SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 |X| No|_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
================================================================================
CLASS OUTSTANDING AS OF NOVEMBER 12, 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......................8
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........19
PART II
Item 1. Legal Proceedings....................................................22
Item 2. Changes in Securities and Use of Proceeds............................22
Item 3. Defaults Upon Senior Securities......................................22
Item 4. Submission of Matters to a Vote of Security Holders..................22
Item 5. Other Information....................................................22
Item 6. Exhibits and Reports on Form 8-K.....................................22
Form 10-Q Signature Page......................................................23
Exhibit Index.................................................................24
PART I - FINANCIAL INFORMATION
PRIVATEBANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks.................................... $ 14,284 $ 11,895 $ 12,188
Federal funds sold......................................... 1,911 3,619 75,119
-------- -------- --------
Total cash and cash equivalents....................... 16,195 15,514 87,307
-------- -------- --------
Available-for-sale securities, at fair value............... 77,269 116,891 56,171
-------- -------- --------
Loans...................................................... 352,236 281,965 239,224
Allowance for loan losses................................. (4,079) (3,410) (3,320)
-------- -------- --------
Net loans.................................................. 348,157 278,555 235,904
-------- -------- --------
Bank premises and equipment, net........................... 1,462 1,588 1,702
-------- -------- --------
Accrued interest receivable................................ 3,016 2,264 2,202
-------- -------- --------
Other assets............................................... 3,739 1,496 1,215
-------- -------- --------
Total assets............................................... $449,838 $416,308 $384,501
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits
Noninterest-bearing....................................... $ 35,939 $ 39,490 $ 33,959
Interest-bearing.......................................... 26,456 26,508 20,458
Savings and money market deposit accounts.................. 187,410 170,713 175,125
Other time deposits........................................ 136,352 128,282 124,805
-------- -------- --------
Total deposits........................................ 386,157 364,993 354,347
Funds borrowed............................................. 15,000 20,000 --
Accrued interest payable................................... 784 721 734
Other liabilities.......................................... 1,546 1,320 1,386
-------- -------- --------
Total liabilities.......................................... 403,487 387,034 356,467
-------- -------- --------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized............... -- -- --
Common stock, without par value; 12,000,000 shares
authorized; 4,584,092; 3,431,424; and 3,385,424
shares issued and outstanding as of September 30,
1999, December 31, 1998, and September 30, 1998,
respectively.............................................. 4,584 3,431 3,385
Surplus.................................................... 39,721 22,274 21,909
Retained earnings.......................................... 6,563 4,913 4,090
Accumulated other comprehensive income .................... 2,569 150 185
Deferred compensation...................................... 823 (544) 585
Loans to officers.......................................... (1,125) (950) (950)
-------- -------- --------
Total stockholders' equity................................. 46,351 29,274 28,034
-------- -------- --------
Total liabilities and stockholders' equity................. $449,838 $416,308 $384,501
======== ======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- ------
INTEREST INCOME
Loans, including fees................................... $18,860 $14,478 $7,006 $4,979
Federal funds sold and interest bearing deposits........ 215 1,808 134 897
Securities.............................................. 4,053 2,079 1,189 654
------- ------- ------ ------
Total interest income.............................. 23,128 18,365 8,329 6,530
------- ------- ------ ------
INTEREST EXPENSE
Deposits:
Interest-bearing demand............................. 426 357 144 118
Savings and money market deposit accounts........... 5,520 4,860 2,000 1,670
Other time....................................... 5,332 4,471 1,852 1,693
Funds borrowed.......................................... 674 -- 170 --
------- ------- ------ ------
Total interest expense.................................. 11,952 9,688 4,166 3,481
------- ------- ------ ------
Net interest income..................................... 11,176 8,677 4,163 3,049
Provision for loan losses............................... 771 272 273 91
------- ------- ------ ------
Net interest income after provision for loan losses..... 10,405 8,405 3,890 2,958
------- ------- ------ ------
NON-INTEREST INCOME
Banking and trust services.............................. 1,412 933 504 340
Securities gains..................................... 58 42 8 42
------- ------- ------ ------
Total non-interest income.......................... 1,470 975 512 382
------- ------- ------ ------
NON-INTEREST EXPENSE
Salaries and employee benefits.......................... 3,403 2,954 1,309 948
Occupancy expense, net.................................. 1,126 1,011 401 344
Towne Square acquisition................................ 1,300 -- 1,300 --
Professional fees....................................... 891 386 394 130
Other non-interest expense.............................. 2,151 1,556 833 531
