<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration Number 333-77147
PROSPECTUS
900,000 Shares
[LOGO OF PRIVATEBANCORP INC.]
Common Stock
This is the initial public offering of our common stock. Our common stock
is traded on the Nasdaq National Market under the symbol "PVTB."
Investing in the common stock involves risks. See "Risk Factors" beginning
on page 11.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price.............................. $18.00 $16,200,000
Underwriting Discount.............................. $ 1.26 $ 1,134,000
Proceeds to PrivateBancorp, Inc.................... $16.74 $15,066,000
</TABLE>
This is a firm commitment underwriting. We have granted the underwriters a
30-day option to purchase up to 135,000 additional shares of our common stock
on the same terms and conditions set forth above to cover over-allotments, if
any.
The shares of common stock that are being offered are not savings accounts
or deposits or other obligations of a bank and are not insured by the Bank
Insurance Fund or the Savings Association Insurance Fund of the Federal Deposit
Insurance Corporation or any governmental agency.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The underwriters expect to deliver the shares to purchasers on July 6, 1999.
EVEREN Securities, Inc. Stifel, Nicolaus & Company
Incorporated
The date of this prospectus is June 30, 1999
<PAGE>
PrivateBancorp, Inc.
[Map of greater Chicago metropolitan area depicting locations of Company's
banking facilities and main bank office.] and [graphic of services offered]
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 11
Special Note Regarding Forward-Looking Statements......................... 17
Pending Acquisition....................................................... 18
Use of Proceeds........................................................... 20
Dividends; No Prior Trading Market........................................ 20
Capitalization............................................................ 21
Dilution.................................................................. 22
Business.................................................................. 23
Selected Consolidated Financial Data...................................... 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 38
Management................................................................ 56
Certain Transactions...................................................... 65
Principal Stockholders.................................................... 66
Supervision and Regulation................................................ 67
Description of Capital Stock.............................................. 74
Shares Eligible for Future Sale........................................... 78
Underwriting.............................................................. 81
Legal Matters............................................................. 83
Experts................................................................... 83
Where You Can Get More Information........................................ 83
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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Our executive offices are located at The PrivateBank and Trust Company, Ten
North Dearborn Street, Chicago, Illinois 60602. Our telephone number is (312)
683-7100.
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You should rely only on the information contained in this document. We have
not authorized anyone to provide you with information that is different. The
information contained in this document may have changed since the date of this
prospectus. This prospectus is not an offer to sell and it is not soliciting an
offer to buy the common stock in any state where offers or sales are not
permitted.
----------------
Until July 25, 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligations to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all the information that may be important to you.
You should read the entire prospectus, including the financial statements and
related notes, before making a decision to invest in the common stock. Unless
we indicate otherwise, all share, per share and financial information in this
prospectus: (a) reflects the two-for-one stock split of our common stock
effective as of June 28, 1999; and (b) assumes no exercise of the underwriters'
option to purchase up to an additional 135,000 shares of common stock from us.
PrivateBancorp
PrivateBancorp is a Delaware corporation headquartered in Chicago, Illinois.
We are a bank holding company with one bank subsidiary, The PrivateBank and
Trust Company, which we formed as a de novo, or start-up, bank in 1991.
PrivateBank provides private banking and trust services primarily to
professionals, entrepreneurial individuals and their business interests. Our
managing directors seek to build strong relationships with clients by
emphasizing a consistently superior level of personalized service. We focus on
the personal financial services needs of our clients as well as the banking
needs of their various business and investment ventures. Clients are teamed
with dedicated managing directors so they are dealing directly with our
decision-makers. In this way, we are able to tailor our loan products and other
services to be highly responsive to the individual situation of each client.
Since year-end 1995, we have grown our asset base at a compound annual rate
of 27.3% to $431.1 million as of March 31, 1999. During the same period, loans
have grown at a compound annual rate of 31.6% to $307.8 million, deposits at a
compound annual rate of 27.0% to $384.5 million and trust assets under
administration at a compound annual rate of 40.2% to $637.4 million.
[CHART APPEARS HERE]
4
<PAGE>
Our Market
We have targeted affluent individuals with annual incomes in excess of
$150,000, professionals, owners of closely-held businesses and commercial real
estate investors because we believe that they have significant unmet demand for
personalized services. Demographic data compiled by National Decision Systems,
San Diego, California, indicates that there is significant growth potential in
the affluent segment of the population. In the metropolitan Chicago area, the
number of households with annual incomes greater than $150,000 was estimated at
190,042 in 1998, compared to 63,861 households in 1990. This equates to a
compound annual growth rate of 14.6%, versus a growth rate for the total number
of households in the metropolitan Chicago area of 0.6%. By 2003, the number of
these affluent households in the Chicagoland area is expected to increase to
358,000, representing an annual growth rate of 13.5%, while the aggregate
number of households is expected to increase at an annual growth rate of only
0.3%.
[CHART APPEARS HERE]
- --------
(1) Based on information from the 1990 U.S. census.
(2) Estimated by National Decision Systems based on, among other things, (a) a
time series of estimates made by the U.S. Census Bureau regarding six
counties in the Chicago metropolitan area; and (b) data provided by the
Department of Planning of the City of Chicago.
(3) Generated by National Decision Systems through the application of an
econometric model of the Chicago metropolitan area to the 1998 estimate.
The econometric forecasting model considers the impact of various economic
factors such as employment, inflation, interest rates and housing starts on
future population growth.
5
<PAGE>
The PrivateBank and Trust Approach
We believe that we have developed a unique approach to private banking
designed to provide our clients with unparalleled service. We emphasize
personalized client relationships and custom-tailored financial services,
complemented by the convenience of technology. The key aspects of our private
banking approach are:
. Personal Relationships. Each of our clients is matched with a dedicated
team of individuals, headed by a managing director who becomes the
client's central point of contact with PrivateBank. Through these
dedicated teams, we are able to build strong, ongoing, personal
relationships with our clients.
. Affluent Target Client. We offer our services to those members of the
affluent segment of the population who are focused on building and
preserving wealth. Our clients include affluent professionals,
entrepreneurial individuals and their business interests.
. Customized Financial Services. We provide our clients with a wide
variety of financial services beyond traditional banking products and
are constantly working with our clients to identify their particular
needs and to develop and shape our services to meet those needs.
. Streamlined Decision-Making Process. Unlike many larger banks, we have
not instituted a lengthy chain of command. Our clients deal directly
with their dedicated managing directors, whose broad decision-making
authority allows them to respond quickly and efficiently.
. Enhanced Personal Service through Technology. While we encourage our
clients to contact us directly, we also utilize technology to complement
and enhance our service. Through PrivateBank Access, an internet banking
service, we offer clients the convenience of accessing our services from
remote locations at any time.
. Extensive Financial Network. To better compete with other financial
service providers, we rely on a network of professionals in the
financial and investment communities with whom we have developed
relationships over the years. This network allows us to deliver to our
clients a broad array of diverse, high-quality services, including
investment management, insurance and brokerage.
Strategy for Growth
Our growth strategy entails five key components:
. Developing Our Existing Relationships. An important part of our future
growth will be the continued development of our existing client
relationships. As the needs of our clients change and grow, we hope to
grow with them and continue to provide them with our unique, flexible
services.
. Increasing the Reach of Our Existing Offices. We hope to expand the
market presence of our existing offices, especially our Oak Brook,
Illinois and Wilmette, Illinois branches. We believe that there is a
growing need for private banking services in these regions which is
largely unmet, and we hope to capitalize on the experience and
reputations of our managing directors in meeting this need.
. Opening Additional Offices in the Chicago Metropolitan Area. The success
of our Oak Brook and Wilmette offices has confirmed a significant demand
by our target clients for specialized private banking services in the
Chicago metropolitan area. We have recently undertaken to establish a
new office in St. Charles, Illinois to meet this demand, and we will
consider opening additional offices as we identify favorable locations
and other qualified senior executives to add to our management team. See
"Pending Acquisition."
. Expanding into New Markets. We believe that the demand for our private
banking services is not unique to Chicago. As we identify Midwestern
markets that present similar opportunities for growth and development,
we intend to pursue selective geographic expansion through acquisitions
of existing institutions or by establishing new banking offices.
. Expanding into New Product Lines. We intend to identify additional
financial services not currently offered by PrivateBank in order to
increase our franchise value by diversifying our fee income,
strengthening our client relationships and broadening our product line.
We may expand our product line by acquisition. We will focus on
companies that emphasize quality service and the value of relationships
and complement our products and client base.
6
<PAGE>
Our Experienced Management Team
PrivateBancorp, Inc. was founded in November 1989 by Ralph B. Mandell and
William R. Langley. Together, they had previously headed a $1.2 billion
publicly traded suburban Chicago bank holding company which they successfully
merged into First Chicago Corporation in 1987. As founders of our company, they
assembled a team of senior bankers with diverse experience and varied
backgrounds. Mr. Mandell, with 34 years in banking, has been instrumental in
the development of many of our client relationships, either personally or by
providing his assistance. As chief executive officer, he sets the direction of
our company and instills our sense of corporate culture. Mr. Langley retired
from active management in 1995, but remains on our Board of Directors.
Our current management team consists of eleven managing directors, including
Mr. Mandell, and six associate managing directors. Our managing directors are
senior financial professionals with an average of 27 years of banking and
financial experience. Together with our Board of Directors, they currently own
an aggregate of 1,079,692 shares of our common stock, which represents
approximately 31.3% of the shares currently outstanding. In addition to Mr.
Mandell, two other managing directors, Caren L. Reed and Donald A. Roubitchek
who have both been involved with the company since 1990, also serve on our
Board of Directors. Mr. Reed, our vice chairman and chief credit officer, has
spent 43 years in banking and has extensive experience in relationship
management and credit administration. Our quality loan portfolio and credit
culture was developed under his tutelage. Mr. Roubitchek, our chief financial
officer, also serves as our chief administrative and operating officer. Mr.
Roubitchek, with 27 years of experience, has been responsible for managing our
rapid growth.
Of our other three executive officers, Gary S. Collins, a managing director
since 1991, has over 24 years of experience and has been responsible for a
considerable number of client relationships through his expertise in real
estate lending. M. Gail Fitzgerald, a managing director since 1996, has 20
years of trust experience and is our senior trust officer responsible for
managing our trust area. Hugh H. McLean, a managing director since 1996, has
over 19 years of experience. He serves as head of our credit marketing group
and manages our Oak Brook office.
7
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by PrivateBancorp........ 900,000 shares(1)
Common stock to be outstanding after the 4,351,824 shares(2)
offering.....................................
Price to Public............................... $18.00 per share
Use of Proceeds............................... We intend to use the net proceeds from the sale of
shares of common stock offered hereby for general
corporate purposes to support our anticipated future
growth. This may include:
. funding internal growth at the current
locations of our banking subsidiary;
. creating new offices in the Chicago
metropolitan area;
. expanding our presence into new markets
located in the Midwest; and/or
. acquiring businesses that are complementary
to ours.
Nasdaq National MarketSM Symbol............... PVTB
</TABLE>
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(1) We have granted the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase up to an additional 135,000
shares of our common stock at the initial public offering price, solely to
cover over-allotments, if any. See "Underwriting."
(2) This number does not include shares reserved for issuance under our stock-
based compensation program and upon the exercise of various other
outstanding stock options. Pursuant to the terms of these programs, we are
permitted, and in some cases obligated, to issue shares of common stock in
addition to the common stock to be outstanding after this offering. If we
issue these shares, the percentage of the common stock you own may be
diluted. The following is a summary of additional shares of common stock
that we have approved for issuance:
. 476,607 shares reserved for issuance under a stock incentive plan
maintained for the benefit of eligible officers and employees. This
number includes (a) 50,119 shares available for future awards, and (b)
426,488 shares issuable upon exercise of currently outstanding options
at a weighted average exercise price of $10.37 per share previously
granted under the plan.
. 206,320 shares reserved for issuance under other outstanding options to
purchase common stock that were previously granted to directors and
officers. The weighted average exercise price of these options is $10.51
per share.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes certain consolidated financial information of
PrivateBancorp. You should read this table in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
----------------- ---------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Statement of
Income Data:
Interest income:
Loans, including fees.. $ 5,636 $ 4,624 $ 19,619 $ 16,729 $ 12,152 $ 10,053 $ 6,418
Federal funds sold and
interest-bearing
deposits.............. 48 498 2,181 875 1,392 1,149 358
Securities............. 1,570 727 3,492 2,519 2,396 1,700 1,265
-------- -------- -------- -------- -------- -------- --------
Total interest
income.............. 7,254 5,849 25,292 20,123 15,940 12,902 8,041
-------- -------- -------- -------- -------- -------- --------
Interest expense:
Interest-bearing
demand deposits....... 142 121 487 377 305 276 210
Savings and money
market deposit
accounts.............. 1,800 1,629 6,651 5,880 4,613 3,484 2,139
Other time deposits.... 1,752 1,346 6,155 3,821 2,973 2,620 782
Funds borrowed......... 144 -- 19 3 143 50 62
-------- -------- -------- -------- -------- -------- --------
Total interest
expense............. 3,838 3,096 13,312 10,081 8,034 6,430 3,193
-------- -------- -------- -------- -------- -------- --------
Net interest income.. 3,416 2,753 11,980 10,042 7,906 6,472 4,848
Provision for loan
losses................. 285 91 362 603 524 930 305
-------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan losses......... 3,131 2,662 11,618 9,439 7,382 5,542 4,543
-------- -------- -------- -------- -------- -------- --------
Non-interest income:
Banking and trust
services.............. 442 273 1,281 1,210 911 674 414
Securities gains....... -- -- 40 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total non-interest
income.............. 442 273 1,321 1,210 911 674 414
-------- -------- -------- -------- -------- -------- --------
Non-interest expense:
Salaries and employee
benefits.............. 1,115 1,102 4,077 3,902 3,411 2,749 2,054
Occupancy.............. 352 334 1,379 1,274 990 946 745
Data processing........ 131 120 508 396 334 282 262
Marketing.............. 153 139 567 500 424 296 272
Amortization of
organization costs.... -- -- -- -- 23 280 280
Professional fees...... 178 94 561 448 326 284 253
Insurance.............. 41 30 134 115 82 238 342
Other expense.......... 285 181 864 627 508 434 321
-------- -------- -------- -------- -------- -------- --------
Total non-interest
expense............. 2,255 2,000 8,090 7,262 6,098 5,509 4,529
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes............... 1,318 935 4,849 3,387 2,195 707 428
Income tax provision... 291 365 1,839 1,242 762 (403) 3
-------- -------- -------- -------- -------- -------- --------
Net income........... $ 1,027 $ 570 $ 3,010 $ 2,145 $ 1,433 $ 1,110 $ 425
======== ======== ======== ======== ======== ======== ========
Per Share Data:
Basic earnings......... $ 0.30 $ 0.18 $ 0.91 $ 0.69 $ 0.49 $ 0.39 $ 0.17
Diluted earnings....... 0.28 0.17 0.86 0.65 0.47 0.38 0.16
Dividends.............. 0.03 0.02 0.08 0.07 0.07 0.03 --
Book value (at end of
period)............... 8.71 7.86 8.53 7.67 6.84 6.47 6.13
Selected Financial
Condition Data
(at end of period):
Total securities(1)..... $105,136 $ 48,322 $116,891 $ 65,383 $ 44,617 $ 38,296 $ 24,669
Total loans............. 307,766 223,746 281,965 218,495 171,343 126,069 98,380
Total assets............ 431,055 331,924 416,308 311,872 246,734 196,917 141,826
Total deposits.......... 384,454 304,660 364,994 285,773 222,571 176,868 122,925
Funds borrowed.......... 10,000 -- 20,000 -- 3,000 700 1,000
Total stockholders'
equity................. 30,054 25,400 29,274 24,688 20,222 18,445 17,471
Trust assets under
administration......... $637,422 $524,019 $611,650 $469,646 $328,662 $212,456 $168,872
</TABLE>
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(1) For all periods after 1994, the entire securities portfolio was classified
"Available for Sale." For 1994, the entire securities portfolio was
classified "Held to Maturity."
9
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
-------------- ---------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios
and Other Data(1):
Performance Ratios:
Net interest margin(2)..... 3.57% 3.65% 3.61% 4.01% 3.73% 3.95% 4.09%
Net interest spread(3)..... 3.02 2.96 2.98 3.31 3.03 3.16 3.42
Non-interest income to
average assets............ 0.42 0.34 0.37 0.45 0.42 0.40 0.35
Non-interest expense to
average assets............ 2.13 2.49 2.29 2.71 2.79 3.31 3.79
Net overhead ratio(4)...... 1.71 2.15 1.91 2.26 2.38 2.90 3.44
Efficiency ratio(5)........ 58.45 67.65 60.82 64.53 69.17 77.09 86.07
Return on average
assets(6)................. 0.97 0.71 0.85 0.80 0.66 0.67 0.36
Return on average
equity(7)................. 13.84 9.11 11.27 9.49 7.38 6.22 2.94
Dividend payout ratio...... 8.36 10.63 8.74 10.13 12.88 8.03 --
Asset Quality Ratios:
Non-performing loans to
total loans............... 0.12 0.32 0.36 0.24 0.65 1.90 0.15
Allowance for possible loan
losses to:
total loans............... 1.20 1.40 1.21 1.40 1.43 1.55 1.04
non-performing loans...... 1,025 440 336 578 220 82 711
Net charge-offs to average
total loans............... -- -- -- -- 0.02 -- 0.01
Non-performing assets to
total assets.............. 0.08 0.21 0.24 0.17 0.45 1.22 0.10
Balance Sheet Ratios:
Loans to deposits.......... 80.1 73.4 77.3 76.5 77.0 71.3 80.0
Average interest-earning
assets to
average interest-bearing
liabilities............... 114.2 117.0 116.4 117.7 118.6 120.7 123.8
Capital Ratios:
Total equity to total
assets.................... 6.97 7.65 7.03 7.92 8.20 9.37 12.32
Total risk-based capital
ratio..................... 11.21 11.47 11.53 11.75 12.21 14.56 19.58
Tier 1 risk-based capital
ratio..................... 10.05 10.22 10.40 10.50 10.96 13.31 18.49
Leverage ratio............. 7.53 7.87 7.88 8.70 8.71 9.76 13.03
</TABLE>
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(1) Certain financial ratios for interim periods have been annualized.
(2) Net interest income divided by average interest-earning assets.
(3) Yield on average interest-earning assets less rate on average interest-
bearing liabilities.
(4) Non-interest expense less non-interest income divided by average total
assets.
(5) Non-interest expense divided by the sum of net interest income plus non-
interest income.
(6) Net income divided by average total assets.
(7) Net income divided by average common equity.
10
<PAGE>
RISK FACTORS
Investing in our common stock involves risk. The discussion below describes
the most significant risk factors related to the offering. You should carefully
consider these risks and uncertainties before deciding to invest in our common
stock. If any of these risks or uncertainties actually occur, our business
could be adversely affected. In that event, the trading price of our common
stock could decline and you could lose all or a part of your investment. This
prospectus also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including those described below and elsewhere throughout the prospectus.
We depend on key personnel.
We are a relatively young organization and are relationship-driven. Our
growth and development to date have depended in large part on the efforts of
our 11 managing directors, who have primary contact with our clients and are
extremely important in maintaining personalized relationships with our client
base, the key aspect of our business strategy and in increasing our market
presence. The unexpected loss of services of one or more of these key employees
could have a material adverse effect on our operations.
We have entered into employment contracts with Ralph B. Mandell, our
Chairman, President and Chief Executive Officer, as well as a co-founder of our
company, Donald A. Roubitchek, our Secretary/Treasurer and Chief Financial
Officer and two of our managing directors. These agreements are effective
beginning July 1, 1999. We are dependent on the continued services of Messrs.
Mandell and Roubitchek in their roles. We have not entered into employment
agreements with any of our other managing directors, nor have we entered into
any key man life insurance policies. See "Management."
