SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to ________
Commission File Number: 000-25887
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter.)
Delaware 36-3681151
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
Ten North Dearborn Street
Chicago, Illinois 60602
(Address of principal executive offices) (ZIP code)
(312) 683-7100
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
================================================================================
Class Outstanding as of August 6, 1999
- --------------------------------------------------------------------------------
Common, no par value 4,584,092
================================================================================
PRIVATEBANCORP, INC.
FORM 10-Q Quarterly Report
Table of Contents
PART I
Page Number
-----------
Item 1. Financial Statements................................................1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................7
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........16
PART II
Item 1. Legal Proceedings...................................................19
Item 2. Changes in Securities and Use of Proceeds...........................19
Item 3. Defaults Upon Senior Securities.....................................19
Item 4. Submission of Matters to a Vote of Security Holders.................19
Item 5. Other Information...................................................20
Item 6. Exhibits and Reports on Form 8-K....................................20
Form 10-Q Signature Page.....................................................21
Exhibit Index................................................................22
PART I - Financial Information
PRIVATEBANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
JUNE 30, DECEMBER 31, JUNE 30,
1999 1998 1998
--------- ------------ ---------
(unaudited) (unaudited)
ASSETS
Cash and due from banks......................................... $ 9,896 $ 11,895 $ 12,072
Federal funds sold.............................................. 995 3,619 22,415
-------- -------- --------
Total cash and cash equivalents............................ 10,891 15,514 34,487
-------- -------- --------
Available-for-sale securities, at fair value.................... 89,026 116,891 45,037
-------- -------- --------
Loans........................................................... 335,306 281,965 237,972
Allowance for loan losses...................................... (3,903) (3,410) (3,230)
-------- -------- --------
Net loans....................................................... 331,403 278,555 234,742
-------- -------- --------
Bank premises and equipment, net................................ 1,477 1,588 1,775
-------- -------- --------
Accrued interest receivable..................................... 2,799 2,264 2,064
-------- -------- --------
Other assets.................................................... 2,573 1,496 2,075
-------- -------- --------
Total assets.................................................... $438,169 $416,308 $320,180
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits
Noninterest-bearing............................................ $ 34,267 $ 39,490 $ 25,353
Interest-bearing............................................... 26,286 26,508 22,930
Savings and money market deposit accounts....................... 176,482 170,713 136,786
Other time deposits............................................. 137,997 128,282 106,839
-------- -------- --------
Total deposits............................................. 375,032 364,993 291,908
Funds borrowed.................................................. 31,000 20,000 --
Accrued interest payable........................................ 721 721 558
Other liabilities............................................... 1,450 1,320 1,603
-------- -------- --------
Total liabilities............................................... 408,203 387,034 294,069
-------- -------- --------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized.................... -- -- --
Common stock, without par value; 12,000,000 shares
authorized; 3,451,824; 3,431,424; and 3,319,824 shares
issued and outstanding as of June 30, 1999,
December 31, 1998, and June 30, 1998, respectively............. 3,452 3,431 3,320
Surplus......................................................... 22,600 22,274 20,991
Retained earnings............................................... 6,879 4,912 3,311
Accumulated other comprehensive income ......................... (1,219) 151 65
Deferred compensation........................................... (796) (544) (626)
Loan to executive officer....................................... (950) (950) (950)
-------- -------- --------
Total stockholders' equity...................................... 29,966 29,274 26,111
-------- -------- --------
Total liabilities and stockholders' equity...................... $438,169 $416,308 $320,180
======== ======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
1
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(In thousands, except per share data)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
INTEREST INCOME
Loans, including fees.................................. $11,854 $ 9,499 $6,218 $4,875
Federal funds sold and interest bearing deposits 81 911 33 413
Securities............................................. 2,864 1,425 1,294 698
------- ------- ------ ------
Total interest income............................. 14,799 11,835 7,545 5,986
------- ------- ------ ------
INTEREST EXPENSE
Deposits:
Interest-bearing demand............................ 282 239 140 118
Savings and money market deposit accounts.......... 3,519 3,190 1,719 1,561
Other time......................................... 3,480 2,778 1,729 1,432
Funds borrowed......................................... 505 -- 360 --
------- ------- ------ ------
Total interest expense................................. 7,786 6,207 3,948 3,111
------- ------- ------ ------
Net interest income.................................... 7,013 5,628 3,597 2,875
Provision for loan losses.............................. 498 180 213 90
------- ------- ------ ------
Net interest income after provision for loan losses.... 6,515 5,448 3,384 2,785
------- ------- ------ ------
NON-INTEREST INCOME
Banking and trust services............................. 908 593 512 320
Securities gains....................................... 50 -- 4 --
------- ------- ------ ------
Total non-interest income......................... 958 593 516 320
------- ------- ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits......................... 2,203 2,006 1,088 904
Occupancy expense, net................................. 725 667 373 333
Other non-interest expense............................. 1,706 1,282 918 717
------- ------- ------ ------
Total non-interest expense....................... 4,634 3,955 2,379 1,954
------- ------- ------ ------
Income before income taxes............................. 2,839 2,086 1,521 1,151
Income tax provision................................... 700 814 409 449
------- ------- ------ ------
NET INCOME............................................. $ 2,139 $ 1,272 $1,112 $ 702
======= ======= ====== ======
Basic earnings per share............................... $ 0.62 $ 0.39 $ 0.32 $ 0.21
Diluted earnings per share............................. $ 0.58 $ 0.37 $ 0.30 $ 0.20
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Six Months Ended June 30, 1998 and 1999
(In thousands, except per share data)
ACCUMULATED
OTHER LOAN TO TOTAL
COMMON RETAINED COMPREHENSIVE DEFERRED EXECUTIVE STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME COMPENSATION OFFICER EQUITY