------- ------- ------ ------
Total non-interest expense........................ 8,871 5,907 4,237 1,953
------- ------- ------ ------
Income before income taxes.............................. 3,004 3,473 165 1,387
Income tax provision.................................... 1,066 1,355 366 541
------- ------- ------ -------
NET INCOME.............................................. $ 1,938 $ 2,118 $ (201) $ 846
======= ======= ====== ======
Basic earnings per share................................ $ 0.51 $ 0.64 $(0.05) $ 0.25
Diluted earnings per share.............................. $ 0.48 $ 0.61 $(0.05) $ 0.24
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) NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
COMPRE- DEFERRED TOTAL
COMMON RETAINED HENSIVE COMPEN- LOANS TO STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME SATION OFFICERS EQUITY
----- ------- -------- ----------- ------ -------- -------------
Balance, January 1, 1998...... $3,217 $19,782 $2,165 $ 29 $(506) $ -- $24,687
Net income................. -- -- 2,118 -- -- -- 2,118
Net increase in fair value of
securities classified as
available-for-sale, net of
income taxes and
reclassification adjustments -- -- -- 156 -- -- 156
------ ------- ------ ------- ----- ------- -------
Total comprehensive income.... -- -- 2,118 156 -- -- 2,274
------ ------- ------ ------- ----- ------- -------
Cash dividends declared
($0.06 per share)............ -- -- (193) -- -- -- (193)
Issuance of common stock...... 168 2,127 -- -- -- -- 2,295
Awards granted................ -- -- -- -- (187) -- (187)
Amortization of deferred
compensation................ -- -- -- -- 108 -- 108
Loan to chief executive officer -- -- -- -- -- (950) (950)
------ ------- ------ ------- ----- ------ -------
Balance, September 30, 1998... $3,385 $21,909 $4,090 $ 185 $(585) $ (950) $28,034
====== ======= ====== ======= ===== ====== =======
Balance, January 1, 1999...... $3,431 $22,274 $4,913 $ 150 $(544) $ (950) $29,274
Net income................. -- -- 1,938 -- -- -- 1,938
Net decrease in fair value of
securities classified as
available-for-sale, net of
income taxes and
reclassification adjustments -- -- -- (2,719) -- -- (2,719)
------ ------- ------ ------- ----- ------- -------
Total comprehensive income.... -- -- 1,938 (2,719) -- -- (781)
------ ------- ------ ------- ----- ------- -------
Cash dividends declared
($0.075 per share)........... -- -- (288) -- -- -- (288)
Issuance of common stock...... 1,153 17,447 -- -- -- -- 18,600
Awards granted................ -- -- -- -- (448) -- (448)
Amortization of deferred
compensation.................. -- -- -- -- 169 -- 169
Loans to officers............. -- -- -- -- -- (175) (175)
------ ------- ------ ------- ----- ------- -------
Balance, September 30, 1999... $4,584 $39,721 $6,563 $(2,569) $(823) $(1,125) $46,351
====== ======= ====== ======= ===== ======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
3
PRIVATEBANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 1,938 $ 2,118
------- -------
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization........................... 384 377
Amortization of deferred compensation................... 168 108
Provision for loan losses............................... 771 272
Gain on sale of securities.............................. (58) (42)
(Decrease) increase in deferred loan fees............... (24) 43
(Increase) in accrued interest receivable............... (752) (621)
Increase in accrued interest payable.................... 63 281
(Increase) decrease in other assets..................... (576) 38
Increase in other liabilities.......................... 226 428
------- -------
Total adjustments.................................... 202 884
------- -------
Net cash provided by operating activities............ 2,140 3,002
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of
securities.............................................. 50,020 57,703
Purchase of securities available-for-sale.................. (14,725) (48,194)
Net loan principal advanced................................ (70,524) (21,724)
Bank premises and equipment expenditures................... (258) (175)
------- -------
Net cash used in investing activities................... (35,487) (12,390)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits........................... 21,163 68,574
Issuance of common stock................................. 18,152 2,108
Dividends paid........................................... (287) (193)
Net decrease in funds borrowed........................... (5,000) --
------- -------
Net cash provided by financing activities............. 34,028 70,489
------- -------
Net increase in cash and cash equivalents.................. 681 61,101
Cash and cash equivalents at beginning of year.............. 15,514 26,206
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $16,195 $87,307
======= =======
NON-CASH TRANSACTIONS
Loans to officers for purchase of common stock.......... $ 175 $ 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 nine months ended September
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):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
NET INCOME $1,938 $2,118 $ (201) $ 846
====== ====== ====== ======
Average common shares outstanding......................... 3,787 3,287 4,460 3,353
Average common shares equivalent (1)...................... 253 189 258 215
------ ------ ------ ------
Weighted average common shares and common
share equivalents........................................ 4,040 3,476 4,718 3,568
====== ====== ====== ======
Net income per average common share - basic............... $ 0.51 $ 0.64 $(0.05) $ 0.25
====== ====== ====== ======
Net income per average common share - diluted............. $ 0.48 $ 0.61 $(0.05) $ 0.24
====== ====== ====== ======
- ------------------
(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.