One of our executive officers, Vice Chairman Caren L. Reed, in addition to
his client responsibilities, serves as our chief credit officer. Mr. Reed has
indicated that he intends to retire from active management in December 1999.
Mr. Reed has agreed to continue to serve as our chief credit officer until we
can name a successor so he can assist in the transition process. Our strong
credit quality experience to date could be adversely impacted by Mr. Reed's
retirement.
We may not be able to implement aspects of our growth strategies.
A key component of our growth strategy involves the expansion of our
business and operations, possibly through the addition of new product lines and
the acquisition or establishment of new offices. Implementing this aspect of
our growth strategy depends in part on our ability to successfully identify
acquisition opportunities and strategic partners that will complement our
private banking approach and to successfully integrate their operations with
ours. To open new offices such as the pending St. Charles branch successfully,
we must be able to correctly identify profitable or growing markets, as well as
attract the necessary relationships to make these new facilities cost-
effective. See "Pending Acquisition." We cannot be sure that we will be able to
identify suitable opportunities for further expansion, or that if we do, that
we will be able to successfully integrate these new operations into our
business. If we are unable to effectively implement our growth strategies, our
business may be adversely affected.
Since our business is concentrated in the Chicago metropolitan area, a downturn
in the Chicago economy may adversely affect our business.
Currently, PrivateBank's lending and deposit gathering activities are
concentrated primarily in the greater Chicago metropolitan area. Our success
depends on the general economic condition of Chicago and its surrounding areas.
Although currently the economy in these areas is favorable, we do not know
whether such conditions will continue. Adverse changes in the economy could
reduce our growth rate, impair our ability to collect loans, and generally
affect our financial condition and results of operations.
11
<PAGE>
Our future success is dependent on our ability to compete effectively in the
highly competitive banking industry.
We face substantial competition in all phases of our operations from a
variety of different competitors. Our future growth and success will depend on
our ability to compete effectively in this highly competitive environment. To
date, we have grown our business successfully by focusing on our market niche
and emphasizing the high level of service and responsiveness desired by our
clients. While it is our intention to continue to operate in our targeted
niche, we compete for loans, deposits and other financial services in our
geographic market with other commercial banks, thrifts, credit unions and
brokerage houses operating in the greater Chicago area. Many of our competitors
offer services which we do not, and many have substantially greater resources,
name recognition and market presence that benefit them in attracting business.
In addition, larger competitors may be able to price loans and deposits more
aggressively than we do. Some of the financial institutions and financial
services organizations with which we compete are not subject to the same degree
of regulation as is imposed on bank holding companies and federally insured,
state-chartered banks and national banks. As a result, these nonbank
competitors have advantages over us in providing certain services. See
"Business--Competition."
Our business may be adversely affected by the highly regulated environment in
which we operate.
We are subject to extensive federal and state legislation, regulation,
examination and supervision. This regulation and supervision is primarily
intended to protect our clients and their deposits, and not our stockholders.
Recently enacted, proposed and future legislation and regulations have had,
will continue to have, or may have a material adverse effect on our business
and operations. Our success depends on our continued ability to maintain
compliance with these regulations, including those pertaining to the Community
Reinvestment Act. Some of these regulations may increase our costs and thus
place other financial institutions in stronger, more favorable competitive
positions. We cannot predict what restrictions may be imposed upon us with
future legislation. See "Supervision and Regulation."
We may be adversely affected by interest rate changes.
Our operating results are largely dependent on our net interest income. When
interest rates are rising, the interest income we earn on loans and interest-
bearing investments may not increase as rapidly as the interest expense paid on
our liabilities. As a result, our earnings may be adversely affected. We
measure the impact of interest rate changes on our income statement through the
use of gap analysis which is a way to measure and manage sensitivity to
interest rate fluctuations. The amount of earning assets that reprice or mature
during a given time interval is compared to the amount of interest-bearing
liabilities that reprice or mature during the same time period. A bank which
matches perfectly the maturities of its assets and liabilities has a "gap"
position of 1.00. In this instance, under the gap analysis changes in interest
rates would have no effect on net interest income because interest income and
interest expense change in like amounts. There is an interest rate "gap" if the
amounts of repricing assets and liabilities differ for the given time period. A
positive gap, or a position greater than 1.00, indicates more assets than
liabilities will reprice in that time period, while a negative gap, or a
position less than 1.00, indicates more liabilities than assets will reprice. A
bank with a positive gap position would benefit from rising interest rates
because assets will reprice faster than liabilities, improving net interest
income, but net interest income would be reduced when interest rates are
falling. Conversely, a bank would benefit from a negative gap position in a
falling interest rate environment.
We generally operate within guidelines set by our asset/liability policy for
maximum interest rate risk exposure, and attempt to maximize our returns within
an acceptable degree of risk. Our policy calls for maintaining a gap position
at the one year horizon of between 0.70 and 1.30 to allow us to take advantage
of anticipated interest rate environments, but within reasonable maximum risk
exposures. Given the current interest rate environment and relatively flat
yield curve, however, we have recently been operating with a gap position at
the low end of our policy limits in light of the available business
opportunities. At March 31, 1999, our gap position was 0.697, slightly below
our policy limit, reflecting borrowers' general preference for
12
<PAGE>
fixed-rate loans or loans adjusting over longer time intervals, and depositors
general preference for shorter term certificates of deposits. Generally
speaking, a short-term rise in interest rates will hurt our earnings more than
if we were operating within our policy guidelines. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations--Asset/Liability
Management Policy."
We may be adversely affected by government monetary policy.
The banking industry is affected by the monetary policies of the Federal
Reserve System, which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. In setting its policy, the Federal
Reserve System may utilize techniques such as the following:
. engaging in open market transactions in United States government
securities;
. setting the discount rate on member bank borrowings; and
. determining reserve requirements.
These techniques may have an adverse effect on our deposit levels, net interest
margin, loan demand or our business and operations. See "Supervision and
Regulation."
Our allowance for loan losses may prove to be insufficient to absorb potential
losses in our loan portfolio.
Lending money is a substantial part of our business. However, every loan we
make carries a certain risk of non-payment. This risk is affected by, among
other things:
. the credit risks of a particular borrower;
. changes in economic and industry conditions;
. the duration of the loan; and
. in the case of a collateralized loan, the changes and uncertainties as
to the future value of the collateral.
We maintain an allowance for loan losses which we believe is appropriate to
provide for any potential losses in our loan portfolio. The amount of this
allowance is determined by management through a periodic review and
consideration of several factors, including:
. an ongoing review of the quality, size and diversity of our loan
portfolio;
. evaluation of non-performing loans;
. historical loan loss experience; and
. the amount and quality of collateral, including guarantees, securing the
loans.
Although we believe our loan loss allowance is adequate to absorb probable
losses in our loan portfolio, we cannot predict such losses, and there can be
no assurance that our allowance will be adequate. Excess loan losses could have
a material adverse effect on our financial condition and results of operations.
Regulatory restrictions on dividend payments from our subsidiary may affect our
ability to pay dividends to our stockholders.
We have paid dividends to our stockholders on a regular basis. Although we
intend to continue to pay dividends, our ability to do so may be affected by
many factors. While in the past we have had available cash at the holding
company level to fund dividend payments, we anticipate that in the future we
will rely on
13
<PAGE>
income earned by PrivateBank as the primary source for dividend payments.
PrivateBank is subject to certain restrictions on the amount of dividends it
may pay to us without regulatory approval. See "Dividends" and "Supervision and
Regulation--Bank Regulation--Dividends."
Our computer systems could experience a security breach.
As a service to our clients, we offer PrivateBank Access, our internet PC
banking product. Use of this service involves the transmission of confidential
information over public networks. We cannot be sure that advances in computer
capabilities, new discoveries in the field of cryptography or other
developments will not result in a compromise or breach in the commercially
available encryption and authentication technology that we use to protect our
clients' transaction data. If we were to experience such a breach or
compromise, we could suffer losses and our operations could be adversely
affected.
We depend on third parties for our data processing needs; and we are in the
process of converting to a new provider for our loan and deposit processing
requirements.
We rely on outside organizations to handle virtually all of the data
processing aspects of our business. If these outside organizations experience
any type of computer or personnel failure and are unable to properly input or
process our information, our operations may be adversely affected. Situations
which might impair the ability of our outside data processors to meet our needs
include:
. computer system failure;
. loss of the personnel to handle the requirements of all of its
customers;
. loss, misapplication or corruption of our data; and
. lack of preparation for the "year 2000 issue."
If any of these outside organizations cease doing business or are unwilling to
renew our contract, we may be adversely affected. In addition, we are currently
in the process of transferring our loan and deposit processing requirements to
a new third party provider. While we anticipate completing this transition
during the third quarter of 1999, we may experience some delays in this process
which could have an adverse impact on our operations.
We rely on the services of outside investment managers.
In our trust and asset management business, which currently is the source of
substantially all of our fee income, we do not provide investment management
services directly through our own personnel. Rather, we rely on selected
outside investment managers to provide investment advice and asset management
services to our clients. We cannot be sure that we will be able to maintain
these arrangements on favorable terms. Also, many of the investment managers
with whom we work are affiliated with our competitors in the financial services
field. We cannot be sure that our investment managers will continue to work
with us in these arrangements. The loss of any of these outside investment
managers may impact our ability to provide our clients with quality service or
certain types of portfolio management without incurring the cost of replacing
them.
Our business may be negatively impacted by the year 2000 issue.
The "year 2000 issue", a critical issue in the banking industry and the
economy as a whole, has emerged because many existing application software
programs and systems use only the last two digits in referring to a year.
Therefore, these computer programs do not properly recognize a year beginning
with "20" instead of the familiar "19." If not corrected, many computer
applications and other technology-based systems could fail or create erroneous
results. The effects of this problem will vary from system to system, and the
extent of the potential impact of the year 2000 problem is not yet known. The
year 2000 problem may adversely affect a
14
<PAGE>
bank's operations. We could experience interruptions in PrivateBank's business
and suffer significant losses if we, or a supplier or vendor with whom
PrivateBank contracts, are unable to achieve year 2000 readiness before January
1, 2000. We are in the process of working with our third party service
providers and software vendors to assure that both our holding company and
PrivateBank are prepared for the year 2000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Our Information
Systems and the Year 2000."
A trading market for our common stock may not develop, and may be affected by a
significant number of shares which will become eligible for public sale after
the offering.
Our common stock has never been publicly traded, so we cannot predict the
extent to which a trading market will develop. In addition, the market price of
our common stock could drop as a result of sales of a large number of shares of
common stock after this offering. Your ability to resell you shares at or above
the initial public offering price may be adversely affected by these factors.
Immediately after this offering, assuming no prior exercise of outstanding
options, there will be 4,351,824 shares of our common stock outstanding. Unless
held by our affiliates, who are subject to certain trading restrictions under
the securities laws:
. 2,770,550 shares, or 63.6% of the shares outstanding, will immediately
be freely tradable in the public market, including all 900,000 shares
sold in this offering; and
. 81,900 shares, or 1.9% of the total outstanding, will become available
for sale beginning in September 1999.
Our directors and executive officers, who hold an aggregate of 1,005,112
shares, and certain of our stockholders, who hold an aggregate of 472,662
shares, representing in aggregate 33.9% of the total number of shares that will
be outstanding after the offering, have agreed not to offer, sell or contract
to sell any of their shares for a period of 180 days after the date of this
prospectus without the prior written consent of EVEREN Securities, Inc. Upon
expiration of this lock-up period, however, these shares may become available
for resale in the public market. See "Shares Eligible for Future Sale."
Pursuant to the terms of our Stock Incentive Plan, we have awarded an
aggregate of 21,600 shares of restricted stock to certain of our employees who
are not executive officers. Although our employees have full voting rights with
regard to these shares and may receive any dividends we declare, they may not
transfer the shares until they are fully vested. Each restricted stock award
will vest in its entirety on the fifth anniversary of the date of grant and is
subject to forfeiture until vesting. The shares vest on various dates between
2001 and 2004.
A substantial number of shares of our common stock issued pursuant to our
Stock Incentive Plan will also become available for resale in the public market
at prescribed times. In addition, we intend to register under the Securities
Act the shares of common stock reserved for issuance under our stock-based
programs.
Certain provisions of Delaware law and our charter and by-laws may discourage
or prevent a takeover of our company and reduce any takeover premium.
Our Amended and Restated Certificate of Incorporation, our By-laws and
Delaware law all contain provisions that could discourage potential acquisition
proposals, or delay or prevent a change in the control of the Company.
Provisions in our charter and By-laws designed to discourage or prevent a
takeover include:
. staggered terms for our directors, which makes it difficult to replace
the entire board;
. the ability of the Board of Directors to issue shares of preferred
stock, which could dilute the voting power and equity interest of
holders of the common stock; and
15
<PAGE>
. the requirement that holders of 66 2/3% of our outstanding common stock
must approve any change of these anti-takeover provisions.
Stockholders sometimes realize a significant premium in their stock price
when an offer is made to purchase a company. Because we have adopted these
provisions, such offers will likely be discouraged, and our stockholders may
lose the benefit of any potential premium. There are also state and federal
laws which regulate direct and indirect takeover attempts of financial
institutions.
Our directors and officers may have significant influence on how our common
stock is voted.
Our directors and executive officers will beneficially own approximately
28.9% of the outstanding shares of our common stock at the closing of this
offering, assuming none of them purchases shares in the offering. If our
directors and executive officers vote together, they could influence the
outcome of certain corporate actions requiring stockholder approval, including
the election of directors and the approval or non-approval of significant
corporate transactions, such as the merger or sale of all or substantially all
of our assets.
You will incur immediate and substantial dilution in your shares.
Investors in this offering will experience an immediate and substantial
dilution in the book value of the common stock. If you purchase shares of our
common stock, and we sell 900,000 shares at the offering price of $18.00 on the
cover page of this prospectus, after giving effect to the issuance of 91,668
shares in the pending acquisition, the pro forma net tangible book value of
your shares at March 31, 1999 will be $10.04. This is $7.96 less than your
purchase price. See "Dilution" and "Pending Acquisition."
Management will have substantial discretion over the use of the proceeds of
this offering.
We have not designated specific uses for all of the net proceeds of this
offering. We intend to immediately use $8.0 million of the net proceeds to
increase the regulatory capital of our PrivateBank subsidiary to support the
growth of our existing banking operations and the planned establishment of a
new office in St. Charles, Illinois. The remaining $6,316,000, or approximately
44%, of the proceeds are currently unallocated and will be available to fund
future internal growth or expansion of our business through establishment of
new banking locations and entering into strategic acquisitions and
affiliations, to the extent we identify these opportunities. Accordingly, you
must rely upon the judgment of our management who will have significant
flexibility with respect to applying the net proceeds. At present, other than
the pending acquisition of Towne Square Financial Corporation, we have no
plans, agreements or understandings relating to any specific acquisitions or
alliances. Although part of our business strategy is to pursue acquisitions and
alliances that will broaden our product offerings and add new markets, we
cannot be sure that we will find strategic acquisition opportunities at
favorable prices, that we will have sufficient capital resources to finance our
acquisition strategy, or that any such acquisitions, if consummated, will be
successfully integrated with our business operations.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make certain forward-looking statements in this prospectus that are based
upon our current expectations and projections about current events. You can
identify these statements from our use of the words "estimate," "project,"
"believe," "intend," "anticipate," "expect" and similar expressions. These
forward-looking statements include:
. statements of our goals, intentions and expectations;
. statements regarding our business plans and growth strategies;
. statements regarding the asset quality of our loan and investment
portfolios;
. estimates of our risks and future costs and benefits; and
. statements regarding the effectiveness of our efforts to make our
operations year 2000 compliant.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors which could affect the actual outcome of future events:
. fluctuations in market rates of interest and loan and deposit pricing,
which could negatively affect our net interest margin, asset valuations
and expense expectations;
. adverse changes in the economy of the greater Chicago metropolitan area,
our primary market, which might affect our business prospects and could
cause credit-related losses and expenses;
. the extent of continuing client demand for the high level of
personalized service that is the key element of our private banking
approach;
. adverse developments in our loan and investment portfolios;
. unforeseen developments or delays relating to the pending acquisition of
Towne Square Financial Corporation or difficulties relating to the
establishment of a St. Charles office;
. difficulties in identifying attractive acquisition opportunities and
strategic partners that will complement our private banking approach;
. competitive factors in the banking industry, such as the trend towards
consolidation in our market;
. changes in banking legislation or the regulatory requirements of federal
and state agencies applicable to bank holding companies and banks like
ours; and
. our effectiveness and that of our suppliers of data processing equipment
and services, government agencies, and other third parties in testing
and implementing year 2000 compliant hardware, software and systems.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. In addition, our past results of operations do not necessarily
indicate our future results. We discuss these uncertainties and others in the
sections of this prospectus named "Risk Factors," "Business," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
17
<PAGE>
PENDING ACQUISITION
Effective as of June 24, 1999, we entered into a definitive agreement to
acquire Towne Square Financial Corporation, a recently organized Delaware
corporation formed for the purpose of developing a de novo, or start-up, bank
in the community of St. Charles, Illinois, a far western suburb of Chicago.
Demographic data shows that the St. Charles area has been one of the more
rapidly growing areas in Illinois in recent years, and our management believes
the transaction affords us an excellent opportunity to expand our franchise in
an attractive market.
Background
Upon learning of Towne Square's plans to form a de novo bank in the St.
Charles area, Ralph Mandell, our Chairman and CEO, contacted representatives of
the Towne Square group to explore the possibility of a strategic alliance. At
the time we began discussions with Towne Square on April 30, 1999, the company
had already raised initial seed capital from a group of six organizers and
developed a business plan to start a local bank focused on private banking
services, but had not yet commenced operations nor filed any of the required
regulatory applications relating to organization of a new bank. Because of the
similarity of our banking strategies and the compatibility of our management,
in lieu of pursuing its de novo strategy, Towne Square has agreed to merge with
us in a stock-for-stock transaction.
The terms of the transaction are the result of extensive arms' length
negotiations between the parties. In approving the transaction on the
negotiated terms, and concluding that the transaction is in the best interest
of our stockholders, our Board of Directors considered a number of factors,
including, among others, the following:
. the potential market opportunities offered by St. Charles and the
surrounding Fox Valley communities and the opportunity to expand the
PrivateBank franchise consistent with the Company's growth strategy;
. management's opinion that the transaction affords us a unique
opportunity to expand in an attractive market on terms that the Board
believed were fair to our stockholders based on a consideration of the
potential dilutive effect of the transaction to existing stockholders
and new investors in this offering in the short term, weighed against
the potential for a favorable internal return on investment over the
longer term;
. the significant contacts of Thomas Castronovo, an experienced banking
veteran in the Fox Valley area, his perceived compatibility with
management and his willingness to join PrivateBank as a managing
director in connection with the transaction;
. the competitive advantages of forestalling the Towne Square organizers
from pursuing an independent private banking strategy;
. the commitment of the Towne Square organizers, all prominent businessmen
and professionals from St. Charles, to serve on a Fox Valley advisory
board of PrivateBank and to support the efforts of the bank in St.
Charles;
. the strategic benefits of non-compete agreements to be entered into by
the Towne Square organizers in connection with the acquisition;
. the value of the preliminary business plan that had been developed by
Towne Square, including the identification of an attractive banking
location in St. Charles that would be available to PrivateBank at market
rates under a ten-year lease; and
. that, as a result of the transaction, PrivateBank would expect to be in
a position to expedite the organizational activities related to
establishing a new banking location and be able to open a banking office
in St. Charles during the fourth quarter of 1999.
Instead of opening a new bank as Towne Square had planned, we will establish
a new office of PrivateBank in St. Charles to be managed by Mr. Thomas
Castronovo, one of the principal organizers of Towne Square who will be joining
us as a managing director. Mr. Castronovo has 17 years of prior banking
experience and has significant contacts in the St. Charles community. Under
this arrangement, we believe there
18
<PAGE>
are significant opportunities for us in St. Charles and the surrounding Fox
River Valley communities to grow our private banking business.
