The intersegment eliminations include adjustments
necessary for each category to agree with the related consolidated
financial statements.
</FN>
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 elimination of fed funds purchased and sold between Chicago and St.
Louis, the reclassification of the unearned discount of loans and the
reclassification related to current and deferred taxes.
14
NOTE 5--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments
as of March 31, 2003 have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 2002.
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 three months ended March 31, 2003 and 2002, on a gross basis (in
thousands):
MARCH 31, 2003
---------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX BENEFIT AMOUNT
---------- ----------- ----------
Unrealized gains on securities available-for-sale
Unrealized holding gains, net..................... $3,850 $1,309 $2,541
Less: reclassification adjustment for net
losses, included in net income................. (55) (19) (36)
------ ------ ------
Unrealized gains, net............................. $3,905 $1,328 $2,577
====== ====== ======
MARCH 31, 2002
---------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX BENEFIT AMOUNT
---------- ----------- ----------
Unrealized losses on securities available-for-sale
Unrealized holding losses, net....................... $ (597) $ (122) $ (475)
Less: reclassification adjustment for net gain,
included in net income............................ (230) (47) (183)
------ ------ ------
Unrealized losses, net............................... $ (367) $ (75) $ (292)
====== ====== ======
15
NOTE 7--FUNDS BORROWED
A summary of all funds borrowed and outstanding at March 31, 2003,
December 31, 2002 and March 31, 2002 is presented in the table below:
CURRENT
LONG TERM FUNDS BORROWED: RATE MATURITY 3/31/2003 12/31/2002 3/31/2002
------------------------------------- ------- -------- --------- ---------- ----------
Subordinated note.................... 3.35% 02/11/07 $ 5,000 $ 5,000 $ 5,000
FHLB fixed advance(1)................ 6.50% 10/23/05 26,648 26,616 24,698
-------- -------- --------
Total long-term funds borrowed....... $ 31,648 $ 31,616 $ 29,698
======== ======== ========
Short term funds borrowed:
FHLB fixed advance................... 1.61% 01/16/04 $ 1,000 $ -- $ --
FHLB fixed advance................... 6.21% 12/05/03 30,000 30,000 30,000
FHLB fixed advance................... 1.73% 11/07/03 6,000 6,000 --
FHLB fixed advance................... 2.21% 07/17/03 1,000 1,000 --
FHLB fixed advance................... 2.74% 07/17/03 1,000 1,000 1,000
FHLB fixed advance................... 2.46% 06/16/03 500 500 --
FHLB fixed advance................... 2.70% 05/08/03 1,000 1,000 --
Borrowing under revolving line of
credit facility................... 3.50% 04/11/03 28,750 25,000 9,000
FHLB fixed advance................... 2.98% 03/10/03 -- 1,000 1,000
FHLB fixed advance................... 2.38% 01/13/03 -- 1,000 1,000
FHLB fixed advance................... 5.89% 12/20/02 -- -- 1,000
FHLB fixed advance................... 2.39% 11/12/02 -- -- 5,000
FHLB fixed advance................... 5.33% 07/22/02 -- -- 1,000
FHLB fixed advance................... 5.91% 06/21/02 -- -- 500
FHLB fixed advance................... 4.21% 05/31/02 -- -- 1,000
FHLB open line advance............... 1.48% daily -- 9,700 --
Fed funds purchased.................. 1.56% daily 9,000 98,000 69,000
Demand repurchase agreements(2)...... 1.25% daily 15,035 4,138 6,325
-------- -------- --------
Total short term funds borrowed...... 93,285 178,338 125,825
-------- -------- --------
Total funds borrowed................. $124,933 $209,954 $155,523
======== ======== ========
<FN>
- ------------------
(1) This FHLB advance is subject to a fair value hedge utilizing an interest
rate swap with a fair value of $2.8 million at March 31, 2003. The
contractual par amount on the advance is $25.0 million.
(2) Demand repurchase agreements are a form of retail repurchase agreement
offered to certain clients of The PrivateBank. 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.
</FN>
In February 2002, the Company renewed the term on an $18.0 million
revolving credit facility with a commercial bank originally entered into in
February 2000. On April 11, 2002, the loan agreement was amended and the
revolving line was increased to $25.0 million. On December 24, 2002, the loan
agreement was amended to increase the revolving line to $35.0 million and to
extend the maturity to December 1, 2003. The interest rate on borrowings under
this revolving line resets quarterly, and is based on, at our option, either the
lender's prime rate or three-month LIBOR plus 120 basis points with a floor of
3.50%. The Company has elected to pay interest based on the three-month LIBOR
rate plus 120 basis points. The initial rate of interest on the revolver was
7.20%, and most recently reset to 3.50% on March 1, 2003. The collateral for
this borrowing consists of the common stock of The PrivateBank (Chicago) and The
PrivateBank (St. Louis), which is held in custody by the lender. As of March 31,
2003, the outstanding balance on the revolving credit facility was $28.8
million.
In February 2000, the Company issued a subordinated note, in the
principal amount of $5.0 million as part of the purchase price for its
acquisition of Johnson Bank Illinois. The interest on the
16
subordinated note is reset each quarter based on the three-month LIBOR rate. The
note is payable in fullon or before February 11, 2007, and provides for certain
rate escalation beginning after February 11, 2002. On February 11, 2002, the
interest rate increased from LIBOR +50 basis points to LIBOR +200 basis points.
This pricing is in effect until February 11, 2004, at which point the pricing
increases to LIBOR +350 until maturity on February 11, 2007. The average rate of
interest on the subordinated note was 3.51% during the first quarter of 2003
compared to 3.27% during 2002 and most recently reset to 3.35% on February 11,
2003. The Company has the right to repay the subordinated note at any time after
giving at least 30 days, but not more than 60 days advance notice.
NOTE 8--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 a liability of the
Company. The aggregate principal amount of the trust preferred securities
outstanding is $20 million. As of March 31, 2003, the entire amount of the
preferred securities is eligible for treatment as Tier I capital as allowed by
the Federal Reserve. At March 31, 2003, the unamortized balance of the
underwriting commissions paid and offering expenses was $1.1 million and is
classified as part of other assets on the balance sheet. This amount is being
amortized on a straight-line basis until maturity at $9,764 per quarter. The
amortization is recognized as interest expense on the income statement. In the
event the Company exercises its right to redeem the securities prior to
maturity, any unamortized commissions would be expensed upon redemption.
NOTE 9--SUBSEQUENT EVENT
In April 2003, The PrivateBank (Chicago) suffered a potential loss of
$400,000 in a check fraud scheme involving a new account deposit. Although the
Company is pursuing insurance coverage with respect to the loss in excess of the
$150,000 deductible, on June 27, 2003, the Company received a letter from its
insurance carrier declining coverage and, accordingly, the Company currently
expects to take a second quarter 2003 charge of $400,000. Upon discovery of
fraud shortly after its occurrence, the Company took steps to avoid further loss
relating to the account and as a result, was able to assist law enforcement
officials in apprehending one of the perpetrators. Based on its investigation of
the incident,
17
the Bank is in the process of implementing enhancements to its
procedures designed to improve fraud prevention efforts relating to new
accounts.
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). Currently, the Company operates one location in the St. Louis market.
Managing directors are strategically located at all of these locations. On
December 30, 2002, The PrivateBank (Chicago) acquired a controlling interest in
Lodestar Investment Counsel, LLC, a Chicago-based investment adviser with $501.3
million of assets under management at March 31, 2003. Lodestar manages equity,
balanced, and fixed income accounts primarily for high net-worth individuals,
retirement plans and charitable organizations with investable assets generally
in excess of $1.0 million, and shares a similar focus on highly personalized
client service.
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 "Operating Segments Results"
beginning on page 27 and "Note 4 -- Operating Segments" to the unaudited
consolidated financial statements of the Company included on page 11.
The profitability of our operations depends on our net interest income,
provision for loan losses, non-interest income, and non-interest expense. Net
interest income is dependent on the amounts and yields of interest-earning
assets as compared to the amounts and rates on interest-bearing liabilities. Net
interest income is sensitive to changes in market rates of interest as well as
to the execution of our asset/liability management strategy. The provision for
loan losses reflects the cost of credit risk in the loan portfolio and is
affected by changes in the loan portfolio, management's assessment of the
collectability of the loan portfolio, loss experience, as well as economic and
market factors.