Due to the third quarter 1999 loss, dilutive earnings per share for the
third quarter 1999 equals basic earnings per share since the dilutive
calculation is anti-dilutive. The year to date earnings per share calculation as
of September 30, 1999 does not equal the sum of the individual quarter earnings
per share amounts. Based upon the application of FASB Statement No. 128,
"Earnings per Share" a difference arises that is attributable to the impact of
the Company's initial public offering which closed in July, 1999, and to the
third quarter 1999 loss.
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
5
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, 2000, 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.
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 September 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
September 30, 1999 and 1998 on a gross basis (in thousands):
SEPTEMBER 30, 1999
-------------------------------------
BEFORE TAX
TAX (BENEFIT) NET OF TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
Unrealized (losses) on securities available for sale--
Unrealized holding losses...................... ($4,327) ($1,644) $(2,683)
Less: reclassification adjustment for gain
included in net income................ 58 22 36
------- ------- -------
Net unrealized (losses)................................. ($4,385) ($1,666) $(2,719)
======= ======= =======
SEPTEMBER 30, 1998
--------------------------------------
BEFORE TAX
TAX (BENEFIT) NET OF TAX
AMOUNT EXPENSE AMOUNT
------ --------- ----------
Unrealized gains on securities available for sale--
Unrealized holding gains........................... $212 $82 $130
Less: reclassification adjustment for gain
included in net income................ 42 16 26
---- --- ----
Net unrealized (losses)................................. $254 $98 $156
==== === ====
6
NOTE 7 - CAPITAL TRANSACTIONS
During the third quarter of 1999, the Company completed its initial public
offering of 1,035,000 shares. The initial public offering price was $18 per
share, and the Company received aggregate net proceeds of approximately $15.6
million after deducting underwriting commissions and offering expenses and
including the underwriters' overallotment shares.
NOTE 8 - ACQUISITIONS
The Company completed its acquisition of Towne Square Financial Corporation
(a de novo bank) on August 3, 1999 in a stock for stock transaction. At closing,
the Company issued 91,668 shares of common stock and recorded a one-time $1.3
million charge that is non-deductible for tax purposes.
NOTE 9 - SUBSEQUENT EVENTS
Significant subsequent events, including the Johnson Bank Acquisition, have
been disclosed in Item 2, Management's Discussion and Analysis.
7
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 the Company's operations depends on net interest
income, provision for possible loan losses, non-interest income, and
non-interest expense. Net interest income is the difference between the income
the Company receives on its loan and investment portfolios and its cost of
funds, which consists of interest paid on deposits and borrowings. The provision
for possible loan losses reflects the cost of credit risk in the loan portfolio.
Non-interest income consists primarily of trust fee income, and to a lesser
extent, net securities gains and fees for ancillary banking services.
Noninterest expense includes salaries and employee benefits as well as
occupancy, data processing, marketing, professional fees, insurance, and other
expenses.
Net interest income is dependent on the amounts and yields of
interest-earning assets as compared to the amounts and rates on interest-bearing
liabilities. Net interest income is sensitive to changes in market rates of
interest and our asset/liability management procedures in coping with such
changes. The provision for loan losses is dependent on increases in the loan
portfolio, management's assessment of the collectibility of the loan portfolio,
loss experience, as well as economic and market factors. The Company earns trust
fees for managing and administering investment funds for a variety of
individuals, families and fiduciary relationships. Non-interest expenses are
heavily influenced by the growth of operations. Growth in the number of client
relationships directly affects the majority of the Company's expense categories.
Non-interest income from fees and deposit service charges are below peer
group levels. This is largely the result of the profile of the Company's typical
client. The clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, the Company does
not earn high service charge income typical of community banks.
Higher account balances result in relatively low levels of transactions per
account dollar and therefore the Company's accounts are less costly to maintain.