------ ------- -------- ------------- ------------ ------- -------------
Balance, January 1, 1998........................ $3,217 $19,782 $2,165 $ 29 $(506) $ -- $24,687
Net income................................... -- -- 1,272 -- -- -- 1,272
Net increase in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification
adjustments................................. -- -- -- 36 -- -- 36
------ ------- ------ ------- ----- ----- -------
Total comprehensive income...................... 1272 36 1,308
------ ------- ------ ------- ----- ----- -------
Cash dividends declared ($0.04 per share)....... -- -- (126) -- -- -- (126)
Issuance of common stock........................ 103 1,209 -- -- -- -- 1,312
Awards granted.................................. -- -- -- -- (187) -- (187)
Amortization of deferred compensation........... -- -- -- -- 67 -- 67
Loan to chief executive officer................. -- -- -- -- -- (950) (950)
------ ------- ------ ------- ----- ----- -------
Balance, June 30, 1998.......................... $3,320 $20,991 $3,311 $ 65 $(626) $(950) $26,111
====== ======= ====== ======= ===== ===== =======
Balance, January 1, 1999........................ $3,431 $22,274 $4,913 $ 150 $(544) $(950) $29,274
Net income................................... -- -- 2,139 -- -- -- 2,139
Net decrease in fair value of securities
classified as available-for-sale, net of
income taxes and reclassification
adjustments................................. -- -- -- (1,369) -- -- (1,369)
------ ------- ------ ------- ----- ----- -------
Total comprehensive income...................... -- -- 2,139 (1,369) -- -- 770
------ ------- ------ ------- ----- ----- -------
Cash dividends declared ($0.05 per share)....... -- -- (172) -- -- -- (172)
Issuance of common stock........................ 21 326 -- -- -- -- 347
Awards granted.................................. -- -- -- -- (347) -- (347)
Amortization of deferred compensation........... -- -- -- -- 94 -- 94
------ ------- ------ ------- ----- ----- -------
Balance, June 30, 1999.......................... $3,452 $22,600 $6,880 $(1,219) $(797) $(950) $29,966
====== ======= ====== ======= ===== ===== =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, 1999 and 1998
(In thousands, except share and per share data)
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................. $ 2,139 $ 1,272
------- --------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization....................................... 251 248
Amortization of deferred compensation............................... 95 67
Provision for loan losses........................................... 498 181
Gain on sale of securities.......................................... (50) --
(Decrease) increase in deferred loan fees........................... (10) 61
(Increase) in accrued interest receivable........................... (535) (482)
Increase in accrued interest payable................................ -- 105
Increase in other assets............................................ (448) (746)
Increase in other liabilities....................................... 130 645
------- -------
Total adjustments................................................ (69) 79
------- -------
Net cash provided by operating activities........................ 2,070 1,351
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities............ 35,175 36,001
Purchase of securities available-for-sale.............................. (9,258) (15,596)
Net loan principal advanced............................................ (53,683) (20,488)
Bank premises and equipment expenditures............................... (140) (119)
------- -------
Net cash used in investing activities............................... (27,906) (202)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits....................................... 10,038 6,135
Issuance of common stock............................................. 347 1,124
Dividends paid....................................................... (172) (127)
Proceeds from funds borrowed......................................... 31,000 --
Principal reductions of funds borrowed............................... (20,000) --
------- -------
Net cash provided by financing activities......................... 21,213 7,132
------- -------
Net (decrease) increase in cash and cash equivalents................... (4,623) 8,281
Cash and cash equivalents at beginning of year.......................... 15,514 26,206
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $10,891 $34,847
======= =======
NON-CASH TRANSACTION
Loan to executive officer for purchase of common stock.............. -- $ 950
------- -------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
NOTE 1 - BASIS OF PRESENTATION
The financial information of PRIVATEBANCORP, Inc. (the "Company") 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 six months ended June 30, 1999
are not necessarily indicative of the results expected for the full year ending
December 31, 1999. The accompanying consolidated financial statements are
unaudited and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations, or cash flows in
accordance with generally accepted accounting principles. The consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes for the year ended December 31, 1998 included in
the Company's registration statement on Form S-1 (File No. 333-77147).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the reported
period. Actual results could differ from these estimates.
NOTE 2 - EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per
share (in thousands except per share data):
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
-------------- -------------- --------------- -------------
NET INCOME $2,139 $1,272 $1,112 $ 702
====== ====== ====== ======
Average common shares outstanding......................... 3,443 3,254 3,452 3,273
Average common shares equivalent (1)...................... 250 184 253 216
------ ------ ------ ------
Weighted average common shares and common share
equivalents.............................................. 3,693 3,438 3,705 3,489
====== ====== ====== ======
Net income per average common share - basic............... $ 0.62 $ 0.39 $ 0.32 $ 0.21
====== ====== ====== ======
Net income per average common share - diluted............. $ 0.58 $ 0.37 $ 0.30 $ 0.20
====== ====== ====== ======
- ------------
(1) Common shares equivalent result from stock options being treated as if they
had been exercised and are computed by application of the treasury stock
method.
NOTE 3 - NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Related Hedging Activities", will, on January 1,
2001, require all derivatives to be recorded at fair value in the balance sheet,
with changes in fair value recorded in the income statement. If derivatives are
documented and effective as hedges, the change in the derivative fair value will
be offset by an equal change in the fair value of the hedged item. All hedge
ineffectiveness will be recognized immediately in earnings. The Statement may be
adopted early at the start of a calendar quarter. The Company does not plan to
adopt the Statement early and adoption is not expected to have a material impact
since the Company does not have derivative instruments or hedging activity.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise", will, on January 1, 1999, allow
mortgage loans that are securitized to be classified as trading, available for
sale, or in certain circumstances, held to maturity. Currently, these must be
classified as trading. Since the Company has not securitized loans, this
Statement is not expected to impact the Company.