Non-interest income consists primarily of net security gains (losses)
and wealth management fee income, and to a lesser extent, fees for ancillary
banking services. Non-interest income from fees and deposit service charges are
below peer group levels. This is largely the result of the profile of our
typical client. Our clients tend to have larger deposit account balances than
customers of traditional banks. Because average balances tend to be high, we do
not earn the high service charge income typical of many retail banks.
Non-interest expense includes salaries and employee benefits as well as
occupancy, data processing, marketing, professional fees, insurance and other
expenses. Non-interest expenses are influenced by the growth of operations. Our
growth directly affects the majority of our expense categories.
18
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require
management to apply significant judgment to various accounting, reporting and
disclosure matters. Management must use assumptions and estimates to apply these
principles where actual measurements are not possible or practical. The
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our unaudited consolidated
financial statements included herein. For a complete discussion of our
significant accounting policies, see the footnotes to our Consolidated Financial
Statements included on pages F-8 through F-13 in our Form 10-K for the fiscal
year ended December 31, 2002 (Commission file number 000-25887). Below is a
discussion of our critical accounting policies. These policies are critical
because they are highly dependent upon subjective or complex judgments,
assumptions and estimates. Changes in such estimates may have a significant
impact on the financial statements. Actual results could differ from those
estimates. Management has reviewed the application of these policies with the
Audit Committee of the Company's Board of Directors.
For PrivateBancorp, Inc., accounting policies that are viewed as
critical to us are those relating to estimates and judgments regarding the
determination of the adequacy of the reserve for loan losses and the estimation
of the valuation of goodwill and the useful lives applied to intangible assets.
ALLOWANCE FOR LOAN LOSSES
We maintain an allowance for loan losses at a level management believes
is sufficient to absorb credit losses inherent in our loan portfolio. The
allowance for loan losses represents our estimate of probable losses in the
portfolio at each balance sheet date and is based on review of available and
relevant information. The allowance contains provisions for probable losses that
have been identified relating to specific borrowing relationships as well as
probable losses inherent in our loan portfolio and credit undertakings that are
not specifically identified. Our allowance for probable loan losses is
reassessed monthly to determine the appropriate level of the reserve. The amount
of the allowance for loan losses is determined based on a variety of factors,
including assessment of the credit risk of the loans in the portfolio, volume of
loans and commitments in the portfolio, delinquent loans, evaluation of current
economic conditions in the market area, actual charge-offs during the period and
historical loss experience. The unallocated portion of the reserve involves the
exercise of judgment by management and reflects various considerations,
including management's view that the reserve should have a margin that
recognizes the imprecision inherent in the process of estimating credit losses.
Management adjusts the allowance for loan losses by recording a
provision for loan losses in an amount sufficient to maintain the allowance at
the level determined appropriate. Loans are charged-off when deemed to be
uncollectible by management. We believe that the allowance for loan losses is
adequate to provide for estimated probable credit losses inherent in our loan
portfolio. The allowance for loan losses as a percentage of total loans was
1.22% as of March 31, 2003 compared to 1.20% as of December 31, 2002.
GOODWILL AND INTANGIBLE ASSETS
During 2001, the PrivateBank (Chicago) recorded approximately $12.2
million in goodwill in connection with the Johnson Bank Illinois acquisition.
During 2002, the Company recorded $8.4 million of goodwill and $2.5 million in
customer intangibles in connection with the Lodestar Investment Counsel, LLC
acquisition. Intangible assets are amortized over an estimated useful life of 15
years. Effective January 1, 2002, the Company adopted FAS No. 142, which
requires that goodwill and intangible assets that have indefinite lives no
longer be amortized but be reviewed for impairment annually, or more frequently
if certain indicators arise. Prior to the adoption of FAS No. 142, goodwill was
being amortized using the straight-line method over a period of 15 years. The
Company did not incur any goodwill
19
impairment in 2002 in adopting FAS 142. An annual impairment test of goodwill is
performed each year by the Company. Impairment losses on recorded goodwill will
be recorded as operating expenses.
Goodwill at March 31, 2003 was $21.7 million compared to a similar
amount of $21.7 million at December 31, 2002. The acquisition of Lodestar
Investment Counsel, LLC on December 30, 2002, increased goodwill by $8.4
million and Lodestar customer intangible assets by $2.5 million. Amortization
expense related to the Lodestar customer intangible assets is expected to be
recorded in the amount of $167,000 each year for 15 years.
RESULTS OF OPERATIONS -THREE MONTHS ENDED MARCH 31, 2003 AND 2002
NET INCOME
Net income for the first quarter ended March 31, 2003, was $3.6
million, up 68% compared to first quarter 2002 net income of $2.1 million.
Earnings per diluted share increased 57% to $0.44 per diluted share in the first
quarter 2003 compared to $0.28 per diluted share in the first quarter 2002. The
improvement in earnings per diluted share in the first quarter 2003 as compared
to the prior year first quarter reflects improvements in net interest income and
non-interest income, which grew at a higher rate than non-interest expenses. The
acquisition of Lodestar Investment Counsel, LLC in December 2002 contributed to
higher non-interest income.
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. Interest income includes
amortization of loan origination fees recorded from loans. Interest expense
includes amortization of prepaid fees on brokered deposits and issuance costs of
trust preferred securities. The volume of non-interest bearing funds, largely
comprised of demand deposits and capital, also affects the net interest margin.
Net interest income was $13.0 million during the three months ended
March 31, 2003 compared to $8.4 million for the first quarter 2002, an increase
of 55%. Average earning assets during the first quarter 2003 were $1.5 billion,
compared to $1.1 billion in the prior year quarter, an increase of 31%. Compared
to fourth quarter 2002, average earning assets increased by $110.3 million, or
8% during the first quarter of 2003. Average earning loans during the first
quarter 2003 increased to $1.0 billion compared to $946.8 million during the
fourth quarter of 2002. Net interest margin (on a tax equivalent basis) was
3.68% in the first quarter 2003, up from 3.18% in the prior year first quarter
and 3.56% in the fourth quarter of 2002. The improvement in net interest margin
compared to the fourth quarter 2002 is primarily attributable to continued
reductions in the rate paid on interest bearing liabilities, which more than
offset lower interest earning asset yields in a modestly lower rate environment.
A changing interest rate environment has an effect on our net interest
margin. A large portion of our loan portfolio is based on floating interest
rates and will likely reprice faster than our deposits and floating rate
borrowings. For the remainder of 2003, we expect our net interest margin to
improve if market interest rates increase relative to 2002 levels.
Alternatively, if market interest rates decrease, we expect our net interest
margin to continue to experience pressure.
20
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 MARCH 31,
-------------------------------------------------------------------------
2003 2002
--------------------------------- ----------------------------------
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE INTEREST RATE
---------- -------- ---- ---------- -------- -----
Fed funds sold and other
short-term investments........... $ 11,833 $ 25 0.85% $ 3,737 $ 17 1.79%
Investment securities (taxable)..... 351,486 3,792 4.35% 243,782 2,863 4.73%
Investment
securities(non-taxable)(2)....... 128,942 2,282 7.08% 109,831 2,031 7.40%
Loans, net of unearned 781,059
discount(3)...................... 1,000,312 15,167 6.10% 12,147 6.26%
---------- -------- ---------- -------
Total earning assets................ $1,492,573 $ 21,266 5.73% $1,138,409 $17,058 6.02%
========== ======== ========== =======
Interest-bearing deposits........... $1,181,714 $ 5,777 1.98% $ 902,915 $ 6,213 2.79%
Funds borrowed...................... 191,897 1,312 2.73% 135,979 1,309 3.85%
Trust preferred securities.......... 20,000 485 9.70% 20,000 485 9.70%
---------- -------- ---------- -------
Total interest-bearing liabilities $1,393,611 7,574 2.20% $1,058,894 8,007 3.06%
========== -------- ========== -------
Tax equivalent net interest income $ 13,692 $ 9,051
======== =======
Net interest spread(4).............. 3.53% 2.96%
Net interest margin(5)(6)........... 3.68% 3.18%
<FN>
- ------------------
(1) Average balances were generally computed using daily balances.
(2) Interest income on tax-advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
approximately $695,428 and $687,109 in the first quarters of 2003 and
2002, respectively.
(3) Nonaccrual loans are included in the average balances and do not have a
material effect on the average yield. Interest due on non-accruing loans
was not material for the periods presented.
(4) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(5) Net interest income, on a tax-equivalent basis, divided by average
interest-earning assets.