The Company believes that as it continues to grow, it will continue to
experience lower overhead costs than other banks with similar aggregate levels
of loans and deposits.
On June 30, 1999, the Company priced its initial public offering of
900,000 shares of its common stock at $18 per share. The shares are listed on
the Nasdaq National Market System under the symbol PVTB. The closing date of the
offering was July 6, 1999, when the Company received net proceeds of
approximately $13.5 million (after deduction of offering expenses). Offering
expenses payable by the Company were approximately $665,000. On July 26, 1999,
an additional 135,000 shares were sold pursuant to the underwriters' exercise of
their over allotment option for additional net proceeds of $2.1 million.
The Company is establishing a new office of The PrivateBank and Trust
Company (the "Bank") in St. Charles, Illinois, through the acquisition of Towne
Square Financial Corporation, a de novo bank, and has obtained all necessary
regulatory approvals. The Company expects to open the St. Charles office during
the fourth quarter of 1999. The Company has incurred $133,200 of non-recurring
start-up costs through September 30, 1999, which have been recorded in
professional fees and other components of non-interest expense. The Company
currently estimates that other pre-opening costs associated with the new office
will approximate $430,000, of which $80,000 have been incurred as of September
30, 1999. In addition, upon completing the Towne Square Financial Corporation
acquisition on August 3, 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.
On October 4, 1999, the Company announced the signing of a definitive
agreement to acquire Johnson Bank Illinois, a unit of Johnson International,
Racine, Wisconsin. Johnson Bank Illinois, with roughly $110.0 million in assets
8
at September 30, 1999, has locations on Chicago's North Shore in Lake Forest and
Winnetka. Pending regulatory approval, the acquisition of Johnson Bank Illinois
is expected to be completed in February, 2000. The purchase price of $20.0
million is payable using $15.0 million in cash and $5.0 million in subordinated
notes. The cash portion will be funded out of the remaining proceeds of the
Company's recent initial public offering and from borrowings under new credit
facilities. At closing the Company will record goodwill representing the excess
purchase price over the fair value of the net assets acquired.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
The net loss for the third quarter of 1999 was $201,000 compared to net
income of $846,000 in the third quarter ended 1998. Third quarter 1999 results
include the acquisition-related charge and costs totaling $1.4 million (net of
tax) related to the Towne Square Financial Corporation acquisition in St.
Charles, Illinois. Without the non-recurring amount, net income from core
operations for the third quarter 1999 was $1.2 million, or an increase of 39.5%
above the $0.8 million earned in the third quarter of 1998. The $1.4 million
amount includes a $1.3 million nondeductible charge associated with the
acquisition and $82,000 (net of tax) in legal, accounting and registration fees
related to the completion of the acquisition. The following table identifies the
components of net income from core operations for the periods ended September
30, 1999 (in thousands except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
-------------------------------- --------------------------------
BEFORE TAX BEFORE TAX
TAX (BENEFIT) NET OF TAX TAX (BENEFIT) NET OF TAX
AMOUNT EXPENSE AMOUNT AMOUNT EXPENSE AMOUNT
------ ------- ---------- ------ ------- ----------
Net income (loss). .................................. $ 165 $366 $ (201) $3,004 $1,066 $1,938
Towne Square acquisition-related one time charges
and costs....................................... $1,433 $(52) $1,381 $1,433 $ (52) $1,381
Net income from core operations...................... $1,598 $418 $1,180 $4,437 $1,118 $3,319
====== ==== ====== ====== ====== ======
Core earnings per dilutive share..................... $ 0.25 $ 0.82
====== ======
For the nine months ended September 30, 1999, net income totaled $1.9
million, or $0.48 per diluted common share, compared to $2.1 million, or $0.61
per diluted common share, in the same period of 1998. Adjusted to eliminate the
impact of the Towne Sqaure acquisition, net income from core operations for the
nine months ended September 30, 1999 was $3.3 million or $0.82 per diluted
common share, an increase of 56.7% over the same period in 1998.
Net Interest Income
-------------------
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowings. The related net
interest margin represents the net interest income on a tax equivalent basis as
a percentage of average earning assets during the period.
Net interest income increased 36.5% to $4.2 million in the third quarter of
1999 compared to $3.0 million in the third quarter of 1998. Net interest margin
(tax equivalent net interest income as a percentage of earning assets) for the
three months ended September 30, 1999 and 1998 was 3.87% and 3.53%,
respectively. The increase in net interest margin for the quarter ended
September 30, 1999 as compared to the year earlier period is the result of
investing the cash proceeds received from the initial public offering that
closed on July 6, 1999, and rising interest rates during the third quarter of
1999.