We expect to file the requisite branch applications with the regulators
during July 1999 and currently anticipate opening the St. Charles office during
the fourth quarter of 1999.
Terms of the Transaction
Pursuant to the contemplated merger, Towne Square will be merged into
PrivateBancorp, Towne Square will cease to exist, and PrivateBancorp will
continue as the surviving corporation. In exchange for their shares of Towne
Square, the stockholders of Towne Square will receive merger consideration
equal to an aggregate of approximately 91,668 shares of PrivateBancorp common
stock. The exchange ratio was determined by dividing $1,650,000 by the initial
public offering price of our stock. Of the shares to be issued in the merger,
approximately 55%, or about 50,000 shares, will be subject to a one year
restriction on resale and the remainder to a three-year resale restriction.
In connection with the transaction, we have agreed to enter into a three-
year employment agreement with Mr. Castronovo providing for, among other
things, a signing bonus in the amount of $150,000 payable in two installments,
one-half at the time we open the St. Charles office and the other half six
months later. It is contemplated that Mr. Castronovo's employment agreement
will commence upon the closing of the transaction. We have also agreed that Mr.
Castronovo will receive options to purchase 7,000 shares, expected to be
granted under our Stock Incentive Plan at the initial public offering price,
and an award of 3,000 shares of restricted stock which will be subject to
forfeiture until fully vested five years after the date of grant. In addition
to our employment of Mr. Castronovo, we have agreed that following consummation
of the merger we will add to our Board of Directors one individual, who must be
acceptable to us, to be designated by the stockholders of Towne Square.
Also as part of the transaction, Towne Square will agree, and will cause
each of its six organizers also to agree, for a period of at least three years
not to compete with our business in the St. Charles market and to support our
efforts to develop relationships in the community. We will be forming a St.
Charles advisory board, to be comprised of the Towne Square organizers plus two
more prominent business people or professionals from the area to be mutually
selected, in order to draw on the experience and contacts of these individuals
in the local community to assist us in the development of our St. Charles
office. Also in connection with the transaction, we will enter into a lease for
space in a building recently acquired by the Towne Square organizers which is
where we will locate our St. Charles office. The lease will run for ten years
and provides for rents not in excess of comparable market rates.
Consummation of the merger is subject to effectiveness of a registration
statement being filed with the SEC relating to the transaction, the approval of
Towne Square's stockholders owning at least a majority of the outstanding
shares of Towne Square, and customary closing conditions. It is currently
anticipated that the transaction will close during the third quarter of 1999
following completion of this offering.
Accounting Treatment; Financial Impact of the Acquisition
Because Towne Square is not yet actively engaged in business, the merger
transaction will not be accounted for as a business combination. Rather, at the
time of closing, we will incur a one-time, nonrecurring charge to earnings in
an amount equal to the excess of the value of our stock issued in the merger
over the net assets of Towne Square on the date of closing. We anticipate that
the net assets of Towne Square, consisting substantially of cash, will
approximate $240,000 at closing. The one-time charge, currently estimated to be
approximately $1.29 million, is expected to be recorded during the third
quarter of 1999 and will adversely affect our 1999 results of operations. The
merger related charge will not be a deductible expense for tax purposes.
In addition to the merger related charge, we will incur additional start-up
costs relating to the opening of the St. Charles office. We currently
anticipate that the total pre-tax start-up costs will be approximately
$430,000, including $75,000 of the signing bonus payable to Mr. Castronovo, and
that the majority of these costs will be expensed during 1999.
19
<PAGE>
USE OF PROCEEDS
The net proceeds which we will receive from the sale of 900,000 shares of
common stock in this offering are estimated to be approximately $14,316,000
(assuming no exercise of the over-allotment option) after deducting
underwriting discounts and the aggregate expenses payable by us. Such expenses
are currently estimated to be approximately $750,000.
We intend to contribute $8.0 million of the net proceeds from this offering
to increase the regulatory capital of PrivateBank to support the growth of our
existing banking operations and the planned establishment of a new office in
St. Charles, Illinois. We are raising the remainder of the proceeds to have
funds available for future internal growth or expansion of our business
through:
. establishing new offices within the Chicago metropolitan area;
. expanding our presence into new markets located in the Midwest; and
. acquiring or affiliating with companies in businesses complementary to
ours.
Other than the pending acquisition of Towne Square Financial Corporation, we
have not yet identified any specific acquisition or affiliation candidates.
Until we have designated the specific use by the company of the remaining
proceeds, we intend to deposit these funds in an account of the company at
PrivateBank, where we can use them as a temporary funding source for loans or
investments of PrivateBank.
DIVIDENDS; NO PRIOR TRADING MARKET
Holders of our common stock are entitled to receive dividends that our Board
of Directors may declare from time to time. We may only pay dividends out of
funds which are legally available for that purpose. Because our consolidated
net income consists largely of the net income of PrivateBank, our ability to
pay dividends to our stockholders may become dependent upon our receipt of
dividends from PrivateBank. PrivateBank's ability to pay dividends is regulated
by banking statutes. See "Supervision and Regulation-- Bank Regulation--
Dividends." Our declaration of dividends is discretionary and will depend on
our earnings and financial condition, regulatory limitations, tax
considerations, and other factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity."
We have paid quarterly dividends on our common stock since the third quarter
of 1995. While our Board of Directors expects to continue to declare dividends
quarterly, there can be no assurance that we will continue to pay dividends at
these levels or at all. The following table sets forth the history of per share
cash dividends declared and paid on our stock since the beginning of 1997:
<TABLE>
<S> <C>
1997
First Quarter............................. $0.016
Second Quarter............................ 0.016
Third Quarter............................. 0.019
Fourth Quarter............................ 0.019
1998
First Quarter............................. $0.019
Second Quarter............................ 0.020
Third Quarter............................. 0.020
Fourth Quarter............................ 0.020
1999
First Quarter............................. $0.025
Second Quarter (1)........................ $0.025
</TABLE>
- --------
(1) Payable on June 30, 1999, to stockholders of record on June 7, 1999.
As of March 31, 1999, we had 491 stockholders of record. Prior to this
offering, there has been no established public trading market for our common
stock. We have applied for inclusion of our common stock in The Nasdaq National
Market upon completion of this offering.
20
<PAGE>
CAPITALIZATION
The following tables set forth our total capitalization and capital ratios
as of March 31, 1999, and our total capitalization pro forma to give effect to
completion of the pending acquisition and pro forma as adjusted to reflect the
issuance and sale of 900,000 shares of our common stock which we are offering
in this prospectus (assuming the underwriters do not exercise the over-
allotment option).
<TABLE>
<CAPTION>
March 31, 1999
---------------------------
Pro
Pro Forma As
Actual Forma(1) Adjusted
------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Stockholders' equity:
Preferred Stock, 1,000,000 shares authorized(2);
none designated or outstanding................... $ -- $ -- $ --
Common stock, without par value, 12,000,000 shares
authorized(2); 3,451,824 shares, $1.00 stated
value, issued and outstanding; 3,543,492 shares
outstanding pro forma, and 4,443,492 shares
outstanding pro forma as adjusted(3)............. 3,452 3,543 4,443
Surplus........................................... 22,600 24,034 37,450
Retained earnings................................. 5,853 4,568 4,568
Accumulated other comprehensive income, net of tax
effect........................................... (58) (58) (58)
Deferred compensation............................. (843) (843) (843)
Loan to executive officer......................... (950) (950) (950)
------- ------- -------
Total stockholders' equity...................... $30,054 $30,294 $44,610
======= ======= =======
</TABLE>
- --------
(1) Gives effect to completion of the pending acquisition of Towne Square
Financial Corporation based on the issuance of 91,668 shares in the
transaction as if the transaction had been consummated on March 31, 1999,
resulting in a one-time charge to earnings of $1,285,000. See "Pending
Acquisition."
(2) Gives effect to the amendment to PrivateBancorp's Restated Certificate of
Incorporation to increase the authorized shares which was approved by
stockholders on April 22, 1999.
(3) These share amounts do not include an aggregate of 632,808 shares of common
stock issuable upon exercise of outstanding options (after giving effect to
option grants through the date of this prospectus), of which 453,408 shares
are subject to currently exercisable options. The pro forma amounts also
exclude 3,000 shares of restricted stock and 7,000 shares to be subject to
options that are expected to be granted in connection with the pending
acquisition. See "Pending Acquisition."
<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Capital ratios (at end of period):
Total equity to total assets........................................ 6.97%
Total risk-based capital ratio...................................... 11.21
Tier 1 risk-based capital ratio..................................... 10.05
Leverage ratio...................................................... 7.53
</TABLE>
21
<PAGE>
DILUTION
As of March 31, 1999, we had an aggregate of 3,451,824 shares of common
stock outstanding, and, giving effect to the assumed issuance of 91,668 shares
in the pending Towne Square acquisition, the common stock had a net tangible
pro forma book value of $8.55 per share. "Net tangible pro forma book value per
share" represents our tangible net worth, which is our total assets less our
intangibles and total liabilities as adjusted to give effect to the Towne
Square acquisition, divided by the total number of shares of common stock
outstanding. Net tangible pro forma book value is equal to our reported book
value as adjusted to give effect to the Towne Square acquisition. Without
taking into account any other changes in net tangible book value after March
31, 1999, other than those resulting from application of the net proceeds we
will receive from the sale of 900,000 shares offered hereby (after deduction of
the underwriting discount and estimated offering expenses), the net tangible
book value at March 31, 1999, would have been $10.04 per share. This represents
an immediate increase of $1.49 per share to current stockholders and an
immediate dilution in book value of $7.96 per share to new investors. The
following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................ $18.00
Net tangible pro forma book value per share before the
offering.................................................. $8.55
Increase per share attributable to investors in the
offering.................................................. 1.49
-----
Net tangible pro forma book value per share after the
offering.................................................... 10.04
------
Per share book value dilution to investors in the
offering(1)................................................. $ 7.96
======
</TABLE>
- --------
(1) Does not give effect to and assumes no prior exercise of currently
outstanding options to purchase up to an aggregate of 632,808 shares of
common stock, of which 453,408 are currently exercisable. Further adjusted
as of March 31, 1999, to give effect to the exercise of such options in
accordance with their terms, the estimated net tangible pro forma book
value per share before the offering would be $8.50 and after the offering
would be $9.86, and the estimated per share book value dilution to
investors in the offering would be $8.14.
The following table compares, on a pro forma basis at March 31, 1999:
. the total number of shares of common stock purchased from us, giving
effect to the assumed issuance of 91,668 shares in the pending Towne
Square acquisition;
. the total cash consideration paid; and
. the average price per share paid by:
. existing stockholders; and
. new investors.
This table assumes the sale of 900,000 shares in the offering, before the
deduction of the underwriting discount and estimated offering expenses, and
assumes no exercise of stock options outstanding as of March 31, 1999.
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration Average
--------------- ---------------- Price
Percent Percent Per
Number of Total Amount of Total Share
------ -------- ------- -------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Existing stockholders.................. 3,543 79.7% $26,272 61.9% $ 7.40
Investors in the offering(1)........... 900 20.3 16,200 38.1 18.00
----- ----- ------- -----
Total................................ 4,443 100.0% $42,472 100.0%
===== ===== ======= =====
</TABLE>
- --------
(1) If the over-allotment option is exercised in full, the number of shares of
common stock held by investors in the offering will increase to 1,035,000
shares, or 22.6% of the total shares of common stock outstanding after this
offering.
22
<PAGE>
BUSINESS
Overview
We organized PrivateBancorp as a Delaware corporation in 1989 to provide
highly personalized financial services primarily to professionals,
entrepeneurial individuals and their closely-held businesses. We were one of
the first banks newly formed in the Chicago area in recent years. The
organizers had significant senior level banking experience and many potential
client contacts from prior banking positions.
We believe that as the financial industry has consolidated, many financial
institutions have focused on a mass market approach using automated customer
service which de-emphasizes personal contact. We believe that the
centralization of decision-making power at these large institutions has
resulted in disruption of client relationships as frontline bank employees who
have limited decision-making authority fill little more than a processor role
for their customers. At many of these large institutions, services are provided
by employees in the "home office" who evaluate requests without the benefit of
personal contact with the customer or an overall view of the customer's
relationship with the institution.
We believe that this trend has been particularly frustrating to affluent
individuals, professionals, owners of closely-held businesses and commercial
real estate investors who traditionally were accustomed to dealing directly
with senior bank executives. These customers typically seek banking
relationships managed by a decision maker who can deliver a prompt response to
their requests and custom tailor a banking solution to meet their needs. As
smaller, independent banks have been acquired by national, multi-bank holding
companies, we believe that the personal relationships that these customers
maintained with the management of such banks have eroded, and their
individualized banking services have been lost.
Through our banking subsidiary, The PrivateBank and Trust Company, we
provide our clients with traditional personal and commercial banking services,
lending programs, and trust and asset management services. Using the European
tradition of "private banking" as our model, we strive to develop a unique
relationship with each of our clients, utilizing a team of highly qualified
account executives to serve the client's individual and corporate banking
needs, and tailoring our products and services to meet such needs. Our managing
directors are strategically located in three Chicago-area offices: Downtown
Chicago, Wilmette, Illinois, and Oak Brook, Illinois. We opened our flagship
Chicago location in 1991. We expanded to our Wilmette office in north suburban
Cook County in 1994 after identifying a senior banking officer with existing
relationships and client contacts in this North Shore area. We opened the Oak
Brook facility in west suburban DuPage County in 1997 with the addition of a
managing director who has extensive relationships in that market.
Since our start in 1991, we have experienced rapid internal growth. From
year-end 1995 to March 31, 1999, our compound annual growth rate in loans was
31.6%, in assets was 27.3%, in deposits was 27.0% and in trust assets under
administration was 40.2%. At March 31, 1999, we had total loans of $307.8
million, total assets of $431.1 million, total deposits of $384.5 million,
total stockholders' equity of $30.1 million and total trust assets under
administration of $637.4 million.
Our Market
In response to the need for individualized banking services, we created The
PrivateBank and Trust Company as the first Chicago-based institution dedicated
primarily to providing banking services to professionals, entrepreneurial
individuals, and their business interests. We targeted the affluent segment of
the market because we believe that there is significant unmet demand for
personalized services within this segment, and also because we recognize its
significant growth potential. According to National Decision Systems, San
Diego, California, the number of households in the metropolitan Chicago area
with annual incomes greater than $150,000 was estimated at 190,042 in 1998,
compared to 63,861 households in 1990. This equates to a compound annual growth
rate of 14.6%, versus an annual growth rate for the total number of households
in the
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metropolitan Chicago area of 0.6%. By 2003, the number of these affluent
households in the Chicagoland area is expected to increase to approximately
358,000, representing an annual growth rate of 13.5%, while the aggregate
number of households is expected to increase at an annual growth rate of 0.3%.
The following graph illustrates the size and relative growth of this market:
[Perfromance Graph Appears Here]
(1) Based on information from the 1990 U.S. census.
(2) Estimated by National Decision Systems based on, among other things, (a) a
time series of estimates made by the U.S. Census Bureau regarding six of
the counties in the Chicago metropolitan area; and (b) data provided by the
Department of Planning of the City of Chicago.
(3) Generated by National Decision Systems through the application of an
econometric model of the Chicago metropolitan area to the 1998 estimate.
The econometric forecasting model considers the impact of various economic
factors such as employment, inflation, interest rates and housing starts on
future population growth.
The PrivateBank and Trust Approach
We believe that we have developed a unique approach to private banking
designed to provide our clients with unparalleled service. We emphasize
personalized client relationships and custom-tailored financial services,
complemented by the convenience of technology. The key aspects of our private
banking approach are:
. Personal Relationships. Our approach begins with the development of
strong, dedicated relationships with our clients. Each client of
PrivateBank is matched with a team of individuals headed by a managing
director. This managing director becomes our client's central point of
contact with PrivateBank. Our eleven managing directors, who are senior
financial professionals with an average
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of 27 years of banking and financial experience, act as the financial
partners of our clients, working with them to identify and service their
banking needs. By dedicating a team of executives to each client, we are
able to build ongoing relationships which allow our managing directors
to use their increasing knowledge of the client's financial history and
goals to quickly adapt our services to the client's individual needs.
Our clients interact with the same persons at PrivateBank for all types
of banking services, enabling them to gain a sense of security and
continuity of personal service in their banking relationship. On the
basis of this trust and confidence, we seek to expand the scope of
services provided to each client, often including banking needs related
to the business affairs of our clients. Satisfied clients provide our
most fertile source of new business and new client referrals as well.
. Affluent Target Client. We believe that the affluent segment of the
population, meaning that segment with annual incomes over $150,000, is
increasing and is diverse in terms of its overall wealth and financial
needs. PrivateBank offers its services to those members of this segment
who are focused on building and preserving wealth. Our clients include
professionals, entrepreneurial individuals and their business interests.
We target service industries such as the accounting, legal and medical
professions, as well as owners of closely-held businesses, commercial
real estate investors and corporate executives. Although we generally
target individuals with high annual incomes and net worths, we recognize
the growth potential of certain young professionals and extend our
services to those individuals whose income or net worth do not initially
meet our criteria. We believe that this segment of the market is most
suited to our business and that these individuals are most likely to
develop long-term relationships with us.
. Customized Financial Services. We realize that many of our clients
require a custom solution to their financial needs. In taking a long-
term, relationship approach to our clients, we are able to differentiate
ourselves from the "one-size-fits-all" mentality of other financial
institutions. We offer our clients a wide variety of financial services
beyond the traditional banking products and are constantly working to
develop and shape our services to meet their growing needs. We take the
time to identify our clients' particular needs and tailor our services
to meet those needs on an individual customized basis, while maintaining
highly competitive rates and fees that take into account the size and
profitability of each client relationship. While we are proud of our
portfolio of products, we believe that it is our service that
distinguishes us from our competition. We encourage our clients to
contact us rather than discourage them. We use regular contact as a way
to strengthen our relationships, increase services to existing clients
and earn referral business.
. Streamlined Decision-Making Process. Unlike most larger banks, we have
not instituted a lengthy chain of command. Our clients deal directly
with their dedicated managing directors, who are given broad decision-
making authority. This allows our managing directors to respond quickly
and efficiently to our clients' needs. We are able to use a streamlined
approach because our organization has many qualified, experienced credit
officers. Officers with credit approval authority make themselves
available on short notice to help consult on or approve credits when
time is of the essence. We use an "on call" approach, rather than
structured meetings, to approve credit. As the amount of the credit and
the complexity increases, we resort to a more traditional process.
. Enhanced Personal Service through Technology. While we encourage our
clients to contact us directly, we also utilize technology to complement
and enhance our service. We created products such as PrivateBank Access,
our internet banking service, MasterMoney debit cards and Private Line
Access, our voice-response communication system, to enhance, not
replace, personal contact. This technology allows us to offer our
clients the convenience of accessing our services from remote locations
at any time of day.
We believe that our PrivateBank Access product is likely to grow in
importance. Our clients may connect to PrivateBank Access directly
through our internet website, without the need for the diskettes or
software downloads found in some competing PC banking systems.
Currently, our product:
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. accesses deposit and loan information;
. allows transfers of funds among accounts;
. includes a bill payment service with a variety of options;
. allows information to be exported to financial software packages;
. includes a help desk which is staffed 92 hours per week; and
. sends e-mail messages from clients to PrivateBank personnel.
We are working to supplement our website to enhance our service to
clients. Some features we are planning include:
. applications for our banking products;
. access to trust account information;
. current deposit rate schedules; and
. current mortgage rate schedules.
As technology changes, we intend to modify and enhance our electronic
banking products. We believe that in the future, a growing number of
our clients will desire both personal and electronic services. We
intend to work to offer dual-delivery systems providing the quality of
service to which PrivateBank clients are accustomed.