(6) The company adjusts GAAP reported net interest income by the tax
equivalent adjustment amount to account for the tax attributes on
federally tax exempt municipal securities. For GAAP purposes, tax
benefits associated with federally tax-exempt municipal securities are
reflected in income tax expense. The following table reconciles
reported net interest income to net interest income on a tax equivalent
basis for the periods presented:
</FN>
RECONCILIATION OF NET INTEREST INCOME TO NET INTEREST INCOME ON A TAX
EQUIVALENT BASIS
1Q03 1Q02
------- ------
Net interest income.................................. $12,997 $8,364
Tax equivalent adjustment to net interest income..... 695 687
------- ------
Net interest income, tax equivalent basis............ $13,692 $9,051
======= ======
The following table shows the dollar amount of changes in interest
income (tax-equivalent) 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.
21
THREE MONTHS ENDED MARCH 31, 2003
COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
CHANGE CHANGE
DUE TO DUE TO CHANGE TOTAL
RATE VOLUME DUE TO MIX CHANGE
------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
Interest Income/ Expense from:
Fed funds sold and other short-term investments............. $ (9) $ 36 $ (19) $ 8
Investment securities (taxable)............................. (228) 1,256 (98) 930
Investment securities (non-taxable)(1)...................... (87) 349 (11) 251
Loans, net of unearned discount............................. (308) 3,384 (57) 3,019
------- ------ ----- ------
Total tax equivalent interest income(1).................. (632) 5,025 (185) 4,208
------- ------ ----- ------
Interest-bearing deposits................................... (1,803) 1,918 (551) (436)
Funds borrowed.............................................. (376) 531 (152) 3
Trust Preferred Securities.................................. -- -- -- --
------- ------ ----- ------
Total interest expense................................... (2,179) 2,449 (703) (433)
------- ------ ----- ------
Net tax equivalent interest income(1)...................... $ 1,547 $2,576 $ 518 $4,641
======= ====== ===== ======
<FN>
- ------------------
(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 $695,428 and $687,109 in the first quarters of 2003 and
2002, respectively.
</FN>
PROVISION FOR LOAN LOSSES
The changes recorded in the components of the allowance for loan losses
resulted in a provision for loan losses of $956,000 for the three months ended
March 31, 2003 compared to $511,000 for the comparable period in 2002. The
increase in the provision for loan losses during the first quarter 2003 was
principally due to several factors. We continued to experience strong loan
growth, primarily in commercial real estate and construction loans. Commercial
real estate and construction loans entail greater risk than residential mortgage
and consumer loans. Another factor was the weakening of credit quality of
certain borrowers as reflected by risk rating downgrades throughout 2002 and
which continued in the first quarter of 2003. We believe that these downgrades
reflect the impact of a slowing economy on the portfolio. Thirdly, as a result
of increases in our lending limit, we believe we have an increasingly more
complex loan portfolio and growth in the dollar amount of individual credit
exposures, which warranted increased provisions. Net charge-offs totaled $70,000
for the quarter ended March 31, 2003 versus net recoveries of $29,000 for the
fourth quarter of 2002 and net charge offs of $27,000 for the quarter ended
March 31, 2002.
A discussion of the allowance for loan losses and the factors
management considers in assessing the adequacy of the allowance begins on
page 27.
NON-INTEREST INCOME
Non-interest income was $2.4 million in the first quarter of 2003,
reflecting an increase of approximately $1.1 million or 84% from the first
quarter of 2002. The increase in fee income was attributable primarily to the
inclusion of the full quarter operating results of Lodestar Investment Counsel,
LLC and increases in fee income from the sale of residential mortgages in the
secondary market. PrivateBancorp, Inc. acquired a controlling interest in
Lodestar Investment Counsel in late 2002.
22
The following table presents the breakdown of banking, wealth
management services and other income for the periods presented:
THREE MONTHS ENDED
---------------------
MARCH 31,
---------------------
2003 2002
------ ------
Residential real estate secondary
market fees......................... $ 782 $ 402
Trust fee revenue...................... 759 724
Lodestar assets management revenue..... 726 --
Banking and other services............. 308 273
Bank owned life insurance.............. 126 142
------ ------
Total............................... $2,701 $1,542
====== ======
Sales of residential real estate loans generated $782,000 of income
during the first quarter 2003 compared to $402,000 during the prior year quarter
primarily due to increased volume of loans sold.
Trust fee revenue increased by 5% to $759,000 during the first quarter
2003 as compared to the prior year quarter. Of this amount, approximately
$394,700 was revenue generated from the wealth management services provided to
those clients where a third-party investment manager is utilized. For the
quarter ended March 31, 2003, we paid $127,000 to third-party investment
managers. These fees are included in the professional fees category of
non-interest expense. Lodestar asset management revenue totaled approximately
$726,000 for the first quarter ended March 31, 2003. Wealth management assets
under management were $1.2 billion at March 31, 2003 compared to $758.2 million
at March 31, 2002 and $1.2 billion at December 31, 2002. Lodestar had $501.3
million of assets under management at March 31, 2003.
During the first quarter of 2003, we recognized income of $126,000
related to the increased cash surrender value of a bank owned life insurance
(BOLI) policy that was entered into in the fourth quarter of 2001 as compared to
$142,500 of income in the first quarter 2002. This policy covers certain
higher-level employees who are deemed to be significant contributors to the
company. All employees included in this policy are aware and have consented to
the coverage. The cash surrender value of BOLI at March 31, 2003 was $10.8
million and is included in other assets on the balance sheet.
Noninterest income for the first quarter of 2003, also reflects the
fair market value adjustment on a previously disclosed $25.0 million 10-year
treasury rate for 3-month LIBOR interest rate swap which resulted in losses of
$230,000 during the first quarter of 2003. During the first quarter 2003, the
Company recognized $55,000 of net securities losses compared to net securities
losses of $230,000 during the first quarter of 2002. The securities losses for
the current quarter include a permanent impairment write-down of $330,000. The
Company wrote down $300,000 on the Company's interest-only collateralized
mortgage obligation ("CMO") portfolio and $30,000 on an investment that
qualifies for CRA purposes. Continued low levels of market interest rates during
the first quarter 2003 led to accelerated mortgage prepayments, which impaired
the fair value of our interest-only CMO security portfolio. Also included in net
security losses of $55,000 are net security gains of $275,000.
23
NON-INTEREST EXPENSE
THREE MONTHS ENDED
---------------------
MARCH 31,
---------------------
2003 2002
------ ------
(IN THOUSANDS)
Salaries and employee benefits.......... $4,778 $3,214
Occupancy............................... 1,419 1,139
Professional fees....................... 1,284 891
Marketing............................... 486 365
Data processing......................... 393 308
Postage, telephone and delivery......... 211 178
Office supplies and printing............ 159 67
Insurance............................... 168 93
Amortization of intangibles............. 42 --
Other expense........................... 479 217
------ ------
Total non-interest expense.............. $9,419 $6,472
====== ======
Non-interest expense increased to $9.4 million in the first quarter of
2003 from $6.5 million in the first quarter of 2002, an increase of 46%. The
increase in non-interest expense between quarters reflects the continued growth
of the organization during the twelve-month period ended March 31, 2003. Our
efficiency ratio improved to 58.5% for the first quarter 2003 as compared to
62.5% for the first quarter 2002. On a tax-equivalent basis, this ratio
indicates that in the first quarter of 2003, we spent 58.5 cents to generate
each dollar of revenue, compared to 62.5 cents in the first quarter of 2002.
During the remainder of 2003, we expect the operating efficiency to remain at a
similar level as reported in the first quarter 2003. The efficiency ratio is
equal to non-interest expense divided by the sum of net interest income on a tax
equivalent basis plus non-interest income. Please refer to footnote 6 on page 21
for a reconciliation of net interest income to net interest income on a tax
equivalent basis.
Salaries and benefits increased to $4.8 million, or 49% during the
first quarter 2003 as compared to the year ago quarter, reflecting the increased
level of full-time equivalent employees to 194 people at March 31, 2003 as
compared to 162 people at March 31, 2002. The increase is due primarily to
overall growth in the organization and the addition of six Lodestar Investment
Counsel employees in the fourth quarter of 2002.
Occupancy expense increased to $1.4 million during the first quarter
2003, reflecting an increase of 25% over the prior year quarter. Occupancy
expense during the first quarter 2003 reflects the addition of additional floor
space that is being leased in our downtown Chicago location as well as the
Lodestar office space.