5
NOTE 4 - OPERATING SEGMENTS
The Bank provides personal and commercial banking services to affluent
individuals, professionals and their business interests in the Chicago
metropolitan area. Such services include loans, deposit instruments,
investments, and trust services. For purposes of making operating decisions and
assessing performance, management treats the Company and Bank as one operating
segment.
NOTE 5 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments as
of June 30, 1999 have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 1998.
NOTE 6 - OTHER COMPREHENSIVE INCOME
Change in fair value of securities available for sale is presented on a net
basis on the Consolidated Statement of Changes in Stockholders' Equity. The
following table discloses the changes in other comprehensive income as of June
30, 1999 and 1998 on a gross basis:
JUNE 30, 1999
-----------------------------------------
BEFORE TAX
TAX (BENEFIT) NET OF TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
Unrealized (losses) on securities available for sale--
Unrealized holding losses...................................... $(2,194) $(856) $(1,338)
Less: reclassification adjustment for gain included in net
income................................................... 50 19 31
------- ----- -------
Net unrealized (losses)............................................. $(2,244) $(875) $(1,369)
======= ===== =======
JUNE 30, 1998
-----------------------------------------
BEFORE TAX
TAX (BENEFIT) NET OF TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
Unrealized gains on securities available for sale--
Unrealized holding gains....................................... $59 $23 $36
=== === ===
NOTE 7 - SUBSEQUENT EVENTS
All significant subsequent events have been disclosed in section Item 2 of
Management's Discussion and Analysis.
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The Company was organized in 1989 to serve as the holding company for a de
novo bank, The PrivateBank and Trust Company, which provides personal and
commercial banking services to affluent individuals, professionals and their
business interests in the Chicago metropolitan area. The Company opened its
flagship Chicago location in 1991, and its full-service offices in the affluent
community of Wilmette, Illinois, a North Shore suburb of Chicago, in 1994, and
Oak Brook, Illinois, located in the rapidly growing western suburbs, in 1997.
The profitability of our operations depends on our net interest income,
provision for possible loan losses, non-interest income, and non-interest
expense. Net interest income is the difference between the income we receive on
our loan and investment portfolios and our cost of funds, which consists of
interest paid on deposits and borrowings. The provision for possible loan losses
reflects the cost of credit risk in our loan portfolio. Non-interest income
consists primarily of trust fee income, and to a lesser extent, net securities
gains and fees for ancillary banking services. Non-interest expense includes
salaries and employee benefits as well as occupancy, data processing, marketing,
professional fees, insurance, and other expenses.
Net interest income is dependent on the amounts and yields of
interest-earning assets as compared to the amounts and rates on interest-bearing
liabilities. Net interest income is sensitive to changes in market rates of
interest and our asset/liability management procedures in coping with such
changes. The provision for loan losses is dependent on increases in the loan
portfolio, management's assessment of the collectibility of the loan portfolio,
loss experience, as well as economic and market factors. We earn trust fees for
managing and administering investment funds for a variety of individuals,
families and fiduciary relationships. Non-interest expenses are heavily
influenced by the growth of operations. Growth in the number of client
relationships directly affects the majority of our expense categories.
Our non-interest income from fees and deposit service charges are below
peer group levels. This is largely the result of the profile of our typical
client. Our clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, we do not earn
high service charge income typical of community banks.
Higher account balances result in relatively low levels of transactions per
account dollar and therefore our accounts are less costly to maintain. We
believe that as we continue to grow, we will continue to experience lower
overhead costs than other banks with similar aggregate levels of loans and
deposits.
On June 24, 1999 the Company entered into a definitive agreement to acquire
Town Square Financial Corporation ("Towne Square") a recently formed corporation
not yet engaged in business. Towne Square agreed to merge with the Company in a
stock for stock transaction in lieu of pursuing its de novo strategy in St.
Charles, Illinois. The Company believes that this transaction affords an
excellent opportunity to expand its private banking in a rapidly growing market.
The Company will establish a new office of The PrivateBank and Trust Company
(the "Bank") in St. Charles, Illinois, and has obtained all necessary regulatory
approvals. The Company expects to open the St. Charles office during the fourth
quarter of 1999 and estimates that pre-tax start-up costs associated with the
new office will approximate $430,000. Upon completing the Towne Square
acquisition on August 6, 1999, the Company incurred a one-time charge to
earnings of approximately $1.3 million, an amount equal to the excess of the
value of stock issued over the net assets of Towne Square on the date of the
closing. This charge is non-deductible for tax purposes. The Company issued
91,668 shares of common stock in the transaction.
7
On June 28, 1999, the Company's common stock spilt two-for-one. On June 30,
1999, the Company completed an initial public offering of 900,000 shares of its
common stock priced at $18 per share. Subsequent to the offering, the shares
were listed on the Nasdaq National Market System under the symbol PVTB. The
closing date of the offering was July 6, 1999, when the Company received net
proceeds of $15.1 million (before deduction of offering expenses). Offering
expenses payable by the Company are estimated at approximately $750,000. On July
26, 1999, an additional 135,000 shares were sold pursuant to the underwriters'
exercise of their over allotment option for additional net proceeds of $2.3
million.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Consolidated net income for the second quarter of 1999 was $1.1 million, or
an increase of 58.4% above the $0.7 million earned in the second quarter of
1998. Diluted earnings were $0.30 per share for the second quarter in 1999 and
$0.20 per share for the second quarter in 1998. Net interest income increased
25.1% to $3.6 million in the second quarter of 1999 compared to $2.9 million in
the second quarter of 1998. Non-interest income increased 61.3% to $500,000 and
non-interest expenses increased 21.8% to $2.4 million in the second quarter of
1999 compared to the comparable period in 1998.