. Extensive Financial Network. In order to compete with other financial
service providers, we rely on a network of professionals in the
financial and investment communities with whom we have developed
strategic alliances over the years. This enables us to offer our clients
a broad array of high quality services. For example, we work with
selected investment management firms in providing services to our trust
clients. Our clients can either maintain existing investment management
relationships when they become our trust clients, or use our preferred
providers of investment management services. We believe this choice
distinguishes our service from the rigid policies set by some of our
competitors. We, in turn, help our clients select a complete package of
services best suited to their individual needs without incurring the
overhead associated with directly employing diversified portfolio
managers. We also have a contractual fee sharing agreement with Mesirow
Financial, Inc., an independent insurance brokerage company in the
Chicago area. Through this affiliation, we offer a full range of
personal and corporate insurance products to our clients. To complement
our existing financial products and services, we have a contractual
arrangement with Sterling Investment Services, Inc., a registered
securities broker-dealer firm, through which we offer our clients on-
site securities brokerage services.
Strategy for Growth
Our growth strategy entails five key components:
. Developing Our Existing Relationships. An important part of our future
growth will be the continued development of our existing client
relationships. As the needs of our clients change and grow, we seek to
grow with them and continue to provide them with our custom-tailored,
flexible services. For example, we strive to follow our clients from the
purchase of their homes, through the financing of their own business, to
the development and planning of their estate, continuing the
relationship tradition with their children and grandchildren. We believe
we have a significant opportunity to further develop our existing client
relationships in each of our offices.
. Increasing the Reach of Our Existing Offices. In addition to increasing
the services provided to our existing clients, we seek to expand the
market presence of our existing offices, especially our Oak Brook and
Wilmette branches. We believe that the growing need for private banking
services in these regions is largely unmet and we have a significant
opportunity to increase our client base in these branches. We hope to
capitalize on our reputation and the reputations of our managing
directors in
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increasing our market presence. Our managing directors, with their
personal and professional contacts in the financial and corporate
arenas, have been instrumental in developing our business to date. We
encourage our senior executives to attend and host business receptions,
charitable activities and promotional gatherings so that we may interact
with our clients in a unique and personal manner. We also hope to grow
our branch offices through referrals from our existing clients.
Referrals have been a significant source of new business for us. We
value this system of networking because it allows us to further develop
and strengthen our personal and professional relationships with both new
and existing clients.
. Opening Additional Offices in the Chicago Metropolitan Area. Our
experience in our Oak Brook and Wilmette offices demonstrates to us that
there exists significant demand by our target client for specialized
private banking services in the Chicago metropolitan area. We built
these offices around senior executive officers whom we recruited for
their strong banking experience and extensive personal and professional
contacts in those areas. To increase our market penetration, we have
recently negotiated the acquisition of Towne Square Financial
Corporation and plan to establish a new office of PrivateBank in St.
Charles, Illinois, a far western suburb of Chicago located in the
rapidly growing Fox River Valley area. We have recruited one of the
organizers of Towne Square, who is an experienced banker with
significant contacts in St. Charles and the surrounding communities, to
join us as a managing director to head this office. See "Pending
Acquisition." We will consider opening additional offices as we identify
locations and other senior executives that will maintain our standards
for high-quality personalized service.
. Expanding into New Markets. We believe the trend toward bank
consolidation and centralized decision-making that has created a demand
for our private banking services is not unique to Chicago. We believe
there is similar demand in other markets within the Midwest and we are
interested in expanding in markets that present opportunities for growth
and development similar to those in the Chicago market. We intend to
pursue selective geographic expansion through possible acquisitions of
existing institutions or by establishing new banking offices.
. Expanding into New Product Lines. We desire to be the primary source of
financial products and services for our clients. By broadening our
product line with additional financial services not currently offered by
PrivateBank, we believe we can increase our franchise value through
diversification of our fee income and strengthening of our client
relationships. To achieve this goal, we intend to consider acquisitions,
joint ventures or strategic alliances with other companies that
emphasize quality service and the value of relationships. Our targets
are businesses that complement our services and enable us to broaden our
product line to better serve our clients.
Our Services
We offer banking services to our clients at a personal level. This is not
the same as personal banking service. We define private banking as offering
banking products and services to our clients when they want it, how they want
it and where they want it. We tailor our products and services to fit our
clients instead of making our clients fit our products and services. Our
services fall into four general categories:
. Commercial Services. PrivateBank offers a full range of lending products
to businesses owned by or affiliated with our clients. We offer lines of
credit for working capital, term loans for equipment and other
investment purposes, and letters of credit to support the commitments
our clients make. PrivateBank tailors these products to meet the varied
needs of the client. Non-credit products we offer include lockbox, cash
concentration accounts, merchant credit card processing, electronic
funds transfer, other cash management products and insurance. We strive
to offer banking packages that are competitive and allow us to provide
service to our clients beyond what is expected in our industry.
. Real Estate Services. PrivateBank provides real estate loan products to
businesses and individuals. Our commercial real estate lending products
are designed for real estate investors. We provide a full range of fixed
and floating rate permanent and mini-permanent mortgages for our clients
to finance a variety of properties such as apartment buildings, office
buildings, strip shopping centers, and other income properties. We also
provide some construction lending for residential and commercial
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developments. We believe that our lending products are competitively
priced with terms that are tailored to our clients' individual needs.
Our residential mortgage products range from 30-year fixed rate
products to personal construction lending. The home mortgage market is
very competitive and we believe that our service is what separates
PrivateBank from our competition. Many mortgage lenders cannot work
with borrowers who have non-traditional income sources or non-
traditional properties, such as co-ops. Our mortgage lending staff is
trained to work with successful individuals who have complex personal
financial profiles. We have developed a proficiency for mortgages in
excess of $1.0 million per loan and will work with our clients and our
market sources to place these loans into the secondary market. Our
experience has been that residential lending is an excellent vehicle to
attract new clients.
. Trust and Asset Management. PrivateBank's trust services include
investment management, personal trust and estate services, custodial
services, retirement accounts and brokerage and investment services. Our
investment management professionals work with our clients to define
objectives, goals and strategies for their investment portfolios.
PrivateBank assists the client with the selection of an investment
manager and works to tailor the investment program accordingly. Our
trust and estate account administrators work with our clients and their
attorneys to establish their estate plans. We work closely with our
clients and their beneficiaries to ensure that their needs are met and
to advise them on financial matters. When serving as trustee or
executor, we often structure and oversee investment portfolios. We also
provide our clients with custodial services for safekeeping of their
assets. Consistent with our private banking approach, we emphasize a
high level of personal service in our trust area, including prompt
collection and reinvestment of interest and dividend income, weekly
valuation, tracking of tax information, customized reporting and ease of
security settlement. PrivateBank also offers retirement products such as
individual retirement accounts and administrative services for
retirement vehicles such as profit sharing plans and employee stock
option plans, as well as a full line of brokerage and investment
products.
. Individual Banking Services. Our typical private banking client has
several of the following products: interest bearing checking with credit
line, money market deposit accounts, certificates of deposit, ATM/debit
card, and brokerage accounts. Some of our clients have recently selected
our PrivateBank Access Internet PC banking product. In addition to
residential mortgages, we provide clients a variety of secured and
unsecured personal loans and lines of credit. Through our affiliations
with Mesirow and Sterling, we offer insurance products and securities
brokerage services. We strive to accommodate the individual needs of
each of our clients by offering the convenience of highly personalized
services, including domestic and international wire transfers and
foreign currency exchange.
Lending Activities
We work with our clients to provide a full range of commercial, real estate
and personal lending products and services. Our loans are concentrated in six
major areas: (a) commercial real estate; (b) residential real estate; (c)
commercial; (d) personal; (e) home equity; and (f) construction. We have
adopted a loan policy that contains general lending guidelines and is subject
to review and revision by the Board of Directors. We extend credit consistent
with this comprehensive loan policy. We believe the credit quality of our loan
portfolio is excellent.
The goal of our lending program is to meet the credit needs of our diverse
client base while using sound credit principles to protect the quality of our
assets. Our business and credit strategy is relationship-driven and we strive
to provide a reliable source of credit, a variety of lending alternatives, and
sound financial advice. When extending credit, our decision is based upon our
client's ability to repay us from non-speculative sources. The quality and
integrity of the borrower is crucial in the loan approval process. We monitor
the performance of our loan portfolio through regular contacts with our
clients, continual portfolio review, careful monitoring of delinquency reports
and reliance on our loan review function.
We have retained an independent, outside resource to perform our loan review
function. Using an outside resource ensures that our loan review process
remains independent of the loan production and administration
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processes. Our loan reviewer examines individual credits to critique individual
problems and the entire portfolio to comment on systemic weaknesses. The
reviewer reports directly to the audit committee of our Board of Directors on a
quarterly basis. In addition to loan review, the loan/investment committee of
our Board reviews the adequacy of the allowance for loan losses on a quarterly
basis. The committee assesses management's loan loss provisions based on loan
review's findings, delinquency trends, historical loan loss experience and
current economic trends.
Our legal lending limit, based on PrivateBank's financials, is calculated at
20% of capital plus unencumbered reserves. At March 31, 1999, our legal lending
limit was approximately $6.6 million. This is the maximum amount of credit that
we may commit to any one individual or business entity after aggregating all
related credit. Immediately after the offering, our legal lending limit will
increase by $1.6 million based on our intention to contribute $8.0 million of
the proceeds to the capital of PrivateBank.
In addition to our chief credit officer, certain individuals have been
designated acting chief credit officers, credit officers, officers with lending
authority, and residential real estate lending officers. No single individual
has sole authority to approve a loan. As the size of aggregate credit exposure
increases, additional officers are required to approve the loan requests. This
serves several purposes: (a) larger credits get more scrutiny, (b) most senior
credit officers become involved in the decision-making process for the vast
majority of dollars loaned without approving a proportionate number of loan
requests, and (c) we become more consistent in administration of credit as
credit officers experience the dynamics of our overall portfolio and credit
culture. We also believe that our past credit approval practices will mitigate
the effect of the impending retirement of our chief credit officer because our
credit culture is firmly in place.
Our chief credit officer, or his designate, is involved in all credit
decisions when the aggregate credit exposure is in excess of $250,000. Our
loan/investment committee reviews all credit decisions over $1.0 million. Prior
approval is required for credit exposure in excess of $4.0 million and for all
credits related to our board members or our managing directors. Loans are
approved at the bank level by a management loan committee or by small group
presentations to credit officers. We believe that this process allows us to be
more responsive to our clients' needs by being able to approve credit without
waiting for scheduled committee meetings. We also use management committee
meetings to discuss complex credits or when we feel that a particular credit
may be informative to everyone in the loan approval process.
Our lending policy sets guidelines for advance rates on certain types of
collateral including accounts receivable, inventory, equipment and real estate
that we generally do not exceed absent special circumstances. Under the policy
guidelines, the maximum loan-to-value ratios are 80% for accounts receivable,
50% for inventory and 65% for equipment. Under the policy, the maximum loan-to-
value ratio for real estate is 80%, but maximum advance rates on real estate
will differ depending upon the type of real estate taken as collateral. For
example, higher loan-to-value ratios are acceptable for owner-occupied
residential properties than non-owner occupied residential or commercial
properties. Vacant land commands the lowest advance rate guidelines. We accept
primary and secondary liens on properties when appraised values are adequate.
Our lending policy also contains advance rate guidelines for securities and
other financial instruments taken as collateral, including stocks, bonds,
commercial paper, and bank deposit instruments. Under the policy guidelines,
maximum loan-to-value ratios should generally not exceed 75% for stocks, 98%
for government bonds, 80% for non-governmental bonds, 95% for commercial paper
and 100% of bank deposit instruments.
Specific collateral requirements are based upon the facts and circumstances
of each individual credit decision. The financial strength and ascertainable
character of each borrower and guarantor is also a factor in the credit
approval process. Because we tend to lend to clients whom we know well, we
believe we are in a good position to assess our borrowers' strengths and
weaknesses and to make well-informed credit decisions on this basis. We make
loans based upon borrowers' available assets and the condition of their
financial statements. We do not sell credit life insurance to our borrowers.
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The following table sets forth our loan portfolio by category as of March
31, 1999:
<TABLE>
<CAPTION>
Percentage
March of total
31, 1999 loans
-------- ----------
<S> <C> <C>
Commercial real estate................................ $108,599 35.3%
Residential real estate............................... 62,208 20.2
Commercial............................................ 53,834 17.5
Personal.............................................. 45,122 14.7
Home equity........................................... 19,860 6.4
Construction.......................................... 18,143 5.9
-------- -----
Total loans......................................... $307,766 100.0%
======== =====
</TABLE>
Commercial Real Estate Loans. Our commercial real estate portfolio is
comprised primarily of loans secured by multi-family housing units located in
the Chicago metropolitan area. Other types of commercial real estate collateral
include: commercial properties owned by clients housing their manufacturing,
warehousing or service businesses, investments in small retail centers, and
investments in other business properties.
Risks inherent in real estate lending are related to the market value of the
property taken as collateral, the underlying cash flows and documentation. It
is important to accurately assess property values through careful review of
appraisals. Some examples of risky commercial real estate lending include loans
secured by properties with widely fluctuating market values or income
properties occupied by renters with unstable sources of income, and not
perfecting liens on property taken as collateral. We mitigate these risks by
understanding real estate values in areas in which we lend, investigating the
sources of cash flow servicing the debt on the property and adhering to loan
documentation policy.
Commercial real estate loan products include mini-permanent and permanent
financing, transaction loans to purchase properties prior to permanent
financing, and lines of credit secured by commercial real estate portfolios. We
typically structure mini-permanent and permanent financing as adjustable rate
mortgages ("ARMs"). ARM structure allows our clients to lock in an interest
rate for a fixed period of time in order to avoid interest rate risk. The vast
majority of our ARM loans have initial fixed pricing for between one to five
years. Each ARM loan has language defining repricing beyond the initial fixed
pricing term. Transaction loans to purchase commercial property typically have
maturities of one year or less. Lines of credit secured by commercial real
estate portfolios are typically granted for one year with annual extensions
after a successful underwriting review. Interest rates for our lines of credit
typically are based on a floating rate formula.
In our credit analysis process for commercial real estate loans, we
typically review the appraised value of the property, the ability of the
property as collateral to service debt, the significance of any outside income
of the borrower or income from other properties owned by the borrowers, and the
strength of guarantors, if any. Our real estate appraisal policy has been
approved by our board loan/investment committee. It addresses selection of
appraisers, appraisal standards, environmental issues and specific requirements
for different types of properties.
Residential Real Estate Loans. Our residential real estate portfolio
consists primarily of first and second mortgage loans for 1-4 unit residential
properties. We do not originate long-term fixed rate loans for our own
portfolio due to interest rate risk considerations. However, we do originate
these loans for sale into the secondary market. This is a significant business
activity in our residential real estate lending unit. For our own portfolio, we
originate ARM loans typically structured with 30 year maturities and initial
rates fixed for between one to five years with annual repricing beyond the
initial term.
Our credit review process mirrors the standards set by traditional secondary
market sources. We review appraised value and debt service ratios, and we
gather data during the underwriting process in accordance with the various laws
and regulations governing residential real estate lending. Our real estate
appraisal policy sets specific standards for valuing residential property.
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We require pre-approval from secondary market sources before we approve
loans to be sold into the secondary market. Our internal approval process is
less stringent for loans pre-approved by our secondary market sources. This
allows us to be responsive to the tight time commitments dictated for locking
in rates in the secondary market.
We believe that we have a competitive advantage in our ability to offer
financing for our clients who have non-traditional income sources or require
large mortgage loans. We have developed secondary market sources for mortgages,
including several able to provide financing in amounts in excess of $1.0
million per loan which is occasionally required by our clients. By offering our
own ARM loans, we can offer credit to individuals who are self-employed or have
significant income from partnerships or investments. The secondary market often
will not take the time or will be unable to make exceptions for otherwise
qualified borrowers. We have experience in making loans to qualified borrowers
secured by co-ops. We believe that we are one of a limited number of financial
institutions in the Chicago area making these loans.
Commercial Loans. Our commercial loan portfolio is comprised of lines of
credit for working capital, term loans for equipment and expansion, and letters
of credit. These loans are made to businesses affiliated with our clients, or
to clients directly for business purposes. The vast majority of our commercial
loans are personally guaranteed. Unsecured loans are made to businesses when a
guarantor, as a secondary source of repayment, has a significant ability to
repay and a significant interest in the business entity. Commercial loans can
contain risk factors unique to the business of each borrower. In order to
mitigate these risks, we seek to gain an understanding of the business of each
borrower, place appropriate value on collateral taken and structure the loan
properly to make sure that collateral values are maintained while loans are
committed. Appropriate documentation of commercial loans is also important to
protect our interests.
Our lines of credit typically are limited to a percentage of the value of
the assets securing the line, and priced by a floating rate formula. Lines of
credit typically are reviewed annually and are supported by accounts
receivable, inventory and equipment. Depending on the risk profile of the
borrower, we may require periodic aging of receivables, and inventory and
equipment listings to verify the quality of the borrowing base prior to
advancing funds. Our term loans are typically also secured by the assets of our
clients' businesses. Term loans typically have maturities between one to five
years, with either floating or fixed rates of interest. Commercial borrowers
are required to provide updated personal and corporate financial statements at
least annually. Letters of credit are an important product to many of our
clients. We issue standby or performance letters of credit, and can service the
international needs of our clients through correspondent banks. We use the same
underwriting standards for letters of credit as we do for funded loans.
Our credit approval process for commercial loans is comprehensive. We
typically review the current and future cash needs of the borrower, the
business strategy, management's ability, the strength of the collateral, and
the strength of the guarantors. While our loan policy has guidelines for
advances on different types of collateral, we establish eligible asset values
on a case-by-case basis for each borrower. Our officer on the account must be
able to validate his or her position during the approval process.
Personal Loans. Our personal loan portfolio consists of loans to secure
funds for personal investment, loans to acquire personal assets such as
automobiles and boats, and personal lines of credit. Quite often, our borrowers
prefer not to liquidate assets to secure funds for investment or personal
acquisitions. They will use these assets as collateral for personal loans, or
if their financial statements and personal reputations are sufficient, we will
grant unsecured credit. A key factor in originating personal loans is knowing
our borrowers. When personal loans are unsecured, we believe that the character
and integrity of the borrower becomes as important as the borrower's financial
statement.
Our clients request a combination of lines of credit, floating-rate term
loans and fixed-rate term loan products. Many of our clients use their personal
investment portfolios as collateral for personal loans. Personal lines of
credit are used for a variety of purposes such as the comfort of having funds
available for future uses or establishing a line of credit as overdraft
protection. We respond quickly to the needs of our clients within the limits
set by our loan policy.
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Personal loans are subject to the same approval process as all other types
of loans. Each client is underwritten to ensure that they have adequate
collateral coverage and/or cash flow. Annual financial statements are required
of each personal borrower.
Home Equity Loans. Our home equity loan portfolio consists of traditional
home equity lines of credit prevalent in the market today. In general, we
advance up to 80% on the value of a home, less the amount of prior liens.
However, we may vary from that percentage depending on the value of the home,
type of dwelling, and the personal financial situation of the borrower. Home
equity loans are funded either through draws requested by our client or by
special home equity credit drafts that function as bank checks. Home equity
loans are approved using the same standards as residential mortgage loans. Our
borrower's personal cash flow is compared to debt service requirements to
determine our borrower's ability to repay. Home equity loans are competitively
priced based using a floating rate formula.
Construction Loans. Our construction loan portfolio consists of single
residential properties, multi-family properties, and commercial projects. As
construction lending has greater inherent risk, we closely monitor the status
of each construction loan throughout its term. Typically, we require full
investment of the borrower's equity in construction projects prior to injecting
our funds. Generally, we do not let our borrowers recoup their equity from the
sale proceeds of finished units (if applicable) until we have recovered our
funds on the overall project. We use a title company to disburse periodic draws
from the construction line to ensure that there will be no title problems at
the end of the project.
Our construction loans are often the highest yielding loans in our portfolio
due to the inherent risks and the monitoring requirements. These loans
typically have floating rates, commitment fees and release fees. During our
credit approval process, factors unique to construction loans are considered.