Professional fees, which include legal, accounting, consulting services
and investment management fees, increased to $1.3 million during the first
quarter of 2003, reflecting an increase of 44% over the prior year quarter. The
increase in professional fees is primarily attributable to higher legal,
accounting and information systems consultation services as well as consulting
fees paid for the management of our investment portfolio.
Insurance expense increased 81% over prior year quarter due to the
increased cost of insurance in the marketplace, and the renewal of our annual
insurance coverage, which was previously under a three-year contract that
expired in June 2002.
In 2003, we amortized $42,000 in intangible assets related to the
acquisition of a controlling interest in Lodestar Investment Counsel.
24
INCOME TAXES
The following table shows our income before income taxes, applicable
income taxes and effective tax rate for the three months ended March 31, 2003
and 2002, respectively (in thousands):
THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
------ ------
Income before taxes.......... $5,000 $2,693
Income tax provision......... 1,397 549
Effective tax rate........... 27.9% 20.4%
The effective income tax rate varies from statutory rates principally
due to certain interest income, which is tax-exempt for federal or state
purposes, and certain expenses, which are disallowed for tax purposes. The
higher effective tax rate for the first quarter 2003 as compared to the prior
year first quarter reflects growth in pretax income of 85.7% that has outpaced
the growth on our federally tax-exempt municipal bonds income. Federally
tax-exempt municipal bonds increased to $149.2 million as of March 31, 2003, a
22.3% increase from $122.0 million at March 31, 2003. In addition, the higher
effective tax rate for the first quarter 2003 as compared to the prior year
quarter is also attributable to the increased profitability of The PrivateBank
St. Louis for 2003 relative to 2002 and has resulted in increased Missouri state
tax expense requirements.
OPERATING SEGMENTS RESULTS
As described in Note 4 to the consolidated financial statements
included in this report, the Company's operations consist of four primary
business segments: The PrivateBank (Chicago), The PrivateBank (St. Louis),
Wealth Management and Holding Company Activities.
The profitability of The PrivateBank (Chicago) is primarily dependent
on the net interest income, provision for loan losses, non-interest income and
non-interest expense. Net income for The PrivateBank (Chicago) for the three
months ended March 31, 2003 increased 56% to $4.2 million from $2.7 million for
the three months ended March 31, 2002.
For the first quarter 2003, the net income growth for The PrivateBank
(Chicago) resulted from improvements in net interest income, which were driven
by increases in loans and investments. The improvement in net interest income
for the first quarter 2003 more than offset increases in operating expenses
associated with continued growth of The PrivateBank (Chicago). Net interest
income for The PrivateBank (Chicago) for the three months ended March 31, 2003
increased to $10.6 million from $8.0 million, or 32%, primarily due to growth in
earning assets, which resulted in improvements in net interest margin for the
first quarter 2003 as compared to the first quarter 2002. The PrivateBank
(Chicago)'s investment in FHLB stock increased as compared to the March 31, 2002
and continued to have a positive impact on total earning assets during the first
quarter 2003. Additionally, reduced interest rates on liabilities more than
offset the impact of declining rates of interest on interest earning assets.
Total loans increased by 29%, or $202.5 million, to $903.6 million during the
first quarter 2003 as compared to the first quarter 2002 total loans of $701.1
million. The majority of the loan growth for the first quarter 2003 occurred in
the commercial real estate and construction loan categories. Total deposits
increased by 33% to $1.2 billion at March 31, 2003, from $915.1 at March 31,
2002. Growth in money market deposits, jumbo certificates of deposits,
noninterest bearing deposits and increased utilization of brokered deposits
accounted for the majority of the deposit growth.
Net income for The PrivateBank (St. Louis) for the three months ended
March 31, 2003 increased by $268,000 to $390,000 as compared to $122,000 in the
prior year quarter. For the first quarter 2003,
25
the net income growth for The PrivateBank (St. Louis) resulted from increases in
net interest income and non-interest income which more than offset increases in
operating expenses. Increased fee income from the sale of residential real
estate loans continues to have a significant positive impact on The PrivateBank
(St. Louis). Net interest income for The PrivateBank (St. Louis) for the three
months ended March 31, 2003 increased to $1.0 million from $890,000 in the prior
year quarter, an increase of 14%, primarily due to growth in earning assets and
improving net interest margins for 2003 as compared to 2002. Reduced interest
rates on liabilities offset the impact of declining rates of interest on
interest earning assets. Total loans increased 42% to $116.6 million at March
31, 2003 from $82.3 million at March 31, 2002, due primarily to growth in
commercial real estate and residential real estate loans categories. Commercial
and personal loans also contributed to the increase in loans but to a lesser
extent as compared to the growth in the commercial and residential real estate
categories. Total deposits increased by $84.5 million to $151.3 million at March
31, 2003 from $66.8 million at March 31, 2002. The majority of the deposit
growth at The PrivateBank (St. Louis) was due to increased money market deposits
and the continued growth of brokered deposits during the first quarter of 2003
as compared to the prior year period.
Wealth management includes investment management, personal trust and
estate services, custodial services, retirement accounts and brokerage and
investment services. Wealth management assets under management increased by
$446.0 million to $1.2 billion at March 31, 2003, as compared to $758.2 million
at March 31, 2002, due primarily to our acquisition of an 80% controlling
interest in Lodestar Investment Counsel, LLC on December 30, 2002. Excluding
Lodestar, trust assets under administration for the Wealth Management segment
were $703.0 million at March 31, 2003, compared to $758.2 million as of March
31, 2002. Lodestar assets under management were $501.2 million as of March 31,
2003. Excluding Lodestar, trust fee revenue generated by the Wealth Management
Segment was $759,000 compared to $724,000 for the three months ended March 31,
2002. Revenue generated by Lodestar for the first quarter 2003 added $726,000 to
the consolidated $1.5 million in wealth management gross revenue generated in
the first quarter 2003. During the first quarter 2003, market value declines in
our assets under management more than offset the positive impact of new accounts
that were opened during the quarter. Net income for the first quarter 2003 for
our Wealth Management segment was $75,000 as compared to $123,000 for the first
quarter 2002. Lodestar contributed net income of approximately $100,000 to the
Wealth Management segment during the first quarter 2003. The trust area of the
Wealth Management segment negatively impacted net income by approximately
$25,000 as compared to net income of $123,000 in the prior year quarter due to
increases in non-interest expense that outpaced its increased revenue
contribution. The increase in non-interest expense in the trust area during the
quarter was incurred in the salaries and benefits as well as the professional
fees expense categories.
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).
Holding Company Activities are reflected primarily by interest expense on
borrowings and operating expenses of the parent company. Recurring holding
company operating expenses consist primarily of compensation (amortization of
restricted stock awards, other salary expense) and miscellaneous professional
fees.
The Holding Company Activities segment reported a net loss of $1.0
million for the first three months of 2003, an increase of $248,000 as compared
to a net loss of $767,000 for the first three months of 2002. The increase in
the amount of the net losses reported for 2003 as compared to prior year quarter
reflects the increased amount of borrowings recorded at the Holding Company
Activities segment. Total borrowings at the Holding Company were $33.8 million
at March 31, 2003 compared to $14.0 million at March 31, 2002.
26
FINANCIAL CONDITION
TOTAL ASSETS
Total assets increased to $1.6 billion at March 31, 2003, an increase
of $85.6 million, or 6% over total assets of $1.5 billion at December 31, 2002,
and an increase of $397.8 million, or 32% over $1.2 billion of total assets at
March 31, 2002. The balance sheet growth during the three months ended March 31,
2003 was accomplished mainly through loan growth throughout the Company and
growth in the investment securities portfolio. The growth in assets was funded
primarily through increases in brokered deposits and to a lesser extent, from
growth in core deposits.
LOANS
Total loans increased to $1.0 billion, an increase of $52.6 million, or
5%, from $965.6 million at December 31, 2002 and an increase of $235.8 million,
or 30%, from $782.4 million at March 31, 2002.
Loan growth since March 31, 2002 has occurred primarily in the
commercial real estate and construction loan categories. The PrivateBank (St.
Louis) had loans outstanding of $116.6 million as of March 31, 2003, which
reflects growth of $34.3 million since March 31, 2002. The remaining loan growth
of $201.5 million experienced by the Company since March 31, 2002 was generated
by The PrivateBank (Chicago). All of The PrivateBank (Chicago) offices posted
strong gains in loan volume as compared to March 31, 2002 loan levels.