Net interest income was $11.2 million and $8.7 million during the nine
months ended September 30, 1999 and 1998, respectively, an increase of 28.7%.
The Company's net interest margin (tax equivalent net interest income as a
percentage of earning assets) was 3.71% for the nine months ended September 30,
1999, compared to 3.61% for the prior year period. Average earning assets during
the nine month period were $419.9 million. The increase in net interest margin
is attributable to rising interest rates, a higher percentage of loans to total
assets and to the receipt of the initial public offering proceeds during 1999.
9
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):
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------------------- ------------------------------
AVERAGE INTEREST RATE AVERAGE INTEREST RATE
------- -------- ---- ------- -------- -----
Federal funds sold...................... $ 5,786 $ 215 4.95% $ 43,866 $ 1,808 5.50%
Investment securities (1)............... 97,965 4,647 6.33% 46,298 2,088 6.01%
Loans, net of unearned discount......... 316,102 18,861 7.96% 227,547 14,478 8.48%
-------- ------- -------- -------
Total earning assets.... $419,853 23,723 7.53% $317,711 $18,374 7.71%
======== ======= ======== =======
Interest bearing deposits............... $346,014 $11,278 4.35% $273,603 $ 9,688 4.72%
Funds borrowed.......................... 17,284 674 5.20% -- -- --
-------- ------- -------- -------
Total interest bearing liabilities...... $363,298 11,952 4.39% $273,603 9,688 4.72%
======== ------- ======== -------
Tax equivalent net interest income (2).. $11,771 $ 8,686
======= =======
Net interest spread..................... 3.14% 2.99%
Net interest margin..................... 3.71% 3.61%
- ------------------
(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 $594,000 and $9,000 in the first nine months of 1999 and
1998, respectively.
(2) Annualized tax equivalent net interest income is $15,581 and $11,485 for
1999 and 1998, respectively.
The following table shows the dollar amount of changes in interest income
and interest expense by major categories of interest-earning assets and
interest-bearing liabilities attributable to changes in volume or rate or a mix
of both, for the periods indicated. Volume variances are computed using the
change in volume multiplied by the previous year's rate. Rate variances are
computed using the changes in rate multiplied by the previous year's volume.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
(DOLLARS IN THOUSANDS)
CHANGE CHANGE CHANGE TOTAL
DUE TO RATE DUE TO VOLUME DUE TO MIX CHANGE
----------- ------------- ---------- --------
Federal funds sold......................... $ (11) $(3,624) $ 2,040 $(1,593)
Investment securities...................... 247 1,336 976 2,559
Loans, net of unearned discount............ (1,832) 8,996 (2,781) 4,383
------- ------- ------- -------
Total interest income................. (1,596) 6,708 235 5,349
------- ------- ------- -------
Interest bearing deposits.................. (1,315) 1,377 1,528 1,590
Funds borrowed............................. 780 780 (886) 674
------- ------- ------- -------
Total interest expense................ (535) 2,157 642 2,264
------- ------- ------- -------
Net interest income........................ $(1,061) $ 4,551 $ (407) $ 3,085
======= ======= ======= =======
Provision for Loan Losses
- -------------------------
The Company's provision for loan losses was $273,000 for the third quarter
of 1999, compared to $91,000 for the comparable period in 1998. Net charge-offs
for the three months ended September 30, 1999 and 1998 were $97,000 and $2,000,
respectively.
The Company's provision for loan losses was $771,000 for the nine months
ended September 30, 1999, compared to $272,000 for the comparable period in
1998. Net charge-offs for the nine months ended September 30, 1999 and 1998 were
$102,000 and approximately $2,000, respectively.
10
The Company provides for an adequate allowance for loan losses that are
probable and inherent in the portfolio. Increases in the provision for loan
losses reflect the latest assessment of the inherent losses in the loan
portfolio. The increase in the provision is due to growth in the loan portfolio
and increase in non-accrual loans. A discussion of the allowance for loan losses
and the factors on which provisions are based begins on page 12.
Non-interest Income
- -------------------
Non-interest income increased by $130,000, or 34.0%, in the third quarter
of 1999 versus the third quarter of 1998. This increase was primarily driven by
a 61.0% increase in trust fee income. Trust assets under administration totaled
$669 million at September 30,1999, compared to $530 million at September 30,
1998.
Non-interest income increased approximately $495,000 or 50.8%, to $1.5
million for the nine months ended September 30, 1999, as compared with $975,000
for the same period in 1998.