For the six months ended June 30, 1999, net income totaled $2.1 million, or
$0.58 per diluted common share, compared to $1.3 million, or $0.37 per diluted
common share, in the same period of 1998. Net interest income increased 24.6% to
$7.0 million for the six months ended June 30, 1999, compared to $5.6 million in
the same period of 1998. Non-interest income during the first half of 1999
increased 61.6% over the prior year period from $593,000 to $958,000.
Net Interest Income
- -------------------
Net interest income was $3.6 million and $2.9 million during the three
months ended June 30, 1999 and June 30, 1998, respectively, an increase of
25.1%. Net interest margin (tax equivalent net interest income as a percentage
of earning assets) for the three months ended June 30, 1999 and 1998 was 3.61%
and 3.76%, respectively.
Net interest income was $7.0 million and $5.6 million during the six months
ended June 30, 1999 and 1998, respectively, an increase of 24.6%. The Company's
net interest margin (tax equivalent net interest income as a percentage of
earning assets) was 3.59% for the six months ended June 30, 1999, compared to
3.70% for the prior year period. Average earning assets during the six month
period were $414 million. The decrease in net interest margin is attributable to
tighter loan spreads due to competitive forces and general interest rate
compression partially offset by a higher percentage of loans to total assets.
Net interest income is defined as the difference between interest income
and fees on earning assets and interest expense on deposits and borrowings. The
related net interest margin represents the net interest income on a tax
equivalent basis as a percentage of average earning assets during the period.
The following table presents a summary of the Company's net interest income
and related net interest margin, calculated on a tax equivalent basis (dollars
in thousands):
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
----------------------------------- ------------------------------------
AVERAGE INTEREST RATE AVERAGE INTEREST RATE
------------ ------------ --------- ------------ ---------- ----------
Federal funds sold............................ $ 3,486 $ 81 4.65% $ 33,471 $ 911 5.44%
Investment securities (1)..................... 105,099 3,355 6.38% 47,603 1,425 5.99%
Loans, net of unearned discount............... 305,217 11,854 7.77% 222,777 9,499 8.53%
-------- ------- -------- -------
Total earning assets.......... $413,802 $15,290 7.39% $303,851 $11,835 7.79%
======== ======= ======== =======
Interest bearing deposits..................... $340,046 $ 7,281 4.28% $260,798 $ 6,207 4.76%
Funds borrowed................................ 18,756 505 5.38% -- -- --
-------- ------- -------- -------
Total interest bearing liabilities............ $358,802 7,786 4.34% $260,798 6,207 4.76%
======== ------- ======== -------
Tax equivalent net interest income............ $ 7,504 $ 5,628
======= =======
Net interest spread........................... 3.05% 3.03%
Net interest margin........................... 3.59% 3.70%
- ------------
(1) Interest income on tax advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
35%. The total tax equivalent adjustment reflected in the above table is
approximately $491,000 and $0 in the first six months of 1999 and 1998,
respectively.
8
The following table shows the dollar amount of changes in interest income
and interest expense by major categories of interest-earning assets and
interest-bearing liabilities attributable to changes in volume or rate or a mix
of both, for the periods indicated. Volume variances are computed using the
change in volume multiplied by the previous year's rate. Rate variances are
computed using the changes in rate multiplied by the previous year's volume.
SIX MONTHS ENDED JUNE 30,
1999 COMPARED TO 1998 (DOLLARS IN THOUSANDS)
CHANGE CHANGE CHANGE
DUE TO DUE TO DUE TO TOTAL
RATE VOLUME MIX CHANGE
-------- -------- -------- -------
Federal funds sold..................................... $ (28) $(1,394) $ 592 $ (830)
Investment securities.................................. 410 3,668 (2,148) 1,930
Loans, net of unearned discount........................ (2,320) 6,406 (1,731) 2,355
------- ------- ------- ------
Total interest income............................. (1,938) 8,680 (3,287) 3,455
------- ------- ------- ------
Interest bearing deposits.............................. (1,632) 3,392 (686) 1,074
Funds borrowed......................................... 1,009 1,009 (1,513) 505
------- ------- ------- ------
Total interest expense............................ (623) 4,401 (2,199) 1,579
------- ------- ------- ------
Net interest income.................................... $(1,315) $ 4,279 $(1,088) $1,876
======= ======= ======= ======
Provision for Loan Losses
- -------------------------
The Company's provision for loan losses was $213,000 for the second quarter
of 1999 compared to $90,000 for the comparable period in 1998.
The Company's provision for loan losses was $498,000 for the six months
ended June 30, 1999 compared to $181,000 for the comparable period in 1998. Net
charge-offs for the six months ended June 30, 1999 and 1998 were $5,000 and
zero, respectively.
For a discussion of the allowance for loan losses and the factors on which
provisions are based, see page 11.
Non-interest Income
- -------------------
Non-interest income increased by $196,000, or 61.3%, in the second quarter
of 1999 versus the second quarter of 1998. This increase was primarily driven by
a 66.0% increase in trust fee income that was in turn a result of a 22.2%
increase in trust assets under administration and a restructuring of fee
agreements.
Non-interest income increased approximately $365,000 or 61.6%, to $958,000
for the first half of 1999, as compared with $593,000 for the same period in
1998.
9
Non-interest Expense
- --------------------
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Salaries and employee benefits................. $2,203 $2,006
Occupancy...................................... 725 667
Data processing................................ 247 235
Marketing...................................... 285 250
Professional fees.............................. 404 256
Insurance...................................... 79 62
Other expense.................................. 691 478
------ ------
Total non-interest expense................ $4,634 $3,954
====== ======
Salary and employee benefit expense increased 9.8% from $2.0 million for
the six months ended June 30, 1998 to $2.2 million for the six months ended June
30, 1999. The increase is due primarily to an increased number of employees.