The following table sets forth the composition of our loan portfolio
net of unearned discount by category (in thousands) at the following dates:
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
---------- ------------ ---------
LOANS
Commercial real estate............................ $ 492,952 $452,703 $330,348
Residential real estate........................... 76,885 72,289 80,423
Commercial........................................ 158,227 165,993 153,340
Personal(1)....................................... 152,043 151,452 126,316
Construction...................................... 138,089 123,204 92,007
---------- -------- --------
Total loans, net of unearned discount.......... $1,018,196 $965,641 $782,434
========== ======== ========
<FN>
- ------------------
(1) Includes home equity loans and overdraft lines.
</FN>
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. In determining the adequacy of the allowance for loan losses, management
considers a variety of factors, including assessment of the credit risk of the
portfolio, delinquent loans, evaluation of current economic conditions in the
market area, actual charge-offs during the year and historical loss experience.
The unallocated portion of the reserve involves the exercise of judgment by
management and reflects various considerations, including management's view that
the reserve should have a margin that recognizes the imprecision inherent in the
process of estimating credit losses.
We maintain an allowance for loan losses at a level management believes
is sufficient to absorb credit losses inherent in our loan portfolio. The
allowance for loan losses represents our estimate of probable losses in the
portfolio at each balance sheet date based on review of available and relevant
information, including probable losses that have been identified relating to
specific borrowing
27
relationships, as well as probable losses inherent in the loan portfolio and
credit undertakings that are not specifically identified. We believe that the
allowance for loan losses is adequate to provide for estimated probable credit
losses inherent in our loan portfolio.
Under our methodology, the allowance for loan losses is comprised of
the following components:
Specific Component of the Reserve
The specific component of the reserve is determined on a loan by loan
basis as part of a regular review of our loan portfolio. The Company utilizes a
loan rating system to assist in developing an internal problem loan
identification system ("Watch List") as a means for identifying and reporting
non-performing and potential problem loans. These loans are allocated
specifically identified reserves based on the loan ratings assigned to
individual loans. The specific reserve is based on a loan's current book value
compared to the present value of its projected future cash flows, collateral
value or market value, as is relevant for the particular loan.
The portion of the provision related to the specific component of the
reserve was approximately $287,000 during the first quarter of 2003 due to an
increase in the dollar amount of identified credit relationships that have been
adversely impacted by the slowdown of the economy and have been allocated
specifically identified reserves based on the loan ratings assigned to
individual loans and other extensions of credit.
Allocated Inherent Component of the Reserve
The allocated portion of the inherent component of the reserve is based
on management's review of historical and industry charge-off experience as well
as its judgment regarding loans in each loan category over a period of time that
management determines is adequate to reflect longer-term economic trends. Loss
factors are evaluated by management and adjusted based on current facts and
circumstances. Loss factor adjustments reflect management's assessment of the
credit risk inherent in each loan category.
The portion of the provision related to the allocated inherent
component of the reserve was $396,000 million during the first three months of
2003. This change primarily reflects the increase in volume in our commercial
real estate loan portfolio and construction loan portfolio. The increase in this
component of the reserve was partially offset by a decline in the impact of
commercial loans, resulting from a decline in volumes.
Unallocated Inherent Components of the Reserve
The unallocated portion of the inherent component of the reserve is
based on management's review of other factors affecting the determination of
probable losses inherent in the portfolio, which are not necessarily captured by
the application of loss factors. This portion of the reserve analysis involves
the exercise of judgment and reflects consideration such as management's view
that the reserve should have a margin that recognizes the imprecision inherent
in the process of estimating credit losses.
The portion of the provision related to the unallocated inherent
component of the reserve was $273,000 for the first quarter of 2003 to account
for an increasingly more complex loan portfolio and growth in the dollar amount
of individual credit exposures. The growth and complexity of the loan portfolio
exposes us to larger individual charge-offs. The measure of imprecision has
increased with this growth and poses greater risk to the Company that losses
could exceed our estimates. As a result, management has elected to increase the
unallocated inherent component of the reserve.
28
Management's application of the methodology for determining the
allowance for loan losses resulted in a reserve for credit losses of $12.5
million at March 31, 2003 compared with $8.8 million at March 31, 2002.
The allowance for loan losses as a percentage of total loans was 1.22%
at March 31, 2003, 1.20% at December 31, 2002 and 1.12% at March 31, 2002. Net
charge-offs totaled $70,000 for the quarter ended March 31, 2003 versus net
charge-offs of $27,000 in the year earlier period. The provision for loan losses
was $956,000 in the first quarter of 2003, versus $511,000 in the first quarter
of 2002.
Following is a summary of changes in the allowance for loan losses for
the three months ended March 31, 2003 and 2002 (in thousands):
2003 2002
------- ------
Balance, January 1.............................. $11,585 $8,306
Provisions charged to earnings.................. 956 511
Loans charged-off, net of recoveries............ (70) (27)
------- ------
Balance, March 31............................... $12,471 $8,790
======= ======
NONPERFORMING LOANS
The following table classifies our non-performing loans as of the dates
shown:
3/31/03 12/31/02 9/30/02 6/30/02 3/31/02
------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Nonaccrual loans........................ $1,483 $ 749 $ 430 $ 649 $1,458
Loans past due 90 days or more.......... 2,032 650 2,549 2,518 1,448
------ ------ ------ ------ ------
Total nonperforming loans............... 3,515 1,399 2,979 3,167 2,906
------ ------ ------ ------ ------
Total nonperforming assets.............. $3,515 $1,399 $2,979 $3,167 $2,906
====== ====== ====== ====== ======
Total nonaccrual loans to total loans... 0.146% 0.078% 0.047% 0.075% 0.186%
Total nonperforming loans to total
loans................................ 0.35% 0.14% 0.33% 0.37% 0.37%
Total nonperforming assets to total
assets............................... 0.22% 0.09% 0.21% 0.24% 0.24%
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 $1.5 million at March 31, 2003 as compared to
$749,000 at December 31, 2002 and $1.5 million at March 31, 2002. Nonaccrual
loans increased by $734,000 since December 31, 2002. The increase relates
primarily to two commercial credit relationships and a letter of credit at The
PrivateBank (Chicago). Loans delinquent over 90 days increased by $1.4 million
since December 31, 2002.
29
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities at
March 31, 2003 and December 31, 2002, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
-----------------------------------------------------------
MARCH 31, 2003
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
U.S. government agency mortgage backed
securities and collateralized
mortgage obligations.................. $159,456 $ 3,898 $ (65) $163,289
Corporate collateralized mortgage
obligations........................... 14,093 471 (2) 14,562
Tax exempt municipal securities.......... 137,993 11,254 (17) 149,230
Taxable municipal securities............. 3,865 5 -- 3,870
Federal Home Loan Bank stock............. 159,975 -- -- 159,975
Other.................................... 13,217 1,734 -- 14,951
-------- ------- ------ --------
Total.................................... $488,599 $17,362 $ (84) $505,877
======== ======= ====== ========
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
-----------------------------------------------------------
DECEMBER 31, 2002
-----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
U.S. government agency mortgage backed
securities and collateralized
mortgage obligations.................. $155,510 $ 3,132 $ (248) $158,394
Corporate collateralized mortgage
obligations........................... 18,166 509 -- 18,675
Tax exempt municipal securities.......... 126,504 8,332 -- 134,836
Taxable municipal securities............. 4,583 114 -- 4,697
Federal Home Loan Bank stock............. 155,606 -- -- 155,606
Other.................................... 13,279 1,533 -- 14,812
-------- ------- ------ --------
Total.................................... $473,648 $13,620 $ (248) $487,020
======== ======= ====== ========
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 March, 31, 2003, net unrealized gains of $17.3 million resulted in
an increase of $11.4 million in reported stockholders' equity. This was an
increase of $2.6 million from net unrealized gains of $8.8 million recorded as
part of equity at December 31, 2002. The increase in unrealized gains during the
first quarter 2003 is attributable primarily to gains in tax-exempt municipal
securities. These municipal securities generally have long-term maturities and
are not callable by the issuer or have long-term call dates. Thus, the fair
value of these securities has increased during the first quarter of 2003 as
rates on tax-free municipal bonds have fallen. The credit quality of the
investment portfolio remains strong. The vast majority of investments are rated
"AAA" by bond rating agencies. It is our policy not to take any undue credit
risk with the investment portfolio.