These include assessment of the market for the finished product, reasonableness
of the construction budget, ability of the borrower to fund cost overruns, and
the borrower's ability to liquidate and repay the loan at the point when the
loan-to-value ratio is the greatest. We seek to manage these risks by, among
other things, ensuring that the collateral value of the property throughout the
construction process does not fall below acceptable levels, ensuring that funds
disbursed are within parameters set by the original construction budget, and
properly documenting each construction draw. Due to our more stringent
standards for underwriting and monitoring construction loans and the credit
profile of our borrowers, we are comfortable with the risk associated with this
portfolio and are committed to construction lending as an integral part of our
lending program.
Investment Activities
The objective of our investment policy is to maximize income consistent with
liquidity, asset quality, regulatory constraints and asset/liability
objectives. The policy is reviewed at least annually by our Board of Directors.
The Board is provided monthly information recapping purchases and sales with
the resulting gains or losses, average maturity, federal taxable equivalent
yields and appreciation or depreciation by investment categories.
We invest primarily in direct obligations of the United States, obligations
guaranteed as to principal and interest by the United States, obligations of
agencies of the United States, bank-qualified obligations of state and local
political subdivisions and collateralized mortgage obligations. We also may
invest from time to time in corporate debt or other securities as permitted by
our investment policy. In addition, we enter into federal funds transactions
with our principal correspondent banks, and primarily act as a net seller of
such funds. The sale of federal funds are effectively short-term loans from us
to other banks.
Our investment accounts also include minimal equity investments in the
Federal Home Loan Bank of Chicago ("FHLB") and Neighborhood Housing Service
("NHS"). We invest in FHLB in order to be a member, which qualifies us to use
their services, including FHLB borrowings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Liquidity and Capital
Resources." NHS is a not-for-profit organization which helps provide affordable
housing to low and moderate income residents in the Chicago area. The size of
our investment is proportionate to the volume of loans in certain credit
programs offered by NHS. NHS is an important vehicle in our Community
Reinvestment Act ("CRA") lending program.
32
<PAGE>
Rather than incurring the costs of employing a full-time investment manager
with the requisite expertise to establish a diverse investment program, we have
engaged two outside investment advisory firms to help us execute our strategy.
One firm is responsible for helping us select taxable investment products to
meet our investment portfolio objectives. This firm employs a team of
professionals who bring us recommendations on a regular basis. Our other
advisor is a leading investment manager of tax-exempt portfolios and is well-
known to us through his work with our trust clients.
Asset/Liability Management Committee
We have an asset/liability committee ("ALCO") comprised of selected senior
executives who are charged with the dual goals of optimization and
stabilization of net interest income over time while adhering to prudent
banking practices. ALCO oversees asset growth, liquidity and capital, and
directs our overall acquisition and allocation of funds. At our monthly
meetings, ALCO reviews issues including:
. data on economic conditions;
. current interest rate outlook;
. current forecast on loans and deposits;
. mix of interest rate sensitive assets and liabilities;
. bank liquidity position;
. investment portfolio purchases and sales; and
. other matters as presented.
ALCO is also responsible for monitoring compliance with our investment
policy. On a monthly basis, ALCO reports to the loan/investment committee who
reviews the portfolio of reports we prepare for our Board of Directors and all
the decisions made by ALCO affecting net interest income.
Trust and Asset Management
We offer our clients a wide variety of trust and asset management services
designed to meet their individual needs and investment goals. Many of our trust
clients have longstanding relationships with our managing directors. In
administering a trust, we work closely with our client, the beneficiaries and
the trustees' attorneys and accountants on personal and tax matters to assist
the client in accomplishing the stated objectives. As fiduciaries of a trust or
estate our responsibilities may include:
. administering the account pursuant to the applicable document;
. collecting, holding and valuing assets;
. monitoring investment portfolios;
. paying debts, expenses and taxes;
. distributing property; and
. advising beneficiaries.
In addition to trust and estate administration, we offer:
. institutional accounts;
. guardianship administration;
. investment agency accounts;
. Section 1031 exchanges; and
. custodial accounts.
33
<PAGE>
Over the past three years, the average account value of new trusts
administered by PrivateBank was approximately $3.0 million. We believe that our
trust business will continue to grow as we expand our client base and our
clients increasingly reach retirement age and focus on their estate plans.
Our investment management philosophy for our trust assets under
administration is built on two principles: (a) the preservation of capital, and
(b) achievement of maximum total return consistent with each individual
client's objectives. We have chosen to outsource the investment management
aspect of our business so that we may offer our clients diversity and
flexibility of investment representation and to allow us to impartially
evaluate investment performance. This structure also allows our clients to
independently designate one or more specific advisors enabling them to maintain
existing relationships they may have within the financial community. If the
client does not have such a relationship in place, we then help them select an
investment management firm that will best service their needs. Based on the
client's investment strategy and objectives and the account attributes, one or
more investment managers will be selected from our list of approved advisors.
Our trust policy has established controls over our trust activities to
safeguard the assets of our clients against operational and administrative
risk. We have a system of internal controls that is designed to keep our
operating risk at appropriate levels. Our system of internal controls includes
policies and procedures relating to authorization, approval, documentation and
monitoring of transactions. Administrative risk is the risk of loss that may
occur as a result of breaching a fiduciary duty to a client. To manage this
risk, our trust policy has established corporate policies and procedures to
ensure that obligations to clients are discharged faithfully and in compliance
with applicable legal and regulatory requirements. These policies and
procedures provide guidance and establish standards related to the creation,
sale, and management of investment products, trade execution, and counterparty
selection.
Properties
We currently have three physical banking locations and are planning to
establish a new office location in St. Charles, Illinois, subject to necessary
regulatory approvals. See "Pending Acquisition."
The main offices of PrivateBancorp and PrivateBank are located in the
central business and financial district of Chicago. We lease 20,923 square feet
comprising the entire eighth, ninth, and tenth floors and part of the eleventh
floor of a building located at Ten North Dearborn Street. This lease expires on
or about August 31, 2006.
PrivateBank established a north suburban office in the affluent North Shore
area located at 517 Green Bay Road, Wilmette, Illinois, in October 1994.
PrivateBank leases approximately 5,300 square feet on the first floor of a
commercial building. This lease expires on June 30, 1999 and has been renewed
for an additional five-year term.
In January 1997, we opened a second branch office of PrivateBank in rapidly
growing, west suburban DuPage County at 1603 West Sixteenth Street, Oak Brook,
Illinois. We lease approximately 4,200 square feet on the first floor of a two-
story office building. This lease expires on December 14, 2001.
We have a variety of renewal options in each of our properties and certain
rights to secure additional space.
Competition
We do business in the highly competitive financial services industry.
PrivateBank's geographic market is primarily the greater Chicago metropolitan
area. The financial services industry is comprised of commercial banks,
thrifts, credit unions, investment banks, brokerage houses, money managers, and
other providers of financial products and services. These firms compete with
PrivateBank for one or more of the following: loans, deposits, trust services,
or investment products. Some of these firms have business units that promote
34
<PAGE>
themselves as "private banks." The typical private banking competitor is a unit
of a large commercial bank catering to the upper echelon of that bank's
customer base.
We view ourselves as the only private bank in the Chicago market focused
solely on offering an extended range of traditional banking and trust products
to affluent professionals, entrepreneurial individuals and their business
interests. While our products may be similar to those of our competitors, we
attempt to distinguish ourselves by emphasizing consistent, superior levels of
personal service. For commercial and commercial real estate lending, we compete
with a number of major Chicago-area financial institutions and suburban banks.
For trust services, we compete with the largest Chicago-area banks and some
investment managers. For private banking services, we compete with the private
banking departments of major Chicago-area financial institutions, some suburban
banks, and brokerage houses. For residential mortgage lending, our products
compete with banks, savings and loans, mortgage brokers and numerous other
financial services firms offering mortgage loans in our market area. Several of
our competitors are national or international in scope.
Some of our competitors are not subject to the same degree of regulation as
that imposed on bank holding companies and Illinois banking organizations. In
addition, the larger banking organizations, investment banks and brokerage
houses have significantly greater resources than us. As a result, such
competitors have advantages over PrivateBank in name recognition and market
penetration.
Legal Proceedings
From time to time, we may be party to various legal proceedings arising in
the normal course of our business. Since PrivateBank acts as a depository of
funds, we may be named from time to time as a defendant in various lawsuits
(such as garnishment proceedings) involving claims to the ownership of funds in
particular accounts. We are not currently subject to any pending or threatened
material legal proceedings.
Employees
As of March 31, 1999, we had 76 full-time equivalent employees. The majority
of our employees are located at the main office in downtown Chicago.
PrivateBank pays the salaries of all of our employees with the exception of
Messrs. Mandell and Roubitchek, a portion of whose salaries are paid by the
Company.
We provide our employees with a comprehensive program of benefits, some of
which are on a contributory basis, including comprehensive medical and dental
plans, life insurance plans, and 401(k) plans. We consider our relationship
with our employees to be good.
35
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial and other
data of PrivateBancorp. The selected statements of condition and statements of
income data, insofar as they relate to the five years in the five-year period
ended December 31, 1998, have been derived from our consolidated financial
statements. The following information should be read in conjunction with our
audited Consolidated Financial Statements and the Notes thereto, included
elsewhere herein. The selected financial data for the three months ended March
31, 1999 and 1998, are derived from our unaudited interim consolidated
financial statements. Such unaudited interim financial statements include all
adjustments (consisting only of normal, recurring accruals) that we consider
necessary for a fair presentation of the financial position and the results of
operations as of the dates and for the periods indicated. Information for any
interim period is not necessarily indicative of results that may be anticipated
for the full year. You should also read the following information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this prospectus.
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
------------- ---------------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ------- ------- ------- ------- ------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Statement of
Income Data:
Interest income:
Loans, including fees... $5,636 $4,624 $19,619 $16,729 $12,152 $10,053 $6,418
Federal funds sold and
interest-bearing
deposits............... 48 498 2,181 875 1,392 1,149 358
Securities.............. 1,570 727 3,492 2,519 2,396 1,700 1,265
------ ------ ------- ------- ------- ------- ------
Total interest income. 7,254 5,849 25,292 20,123 15,940 12,902 8,041
------ ------ ------- ------- ------- ------- ------
Interest expense:
Interest-bearing demand
deposits............... 142 121 487 377 305 276 210
Savings and money
market deposit
accounts............... 1,800 1,629 6,651 5,880 4,613 3,484 2,139
Other time deposits..... 1,752 1,346 6,155 3,821 2,973 2,620 782
Funds borrowed.......... 144 -- 19 3 143 50 62
------ ------ ------- ------- ------- ------- ------
Total interest
expense.............. 3,838 3,096 13,312 10,081 8,034 6,430 3,193
------ ------ ------- ------- ------- ------- ------
Net interest income... 3,416 2,753 11,980 10,042 7,906 6,472 4,848
Provision for loan
losses.................. 285 91 362 603 524 930 305
------ ------ ------- ------- ------- ------- ------
Net interest income
after provision for
loan losses.......... 3,131 2,662 11,618 9,439 7,382 5,542 4,543
------ ------ ------- ------- ------- ------- ------
Non-interest income:
Banking and trust
services............... 442 273 1,281 1,210 911 674 414
Securities gains........ -- -- 40 -- -- -- --
------ ------ ------- ------- ------- ------- ------
Total non-interest
income............... 442 273 1,321 1,210 911 674 414
------ ------ ------- ------- ------- ------- ------
Non-interest expense:
Salaries and employee
benefits............... 1,115 1,102 4,077 3,902 3,411 2,749 2,054
Occupancy............... 352 334 1,379 1,274 990 946 745
Data processing......... 131 120 508 396 334 282 262
Marketing............... 153 139 567 500 424 296 272
Amortization of
organization costs..... -- -- -- -- 23 280 280
Professional fees....... 178 94 561 448 326 284 253
Insurance............... 41 30 134 115 82 238 342
Other expense........... 285 181 864 627 508 434 321
------ ------ ------- ------- ------- ------- ------
Total non-interest
expense.............. 2,255 2,000 8,090 7,262 6,098 5,509 4,529
------ ------ ------- ------- ------- ------- ------
Income before income
taxes.................. 1,318 935 4,849 3,387 2,195 707 428
Income tax provision.. 291 365 1,839 1,242 762 (403) 3
------ ------ ------- ------- ------- ------- ------
Net income............ $1,027 $ 570 $ 3,010 $ 2,145 $ 1,433 $ 1,110 $ 425
====== ====== ======= ======= ======= ======= ======
Per Share Data:
Basic earnings.......... $ 0.30 $ 0.18 $ 0.91 $ 0.69 $ 0.49 $ 0.39 $ 0.17
Diluted earnings........ 0.28 0.17 0.86 0.65 0.47 0.38 0.16
Dividends............... 0.03 0.02 0.08 0.07 0.07 0.03 --
Book value (at end of
period)................ 8.71 7.86 8.53 7.67 6.84 6.47 6.13
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- ------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- -------- -------- -------- -------- --------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial
Condition Data
(at end of period):
Total securities(1)..... $ 105,136 $ 48,322 $116,891 $ 65,383 $ 44,617 $ 38,296 $ 24,669
Total loans............. 307,766 223,746 281,965 218,495 171,343 126,069 98,380
Total assets............ 431,055 331,924 416,308 311,872 246,734 196,917 141,826
Total deposits.......... 384,454 304,660 364,994 285,773 222,571 176,868 122,925
Funds borrowed.......... 10,000 -- 20,000 -- 3,000 700 1,000
Total stockholders'
equity................. 30,054 25,400 29,274 24,688 20,222 18,445 17,471
Trust assets under
administration......... $ 637,422 $ 524,019 $611,650 $469,646 $328,662 $212,456 $168,872
Selected Financial
Ratios and Other
Data(2):
Performance Ratios:
Net interest margin(3). 3.57% 3.65% 3.61% 4.01% 3.73% 3.95% 4.09%
Net interest spread(4). 3.02 2.96 2.98 3.31 3.03 3.16 3.42
Non-interest income to
average assets........ 0.42 0.34 0.37 0.45 0.42 0.40 0.35
Non-interest expense to
average assets........ 2.13 2.49 2.29 2.71 2.79 3.31 3.79
Net overhead ratio(5).. 1.71 2.15 1.91 2.26 2.38 2.90 3.44
Efficiency ratio(6).... 58.45 67.65 60.82 64.53 69.17 77.09 86.07
Return on average
assets(7)............. 0.97 0.71 0.85 0.80 0.66 0.67 0.36
Return on average
equity(8)............. 13.84 9.11 11.27 9.49 7.38 6.22 2.94
Dividend payout ratio.. 8.36 10.63 8.74 10.13 12.88 8.03 --
Asset Quality Ratios:
Non-performing loans to
total loans........... 0.12 0.32 0.36 0.24 0.65 1.90 0.15
Allowance for possible
loan losses to:
total loans........... 1.20 1.40 1.21 1.40 1.43 1.55 1.04
non-performing loans.. 1,025 440 336 578 220 82 711
Net charge-offs to
average total loans... -- -- -- -- 0.02 -- 0.01
Non-performing assets
to total assets....... 0.08 0.21 0.24 0.17 0.45 1.22 0.10
Balance Sheet Ratios:
Loans to deposits...... 80.1 73.4 77.3 76.5 77.0 71.3 80.0
Average interest-
earning assets to
average interest-
bearing liabilities... 114.2 117.0 116.4 117.7 118.6 120.7 123.8
Capital Ratios:
Total equity to total
assets................ 6.97 7.65 7.03 7.92 8.20 9.37 12.32
Total risk-based
capital ratio......... 11.21 11.47 11.53 11.75 12.21 14.56 19.58
Tier 1 risk-based
capital ratio......... 10.05 10.22 10.40 10.50 10.96 13.31 18.49
Leverage ratio......... 7.53 7.87 7.88 8.70 8.71 9.76 13.03
</TABLE>
- --------
(1) For all periods after 1994, the entire securities portfolio was classified
"Available for Sale." For 1994, the entire securities portfolio was
classified "Held to Maturity."
(2) Certain financial ratios for interim periods have been annualized.
(3) Net interest income divided by average interest-earning assets.
(4) Yield on average interest-earning assets less rate on average interest-
bearing liabilities.
(5) Non-interest expense less non-interest income divided by average total
assets.
(6) Non-interest expense divided by the sum of net interest income plus non-
interest income.
(7) Net income divided by average total assets.
(8) Net income divided by average common equity.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with "Selected
Consolidated Financial Data" and our Consolidated Financial Statements and
Notes thereto, each appearing elsewhere in this prospectus. In addition to
historical information, the following "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements that involve risks and uncertainties. Our actual results could
differ significantly from those anticipated in these forward-looking statements
as a result of certain factors, including those discussed in "Risk Factors"
contained elsewhere in this prospectus.
Overview
PrivateBancorp 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. We opened our flagship
Chicago location in 1991, and our full-service offices in the affluent
communities of Wilmette, Illinois, a North Shore suburb of Chicago, in 1994,
and Oak Brook, Illinois, located in the rapidly growing western suburbs, in
1997.
Effective as of June 24, 1999, we entered into a definitive agreement to
acquire Towne Square Financial Corporation which we believe provides us an
attractive opportunity to establish a new office in St. Charles, Illinois, a
far western suburb of Chicago. Upon consummation of the transaction, we will
incur a one-time, merger-related charge to earnings, currently estimated to be
approximately $1.29 million. See "Pending Acquisition" for a discussion of the
anticipated financial impact of this transaction and start-up costs associated
with the planned opening of the St. Charles branch.
Since inception, we have experienced rapid internal growth as a result of:
. developing new banking relationships through the lending expertise of
our senior banking officers;
. developing new clients primarily through referrals from professional
advisors and existing clients;
. expanding our products offered and cross-marketing our existing
products;
. expanding our business lines through strategic partnerships; and
. opening new branches.
Since year-end 1995, we have grown our asset base at a compound annual rate
of 27.3% to $431.1 million as of March 31, 1999. During the same period, loans
have grown at a compound annual rate of 31.6% to $307.8 million, deposits at a
compound annual rate of 27.0% to $384.5 million and trust assets under
administration at a compound annual rate of 40.2% to $637.4 million. Due to our
increased size, we expect that these growth rates will moderate over time.
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.
38
<PAGE>
Our primary financial objectives are to continue to grow our loan portfolio
while maintaining high asset quality, and to increase non-interest income while
maintaining strong expense controls. We have maintained high asset quality
while managing rapid internal growth since our inception. We believe our
history of strong credit quality is testament to our sound credit practices, as
well as evidence that our affluent target client is a better than average
credit risk, resulting in lower loan charge-offs and lower loan loss provisions
than at traditional banks. The following table shows our growth in loans and
our credit quality history:
<TABLE>
<CAPTION>
December 31,
March --------------------------------------
31, 1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average loans, net of
unearned discount....... $288,322 $233,987 $195,237 $140,767 $111,637
Net charge-offs to
average loans........... -- -- -- 0.02% --
Non-performing loans to
total loans............. 0.12% 0.36% 0.24% 0.65% 1.90%
</TABLE>
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. In 1998, we entered into
an alliance with Mesirow Financial to provide insurance services to our
clients. It is expected that fees related to the sale of insurance services
will increase in 1999 and future years.
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. We intend to continue to improve our operating efficiency by growing
net interest income and non-interest income at a faster rate than non-interest
expense, and developing new sources of non-interest income. The following table
highlights our improving efficiency measures:
<TABLE>
<CAPTION>
December 31,
March 31, ----------------------
1999 1998 1997 1996 1995
--------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-interest expense to average assets.... 2.13% 2.29% 2.71% 2.79% 3.31%
Net overhead ratio........................ 1.71 1.91 2.26 2.38 2.90
Efficiency ratio.......................... 58.5 60.8 64.5 69.2 77.1
</TABLE>
Results of Operations
Net income
In 1998, we earned $3.0 million as compared to $2.1 million in 1997. This
40.3% increase in earnings was primarily the result of growth in the balance
sheet, particularly in the loan portfolio. Also contributing to improved
performance were increases in the investment portfolio, a reduced provision for
loan losses, increases in trust fees, and improved operating expense levels
which grew at a slower rate than the combined income components.