Full time equivalent employees increased 15% to 83 as of June 30, 1999 from 72
at June 30, 1998.
Professional fees increased 57.8% to $404,000 for the first half of 1999
from $256,000 for the prior year period. The increase is due primarily to
increased consulting services rendered in regards to year 2000 readiness. In
addition, the increase in trust related business has resulted in increased
investment management fees paid to third parties during the six months ended
June 30, 1999.
Income Taxes
- ------------
Our consolidated income tax rate varies from statutory rates principally
due to certain interest income which is tax-exempt for federal and state
purposes, and certain expenses which are disallowed for tax purposes. Decreases
in our income tax provision for the six months ended June 30, 1999 as compared
to the comparable period in 1998 resulted from our municipal bond portfolio and
the initiation of a tax-advantaged investment program initiated in February
1999.
FINANCIAL CONDITION
Total assets were $438.2 million at June 30, 1999, an increase of $118
million, or 37% over the $320.2 million a year earlier, and $22 million, or 5%
over the $416.3 million at December 31, 1998. The balance sheet growth was
created mainly through loan growth.
Loans
- -----
Total loans increased $97 million, or 41%, from $238 million at June 30,
1998, and $53 million, or 19%, from $282 million at December 31, 1998.
The following table sets forth our loan portfolio by category (in
thousands):
LOANS JUNE 30, 1999 DECEMBER 31, 1998 JUNE 30, 1998
----- ------------- ----------------- -------------
Commercial real estate.................................. $116,802 $ 94,392 $ 64,413
Residential real estate................................. 62,085 54,170 55,108
Commercial.............................................. 63,520 46,800 40,419
Personal (1)............................................ 72,131 64,195 64,310
Construction............................................ 20,768 22,408 13,722
-------- -------- --------
Total loans.............................. $335,306 $281,965 $237,972
======== ======== ========
- ------------
(1) Includes home equity loans and overdraft lines.
10
Allowance for Loan Losses
- -------------------------
Loan quality is continually monitored by management and reviewed by the
loan/investment committee of the Board of Directors of the Bank on a monthly
basis. The amount of additions to the allowance for loan losses which is charged
to earnings through the provision for loan losses is determined based on a
variety of factors, including assessment of the credit risk of the portfolio,
delinquent loans, and evaluation of current and prospective economic conditions
in the market area, actual charge-offs during the year and historical loss
experience.
The Company maintains an allowance for loan losses sufficient to absorb
credit losses inherent in the loan portfolio. The allowance for loan losses
represents the Company's estimate of probable losses in the portfolio at each
balance sheet date and is supported by all available and relevant information.
The allowance for the loan losses contains provisions for probable losses that
have been identified relating to specific borrowing relationships as well as
probable losses inherent in the loan portfolio and credit undertakings that are
not specifically identified. The Company believes that the allowance for loan
losses is adequate to provide for estimated probable credit losses inherent in
the loan portfolio.
The allowance for loan losses as a percentage of total loans was 1.2% as of
June 30, 1999, 1.2% as of December 31, 1998 and 1.4% as of June 30, 1998. In
management's judgment, an adequate allowance for loan losses has been
established. Management judges the adequacy of the allowance by formally
reviewing and analyzing potential problem credits, which entails assessing
current and historical loss experience, loan portfolio trends, prevailing
economic and business conditions, specific loan review and other relevant
factors.
Following is a summary of changes in the allowance for loan losses for the
six months ended June 30 (in thousands):
1999 1998
---- ----
Balance, January 1............................. $3,410 $3,050
Provision charged to operations................ 498 180
Loans charged-off (net)........................ (5) --
------ ------
Balance, June 30.............................. $3,903 $3,230
====== ======
Nonaccrual and Nonperforming Loans
- ----------------------------------
Nonaccrual loans increased to $94,000 as of June 30, 1999 from zero as of
December 31, 1998. Management does not believe that the increase in nonaccrual
loans represents a decline in the overall quality of the loan portfolio at this
time.
Nonperforming loans include nonaccrual loans and accruing loans which are
ninety days or more delinquent. Nonperforming loans were $804,000 as of June 30,
1999 compared to $1.016 million at December 31, 1998 and $47,000 at June 30,
1998. Nonperforming loans were .24%, .36% and .02% of total loans as of June 30,
1999, December 31, 1998 and June 30, 1998, respectively. Nonperforming loans
were .18%, .24% and .01% of total assets as of June 30, 1999, December 31, 1998
and June 30, 1998, respectively.
Securities
- ----------
All securities are classified as available-for-sale and may be sold as part
of the Company's asset/liability management strategy in response to changes in
interest rates, liquidity needs or significant prepayment risk. Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital. As of June 30, 1999, net unrealized losses resulted in a $1.2 million
decrease in equity. This was a decrease of $1.4 million from a net unrealized
gain of $151,000 recorded as part of equity at December 31, 1998.
Securities available-for-sale decreased 24% to $89 million as of June 30,
1999, from $117 million as of December 31, 1998. The general decline in
investment securities is the result of management's decision to use the proceeds
of matured securities to increase the Company's loan portfolio as lending
opportunities became available. U.S. Treasury securities
11
decreased by 18% to $5 million as of June 30, 1999. U.S. government agency
securities and collateralized mortgage obligations decreased 45% to $34 million
as of June 30, 1999 from $61 million as of December 31, 1998. A primary reason
for the decreases in the government agency securities portfolio resulted from
principal pay-downs that were driven by the low interest rate environment
earlier in 1999. Municipal securities increased by 1% to $38 million as of June
30, 1999. The increase in unrealized losses of $2.2 million since December 31,
1998 is primarily attributable to the municipal securities portfolio; rising
interest rates during the second quarter of 1999 have caused the municipal
securities portfolio to decline in value. Corporate and equity securities
remained relatively unchanged at $12 million as of June 30, 1999. Management
does not consider any of these changes to represent a change in the management
philosophy of the investment portfolio.