Securities available for sale increased to $505.9 million at March 31,
2003, up 4% from $487.0 million at December 31, 2002. The growth in the
investment security portfolio since December 31, 2002
30
resulted from the continued implementation of our asset/liability management
strategy. Tax exempt municipal securities increased by $14.4 million. These
securities provide net interest margin protection in a falling interest-rate
environment. Investments in Federal Home Loan Bank stock increased by $4.4
million due to stock dividends received in the first quarter 2003.
DEPOSITS AND FUNDS BORROWED
The following table presents the balances of deposits by category and
each category as a percentage of total deposits at March 31, 2003 and
December 31, 2002:
MARCH 31, DECEMBER 31,
-------------------------- ------------------------
2003 2002
-------------------------- ------------------------
PERCENT OF PERCENT
BALANCE TOTAL BALANCE OF TOTAL
---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Demand............................ $ 88,243 7% $ 88,986 7%
Savings........................... 8,251 1% 6,344 1%
Interest-bearing demand........... 73,699 5% 64,893 5%
Money market...................... 467,849 34% 482,597 40%
Brokered deposits................. 387,006 28% 279,806 23%
Other time deposits............... 340,296 25% 282,645 24%
---------- --- ---------- ---
Total deposits................. $1,365,344 100% $1,205,271 100%
========== === ========== ===
Total deposits of $1.4 billion at March 31, 2003 represent an increase
of $160.1 million or 13% as compared to total deposits of $1.2 billion as of
December 31, 2002. Noninterest-bearing deposits decreased by 0.8% to $88.2
million at March 31, 2003 as compared to $88.9 million at December 31, 2002.
Interest-bearing demand deposits increased by 14% to $73.7 million as compared
to $64.9 million at December 31, 2002. Money market accounts decreased by $14.7
million to $467.8 million at March 31, 2003 as compared to $482.6 million at
December 31, 2002. Other time deposits increased by approximately $57.7 million
to $340.3 million as compared to $282.6 million at year-end 2002. Brokered
deposits increased by 38% to $387.0 million at March 31, 2003 as compared to
$279.8 million at December 31, 2002.
We continued to utilize brokered deposits as a source of funding for
growth in the loan and investment portfolios. Brokered deposits increased to
$387.0 at March 31, 2003 from $279.8 at December 31, 2002. Certain brokered
deposits may include call option provisions, which can provide us with the
opportunity to repay the certificates of deposit on a specified date prior to
the contractual maturity date. As of March 31, 2003, there were no outstanding
brokered deposits containing call provisions. The following table presents the
maturity and rate of our brokered deposits, net of unamortized prepaid broker
commissions as of March 31, 2003.
BROKERED DEPOSITS NET OF UNAMORTIZED PREPAID BROKER COMMISSIONS
AT MARCH 31, 2003 (IN THOUSANDS)
MATURITY DATE RATE(1) AMOUNT
------------- ------- ------
11/13/2007 3.400% $ 7,000
02/28/2005 2.050% 7,233
01/31/2005 2.150% 15,000
01/24/2005 2.250% 10,000
10/18/2004 2.300% 7,668
09/27/2004 1.750% 11,448
08/30/2004 2.500% 25,000
31
MATURITY DATE RATE(1) AMOUNT
------------- ------- ------
08/04/2004 1.750% 10,000
07/09/2004 1.950% 5,000
04/21/2004 2.100% 10,000
04/19/2004 2.250% 5,000
03/26/2004 1.500% 10,549
02/26/2004 1.800% 30,000
02/19/2004 1.600% 25,000
01/30/2004 1.850% 11,872
01/22/2004 1.700% 10,000
01/22/2004 1.900% 12,000
01/15/2004 1.700% 28,000
01/15/2004 1.850% 18,448
01/09/2004 1.850% 10,000
12/31/2003 1.800% 953
10/29/2003 1.750% 20,000
10/17/2003 2.050% 5,000
10/17/2003 1.850% 6,699
10/17/2003 2.050% 3,000
09/05/2003 3.800% 2,394
07/24/2003 2.400% 17,425
07/21/2003 2.450% 15,312
07/17/2003 2.250% 20,000
06/27/2003 7.050% 4,548
06/23/2003 7.200% 2,594
04/21/2003 2.200% 11,063
04/16/2003 2.000% 10,000
--------
Total brokered deposits................... 388,206
Unamortized prepaid broker commissions.... (1,200)
--------
Total brokered deposits, net of
unamortized prepaid broker commissions.... $387,006
========
- ------------------
(1) Represents the coupon rate of each brokered deposit.
Membership in the Federal Home Loan Bank System gives us 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 2003, our utilization of Federal Home Loan Bank advances to fund
loan growth slightly decreased as advances matured. Management anticipates that
our reliance on Federal Home Loan Bank borrowings as a funding source will
likely remain at current levels or increase slightly in 2003 to the extent that
rates on Federal Home Loan Bank advances continue to be more attractive than
deposit pricing. Federal Home Loan Bank borrowings totaled $67.1 million at
March 31, 2003 compared to $77.8 million at December 31, 2002.
32
A summary of all funds borrowed and outstanding at March 31, 2003,
December 31, 2002 and March 31, 2002 is presented in the table below:
CURRENT
LONG TERM FUNDS BORROWED: RATE MATURITY 3/31/2003 12/31/2002 3/31/2002
------------------------------------- ------- -------- --------- ---------- ---------
Subordinated note.................... 3.35% 02/11/07 $ 5,000 $ 5,000 $ 5,000
FHLB fixed advance(1)................ 6.50% 10/23/05 26,648 26,616 24,698
-------- -------- --------
Total long-term funds borrowed....... $ 31,648 $ 31,616 $ 29,698
======== ======== ========
Short term Funds borrowed:
FHLB fixed advance................... 1.61% 01/16/04 $ 1,000 $ -- $ --
FHLB fixed advance................... 6.21% 12/05/03 30,000 30,000 30,000
FHLB fixed advance................... 1.73% 11/07/03 6,000 6,000 --
FHLB fixed advance................... 2.21% 07/17/03 1,000 1,000 --
FHLB fixed advance................... 2.74% 07/17/03 1,000 1,000 1,000
FHLB fixed advance................... 2.46% 06/16/03 500 500 --
FHLB fixed advance................... 2.70% 05/08/03 1,000 1,000 --
Borrowing under revolving line of
credit facility................... 3.50% 04/11/03 28,750 25,000 9,000
FHLB fixed advance................... 2.98% 03/10/03 -- 1,000 1,000
FHLB fixed advance................... 2.38% 01/13/03 -- 1,000 1,000
FHLB fixed advance................... 5.89% 12/20/02 -- -- 1,000
FHLB fixed advance................... 2.39% 11/12/02 -- -- 5,000
FHLB fixed advance................... 5.33% 07/22/02 -- -- 1,000
FHLB fixed advance................... 5.91% 06/21/02 -- -- 500
FHLB fixed advance................... 4.21% 05/31/02 -- -- 1,000
FHLB open line advance............... 1.48% daily -- 9,700 --
Fed funds purchased.................. 1.56% daily 9,000 98,000 69,000
Demand repurchase agreements(2)...... 1.25% daily 15,035 4,138 6,325
-------- -------- --------
Total short term funds borrowed...... 93,285 178,338 125,825
-------- -------- --------
Total funds borrowed................. $124,933 $209,954 $155,523
======== ======== ========
<FN>
- ------------------
(1) This FHLB advance is subject to a fair value hedge utilizing an interest
rate swap with a fair value of $2.8 million at March 31, 2003. The
contractual par amount on the advance is $25.0 million.
(2) Demand repurchase agreements are a form of retail repurchase agreement
offered to certain clients of The PrivateBank. 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.
</FN>
The decrease in funds borrowed as of March 31, 2003 as compared to
December 31, 2002, reflects a decrease in our federal funds purchased position
and decreases in FHLB fixed advances, offset by an increase in our borrowings
under a revolving line of credit.