Non-interest Expense
- --------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
------ ------
(IN THOUSANDS)
Salaries and employee benefits................. $3,403 $2,954
Towne Square Acquisition....................... 1,300 --
Occupancy...................................... 1,126 1,011
Data processing................................ 382 356
Marketing...................................... 429 404
Professional fees.............................. 891 386
Insurance...................................... 132 95
Other expense.................................. 1,208 701
------ ------
Total non-interest expense................ $8,871 $5,907
====== ======
Included in non-interest expense for the nine months ended September 30,
1999, is the one-time $1.3 million charge associated with the acquisition of
Towne Square Financial Corporation, together with the $133,200 of start-up
costs. This non-recurring charge is not tax deductible. Excluding the effect of
the one-time charge, non interest expense increased 25.9% to $7.4 million
compared to $5.9 million for the year earlier period. Efficiency ratio (tax
equivalent) for the nine months ended September 30, 1999 was 67.0% compared to
61.1% for the same period in 1998. Excluding the effect of the one-time charge,
the efficiency ratio for the nine months ended September 30, 1999 is 56.2%.
Salary and employee benefit expense increased 15.2% from $3.0 million for
the nine months ended September 30, 1998 to $3.4 million for the nine months
ended September 30, 1999. The increase is due primarily to an increased number
of employees, including the senior officer responsible for opening the St.
Charles office. Full time equivalent employees increased 13.2% to 77 as of
September 30, 1999, from 68 at September 30, 1998.
Professional fees increased 130.8% to $891,000 for the first nine months of
1999 from $386,000 for the prior year period. The increase is due to a number of
factors including increased consulting services rendered in regards to year 2000
readiness. During the third quarter of 1999, the Company completed its data
processing conversion to a new third party provider. The Company incurred
$145,000 of expenses for consulting related to the data processing conversion
during the third quarter 1999. Included in professional fees for the 1999 period
are approximately $95,000 of non-recurring legal and accounting fees associated
with the Towne Sqaure acquisition. In addition, the increase in trust
related business has resulted in increased investment management fees paid to
third parties during the nine months ended September 30, 1999.
11
Income Taxes
- ------------
The following table shows the Company's income before income taxes,
applicable income taxes and effective tax rate for the nine months ended
September 30, 1999 and 1998, respectively.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1999 1998
----- ------
Income before income taxes................. $3,004 $3,473
Income Tax Provision....................... 1,066 1,355
Effective Tax Rate......................... 35.5% 39.0%
The effective income tax rate varies from statutory rates principally due
to certain interest income which is tax-exempt for federal and state purposes,
and certain expenses (including the Towne Square acquisition charge) which are
disallowed for tax purposes. Decreases in the income tax provision for the nine
months ended September 30, 1999 as compared to the comparable period in 1998
resulted from the increase of the Company's municipal bond portfolio as a
percentage of total investments and the initiation of a tax- advantaged
investment program implemented in February 1999. Municipal securities increased
from $5.4 million at September 30, 1998 to $38.3 million at September 30, 1999.
FINANCIAL CONDITION
Total assets were $ 449.8 million at September 30, 1999, an increase of
$65.3 million, or 17.0% over the $384.5 million a year earlier, and $33.5
million, or 8.0% over the $416.3 million at December 31, 1998. The balance sheet
growth was created mainly through loan growth.
Loans
- -----
Total loans increased $113.0 million, or 47.2%, from $239.2 million at
September 30, 1998, and $70.3 million, or 24.9%, from $282.0 million at December
31, 1998.
The following table sets forth our loan portfolio net of unearned discount
by category (in thousands):
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1999 1998 1998
------------- ------------ -------------
GROSS LOANS:
Commercial real estate............. $125,923 $ 94,392 $ 75,596
Residential real estate............ 66,287 54,170 48,453
Commercial......................... 62,410 46,800 40,636
Personal (1)....................... 76,340 64,195 58,908
Construction....................... 21,276 22,408 15,631
-------- -------- --------
Total gross loans... $352,236 $281,965 $239,224
======== ======== ========
- ------------------
(1) Includes home equity loans and overdraft lines
Allowance for Loan Losses
- -------------------------
Loan quality is continually monitored by management and reviewed by the
loan/investment committee of the Board of Directors of the Bank on a monthly
basis. The amount of additions to the allowance for loan losses which is charged
to earnings through the provision for loan losses is determined based on a
variety of factors, including assessment of the credit risk of the portfolio,
delinquent loans, 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
12
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
September 30, 1999, 1.2% as of December 31, 1998 and 1.4% as of September 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
nine months ended September 30, 1999 and 1998 (in thousands):
1999 1998
---- ----
Balance, January 1................................ $3,410 $3,050
Provision charged to operations................... 771 272
Loans charged-off (net)........................... (102) (2)
------ ------
Balance, September 30.................... $4,079 $3,320
====== ======
Nonaccrual and Nonperforming Loans
- ----------------------------------
Nonaccrual loans increased to $569,000 as of September 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 $704,000 as of
September 30, 1999, compared to $1.016 million at December 31, 1998 and $602,000
at September 30, 1998. Nonperforming loans were .20%, .36% and .25% of total
loans as of September 30, 1999, December 31, 1998 and September 30, 1998,
respectively. Nonperforming loans were .16%, .24% and .16% of total assets as of
September 30, 1999, December 31, 1998 and September 30, 1998, respectively.