Deposits and Funds Borrowed
- ---------------------------
Total deposits of $375 million as of June 30, 1999 represented an increase
of $10 million or 3.0% from $365 million as of December 31, 1998.
Non-interest-bearing deposits were $34 million as of June 30, 1999,
approximately $5 million lower than the $39 million reported as of December 31,
1998. At the same time, interest-bearing demand deposits remained relatively
stable at $26 million as of June 30, 1999. Savings and money market deposit
accounts increased by approximately $6 million to $176 million at June 30, 1999.
Other time deposits increased by approximately $10 million to $138 million as
compared with the December 31, 1998 balance of $128 million.
The Company's membership in the Federal Home Loan Bank System gives it the
ability to borrow funds from the Federal Home Loan Bank of Chicago (FHLB) for
short- or long-term purposes under a variety of programs. At June 30, 1999 FHLB
borrowed funds totaled $28 million at an interest rate of 5.05%. This FHLB
borrowing matured on July 6, 1999 and was subsequently renewed through August
1999. The borrowings were used to fund loan demand in advance of future
anticipated deposit growth. The remaining borrowed funds represented federal
funds purchased of $3 million.
Capital Resources
- -----------------
Stockholders' equity rose to $30 million, an increase of $690,000 from the
1998 year-end level, due primarily to the Company's net income from the first
half of 1999. The change in the fair value of the available-for-sale investment
portfolio decreased stockholders' equity by $1.4 million net of tax as of June
30, 1999. During July 1999, the Company raised approximately $16.6 million in
capital through the issuance of 1.035 million shares.
The Company and its Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and 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 adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion and plans for capital restoration are required.
The following table reflects various consolidated measures of capital at
June 30, 1999 and December 31, 1998:
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
Leverage ratio........................... 7.63% 7.92%
Tier 1 risk based capital ratio.......... 9.63% 10.13%
Total risk based capital ratio........... 10.77% 11.26%
Total equity to total assets............. 6.83% 7.02%
12
At June 30, 1999, the Company continued to exceed the minimum levels of all
regulatory capital requirements, and the Bank was considered "well-capitalized"
under regulatory standards. The additional capital raised in the initial public
offering during July 1999, will fund further asset growth of the Bank, and the
Company expects to continue to meet the "well capitalized" standard in the
foreseeable future.
To be considered "well capitalized," an entity must maintain a leverage
ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and
a total risk-based capital ratio of at least 10.0%. To be "adequately
capitalized," an entity must maintain a leverage ratio of at least 4.0%, a Tier
1 risk-based capital ratio of at least 4.0%, and a total risk-based capital
ratio of at least 8.0%.
Liquidity
- ---------
Liquidity measures the ability of the Company to meet maturing obligations
and its existing commitments, to withstand fluctuations in deposit levels, to
fund its operations and to provide for clients' credit needs. The liquidity of
the Company principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of deposits and
borrowings and its ability to borrow funds in the money or capital markets.
Net cash inflows provided by operations were $2 million in the first six
months of 1999 compared to a net inflow of $1.4 million a year earlier. Net cash
outflows from investing activities were $28 million in the first six months of
1999 compared to a net cash outflow of $200,000 a year earlier. Cash outflows
from financing activities in the first six months of 1999 were $5 million
compared to a net inflow of $8 million in 1998.
In the event of short-term liquidity needs, the Bank may purchase federal
funds from correspondent banks. The Company's membership in the Federal Home
Loan Bank System gives it the ability to borrow funds from the FHLB for short-
or long-term purposes under a variety of programs.
13
YEAR 2000 COMPLIANCE
At the direction of its Board of Directors, the Company has established a
year 2000 readiness committee and has engaged consultants qualified to help
address the Company's year 2000 issues. The Company's consultants are
experienced with technology issues and year 2000 compliance, and have worked
closely with the year 2000 readiness committee. The Company also engaged an
outside consulting firm to perform an independent review of year 2000 planning.
Following the guidelines established by the FFIEC, the Company has broken
down its compliance efforts into six stages: awareness, assessment, renovation,
validation, implementation and contingency planning.
o AWARENESS. During the awareness phase, the Company became educated on
the issues and risks associated with the year 2000 problem. The
Company also identified the aspects of operations which are year 2000
sensitive.
o ASSESSMENT. During this stage, the Company was able to determine the
scope of the entire year 2000 readiness project. The Company reviewed
its systems, equipment, vendors, client exposure, counterparties and
fiduciary risk. As part of this stage, the Company established a
formal liquidity risk management plan, which included a contingency
plan to aid in mitigating risks involved with potential withdrawal of
client funds before or after the year 2000 rollover date. This plan
has been approved by the Company's Board of Directors.
o RENOVATION. For most companies, this phase is time consuming and
complicated. It involves upgrading or replacing all sensitive systems
and equipment. Because the Company relies on third party vendors for
virtually all of its systems and for its data processing needs, the
Company's internal renovations were minimal. The Company has
undertaken efforts to ensure that its third party vendors are also
year 2000 compliant. The Company has polled each of its third party
vendors regarding their compliance efforts, and the year 2000 project
manager monitors the year 2000 readiness and financial status of all
of the Company's vendors at least on a quarterly basis. However, the
Company cannot be sure that each of its third party vendors will
complete their compliance efforts in a timely manner or successfully
maintain year 2000 readiness.