In February 2002, the Company renewed the term on an $18.0 million
revolving credit facility with a commercial bank originally entered into in
February 2000. On April 11, 2002, the loan agreement was amended and the
revolving line was increased to $25.0 million. On December 24, 2002, the loan
agreement was amended to increase the revolving line to $35.0 million and to
extend the maturity to December 1, 2003. The interest rate on borrowings under
this revolving line resets quarterly, and is based on, at our option, either the
lender's prime rate or three-month LIBOR plus 120 basis points with a floor of
3.50%. The Company has elected to pay interest based on the three-month LIBOR
rate plus 120 basis points. The initial rate of interest on the revolver was
7.20%, and most recently reset to 3.50% on March 1, 2003. The collateral for
this borrowing consists of the common stock of The PrivateBank (Chicago) and The
PrivateBank (St. Louis), which is held in custody by the lender. As of March 31,
2003, the outstanding balance was $28.8 million.
33
In February 2000, the Company issued a subordinated note, in the
principal amount of $5.0 million as part of the purchase price for its
acquisition of Johnson Bank Illinois. The interest on the subordinated note is
reset each quarter based on the three-month LIBOR rate. The note is payable in
full on or before February 11, 2007, and provides for certain rate escalation
beginning after February 11, 2002. On February 11, 2002, the interest rate
increased from LIBOR +50 basis points to LIBOR +200 basis points. This pricing
is in effect until February 11, 2004, at which point the pricing increases to
LIBOR +350 until maturity on February 11, 2007. The average rate of interest on
the subordinated note was 3.51% during the first quarter of 2003 compared to
3.27% during 2002 and most recently reset to 3.35% on February 11, 2003. 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.
CAPITAL RESOURCES
At March 31, 2003, $20.0 million of the trust preferred securities was
treated as Tier 1 capital. Stockholders' equity rose to $95.4 million at March
31, 2003, an increase of $6.3 million from the 2002 year-end level, due to an
increase in year-to-date 2003 net income.
The Company and its banking subsidiaries are subject to regulatory
capital requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings and other factors, and the regulators can lower classifications in
certain areas. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
The prompt corrective action regulations provide five classifications,
including well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If a banking
subsidiary is not "well capitalized," regulatory approval is required to accept
brokered deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion and plans for capital restoration are required.
The following table sets forth our consolidated regulatory capital
amounts and ratios as of March 31, 2003 and 2002, and December 31, 2002:
MARCH 31, DECEMBER 31,
----------------------------------------------------------- ----------------------------
2003 2002 2002
---------------------------- ---------------------------- ----------------------------
"WELL- "WELL- "WELL
CAPITAL- EXCESS/ CAPITAL- EXCESS CAPITAL- EXCESS
IZED" (DEFICIT) IZED" (DEFICIT) IZED" (DEFICIT)
CAPITAL STANDARD CAPITAL CAPITAL STANDARD CAPITAL CAPITAL STANDARD CAPITAL
------- -------- ------- ------- -------- ------- ------- -------- -------
DOLLAR BASIS:
Tier 1 leverage
capital............... $82,226 $ 78,020 $ 4,206 $74,090 $59,282 $14,808 $78,524 $ 71,818 $ 6,706
Tier 1 risk-based
capital............... 82,226 70,600 11,626 74,090 53,097 20,993 78,524 68,134 10,390
Total risk-based
capital............... 97,697 117,667 (19,970) 87,880 88,496 (616) 94,109 113,556 (19,447)
PERCENTAGE BASIS:
Leverage ratio........... 5.27% 5.00% 6.25% 5.00% 5.47% 5.00%
Tier 1 risk-based
capital ratio......... 6.99 6.00 8.37 6.00 6.91 6.00
Total risk-based
capital ratio......... 8.30 10.00 9.93 10.00 8.29 10.00
Total equity to
total assets.......... 5.85 -- -- 5.27 5.77 -- --
34
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," a bank 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 March 31, 2003, the Company and each of the banking subsidiaries
continued to exceed the minimum levels of all regulatory capital requirements,
and each banking subsidiary was considered "well capitalized" under all
regulatory standards. The Company plans to issue additional common stock to
raise additional equity capital and increase its regulatory capital ratios
during the second quarter of 2003.
RISK MANAGEMENT
We are exposed to market risk from changes in interest rates that could
affect our results of operations and financial condition. We manage our exposure
to these market risks through our regular operating and financing activities. We
hedge our interest rate risk through the use of derivative financial
instruments. We use derivative financial instruments as risk management tools.
INTEREST RATE RISK
One of two interest rate swaps we have entered into is designated as a
fair value hedge of a fixed-rate $25.0 million advance from the Federal Home
Loan Bank of Chicago (FHLB). We entered into this interest rate swap transaction
in 2001 and we agreed to receive a fixed rate in exchange for payment of a
floating rate based on an agreed-upon notional amount of $25.0 million. The fair
value of the interest rate swap was $2.8 million as of March 31, 2003, a
decrease of $89,993 as compared to December 31, 2002.
The Company entered into a $25 million interest rate swap during the
third quarter of 2002, swapping the 10-year treasury rate for 3-month LIBOR to
serve as an economic hedge of a portion of the Company's available-for-sale
municipal bond securities portfolio. The March 31, 2003 fair market value
adjustment on this swap resulted in the trading loss of $230,000 for the
quarter, with a corresponding derivative liability of the same amount. This swap
does not qualify for hedge accounting treatment and the mark-to-market
adjustment on the swap is recognized in earnings. At March 31, 2003, the
carrying value of the trading swap was a liability of $807,703.
LIQUIDITY
Liquidity measures our ability to meet maturing obligations and its
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 provided by operations was $11.8 million in the first three
months of 2003 compared to net cash inflows of $8.8 million a year earlier. The
net cash provided during the first quarter 2003 was impacted by the growth and
timing of receipts of interest and cash settlement payments. Net cash outflows
from investing activities were $67.7 million in the first three months of 2003
compared to a net cash outflow of $58.5 million a year earlier. Cash inflows
from financing activities in the first three months of 2003 were $75.2 million
compared to a net inflow of $56.3 million in the first three months of 2002.
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
35
subsidiaries the ability to borrow funds from the FHLB for short- or long-term
purposes under a variety of programs.
Our investment in FHLB stock is a source of liquidity for the Company.
At March 31, 2003, we owned $160.0 million of FHLB stock. FHLB stock can be sold
at par by the Company, back to the FHLB at any time, excluding the required FHLB
stock minimum that needs to be maintained in order to support existing FHLB
advances. FHLB has communicated to the Company that generally the stock will be
redeemed immediately upon a request by the Company, however, FHLB can legally
require six months advance notice of the stock sale before the stock is actually
liquidated for cash at its par value. Alternatively, FHLB can redeem, at any
time any FHLB stock we own, in excess of the required minimum FHLB stock that
needs to be maintained in order to support existing advances. During the first
quarter of 2003, our utilization of Federal Home Loan advances ("FHLB")
decreased slightly due to scheduled maturities of advances. For the remainder of
2003, we expect to continue to utilize FHLB advances as a funding source to the
extent that rates on FHLB advances are more attractive than other sources of
liquidity. On May 6, 2003, we purchased $45.0 million of additional FHLB stock
to take advantage of the favorable dividend yield in addition to the liquid
nature of the investment.
During the first quarter 2003, we continued to rely on brokered
deposits to fund growth in loans and investment securities as well as liquidity
at our banks. For the remainder of 2003, we expect to continue to rely on
brokered deposits for liquidity purposes if brokered rates continue to compare
favorably to other sources of liquidity, and may increase the level of these
deposits. Our asset liability policy currently limits our use of brokered
deposits to levels no more than 40% of total deposits. Consistent with this
policy, brokered deposits represented 28% of total deposits at March 31, 2003
compared to 23% of total deposits at December 31, 2002. We do not expect our 40%
threshold limitation to limit our ability to implement our growth plan.
36
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 monitored 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 management policy by
establishing criteria by which we may purchase securities. These criteria
include approved types of securities, brokerage sources, terms of investment,
quality standards, and diversification.