13
Investment Securities
- ---------------------
The amortized cost and the estimated fair value of securities as of
September 30, 1999 and December 31, 1998, were as follows (in thousands):
INVESTMENT SECURITIES - AVAILABLE FOR SALE
SEPTEMBER 30, 1999
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U. S. Treasury....................... -- -- -- --
U. S. Government Agency Obligation... 31,287 22 (450) 30,859
Municipals........................... 38,342 49 (3,617) 34,774
Other(1)............................. 11,851 -- (215) 11,636
-------- -- ------ --------
$ 81,480 71 (4,282) $ 77,269
======== == ====== ========
INVESTMENT SECURITIES - AVAILABLE FOR SALE
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
U. S. Treasury....................... 6,021 73 -- 6,094
U. S. Government Agency Obligation... 61,358 118 (61) 61,415
Municipals........................... 37,709 227 (132) 37,804
Other(1)............................. 11,558 20 -- 11,578
-------- --- ---- --------
$116,646 438 (193) $116,891
======== === ==== ========
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 September 30, 1999, net unrealized losses resulted in a $2.6
million decrease in equity. This was a decrease of $2.7 million from a net
unrealized gain of $151,000 recorded as part of equity at December 31, 1998.
Securities available-for-sale decreased 33.9% to $77.3 million as of
September 30, 1999, from $116.9 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. The U.S. Treasury securities portfolio
was sold in the third quarter and the proceeds were reinvested in U.S.
government agency securities. U.S. government agency securities and
collateralized mortgage obligations decreased 49.0% to $31.3 million as of
September 30, 1999 from $61.4 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
experienced during 1999. Municipal securities increased by 1.7% to $38.3 million
as of September 30, 1999. The increase in unrealized losses of $4.2 million
since December 31, 1998 is primarily attributable to the municipal
- --------
(1) Represents corporate and equity securities.
14
securities portfolio; rising interest rates during 1999 have caused the
municipal securities portfolio to decline in value. Corporate and equity
securities remained relatively unchanged at $11.9 million as of September 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 $386.2 million as of September 30, 1999 represented an
increase of $21.2 million or 5.8% from $365.0 million as of December 31, 1998.
Non-interest-bearing deposits were $36.0 million as of September 30, 1999,
approximately $3.6 million lower than the $39.5 million reported as of December
31, 1998. Interest-bearing demand deposits remained relatively stable at $26.5
million as of September 30, 1999. Savings and money market deposit accounts
increased by approximately $16.7 million to $187.4 million at September 30, 1999
as compared to December 31, 1999. Other time deposits increased by approximately
$8.1 million to $136.4 million as compared with the December 31, 1998 balance of
$128.3 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. The Company has
periodically used services of the FHLB for short-term funding needs and other
correspondent services. At September 30, 1999, FHLB borrowed funds totaled $15.0
million at an interest rate of 5.45%. This FHLB borrowing matured on November 3,
1999, and was subsequently renewed at $20.0 million through December 1999. The
borrowings were used to fund loan demand in advance of future anticipated
deposit growth.
Capital Resources
- -----------------
Stockholders' equity rose to $46.4 million, an increase of $17.1 million
from the 1998 year-end level, due primarily to the Company's initial public
offering in July, 1999 and to net income from the first nine months of 1999.
During July 1999, the Company raised approximately $15.6 million in capital
through the issuance of 1.035 million shares. The change in the fair value of
the available-for-sale investment portfolio decreased stockholders' equity by
$2.7 million net of tax as of September 30, 1999 as compared to December 31,
1999.