Diluted earnings per share for 1998 were $0.86, as compared to $0.65 for
1997, an increase of 30.3%. The growth rate of diluted earnings per share was
lower than the growth rate in earnings due to an increase in the number of
shares outstanding between the years and the value of existing stock options.
Return on average assets for 1998 was 0.85%, as compared to 0.80% for 1997.
Return on average equity for 1998 was 11.27%, as compared to 9.49% for 1997.
In 1997, we earned $2.1 million as compared to $1.4 million in 1996. This
49.7% increase was primarily the result of growth in the loan portfolio and
other balance sheet categories. Fees from banking and trust services grew by
32.8% in 1997 over 1996, while the provision for loan losses and other expense
grew by a combined 18.8%. Diluted earnings per share for 1997 were $0.65, as
compared to $0.47 for 1996. Return on
39
<PAGE>
average assets for 1997 was 0.80%, as compared to 0.66% for 1996. Return on
average equity for 1997 was 9.49%, as compared to 7.38% for 1996.
During the first quarter of 1999, we earned $1.0 million as compared to
$570,000 during the first quarter of 1998. This 80.1% increase was primarily
the result of improvements in net interest income and non-interest income which
more than offset increases in the provision for loan losses and non-interest
expenses. Tax strategies implemented in late 1998 resulted in a reduced tax
provision in the first quarter of 1999 as compared to the first quarter of
1998, despite higher pre-tax earnings. Diluted earnings per share for the first
quarter of 1999 was $0.28 as compared to $0.17 for the first quarter of 1998.
Annualized return on average assets and annualized return on average equity for
the first quarter of 1999 were 0.97% and 13.84%, respectively, as compared to
0.71% and 9.11% for the first quarter of 1998, respectively.
Net interest income and net interest margin.
In 1998, net interest income increased from 1997 by $1.9 million, or 19.3%,
to $12.0 million. During the same period, the net interest margin decreased
from 4.01% to 3.61%. Net interest income is affected by both the volume of
assets and liabilities we hold, and the corresponding rates earned and paid.
Earning assets, on average, grew by $80.3 million in 1998, while yields
dropped from 8.03% in 1997 to 7.65% in 1998. Rates earned on assets were
affected by a general reduction in interest rate levels. During 1998, the
Federal Open Market Committee lowered the target federal funds rate on three
separate occasions, by a total of 75 basis points. Similar reductions in
Treasury rates, which are used as indices for several loan products, affected
the average yield on our loan portfolio.
In 1998, average interest-bearing liabilities grew by $71.8 million, while
average rates paid on interest bearing liabilities dropped from 4.72% in 1997
to 4.67% in 1998. Due to rate compression and competitive pressures, we were
unable to reduce rates paid as quickly or as significantly as experienced on
the asset side of the balance sheet. The volume of non-interest bearing funds,
largely comprised of demand deposits and capital, also affects the net interest
margin. In 1998, the effect of non-interest bearing funds on the net interest
margin added 63 basis points to the margin. In 1997, the effect was an addition
of 70 basis points to the net interest margin.
In 1997, net interest income increased from 1996 by $2.1 million, or 27.0%,
to $10.0 million. During the same period, net interest margin increased from
3.73% to 4.01%. Average earning assets grew by $45.7 million, while yields
increased from 7.66% in 1996 to 8.03% in 1997. Yields on assets were affected
by a slight increase in interest rate levels throughout the year. In 1996,
loans comprised 68.5% of earning assets as compared to 77.7% of earning assets
in 1997. Comparatively, this had a positive effect on asset yields in 1997. In
1997, interest-bearing liabilities, on average, grew by $40.2 million while
average rates paid on interest-bearing liabilities increased from 4.63% in 1996
to 4.72% in 1997. Rates paid increased slightly in all categories in 1997. The
effect of non-interest-bearing funds on the net interest margin was 70 basis
points in both 1996 and 1997.
Net interest income increased by 24.1% from $2.8 million in the first
quarter of 1998, to $3.4 million in the first quarter of 1999. Lower interest
rate levels and an increased percentage of assets funded by interest-bearing
liabilities compressed the net interest margin from 3.65% in the first quarter
of 1998, to 3.57% in the first quarter of 1999. The increase in average assets
of more than $100 million reflects increases in both loans and investment
securities. The average balance of federal funds sold in the first quarter of
1999 was significantly less than in the first quarter of 1998. The cost of
interest-bearing liabilities in the first quarter of 1999 was 4.38%, as
compared to 4.83% in the first quarter of 1998.
40
<PAGE>
Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates
and Interest Differential
The following table sets forth the average balances, the interest earned or
paid thereon, and the effective interest rate yield or cost for each major
category of interest-earning assets, interest-bearing liabilities and
stockholders' equity for the three months ended March 31, 1999 and 1998, and
for the years ended December 31, 1998, 1997 and 1996 on a tax-equivalent
basis, assuming a 34% tax rate.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------
1999 1998 1998
-------------------------- -------------------------- ----------------------
Average Average Average Average Average
Balance Yield/ Balance Yield/ Balance
(1) Interest Cost (1) Interest Cost (1) Interest
-------- -------- ------- -------- -------- ------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold. $ 4,167 $ 48 4.61% $ 36,775 $ 498 5.42% $ 40,230 $ 2,181
Taxable investment
securities......... 112,724 1,570 6.28 48,339 727 6.16 57,427 3,491
Loans, net of
unearned discount.. 288,322 5,636 7.88 219,133 4,624 8.55 233,987 19,620
-------- ------ -------- ------ -------- -------
Total earning
assets.......... 405,213 7,254 7.40 304,247 5,849 7.79 331,644 25,292
-------- ------ -------- ------ -------- -------
Cash and due from
banks--non-interest
bearing............ 11,664 8,784 9,989
Allowance for
possible loan
losses............. (3,470) (3,082) (3,218)
Premises and
equipment, net..... 1,569 1,885 1,781
Other assets....... 4,898 3,704 4,187
-------- -------- --------
Total assets.... $419,874 $315,538 $344,383
======== ======== ========
Liabilities and
Stockholders'
Equity
Deposits-interest
bearing:
Interest-bearing
demand accounts... $ 27,199 142 2.12% $ 21,742 121 2.26% $ 22,073 487
Savings and money
market deposits... 177,600 1,800 4.11 142,077 1,629 4.65 151,558 6,651
Time deposits..... 139,512 1,752 5.10 96,226 1,346 5.68 111,407 6,155
-------- ------ -------- ------ -------- -------
Total interest-
bearing
deposits........ 344,311 3,694 4.36 260,045 3,096 4.83 285,038 13,293
-------- ------ -------- ------ -------- -------
Funds borrowed..... 10,485 144 5.07 -- -- 373 19
Term-debt and
subordinated debt.. -- -- -- -- -- --
-------- ------ -------- ------ -------- -------
Total interest-
bearing
liabilities..... 354,796 3,838 4.38 -- 3,096 285,411 13,312
-------- ------ -------- ------ -------- -------
Non-interest
bearing deposits... 32,990 28,594 31,335
Other liabilities.. 3,487 3,620 3,246
Stockholders'
equity............. 28,601 23,279 24,391
-------- -------- --------
Total
liabilities and
stockholders'
equity.......... $419,874 $315,538 $344,383
======== ======== ========
Net interest
income/spread...... $3,416 3.02% $2,753 2.96% $11,980
====== ==== ====== ==== =======
Net interest
margin............. 3.57% 3.65%
==== ====
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1997 1996
-------------------------- --------------------------
Average Average Average Average Average
Yield/ Balance Yield/ Balance Yield/
Cost (1) Interest Cost (1) Interest Cost
------- --------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold. 5.35% $ 15,917 $ 875 5.43% $ 26,287 $ 1,393 5.22%
Taxable investment
securities......... 6.20 40,164 2,519 6.27 38,569 2,396 6.21
Loans, net of
unearned discount.. 8.40 195,237 16,729 8.60 140,767 12,151 8.51
--------- -------- --------- --------
Total earning
assets.......... 7.65 251,318 20,123 8.03 205,623 15,940 7.66
--------- -------- --------- --------
Cash and due from
banks--non-interest
bearing............ 7,642 6,183
Allowance for
possible loan
losses............. (2,791) (2,198)
Premises and
equipment, net..... 1,995 1,280
Other assets....... 2,690 2,113
--------- ---------
Total assets.... $260,854 $213,001
========= =========
Liabilities and
Stockholders'
Equity
Deposits-interest
bearing:
Interest-bearing
demand accounts... 2.21% $ 17,722 377 2.13% $ 14,523 305 2.10%
Savings and money
market deposits... 4.39 127,560 5,880 4.61 102,759 4,613 4.48
Time deposits..... 5.53 68,252 3,821 5.60 53,601 2,973 5.54
--------- -------- --------- --------
Total interest-
bearing
deposits........ 4.67 213,534 10,078 4.72 170,883 7,891 4.61
--------- -------- --------- --------
Funds borrowed..... 5.06 49 3 5.83 2,483 143 5.67
Term-debt and
subordinated debt.. -- -- -- -- -- -- --
--------- -------- --------- --------
Total interest-
bearing
liabilities..... 4.67 213,583 10,081 4.72 173,366 8,034 4.63
--------- -------- --------- --------
Non-interest
bearing deposits... 25,053 20,783
Other liabilities.. 1,645 1,073
Stockholders'
equity............. 20,573 17,779
--------- ---------
Total
liabilities and
stockholders'
equity.......... $260,854 $213,001
========= =========
Net interest
income/spread...... 2.98% $10,042 3.31% $ 7,906 3.03%
======= ======== ======= ======== =======
Net interest
margin............. 3.61% 4.01% 3.73%
======= ======= =======
</TABLE>
- ----
(1) Average balances were generally computed using daily balances.
41
<PAGE>
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 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. The change
in interest due to both rate and volume has been allocated between the factors
in proportion to the relationship of the absolute dollar amounts of the change
in each.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
----------------------- -------------------------------------------
1998 Compared to 1997 Compared to
1999 Compared to 1998 1997 1996
----------------------- --------------------- ---------------------
Change Change Change Change Change Change
Due to Due to Total Due to Due to Total Due to Due to Total
Rate Volume Change Rate Volume Change Rate Volume Change
------- ------ ------ ------ ------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold...... $ (72) $ (378) $ (450) $ (11) $1,317 $1,306 $ 52 $ (570) $ (518)
Investment securities... 26 817 843 (30) 1,002 972 23 100 123
Loans, net of unearned
discount............... (2,155) 3,167 1,012 (414) 3,305 2,891 96 4,482 4,578
------- ------ ------ ----- ------ ------ ---- ------ ------
Total interest income.. (2,201) 3,606 1,405 (455) 5,624 5,169 171 4,012 4,183
------- ------ ------ ----- ------ ------ ---- ------ ------
Interest-bearing demand
accounts............... (44) 65 21 14 96 110 4 68 72
Savings and money market
deposits............... (995) 1,166 171 (292) 1,063 771 126 1,141 1,267
Time deposits........... (842) 1,248 406 (56) 2,390 2,334 27 821 848
Funds borrowed.......... -- 144 144 -- 16 16 4 (144) (140)
------- ------ ------ ----- ------ ------ ---- ------ ------
Total interest expense. (1,881) 2,623 742 (334) 3,565 3,231 161 1,886 2,047
------- ------ ------ ----- ------ ------ ---- ------ ------
Net interest income..... $ (320) $ 983 $ 663 $(121) $2,059 $1,938 $ 10 $2,126 $2,136
======= ====== ====== ===== ====== ====== ==== ====== ======
</TABLE>
Provision for loan losses.
The provision for loan losses decreased 60.0% from $603,000 in 1997 to
$362,000 in 1998. Throughout 1998, the allowance for loan losses was reassessed
to determine the appropriate level to be maintained. This analysis was
influenced by the following factors: the volume and quality of loans and
commitments in the portfolio, loss experience, and economic conditions. The
reduced provision, despite an increasing portfolio, reflects management's
assessment of the overall risk in the loan portfolio.
The provision for loan losses increased from $524,000 in 1996 to $603,000 in
1997. This 15.1% increase was less than the rate of increase of the loan
portfolio. The quality of the loan portfolio in 1997 continued to be as strong
as experienced in 1996.
The provision for loan losses in the first quarter of 1999, was $285,000 as
compared to $91,000 in the first quarter of 1998. The reason for this increase
was the sharp increase in loan balances of $25.8 million during the first three
months of 1999 as compared to $5.3 million in the first three months of 1998.
Non-interest income.
Our total non-interest income increased 9.2% from $1.2 million in 1997 to
$1.3 million in 1998. The largest component of other income is trust fees.
Trust fees increased 9.7% from $937,000 in 1997 to $1.0 million in 1998,
reflecting growth in trust assets under administration of $141.6 million, or
30.1%, to $611.6 million at year end 1998. Trust assets have more than doubled
since mid-1996. This growth is in part attributable to our success in
attracting larger blocks of business and the favorable stock market. During
1997, we earned fees of $119,000 while administering a problem account. This
account was transferred to another trust institution late in 1997. Without this
income in 1997, the increase in trust income in 1998 over 1997 would have been
$210,000, or 25.7%. In 1998, we realized gains from securities sales of
$40,000.
Our non-interest income increased 32.8% from $911,000 in 1996 to $1.2
million in 1997. During this period, trust fees increased 62.4% from $577,000
in 1996 to $937,000 in 1997. Without fees earned on the
42
<PAGE>
transferred trust account (on which we earned $59,000 in 1996), our annual
increase from 1996 to 1997 would have been 57.9%. In 1997, other income was
enhanced by consulting fees of $132,000 which were of a non-recurring nature.
Non-interest income increased by 61.9% to $442,000 in the first quarter of
1999, as compared to $273,000 in the first quarter of 1998. The major component
of non-interest income, trust fees grew to $320,000 in the first quarter of
1999, as compared to $229,000 in the first quarter of 1998. This 39.7% increase
follows similar increases in trust assets under administration.
Non-interest expense.
<TABLE>
<CAPTION>
Three Months
Ended March Year Ended December
31, 31,
------------- --------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits............... $1,115 $1,102 $4,077 $3,902 $3,411
Occupancy.................................... 352 334 1,379 1,274 990
Data processing.............................. 131 120 508 396 334
Marketing.................................... 153 139 567 500 424
Amortization of organization costs........... -- -- -- -- 23
Professional fees............................ 178 94 561 448 326
Insurance.................................... 41 30 134 115 82
Other expense................................ 285 181 864 627 508
------ ------ ------ ------ ------
Total non-interest expense................. $2,255 $2,000 $8,090 $7,262 $6,098
====== ====== ====== ====== ======
</TABLE>
Total non-interest expense increased 11.4% from $7.3 million in 1997, to
$8.1 million in 1998. Non-interest expense as a percentage of average assets
declined from 2.7% in 1997 to 2.3% in 1998, reflecting the increased efficiency
of our infrastructure in supporting our growth rate. Similar improvements in
efficiency have been achieved in each year of the Company's existence. Non-
interest expense increased 19.1% from $6.1 million in 1996, to $7.3 million in
1997. Non-interest expense as a percentage of average assets declined from 2.8%
in 1996 to 2.7% in 1997.
The efficiency ratio, which measures the percentage of net revenue that is
paid as non-interest expense, has improved each year from 69% in 1996, to 65%
in 1997, to 61% in 1998. This is an indication that expenses have not grown as
quickly as revenues. It also supports the statement that the Company was able
to grow into the infrastructure established in its early years.
Salaries and employee benefits increased 4.5% to $4.1 million in 1998 from
$3.9 million in 1997. Growth from 1996 to 1997 was $491,000, or 14.4%. Staff
levels have been kept under control with the number of full time equivalent
employees increasing from 59.0 at year-end 1996, to 66.5 at year-end 1997 and
70.5 at year-end 1998. Except for staffing of the Oak Brook facility at year-
end 1996, there have been no additions at the executive level for the periods
discussed. Staff additions have been necessary to support growth of the
business.
Occupancy costs related to our facilities showed increases of $105,000, or
8.2% from 1997 to 1998, and $284,000, or 28.7% from 1996 to 1997. The majority
of our increase in operating expenses in 1997 was related to the opening of our
Oak Brook office in January 1997, and a full year's rent paid in 1997 for an
additional floor of the Chicago office.
Insurance costs related to our property, liability, and bond coverages
increased by $19,000, or 16.5%, from 1997 to 1998. The increased costs are
primarily related to increases in coverage commensurate with our growth.
Deposit insurance was an insignificant expense in each of the years.
Data processing increases for 1997 and 1998 are volume-related. During the
third quarter of 1999, we will be converting the processing of our loan and
deposit applications to a different service bureau. This is the result
43
<PAGE>
of our current processor's announcement that it will be terminating operations
in 2000. We expect our data processing expense to increase in 1999 as a result
of this conversion, and remain at higher levels in the years to follow.
Professional fees which include legal, accounting and consulting services
increased by $113,000, or 25.2% from 1997 to 1998, and $122,000, or 37.4% from
1996 to 1997. Reasons for these increases include increased usage of audit and
accounting services, consulting services related to regulatory compliance, and
in 1998, increases in investment advisory services related to our investment
portfolio.
Other expenses include office supplies, postage, telephone, delivery,
training, director fees, filing fees and duplicating. The majority of increases
in these items are related to growth of the Company.
Non-interest expense increased by 12.8% to $2.3 million in the first quarter
of 1999, as compared to $2.0 million in the first quarter of 1998. This
percentage increase was well below increase percentages earned in net interest
income and non-interest income. Most notable were increases in professional
fees related to bank investment portfolio consultants, year 2000 consultants
and internal audit expenses.
Provision for 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 our expenses which are disallowed for tax purposes. Increases in our income
tax provision for the three years ended December 31, 1998 are primarily related
to increases in pre-tax earnings.
Income taxes in the first quarter of 1999, included the effect of federally
non-taxable interest earned on our municipal bond portfolio and the result of a
tax-advantaged investment program initiated in February 1999.
Financial Condition
Loans.
Our loan clients include individuals, partnerships and corporations. Loan
types include commercial real estate, which is concentrated in apartment
buildings, residential real estate, commercial, personal, home equity, and
construction. Loan quality has remained high with low levels of delinquencies
and minimal charge-offs.
The following table sets forth our loan portfolio by category as of March
31, 1999, and as of December 31 for the previous five fiscal years:
<TABLE>
<CAPTION>
December 31,
March -------------------------------------------
31, 1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial real estate..... $108,599 $ 94,392 $ 55,429 $ 39,452 $ 29,114 $22,402
Residential real estate.... 62,208 54,171 56,307 45,012 25,973 21,696
Commercial................. 53,834 46,800 33,862 28,004 22,906 18,092
Personal................... 45,122 44,094 42,077 35,339 28,150 20,466
Home equity................ 19,860 20,100 20,680 20,683 18,707 11,504
Construction............... 18,143 22,408 10,140 2,853 1,219 747
Bankers' acceptances....... -- -- -- -- -- 3,473
-------- -------- -------- -------- -------- -------
Total loans.............. $307,766 $281,965 $218,495 $171,343 $126,069 $98,380
======== ======== ======== ======== ======== =======
</TABLE>
44
<PAGE>
The following table classifies the loan portfolio, by category, at March 31,
1999, by date at which the loans mature:
<TABLE>
<CAPTION>
More than one
After year
One year From one five ----------------
or less to five years years Total Fixed Variable
-------- ------------- -------- -------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial real estate.. $ 16,388 $ 53,400 $ 38,811 $108,599 $36,538 $ 55,673
Residential real estate. 3,142 4,639 54,427 62,208 13,476 45,590
Commercial.............. 32,233 21,236 365 53,834 4,741 16,860
Personal................ 38,018 6,191 913 45,122 1,092 6,012
Home equity............. 1,032 9,941 8,887 19,860 -- 18,828
Construction............ 11,932 5,906 305 18,143 1,993 4,218
-------- -------- -------- -------- ------- --------
Total loans........... $102,745 $101,313 $103,708 $307,766 $57,840 $147,181
======== ======== ======== ======== ======= ========
</TABLE>
Asset Quality.