The Company considers those third party vendors who provide it
significant services to be "mission critical" to its operations. The
Company has received responses to its inquiries regarding year 2000
compliance efforts from 100% of its vendors, and each vendor claims to
be year 2000 compliant. In connection with the inquiries and related
responses, the Company has also completed an assessment of the
financial and operational capabilities of each of these "mission
critical" vendors. Although the Company does not have any contractual
assurances that its "mission critical" vendors are or will be year
2000 compliant, based on their responses and the Company's, the
Company believes each of them has taken appropriate steps to prepare
for the year 2000, and that the Company will have no material exposure
from its vendors involving the year 2000 issue.
The Company has also undertaken to assess the year 2000 readiness of
its significant borrowers and other clients consistent with the
guidelines of the banking regulations. Each of these clients has been
contacted regarding the year 2000 issue and the need for readiness.
Management continues to solicit client response and to monitor
clients' preparedness for year 2000. Failure of clients to prepare for
year 2000 could have a significant adverse effect on their operations
and profitability, potentially causing their ability to repay loans to
be impaired, which could adversely affect the Company's results. At
this time, the Company is unable to estimate with reliability the
extent to which its significant borrowers and other clients are
susceptible to potential problems relating to the year 2000 issue, or
to quantify the potential impact in this case.
o VALIDATION. The Company has completed the validation, or testing phase
of its readiness project. Using a comprehensive test plan developed
with its consultants, the Company has tested, either individually or
in collaboration with its third party vendors, each system and piece
of equipment currently in place in its offices for year 2000 readiness
and compatibility with other systems with which they interface. The
Company's plan, which was
14
modeled on FFIEC recommendations, indicates, on a system-by-system
basis, the methods used to validate each system and includes
procedures for documenting test results. The Company's consultants
have monitored the maintenance of process controls throughout the
testing process. The Company's internal auditors have reviewed the
results of the year 2000 testing.
The Company is currently in the process of transferring its loan and
deposit processing to a new data processing provider. The conversion
date is scheduled for the end of August 1999. The Company has been
working with its new vendor since early April 1999. Through the use of
proxy testing, the Company is validating the results of its new
vendor's year 2000 readiness. In addition, the Company has received
contractual assurances from this new data processing provider that its
software systems are and will be year 2000 compliant. However, if this
vendor ultimately fails to be prepared for the year 2000, the Company
has by contract waived any rights to claim damages from them. The
Company's business may be disrupted in the event of failure of the
data processing system to handle the century date change successfully,
and it could be materially adversely affected in this event.
o IMPLEMENTATION. The Company has completed the testing and has
implemented necessary changes to computer hardware, network equipment
and operating systems owned by it and located in its offices. The
Company is currently using most of these systems in its year 2000
compliant version. As the Company continues to evaluate and modify
these systems as needed, the Company will use its best efforts to
maintain its year 2000 compliance. Because virtually all of its year
2000-related software modifications are handled by third-party
processing services, and because it has no control over the renovation
of software code, the Company will continue to monitor software
application upgrade releases from its vendors and the year 2000
implications of such releases. The Company will continue to implement
such changes as are necessary based on the results of its validation
efforts and its ongoing monitoring efforts.
o CONTINGENCY. The final stage of the Company's readiness project
involves the creation of a business continuity plan which outlines how
its operations will continue in the event that it is unable to ensure
that all of its operations will be compliant, or if the Company
experiences a failure of any of its systems. The business continuity
plan is completed and the business resumption validation procedures
have been completed. In the Company's business continuity plan, the
Company identifies possible scenarios which could be the result of
year 2000 failures. These scenarios include malfunction of automated
systems, loss of electrical power and extraordinary needs for cash. In
each case, the plan considers solutions including use of electronic
and manual alternatives to the Company's primary operating systems,
operating from alternative physical sites and acquiring replacements
for equipment. During the third quarter of 1999, where practical, the
Company will selectively test its business resumption validation
procedures.
The Company estimates that the entire cost of its year 2000 readiness
project will be approximately $650,000. These costs include:
o upgrades of existing systems and equipment;
o acquisitions of new systems and equipment;
o consultant fees and expenses; and
o allocated personnel costs.
Through June 30, 1999, the Company has spent approximately $500,000 toward its
year 2000 readiness.
Although the Company is working closely with its consultants, its third
party vendors and its regulators to upgrade its systems and operations, there
can be no assurance that all of its operations will be year 2000 compliant. In
the event of system failure, either internally, or on the part of one or more of
its vendors, its operations may be adversely affected. The Company may
experience an interruption in its business and incur significant losses.
15
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT POLICY
As a continuing part of our financial strategy, the Company attempts to
manage the impact of fluctuations in market interest rates on its net interest
income. This effort entails providing a reasonable balance between interest rate
risk, credit risk, liquidity risk and maintenance of yield. Asset/liability
management policy is established by the Board of Directors and is monitored by
management. The Company's asset/liability policy sets standards within which it
is expected to operate. These standards include guidelines for exposure to
interest rate fluctuations, liquidity, loan limits as a percentage of funding
sources, exposure to correspondent banks and brokers, and reliance on non-core
deposits. The policy also states the reporting requirements to its Board of
Directors. The investment policy complements the asset/liability policy by
establishing criteria by which it may purchase securities. These criteria
include approved types of securities, brokerage sources, terms of investment,
quality standards, and diversification.
The following table illustrates the estimated interest rate sensitivity and
periodic and cumulative gap positions calculated as of June 30, 1999.