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and 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
September 30, 1999 and December 31, 1998:
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
Leverage ratio.............................. 11.19% 7.92%
Tier 1 risk based capital ratio............. 14.09% 10.13%
Total risk based capital ratio.............. 15.22% 11.26%
Total equity to total assets................ 10.30% 7.02%
At September 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
15
in the initial public offering during July 1999, is funding 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 $2.0 million in the first nine
months of 1999 compared to a net inflow of $3.0 million a year earlier. Net cash
outflows from investing activities were $35.5 million in the first nine months
of 1999 compared to a net cash outflow of $12.4 a year earlier. Cash inflows
from financing activities in the first nine months of 1999 were $34.0 million
compared to a net inflow of $70.5 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.
16
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 assessment,
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
17
which they interface. The Company's plan, which was 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.
During the third quarter of 1999, the Company transferred its loan and
deposit processing to a new data processing provider. Through the use
of proxy testing, the Company has validated 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 limited rights to claim damages from it. 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. 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.
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 September 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.
18
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 compliments the asset/liability policy by
establishing criteria by which the Company may purchase securities. These
criteria include approved types of securities, brokerage sources, terms of
investment, quality standards, and diversification.
The following table illustrates the estimated interest rate sensitivity and
periodic and cumulative gap positions calculated as of September 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.................................. $180,774 $ 9,121 $ 98,463 $ 62,615 $350,973
Investments............................ 7,415 15,318 18,659 40,088 81,480
Federal funds sold..................... 1,911 -- -- -- 1,911
-------- --------- -------- -------- --------
Total interest-earning assets....... $190,100 $ 24,439 $117,122 $102,703 $434,364
======== ========= ======== ======== ========
INTEREST -BEARING LIABILITIES
Interest-bearing demand................ -- -- -- $ 26,456 $ 26,456
Savings and money market............... $187,410 $ -- -- -- 187,410
Time deposits.......................... 78,374 54,408 3,570 -- 136,352
Funds borrowed......................... 15,000 -- -- -- 15,000
-------- --------- -------- -------- --------
Total interest-bearing liabilities $280,784 $ 54,408 $ 3,570 $ 26,456 $365,218
======== ========= ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA)............ $190,100 $ 214,539 $331,661 $434,364
Rate sensitive liabilities (RSL)....... $280,784 $ 335,192 $338,762 $365,218
GAP (GAP=RSA-RSL)................... $(90,684) $(120,653) $ (7,101) $ 69,146
RSA/RSL................................. 67.7% 64.0% 97.9% 118.9%
RSA/Total assets........................ 42.3% 47.7% 73.7% 96.6%
RSL/Total assets........................ 62.4% 74.5% 75.3% 81.2%
GAP/Total assets........................ 20.2% 26.8% 1.6% 15.4%
GAP/Total RSA........................... 20.9% 27.8% 1.6% 15.9%
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.
19
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........................... -11.6% 13.8%
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 11.6% over a two year horizon. Conversely, a like shift of
- -200 basis points would increase net interest income by 13.8% 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.
20
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Reform Act of 1995, and is including this statement for purposes of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, can generally be identified by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain 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 the Company's market areas; legislative or regulatory changes;
adverse developments in the Company's loan or investment portfolios; significant
increases in competition; unforeseen difficulties or delays in completing the
pending acquisition of Johnson Bank Illinois or opening the new St. Charles,
Illinois office; an inability to realize cost savings in the acquired operations
of Johnson Bank Illinois or to achieve expected revenues to the full extent
expected or within the expected time frame following the acquisition; the
possible dilutive effect of potential acquisitions' additional and startup
operations; 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.
21
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 $15.6 million after
deducting underwriting commissions and offering expenses of approximately
$665,000. 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 the
new St. Charles, Illinois office.
On August 3, 1999, the Company completed the acquisition of Towne Square.
The Company issued 91,668 shares of common stock in the transaction pursuant to
a registration statement filed with the SEC.
It is intended that the remaining net proceeds will be applied to pay, in
part, the cash portion of the Johnson Bank Illinois purchase price. Pending such
application, 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10.1 - Stock Purchase Agreement dated as of October 4,
1999, by and among PrivateBancorp, Inc., Johnson International,
Inc. and Johnson Bank Illinois.
Exhibit 27 - Financial Data Schedule.
(b) Filings on Form 8-K.
None.
22
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: November 15, 1999
23
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Stock Purchase Agreement dated as of October 4, 1999, by and
among PrivateBancorp, Inc., Johnson International, Inc. and
Johnson Bank Illinois
27 Financial Data Schedule
24