We measure the impact of interest rate changes on our income statement
through the use of gap analysis. The gap represents the net position of assets
and liabilities subject to repricing in specified time periods. During any given
time period, if the amount of rate sensitive liabilities exceeds the amount of
rate sensitive assets, a company would generally be considered negatively gapped
and would benefit from falling rates over that period of time. Conversely, a
positively gapped company would generally benefit from rising rates. The
following tables illustrate the estimated interest rate sensitivity and periodic
and cumulative gap positions calculated as of March 31, 2003 and December 31,
2002:
37
MARCH 31, 2003
-----------------------------------------------------------------------
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
-------- --------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Total Net Loans...................... $634,062 $ 83,215 $ 226,607 $ 61,841 $1,005,725
Investments.......................... 38,875 69,853 58,407 161,520 328,655
Total FHLB Stock..................... 159,945 -- -- -- 159,945
Total Fed Funds Sold................. 7,415 -- -- -- 7,415
-------- --------- ---------- ---------- ----------
Total Interest-Earning Assets........ $840,297 $ 153,068 $ 285,014 $ 223,361 $1,501,740
INTEREST-BEARING LIABILITIES
PrivateBank Deposit Accounts......... $ -- $ -- $ -- $ 73,699 $ 73,699
Savings Deposits..................... 8,251 -- -- -- 8,251
Money Market Deposits................ 467,849 -- -- -- 467,849
Total Time Deposits.................. 162,434 132,905 44,957 -- 340,296
Total Brokered Deposits.............. 28,205 246,652 112,149 -- 387,006
Total Borrowings..................... 55,933 39,000 30,000 20,000 144,933
-------- --------- ---------- ---------- ----------
Total Interest-Bearing Liabilities... $722,672 $ 418,557 $ 187,106 $ 93,699 $1,422,034
CUMULATIVE
Rate sensitive assets (RSA)....... 840,297 993,365 1,278,379 1,501,740
Rate sensitive liabilities (RSL).. 722,672 1,141,229 1,328,335 1,422,034
GAP (GAP=RSA-RSL).................... 117,625 (147,864) (49,956) 79,706
RSA/RSL.............................. 116.28% 87.04% 96.24% 105.61%
RSA/Total assets..................... 51.58% 60.98% 78.48% 92.19%
RSL/Total assets..................... 44.36% 70.06% 81.54% 87.30%
GAP/Total assets..................... 7.22% (9.08)% (3.07)% 4.89%
GAP/Total RSA........................ 14.00% (14.89)% (3.91)% 5.31%
38
DECEMBER 31, 2002
-----------------------------------------------------------------------
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
-------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS
Loans................................ $635,664 $ 77,465 $ 175,066 $ 79,197 $ 967,392
Investments.......................... 163,621 21,138 26,576 261,208 472,543
Short-term investments............... 258 -- -- -- 258
-------- ---------- ---------- ---------- ----------
Total interest-earning assets........ $799,543 $ 98,603 $ 201,642 $ 340,405 $1,440,193
======== ========== ========== ========== ==========
INTEREST-BEARING LIABILITIES
Interest-bearing demand.............. $ -- $ -- $ -- $ 64,892 $ 64,892
Savings and money market............. 486,819 1,262 -- 859 488,940
Time deposits........................ 191,238 205,474 91,872 73,868 562,452
Funds borrowed....................... 143,838 31,500 53,000 -- 228,338
-------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities... $821,895 $ 238,236 $ 144,872 $ 139,619 $1,344,622
======== ========== ========== ========== ==========
CUMULATIVE
Rate sensitive assets (RSA).......... $799,543 $ 898,146 $1,099,788 $1,440,193
Rate sensitive liabilities (RSL)..... 821,895 1,060,131 1,205,003 1,344,622
GAP (GAP=RSA-RSL).................... (22,352) (161,985) (105,215) 95,571
RSA/RSL.............................. 97.28% 84.72% 91.27% 107.11%
RSA/Total assets..................... 51.80% 58.19% 71.26% 93.31%
RSL/Total assets..................... 53.25% 68.69% 78.07% 87.12%
GAP/Total assets..................... (1.45)% (10.50)% (6.82)% 6.19%
GAP/Total RSA........................ (2.80)% (18.04)% (9.57)% 6.64%
The following table shows the impact of an immediate 200 basis point
change in interest rates as of March 31, 2003 and December 31, 2002. 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.
MARCH 31, 2003 DECEMBER 31, 2002
---------------------------------------------------------
+200 BASIS -200 BASIS +200 BASIS -200 BASIS
POINTS POINTS POINTS POINTS
---------- ----------- ---------- ----------
Percentage change in net interest income due to
an immediate 200 basis point change in
interest rates over a one-year time horizon......... (1.5)% (8.9)% 2.9% (10.5)%
This table shows that if there had been an instantaneous parallel shift
in the yield curve of -200 basis points on March 31, 2003 and December 31, 2002,
we would suffer a decline in net interest income of -8.9% and -10.5%,
respectively, over each one-year period. Conversely, a shift of +200 basis
points would decrease net interest income -1.5% over a one-year horizon based on
March 31, 2003 balances, as compared to an increase of net interest income of
2.9% measured on the basis of the December 31, 2002 portfolio.
Changes in the effect on net interest income from a 200 basis point
movement at March 31, 2003, compared to December 31, 2002 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
39
the timing of repricing within the 91 to 365 day bucket, would lead to only a
moderate decrease in net interest income from an immediate +200 basis point
move. The difference in the effect on net interest income at March 31, 2003 as
compared to December 31, 2002 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.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company's
Chief Executive Officer and Chief Financial Officer carried out an evaluation
under their supervision, with the participation of other members of management
as they deemed appropriate, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures as contemplated by Exchange Act
Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective, in all material respects, in
timely alerting them to material information relating to the Company (and its
consolidated subsidiaries) required to be included in the periodic reports the
Company is required to file and submit to the SEC under the Exchange Act.
There have been no significant changes to the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date that the internal controls were most recently evaluated.
There were no significant deficiencies or material weaknesses identified in that
evaluation and, therefore, no corrective actions were taken.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995,
and we are including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe our future plans, strategies and expectations, can generally be
identified by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project," or similar expressions. Our ability to predict results or
the actual effect of future plans or strategies is inherently uncertain and
actual results may differ materially from the results discussed in
forward-looking statements. Factors which might cause such a difference include,
but are not limited to, fluctuations in market rates of interest and loan and
deposit pricing; a deterioration of general economic conditions in our market
areas; legislative or regulatory changes; adverse developments in our loan or
investment portfolios; significant increases in competition; difficulties in
identifying attractive acquisition opportunities or strategic partners to
complement our private banking approach and the products and services we offer;
and the possible dilutive effect of potential acquisitions or expansion. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should
40
not be placed on such statements. We undertake no obligation to update publicly
any of these statements in light of future events except as required in
subsequent periodic reports we file with the SEC.
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 neither the
Company nor any of its subsidiaries is a party to any pending material legal
proceedings that the Company believes will have a material adverse effect on its
business, results of operations, financial condition or cash flows.
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.
3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc., as amended. (previously filed)
3.2 Amended and Restated By-laws of PrivateBancorp, Inc. (previously filed)
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.
15.0 Acknowledgment of Independent Auditors
41
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Independent Accountants' Review Report (previously filed)
(b) Reports on Form 8-K
(1) Current Report on Form 8-K dated January 3, 2003, filed with
the SEC on January 3, 2003.
(2) Current Report on Form 8-K dated January 9, 2003, filed with
the SEC on January 9, 2003.
(3) Current Report on Form 8-K dated January 21, 2003, filed with
the SEC on January 21, 2003.
(4) Current Report on Form 8-K dated January 27, 2003, filed with
the SEC on January 27, 2003.
(5) Current Report on Form 8-K dated February 27, 2003, filed with
the SEC on February 27, 2003.
(6) Current Report on Form 8-K dated March 24, 2003, filed with
the SEC on March 24, 2003.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-Q/A 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/ Dennis L. Klaeser
-----------------------------
Dennis L. Klaeser,
Chief Financial Officer
(principal financial officer)
By: /s/ Lisa M. O'Neill
-----------------------------
Lisa M. O'Neill,
Controller
(principal accounting officer)
Date: July 1, 2003
43
CERTIFICATIONS
I, Ralph B. Mandell, Chairman, President and Chief Executive Officer of
PrivateBancorp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of PrivateBancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: July 1, 2003
/s/ Ralph B. Mandell
- ------------------------------------------------
Ralph B. Mandell
Chairman, President and Chief Executive Officer
PrivateBancorp, Inc.
44
CERTIFICATIONS
I, Dennis L. Klaeser, Chief Financial Officer of PrivateBancorp, Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of PrivateBancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: July 1, 2003
/s/ Dennis L. Klaeser
- ---------------------------------------
Dennis L. Klaeser
Chief Financial Officer
PrivateBancorp, Inc.
45
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp,
Inc., as amended. (previously filed)
3.3 Amended and Restated By-laws of PrivateBancorp, Inc. (previously filed)
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.
15.0 Acknowledgment of Independent Auditors
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
99.2 Independent Accountants' Review Report (previously filed)
46