The following table classifies our non-performing loans as of the dates
shown:
<TABLE>
<CAPTION>
December 31,
March 31, ----------------------------------
1999 1998 1997 1996 1995 1994
--------- ------ ---- ------ ------ ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans................. $-- $ -- $-- $ -- $2,298 $--
Loans past due 90 days or more... 361 1,016 527 1,116 100 144
---- ------ ---- ------ ------ ----
Total non-performing loans..... 361 1,016 527 1,116 2,398 144
---- ------ ---- ------ ------ ----
Other real estate owned.......... -- -- -- -- -- --
---- ------ ---- ------ ------ ----
Total non-performing assets.... $361 $1,016 $527 $1,116 $2,398 $144
==== ====== ==== ====== ====== ====
Total non-performing loans to
total loans..................... 0.12% 0.36% 0.24% 0.65% 1.90% 0.15%
Total non-performing assets to
total assets.................... 0.08 0.24 0.17 0.45 1.22 0.10
</TABLE>
It is our policy to discontinue the accrual of interest income on any loan
for which we have reasonable doubt as to the payment of interest or principal.
Nonaccrual loans are returned to an accrual status when the financial position
of the borrower indicates there is no longer any reasonable doubt as to the
payment of principal or interest.
Other than those loans reflected in the table above, we had no significant
loans for which the terms had been renegotiated or restructured, or for which
we had serious doubts as to the ability of the borrower to comply with
repayment terms. We did not have any Other Real Estate Owned as of any of the
dates shown.
Potential Problem Loans. In addition to those loans reflected in the table
above, we have identified some loans through our problem loan identification
system which exhibit a higher than normal credit risk. Loans in this category
include those with characteristics such as those past maturity more than 90
days, those that have recent adverse operating cash flow or balance sheet
trends, or have general risk characteristics that the managing director
believes might jeopardize the future timely collection of principal and
interest payments. The principal amount of loans in this category as of March
31, 1999 was $960,000. At March 31, 1999, there were no significant loans which
were classified by any bank regulatory agency that are not included above as
nonaccrual, past due or restructured.
Loan Concentrations. Loan concentrations are considered to exist when there
are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by economic or other
conditions. Other than loans made to borrowers residing in the Chicago
metropolitan area and our involvement in lending secured by real estate, we had
no concentrations of loans exceeding 10% of total loans at March 31, 1999.
45
<PAGE>
Allowance for Loan Losses.
We believe our loan loss experience to date reflects the high credit quality
of our loan portfolio. The following table shows changes in the allowance for
loan losses resulting from additions to the allowance and loan charge-offs for
each of the periods shown. All charge-offs have been of loans in the personal
loan category. There were no recoveries on loans previously charged off in any
of the periods. Charge-offs as a percentage of average total loans have been
negligible.
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------------------------
1999 1998 1997 1996 1995 1994
--------- -------- -------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period.................. $ 3,410 $ 3,050 $ 2,450 $ 1,955 $ 1,025 $ 728
Loans charged-off:
Commercial real estate... -- -- -- -- -- --
Residential real estate.. -- -- -- -- -- --
Commercial............... -- -- -- -- -- --
Personal................. -- 2 3 29 -- 8
Home equity.............. -- -- -- -- -- --
Construction............. --
-------- -------- -------- -------- -------- -------
Total loans charged-
off................... -- 2 3 29 -- 8
-------- -------- -------- -------- -------- -------
Provision for loan
losses.................. 285 362 603 524 930 305
-------- -------- -------- -------- -------- -------
Balance at end of period. $ 3,695 $ 3,410 $ 3,050 $ 2,450 $ 1,955 $ 1,025
======== ======== ======== ======== ======== =======
Average total loans...... $288,987 $234,486 $195,605 $141,043 $111,855 $80,717
======== ======== ======== ======== ======== =======
</TABLE>
The following table shows our allocation of the allowance for loan losses by
specific category at the end of each of the periods shown. We considered
various qualitative and quantitative factors about the loan portfolio which we
deemed relevant.
<TABLE>
<CAPTION>
December 31,
March 31, ------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
% of % of % of % of % of % of
Total Total Total Total Total Total
Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance
------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial real
estate.......... $ 928 25.1% $ 732 21.5% $ 429 14.1% $ 295 12.0% $ 226 11.6% $ 174 17.0%
Residential real
estate.......... 303 8.2 277 8.1 306 10.0 254 10.4 142 7.3 125 12.2
Commercial....... 833 22.5 693 20.3 464 15.2 422 17.2 913 46.7 271 26.4
Personal......... 509 13.8 545 16.0 1,037 34.0 973 39.7 392 20.1 290 28.3
Home equity...... 217 5.9 201 5.9 201 6.6 184 7.5 164 8.4 105 10.2
Construction..... 185 5.0 236 6.9 106 3.5 28 1.1 13 0.7 7 0.7
Unallocated...... 720 19.5 726 21.3 507 16.6 294 12.0 105 5.4 53 5.2
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total........... $3,695 100.0% $3,410 100.0% $3,050 100.0% $2,450 100.0% $1,955 100.0% $1,025 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Control of our loan quality is continually monitored by management and is
reviewed by the loan/investment committee of the Board of Directors of
PrivateBank on a monthly basis. The amount of additions to the allowance for
loan losses which are charged to earnings through the provision for loan losses
are determined based on a variety of factors, including assessment of the
credit risk of the portfolio, delinquent loans, an evaluation of current and
prospective economic conditions in the market area, actual charge-offs during
the year and historical loss experience.
We maintain an allowance for loan losses sufficient to absorb credit losses
inherent in our loan portfolio. The allowance for loan losses represents our
estimate of probable losses in the portfolio at each balance sheet date and is
supported by all available
46
<PAGE>
and relevant information. The allowance contains provisions for probable
losses that have been identified relating to specific borrowing relationships
as well as probable losses inherent in our loan portfolio and credit
undertakings that are not specifically identified. We believe that the
allowance for loan losses is adequate to provide for estimated probable credit
losses inherent in our loan portfolio.
Investment Securities.
Investments are substantially comprised of federal funds sold and
securities. "Federal funds sold" are overnight investments in which, except
for cash reserves, all remaining funds are invested. Our securities portfolio
is primarily comprised of U.S. Treasury securities and agency obligations,
municipal bonds, collateralized mortgage obligations, and corporate
securities. In the fourth quarter of 1998, we invested in municipal bonds to
take advantage of their favorable taxable equivalent yields. Equity securities
consist of minimal investments in the FHLB and NHS.
All of our investment securities are classified as "available for sale" to
give us the flexibility to alter the composition of our portfolio, and are
carried at fair value. The table below shows the estimated fair value of
investment securities at the dates indicated, presented by category.
<TABLE>
<CAPTION>
December 31,
March 31, ------------------------
1999 1998 1997 1996
--------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-Sale
U.S. Treasury securities and U.S. Government
agency obligations......................... $ 5,058 $ 6,095 $ 6,066 $ 7,095
State and political subdivision obligations. 40,608 37,804 -- --
Collateralized mortgage obligations......... 47,536 61,414 40,308 14,171
Corporate debt securities................... 10,280 10,263 18,269 21,951
Equity securities........................... 1,654 1,315 740 1,400
-------- -------- ------- -------
Total investment securities............... $105,136 $116,891 $65,383 $44,617
======== ======== ======= =======
</TABLE>
Maturities of investment securities, by category, as of March 31, 1999, are
shown in the following table.
<TABLE>
<CAPTION>
Within From one From five to After Equity
one year to five years ten years ten years securities Total
-------- ------------- ------------ --------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and U.S. Government
agency obligations..... $4,039 $1,019 $ -- $ -- $ -- $ 5,058
State and political
subdivision
obligations............ 451 2,598 2,764 34,795 -- 40,608
Collateralized mortgage
obligations............ -- -- 4,707 42,829 -- 47,536
Corporate debt
securities............. -- -- -- 10,280 -- 10,280
Equity securities....... -- -- -- -- 1,654 1,654
------ ------ ------ ------- ------ --------
Total investment
securities........... $4,490 $3,617 $7,471 $87,904 $1,654 $105,136
====== ====== ====== ======= ====== ========
</TABLE>
The weighted average yield (computed on a tax equivalent basis) for each
range of maturities of securities, by category, is shown below as of March 31,
1999:
<TABLE>
<CAPTION>
Within From one From five to After Equity
one year to five years ten years ten years securities Total
-------- ------------- ------------ --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities
and U.S. Government
agency obligations..... 6.02% 5.80% -- -- -- 5.97%
State and political
subdivisions
obligations............ 4.82 5.27 5.98% 7.09% -- 6.88
Collateralized mortgage
obligations............ -- -- 5.22 5.88 -- 5.81
Corporate debt
securities............. -- -- -- 7.05 -- 7.05
Equity securities....... -- -- -- -- 6.10% 6.10
---- ---- ---- ---- ---- ----
Total investment
securities........... 5.90% 5.42% 5.50% 6.50% 6.10% 6.36%
==== ==== ==== ==== ==== ====
</TABLE>
47
<PAGE>
Deposits.
In 1998, total deposits increased by $79.2 million, or 27.7%, to $365.0
million. Over each of the past three years, our deposits have grown at rates in
excess of 25% per year. We rely upon our clients to provide funds to support
our lending and investment activities. Our deposit mix is substantially
comprised of interest-bearing deposits. As a client service, we facilitate
quick and convenient transfers of funds to checking accounts on an as-needed
basis. This contributes to our clients keeping account balances that we believe
to be in excess of those at most other financial institutions. While these
larger, interest-bearing accounts tend to increase our cost of funds, we are
able to support our asset base with a smaller number of accounts to service, at
a lower cost per dollar of deposits, than at similar banks of similar asset
size. For the period ended March 31, 1999, the average aggregate balance per
client relationship was approximately $94,000.
The following table presents the balances of deposits by category, and each
category as a percentage of total deposits, at March 31, 1999 and at December
31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
March 31, 1999 1998 1997 1996
----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent
Balance of Total Balance of Total Balance of Total Balance of Total
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Demand.................. $ 32,582 8.5% $ 39,490 10.8% $ 34,234 12.0% $ 21,177 9.5%
Savings................. 499 0.1 482 0.1 640 0.2 258 0.1
Interest-bearing demand. 27,390 7.1 26,508 7.3 26,084 9.1 17,263 7.8
Money market............ 180,372 46.9 170,231 46.6 134,985 47.3 122,589 55.1
Certificates of deposit. 143,611 37.4 128,283 35.2 89,830 31.4 61,284 27.5
-------- ----- -------- ----- -------- ----- -------- -----
Total deposits........ $384,454 100.0% $364,994 100.0% $285,773 100.0% $222,571 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The aggregate amounts of time deposits, in denominations of $100,000 or
more, by maturity, are shown below as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
March ------------------------
31, 1999 1998 1997 1996
-------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Three months or less................... $ 89,109 $ 67,922 $37,389 $26,833
Over three through six months.......... 16,478 18,974 16,200 7,638
Over six through twelve months......... 14,348 17,664 16,100 9,353
Over twelve months..................... 1,248 904 941 400
-------- -------- ------- -------
Total................................ $121,183 $105,464 $70,630 $44,224
======== ======== ======= =======
</TABLE>
Over the past several years, in a low interest rate, relatively flat yield
curve environment, our clients have chosen to keep the maturities of their
deposits short. We expect these short-term certificates of deposit to be
renewed on terms and with maturities similar to those currently in place. In
the event that certain of these certificates of deposits are not renewed and
the funds are withdrawn from the bank, we will replace those deposits with
other forms of borrowed money or capital as discussed below, or liquidate
assets to reduce our funding needs.
Liquidity and Capital Resources
The following table reflects various measures of our capital at March 31,
1999, and at December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
March 31, -------------------
1999 1998 1997 1996
--------- ----- ----- -----
<S> <C> <C> <C> <C>
Total equity to total assets............... 6.97% 7.03% 7.92% 8.20%
Total risk-based capital ratio............. 11.21 11.53 11.75 12.21
Tier 1 risk-based capital ratio............ 10.05 10.40 10.50 10.96
Leverage ratio............................. 7.53 7.88 8.70 8.71
</TABLE>
48
<PAGE>
At March 31, 1999, we exceeded the minimum levels of all regulatory capital
requirements, and PrivateBank was considered "well-capitalized" under
regulatory standards. Based on guidelines established by the Federal Reserve
Bank, a bank holding company is required to maintain a leverage ratio (Tier 1
capital/total assets less intangibles) of 4.0%, a ratio of Tier 1 capital to
risk-based assets of 4.0% and a ratio of total capital to risk-based assets of
8.0%.
Since inception, we have raised over $22 million in a series of common stock
offerings to provide the necessary capital to support our growth. The proceeds
of these common stock offerings have been the principal source of funds at the
holding company level. We have regularly infused capital into our bank
subsidiary as and when needed to maintain adequate capital ratios and have
tended to retain the balance of the holding company funds on deposit in a non-
interest bearing account at PrivateBank to be available for its funding and
liquidity purposes. The following table shows the funds we have raised through
private placements of our common stock:
<TABLE>
<CAPTION>
Number of Price Per Gross Proceeds Net Proceeds
Shares Sold Share to Company to Company
Date of Offering ----------- --------- -------------- ------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
4Q 1989................. 80,800 $ 6.25 $ 505 $ 505
1Q 1991................. 1,334,400 6.25 8,340 8,340
3Q 1992................. 412,208 6.88 2,834 2,781
2Q 1994................. 1,023,264 7.81 7,994 7,877
2Q 1997................. 208,256 10.94 2,278 2,251
4Q 1998................. 46,000 16.00 736 736
</TABLE>
Liquidity management at PrivateBank involves planning to meet anticipated
funding needs at a reasonable cost. Liquidity management is guided by policies,
formulated and monitored by our senior management and the Bank's
asset/liability committee, which takes into account the marketability of
assets, the sources and stability of funding and the level of unfunded
commitments. PrivateBank's principal sources of funds are deposits, short-term
borrowings and capital contributions by the Company out of the proceeds of our
common stock offerings.
PrivateBank's core deposits, the most stable source of liquidity for
PrivateBank due to the nature of long-term relationships generally established
with clients, are available to provide long-term liquidity. At March 31, 1999,
61.1% of our total assets were funded by core deposits. At December 31, 1998,
62.5% of our total assets were funded by core deposits. At December 31, 1997
and 1996, 69.5% and 72.8% of total assets were funded by core deposits,
respectively.
We periodically use services of the FHLB for short-term funding needs and
other correspondent services. At March 31, 1999, we had a short-term advance of
$10.0 million outstanding at 5.00% with a maturity of April 5, 1999, and at
December 31, 1998, we had a short-term advance of $20.0 million at 5.20% which
matured on January 7, 1999. In addition, we periodically use the FHLB to supply
letters of credit as collateral to support public fund deposits. At March 31,
1999, we had FHLB letters of credit of $17.3 million outstanding. At December
31, 1998, we had no FHLB letters of credit outstanding. We pay 0.125% per annum
for FHLB letters of credit. The following table shows our maximum availability
for and usage of FHLB advances and letters of credit.
<TABLE>
<CAPTION>
Availability Usage
Date ------------ -------
(in thousands)
<S> <C> <C>
March 31, 1999.............. $52,117 $27,340
December 31, 1998........... 45,842 20,000
December 31, 1997........... 32,673 7,905
December 31, 1996........... 25,214 10,890
</TABLE>
Liquid assets refers to money market assets such as federal funds sold, as
well as available-for-sale securities. Net liquid assets represent the sum of
the liquid asset categories less the amount of assets pledged to
49
<PAGE>
secure public funds. At March 31, 1999, net liquid assets were approximately
$83.1 million. At December 31, 1998, net liquid assets totaled approximately
$104.5 million, compared to approximately $76.2 million at December 31, 1997
and $55.4 million at December 31, 1996.
PrivateBank accepts deposits from a variety of municipal entities.
Typically, these municipal entities require that banks pledge marketable
securities to collateralize these public deposits. The State of Illinois also
accepts FHLB letters of credit as collateral. At March 31, 1999 and December
31, 1998, 1997 and 1996, PrivateBank had approximately $9.7 million, $15.0
million, $13.1 million and $11.5 million, respectively, of securities
collateralizing such public deposits. Deposits requiring pledged assets are not
considered to be core deposits, and the assets that are pledged as collateral
for these deposits are not deemed to be liquid assets.
Our Information Systems and the Year 2000
The year 2000 issue is a computer programming concern that centers on the
inability of certain computer systems to recognize the year 2000 and other year
2000-sensitive dates. Many existing computer programs and systems were
originally programmed to accept only six-digit date fields. In these systems,
the calendar year is identified by the last two digits only. This problem may
leave these programs and computers unable to distinguish between dates in the
twentieth and twenty-first centuries. For example, some computers will treat
"00" as the year 1900, rather than 2000. These computers may also be unable to
correctly identify the year 2000 as a leap year. The inability of these
computer systems to recognize dates could result in the failure of critical
applications of the generation of inaccurate results. Therefore, these systems
must be replaced or upgraded to become compliant with the year 2000 and to
avoid these errors.
Like most providers of financial services, we are particularly sensitive to
the year 2000 issue because our operations depend on computer-generated
financial information. Software, hardware and equipment both within and outside
of our direct control, and third parties with whom we electronically or
operationally interact may be adversely affected by this issue. These third
parties include our clients as well as third party vendors providing data
processing services, information systems management, computer system
maintenance and credit bureau information. In addition, under certain
circumstances, failure to address adequately the year 2000 issue could
adversely affect the viability of our suppliers and creditors and the
creditworthiness of our borrowers. If not adequately addressed, the year 2000
issue could have a significant adverse effect on our products, services and
competitive condition and ultimately our financial condition and results of
operations.
Regulatory Oversight. Regulators of financial institutions have increased
their focus on year 2000 compliance issues, have issued guidance concerning the
responsibilities of senior management and directors and are conducting periodic
examinations to ascertain the state of year 2000 compliance readiness. The
Federal Financial Institutions Examination Council ("FFIEC") has issued a
number of interagency statements on Year 2000 Project Management Awareness.
These statements require financial institutions to, among other things, examine
the year 2000 implications of their reliance on vendors and with respect to
data exchange and the potential impact of the year 2000 issue on their
customers, suppliers and borrowers. These statements also require each
federally regulated financial institution to survey its exposure, measure its
risk and prepare a plan to address the year 2000 issue. In addition, the
federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions to ensure resolution of any year
2000 problems. The federal banking agencies have asserted that year 2000
testing and certification is a key safety and soundness issue in conjunction
with regulatory examinations. Consequently, an institution's failure to
appropriately and timely address the year 2000 issue could result in
supervisory action, including the reduction of the institution's supervisory
ratings, which almost certainly would involve the denial of future applications
for approval of mergers or acquisitions until compliance is achieved. In
certain egregious situations, civil money penalties may be imposed.
Our Readiness. At the direction of our Board of Directors, we have
established a year 2000 readiness committee and have engaged consultants
qualified to help us address our year 2000 issues. Our consultants are
experienced with technology issues and year 2000 compliance, and have worked
closely with our year 2000
50
<PAGE>
readiness committee. We also engaged an outside consulting firm to perform an
independent review of our year 2000 planning. The firm evaluated our program
through review of our written procedures, discussion with our year 2000 project
leader and personnel, and observation of our compliance efforts. Based on the
consultants' report to management, management considers our program to address
adequately our potential exposure to the year 2000 issue, but has determined to
make certain suggested procedural changes, none of which we consider
significant.
Following the guidelines established by the FFIEC, we have broken down our
compliance efforts into six stages: awareness, assessment, renovation,
validation, implementation and contingency planning.
. Awareness. During our awareness phase, we educated ourselves on the
issues and risks associated with the year 2000 problem. We also
identified the aspects of our operations which are year 2000 sensitive.