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------
(DOLLARS IN THOUSANDS)
0-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS TOTAL
--------- ----------- --------- ------------ -----
INTEREST-EARNING ASSETS
Loans........................................ $183,041 $ 21,709 $116,639 $ 13,304 $334,693
Investments.................................. 9,372 21,645 23,041 36,966 91,024
Federal funds sold........................... 995 -- -- -- 995
-------- --------- -------- -------- --------
Total interest-earning assets........... $193,408 $ 43,354 $139,680 $ 50,270 $426,712
======== ========= ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand...................... -- -- -- $ 26,286 $ 26,286
Savings and money market..................... $133,888 $ 41,887 -- 707 176,482
Time deposits................................ 92,557 40,868 4,572 -- 137,997
Funds borrowed............................... 31,000 -- -- -- 31,000
-------- --------- -------- -------- --------
Total interest-bearing liabilities...... $257,445 $ 82,755 $ 4,572 $ 26,993 $371,765
======== ========= ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA).................. $193,408 $ 236,762 $376,442 $426,712
Rate sensitive liabilities (RSL)............. $257,445 $ 340,200 $344,772 $371,765
GAP (GAP=RSA-RSL)....................... $(64,037) $(103,438) $ 31,670 $ 54,947
RSA/RSL........................................... 75.1% 69.6% 109.2% 114.8%
RSA/Total assets.................................. 44.1% 54.0% 85.9% 97.4%
RSL/Total assets.................................. 58.8% 77.6% 78.7% 84.8%
GAP/Total assets.................................. 14.6% 23.6% 7.2% 12.5%
GAP/RSA........................................... 15.0% 24.2% 7.4% 12.9%
The Company measures the impact of interest rate changes on its income
statement through the use of gap analysis. The gap represents the net position
of assets and liabilities subject to repricing in specified time periods. During
any given time period, if the amount of rate sensitive liabilities exceeds the
amount of rate sensitive assets, a company would generally be considered
negatively gapped and would benefit from falling rates over that period of time.
Conversely, a positively gapped company would generally benefit from rising
rates.
16
The following table shows the "rate shock" results of a simulation model
that attempts to measure the effect of rising and falling interest rates over
the next two-year horizon in a rapidly changing rate environment.
+200 BASIS -200 BASIS
POINTS POINTS
---------- ----------
Percentage change in net interest income due to an immediate
200 basis point change in interest rates over a two-year
time horizon................................................. - 8.1% 10.4%
This table shows that if there was an instantaneous, parallel shift in the
yield curve of +200 basis points, the Company would suffer a decline in net
interest income of 8.1% over a two year horizon. Conversely, a like shift of
- -200 basis points would increase net interest income by 10.4% over a two year
horizon. The Company used a sensitivity model which simulated these interest
rate changes on its earning assets and interest-bearing liabilities. This
process allows the Company to explore the complex relationships among the
financial instruments in various interest rate environments.
The preceding sensitivity analysis is based on numerous assumptions
including: the nature and timing of interest rate levels including the shape of
the yield curve, prepayments on loans and securities, changes in deposit levels,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how client
preferences or competitor influences might change.
17
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, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such forward-
looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Company and its subsidiary include, but
are not limited to, fluctuations in market rates of interest and loan and
deposit pricing, general economic conditions in the greater Chicago metropolitan
area, legislative or regulatory changes, adverse developments in the Company's
loan or investment portfolios, competition, unforeseen difficulties or delays
relating to the Company's establishment of a St. Charles, Illinois office, the
possible dilutive effect of potential acquisitions, unforeseen difficulties or
delays in the Company's data processing conversion, and the effectiveness of the
Company and its key vendors in testing and implementing Year 2000 compliant
hardware, software and systems. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
18
PART II
PRIVATEBANCORP, INC.
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or its
subsidiary is a party other than ordinary routine litigation incidental to their
respective businesses.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1999, the Company completed the sale of 1,035,000 shares of common
stock in its initial public offering. The IPO price was $18 per share, and the
Company received aggregate net proceeds of approximately $16.6 million after
deducting underwriting commissions and estimated offering expenses of
approximately $750,000. Of these net proceeds, $8.0 million has been contributed
to the Company's bank subsidiary to increase regulatory capital to support
growth of the Company's existing banking operations and to fund the costs of
opening by the new St. Charles, Illinois office.
The remainder of the proceeds are available to the Company to fund future
internal growth or expansion of the business through:
o establishing new offices within the Chicago metropolitan area;
o expanding the Company's presence into new markets located in the
Midwest; and
o acquiring or affiliating with companies in businesses complementary to
the Company's.
The Company has not yet identified the specific use of any of these
remaining proceeds. The funds have been deposited in an account of the Company
at its bank subsidiary, where it can use them as a temporary funding source for
loans or investments.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Stockholders was held on April 22, 1999.
b) At the Annual Meeting of Stockholders, the following matters were
submitted to a vote of stockholders:
1) The election of six Class I directors for a term ending at
the Annual Meeting of Stockholders to be held in 2002:
Directors Votes For Votes Against Abstentions
--------- --------- ------------- -----------
Naomi Borwell 1,328,283 0 0
William Castellano 1,328,283 0 0
William Farrell 1,328,283 0 0
Alvin Gottlieb 1,328,283 0 0
William Langley 1,328,283 0 0
Ralph Mandell 1,328,283 0 0
19
2) To amend the Company's Restated Certificate of Incorporation
to increase the authorized shares to 12,000,000 shares of
common stock, without par value, and 1,000,000 shares of
preferred stock without par value:
Votes For Votes Against Abstentions
--------- ------------- -----------
1,305,683 17,600 5,000
3) To ratify the appointment of Arthur Andersen LLP as the
Company's independent auditors:
Votes For Votes Against Abstentions
--------- ------------- -----------
1,325,883 0 2,400
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 27 - Financial Data Schedule
(b) Filings on Form 8-K.
None
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIVATEBANCORP, INC.
(Registrant)
By: /s/ Ralph B. Mandell
-------------------------------------
Ralph B. Mandell,
Chairman, President and
Chief Executive Officer
By: /s/ Donald A. Roubitchek
-------------------------------------
Donald A. Roubitchek,
Chief Financial Officer
(principal financial officer)
By: /s/ Lisa M. O'Neill
-------------------------------------
Lisa M. O'Neill,
Controller
(principal accounting officer)
Date: August 13, 1999
21
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
22