. Assessment. During this stage, we were able to determine the scope of
our entire year 2000 readiness project. We reviewed our systems,
equipment, vendors, client exposure, counterparties and fiduciary risk.
As part of this stage, we 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 our Board of
Directors.
. Renovation. For most companies, this phase is time consuming and
complicated. It involves upgrading or replacing all sensitive systems
and equipment. Because we rely on third party vendors for virtually all
of our systems and for our data processing needs, our internal
renovations were minimal. We have undertaken efforts to ensure that our
third party vendors are also year 2000 compliant. We have polled each of
our third party vendors regarding their compliance efforts, and our year
2000 project manager monitors the year 2000 readiness and financial
status of all of our vendors at least on a quarterly basis. However, we
cannot be sure that each of our third party vendors will complete their
compliance efforts in a timely manner or successfully maintain year 2000
readiness.
We consider those third party vendors who provide us significant
services to be "mission critical" to our operations. As of May 28,
1999, we had received responses to our inquiries regarding their year
2000 compliance efforts from 100% of them, and each of them claims to
be year 2000 compliant. In connection with our inquiries and their
responses, we have also completed an assessment of the financial and
operational capabilities of each of these "mission critical" vendors.
Although we do not have any contractual assurances that our "mission
critical" vendors are or will be year 2000 compliant, based on their
responses and our assessments, we believe each of them has taken
appropriate steps to prepare for the year 2000, and that we will have
no material exposure from our vendors involving the year 2000 issue.
We have also undertaken to assess the year 2000 readiness of our
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 our results. At this time, we
are unable to estimate with reliability the extent to which our
significant borrowers and other clients are susceptible to potential
problems relating to the year 2000 issue, or to quantify the potential
impact to us in this case.
. Validation. We have completed the validation, or testing, phase of our
readiness project. Using a comprehensive test plan developed with our
consultants, we have tested, either individually or in collaboration
with our third party vendors, each system and piece of equipment
currently in place in our offices for year 2000 readiness and
compatibility with other systems with which they interface. Our plan,
which we 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. Our
51
<PAGE>
consultants have monitored the maintenance of process controls
throughout the testing process. Our internal auditors have reviewed the
results of our year 2000 testing.
We are currently in the process of transferring our loan and deposit
processing to a new provider. Our conversion date is scheduled for the
end of August 1999. We have been working with our new vendor since early
April 1999. The pre-conversion preparation process is approximately 50%
complete. Through the use of proxy testing, we will be validating the
results of our new vendor's year 2000 readiness. This validation process
has not yet begun but will be completed before the actual conversion
date. In addition, we have 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, we have by contract waived any rights to claim
damages from them. Our business may be disrupted in the event of failure
of the data processing system to handle the century date change
successfully, and we could be materially adversely affected in this
event.
. Implementation. We have completed the testing and have implemented
necessary changes to computer hardware, network equipment and operating
systems owned by us and located in our offices. We are currently using
most of these systems in their year 2000 compliant version. As we
continue to evaluate and modify these systems as needed, we will use our
best efforts to maintain our year 2000 compliance. Because virtually all
of our year 2000-related software modifications are handled by third-
party processing services, and because we have no control over the
renovation of software code, we will continue to monitor software
application upgrade releases from our vendors and the year 2000
implications of such releases. We will continue to implement such
changes as are necessary based on the results of our validation efforts
and our ongoing monitoring efforts.
. Contingency. The final stage of our readiness project involves the
creation of a business continuity plan which outlines how our operations
will continue in the event that we are unable to ensure that all of our
operations will be compliant, or if we experience a failure of any of
our systems. Our business continuity plan is completed and we expect to
have our business resumption validation procedures completed prior to
June 30, 1999. In our business continuity plan, we identify 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, our plan considers
solutions including use of electronic and manual alternatives to our
primary operating systems, operating from alternative physical sites and
acquiring replacements for equipment. During the third quarter of 1999,
where practical, we will selectively test our business resumption
validation procedures.
The Costs of Our Compliance Efforts. We estimate that the entire cost of
our year 2000 readiness project will be approximately $650,000. These costs
include:
. upgrades of existing systems and equipment;
. acquisitions of new systems and equipment;
. consultant fees and expenses; and
. allocated personnel costs.
Through March 31, 1999, we have spent approximately $400,000 toward our year
2000 readiness.
The Risks Involved in Our Efforts. Although we are working closely with our
consultants, our third party vendors and our regulators to upgrade our systems
and operations, there can be no assurance that all of our operations will be
year 2000 compliant. In the event of system failure, either internally, or on
the part of one or more of our vendors, our operations may be adversely
affected. We may experience an interruption in our business and incur
significant losses.
52
<PAGE>
Asset/Liability Management Policy
As a continuing part of our financial strategy, we attempt to manage the
impact of fluctuations in market interest rates on our net interest income.
This effort entails providing a reasonable balance between interest rate risk,
credit risk, liquidity risk and maintenance of yield. Asset/liability
management policy is established by our Board of Directors and monitored by
management. Our asset/liability policy sets standards within which we are
expected to operate. These standards include guidelines for exposure to
interest rate fluctuations, liquidity, loan limits as a percentage of funding
sources, exposure to correspondent banks and brokers, and reliance on non-core
deposits. Our policy also states the reporting requirements to our Board of
Directors. Our investment policy complements our asset/liability policy by
establishing criteria by which we may purchase securities. These criteria
include approved types of securities, brokerage sources, terms of investment,
quality standards, and diversification.
The following table illustrates our estimated interest rate sensitivity and
periodic and cumulative gap positions calculated as of March 31, 1999.
<TABLE>
<CAPTION>
Time to Maturity or Repricing
---------------------------------------
0-90 91-365 1-5 Over 5
Days Days Years Years Total
-------- --------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans...................... $163,231 $ 22,535 $107,224 $ 14,732 $307,722
Investments................ 9,717 27,096 30,736 37,682 105,231
Federal funds sold......... 7,759 -- -- -- 7,759
-------- --------- -------- -------- --------
Total interest-earning
assets.................. $180,707 $ 49,631 $137,960 $ 52,414 $420,712
======== ========= ======== ======== ========
Interest-Bearing Liabilities:
Interest-bearing demand.... $ -- -- -- 27,390 $ 27,390
Savings and money market... 138,109 42,263 -- 499 180,871
Time deposits.............. 100,815 $ 39,452 $ 3,344 -- 143,611
Funds borrowed............. 10,000 -- -- -- 10,000
-------- --------- -------- -------- --------
Total interest-bearing
liabilities............. $248,924 $ 81,715 $ 3,344 $ 27,889 $361,872
======== ========= ======== ======== ========
Cumulative:
Rate sensitive assets
(RSA)..................... $180,707 $ 230,338 $368,298 $420,712
Rate sensitive liabilities
(RSL)..................... $248,924 $ 330,639 $333,983 $361,872
GAP (GAP = RSA-RSL)...... $(68,217) $(100,301) $ 34,315 $ 58,840
RSA/RSL...................... 72.6% 69.7% 110.3% 116.3%
RSA/Total assets............. 41.9 53.4 85.4 97.6
RSL/Total assets............. 57.7 76.7 77.4 84.0
GAP/Total assets............. 15.8% 23.3% 8.0% 13.7%
GAP/RSA...................... 16.2 23.8 8.2 14.0
</TABLE>
We measure the impact of interest rate changes on our income statement
through the use of gap analysis. The gap represents the net position of assets
and liabilities subject to repricing in specified time periods. During any
given time period, if the amount of rate sensitive liabilities exceeds the
amount of rate sensitive assets, a company would generally be considered
negatively gapped and would benefit from falling rates over that period of
time. Conversely, a positively gapped company would generally benefit from
rising rates.
We have structured the assets and liabilities of our company to mitigate the
risk of either a rising or falling interest rate environment. We manage our gap
position at the one year horizon. Depending upon our assessment of economic
factors such as the magnitude and direction of projected interest rates over
the short- and long-term, we generally operate within guidelines set by our
asset/liability policy and attempt to maximize
53
<PAGE>
our returns within an acceptable degree of risk. Our policy states that we
shall maintain a gap position at the one year horizon of between 0.70 and 1.30.
Our position at March 31, 1999 was 0.697 and was outside of the guidelines of
our policy. We have continued to maintain our gap position near the low end set
by our policy guidelines and expect to continue to operate in this manner as
long as the general rate structure of the economy and our business
opportunities remain consistent. Therefore, generally speaking, a short-term
rise in interest rates will hurt earnings, while a short-term drop in interest
rates would help earnings.
Interest rate changes do not affect all categories of assets and liabilities
equally or simultaneously. There are other factors which are difficult to
measure and predict that would influence the effect of interest rate
fluctuations on our income statement. For example, a rapid drop in interest
rates might cause our loans to repay at a more rapid pace and certain mortgage-
related investments to prepay more quickly than projected. This could mitigate
some of the benefits of falling rates as are expected when negatively gapped.
Conversely, a rapid rise in rates could give us an opportunity to increase our
margins and stifle the rate of repayment on our mortgage-related loans which
would increase our returns.
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 a
two-year horizon in a rapidly changing rate environment.
<TABLE>
<CAPTION>
+200 Basis -200 Basis
Points Points
---------- ----------
<S> <C> <C>
Percentage change in net interest income due to an
immediate 200 basis point change in interest rates
over a two-year time horizon...................... -8.7% +10.3%
</TABLE>
This table shows that if there was an instantaneous, parallel shift in the
yield curve of +200 basis points, we would suffer a decline in net interest
income of 8.7% over a two year horizon. Conversely, a like shift of -200 basis
points would increase net interest income by 10.3% over a two year horizon. We
used a sensitivity model which simulated these interest rate changes on our
earning assets and interest-bearing liabilities. This process allows us 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, we cannot make any
assurances as to the predictive nature of these assumptions including how
client preferences or competitor influences might change.
Interest rate exposure is measured by the potential impact on our income
statement of possible changes in interest rates. We use information from our
gap analysis and rate shock calculations as input to help manage our exposure
to changing interest rates. During the past year, we have managed our balance
sheet in a negatively gapped position, reflecting our outlook that the U.S.
economy will be stable with general interest rate levels stable to falling. We
recognized opportunities to extend maturities on assets to take advantage of
higher interest rates at longer maturities.
We use our rate shock information to tell us how much exposure we have to
rapidly changing rates. Based on historical information and our assessment of
future interest rate trends, we do not believe there is a substantial risk of
rapidly rising rates, which would negatively impact our income statement.
Conversely, we also believe there is minimal likelihood of rapidly falling
rates, which would positively impact our income statement.
We feel that more likely scenarios include gradual changes in interest rate
levels. We continue to monitor our gap and rate shock reports to detect changes
to our exposure to fluctuating rates. We have the ability to
54
<PAGE>
shorten or lengthen maturities on newly acquired assets, sell investment
securities, or seek funding sources with different maturities in order to
change our asset and liability structure for the purpose of mitigating the
effect of interest rate risk.
Inflation
Our consolidated financial statements and the related notes thereto,
presented elsewhere in this prospectus, have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. Under these principles and practices, we are required to measure our
financial position in terms of historical dollars, without considering changes
in the relative purchasing power of money over time due to inflation.
Unlike many industrial companies, virtually all of our assets and
liabilities are monetary in nature. As a result, interest rates have a more
significant impact on our performance than the general level of inflation. Over
short periods of time, interest rates may not necessarily move in the same
direction or in the same magnitude as inflation.
Recent Accounting Pronouncements
We follow generally accepted accounting principles in the preparation of our
financial statements. There have been several recent authoritative accounting
pronouncements issued by the Financial Accounting Standards Board that we have
adopted or will adopt in the future:
. Effective January 1, 1999, Reporting on the Costs of Start-Up Activities
(AICPA Statement of Position 98-5) requires start-up costs and
organizational costs to be charged to expense when incurred. This new
accounting standard will apply to start-up costs associated with our
planned St. Charles office, currently anticipated to approximate
$430,000 pre-tax. See "Pending Acquisition."
. Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS No. 125) requires that after a
transfer of financial assets, we must continue to recognize the
financial and servicing assets we control and the liabilities incurred
until control has been surrendered and liabilities extinguished. Our
adoption of SFAS No. 125 had no effect on our reported consolidated
financial position and results of operations.
. Reporting Comprehensive Income (SFAS No. 130) establishes standards for
reporting and display of comprehensive income and its components. Our
adoption of SFAS No. 130 had no effect on the reported consolidated
financial position and results of operations.
. Accounting for Derivatives Instruments and for Hedging Activities (SFAS
No. 133) will be effective for our fiscal quarters beginning after June
15, 1999. SFAS No. 133 requires that all derivatives be recognized as
assets or liabilities on the balance sheet and be measured at fair
value. Currently, however, we do not own any derivative instruments.
Accordingly, this statement is not expected to affect our reported
consolidated financial position and results of operations.
55
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, their ages, and their principal
position(s) with the company are shown in the table below. All of our directors
are also directors of PrivateBank except Mr. Farrell and Mr. Gottlieb. Our
officers are elected annually by our Board to serve for the terms provided in
our By-laws.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Ralph B. Mandell(3)(4)........... 58 Chairman, President and CEO
Caren L. Reed(5)................. 64 Vice Chairman
Donald A. Roubitchek(5).......... 48 Chief Financial Officer and Director
Donald L. Beal(2)(5)............. 53 Director
Naomi T. Borwell(1)(4)........... 71 Director
William A. Castellano(1)(3)(4)... 58 Director
Robert F. Coleman(2)(3)(6)....... 54 Director
W. James Farrell(4).............. 57 Director
John E. Gorman(2)(3)(5).......... 54 Director
Alvin J. Gottlieb(4)............. 72 Director
James M. Guyette(1)(2)(3)(6)..... 54 Director
Philip M. Kayman(6).............. 57 Director
William R. Langley(2)(3)(4)...... 58 Director
Thomas F. Meagher(1)(6).......... 68 Director
Michael B. Susman(1)(5).......... 61 Director
Gary S. Collins.................. 41 Managing Director of PrivateBank
M. Gail Fitzgerald............... 56 Managing Director of PrivateBank
Hugh H. McLean................... 40 Managing Director of PrivateBank
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Planning Committee.
(4) Serves as a Class I director with a term expiring in 2002.
(5) Serves as a Class II director with a term expiring in 2000.
(6) Serves as a Class III director with a term expiring in 2001.
Ralph B. Mandell, a director since 1989, is a co-founder of PrivateBancorp
and PrivateBank. A Managing Director of PrivateBank, he has served as Chairman
and Chief Executive Officer of PrivateBancorp and PrivateBank since 1994 and
assumed the additional title of President of both entities in March 1999. From
inception until 1994, Mr. Mandell had the title of Co-Chairman and Co-Chief
Executive Officer. Prior to starting PrivateBank and PrivateBancorp, Mr.
Mandell was the Chief Operating Officer of First United Financial Services,
Inc., from 1985 to 1989, and served as its President from 1988 to 1989. First
United, a company that was traded on the Nasdaq National Market, was sold to
First Chicago Corporation in 1987. He also served as President of Oak Park
Trust & Savings Bank from 1985 until 1988. Prior thereto, Mr. Mandell had
served as Executive Vice President of Oak Park Trust & Savings Bank since 1979.
Caren L. Reed, a director since 1990, is one of PrivateBank's founding
directors. A Managing Director of PrivateBank, he currently serves as Vice
Chairman of PrivateBancorp and PrivateBank, and functions as Chief Credit
Officer. From 1990 to March 1999, Mr. Reed also held the title of President of
PrivateBancorp and PrivateBank. Prior to joining
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PrivateBank, Mr. Reed was an Executive Vice President of Continental Bank,
Chicago with a career spanning 34 years. His responsibilities included North
American Banking, Multinational Banking-Europe, U.S. Capital Markets, and the
London Merchant Bank.
Donald A. Roubitchek has been a director since 1997. He has been the
Secretary/Treasurer and Chief Financial Officer of PrivateBancorp, and Managing
Director and Chief Operating Officer of PrivateBank, since inception. He has 27
years' experience in the banking industry and a concentrated background in
finance. Prior to joining PrivateBank, Mr. Roubitchek served in various
capacities with LaSalle Community Banks, and its predecessor, Lakeview Bank.
Donald L. Beal, a director since 1991, has been the owner of Kar-Don, Inc.
d/b/a Arrow Lumber Company, located in Chicago, Illinois, since 1980. Prior to
that, Mr. Beal served as Vice President of Hyde Park Bank & Trust with
responsibilities including commercial lending and personal banking. Mr. Beal is
also the sole owner of Ashland Investment, Inc. In 1994, Ashland Investment
filed for Chapter 11 relief under the federal bankruptcy laws and emerged from
bankruptcy after reorganization in April 1995.
Naomi T. Borwell has been a director since 1990. She is a private investor.
Mrs. Borwell is a former director of First Chicago Bank of Oak Park and First
United Trust Company.
William A. Castellano has been a director since 1991. From 1996 to present
he has been Chairman and founder of both Workspace, Inc. and Worknet, Inc.,
located in Oakbrook Terrace, Illinois. Workspace provides office furniture to
businesses, and Worknet provides computer networking services to businesses. He
was the founder of and served as the Chief Executive Officer to Chrysler
Systems Leasing from 1977 to 1991.
Robert F. Coleman, a director since 1990, is a principal of Robert F.
Coleman & Associates, a law firm located in Chicago, Illinois. He concentrates
his practice on business and professional litigation.
W. James Farrell, a director since 1990, has been an executive with Illinois
Tool Works, Inc. ("ITW"), a manufacturer of fasteners, components, assemblies
and systems, since 1965, and became its Chairman and CEO in 1997. He currently
serves as a director of ITW as well as The Quaker Oats Company, Morton
International, Inc., Premark International, Inc. and Allstate Insurance
Company, each of which is traded on the New York Stock Exchange.
John E. Gorman has been a director since 1994. Since 1982, Mr. Gorman has
been a General Partner of the Jorman Group, a privately-owned organization with
diversified business holdings.
Alvin J. Gottlieb, a director since 1990, is a private investor. Since 1961,
Mr. Gottlieb has served in various capacities on the Board of Directors of
Gottlieb Memorial Hospital, located in Melrose Park, Illinois, and he currently
holds the position of Vice Chairman.
James M. Guyette has been a director since 1990. Since 1997, he has been
President and Chief Executive Officer of Rolls Royce North America, Inc. Mr.
Guyette served as Executive Vice President of UAL Corporation from 1985 to 1995
when he retired after more than 25 years of employment with that company. He is
currently a director of Rolls-Royce plc (London) and Pembroke Capital (Dublin),
and formerly a director of First United Financial Services and United Airlines
Employees Credit Union.
Philip M. Kayman, a director since 1990, has been a senior partner with the
law firm of Neal Gerber & Eisenberg in Chicago, Illinois since the firm's
founding in 1986.
William R. Langley, a director since 1989, is a co-founder of PrivateBancorp
and PrivateBank. Mr. Langley held the title of Co-Chairman of PrivateBancorp,
and was active in day-to-day management of the company until 1995 when he
retired. Prior to the formation of PrivateBancorp, Mr. Langley had served as
Chief Executive Officer of First United Financial Services, Inc. from 1985 to
1987 and as Chairman from 1987 to 1989. First United, a company that was traded
on the Nasdaq National Market, was sold to First Chicago Corporation in 1987.
Prior to that, he served as Chairman and President of Oak Park Trust and
Savings Bank, where he had been employed since 1973.
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<PAGE>
Thomas F. Meagher has been a director since 1996. Mr. Meagher has been the
Chairman of Howell Tractor and Equipment Co., a distributor of heavy equipment
located in Elk Grove Village, Illinois, since 1980. He has had an extensive
career in the transportation industry and currently serves on the Board of
Directors of Trans World Airlines, Inc., a New York Stock Exchange company.
Michael B. Susman has been a director since 1990. He has been a partner in
the law firm of Spitzer, Addis, Susman & Krull, located in Chicago, Illinois,
since 1974.
Gary S. Collins has been a Managing Director of PrivateBank since 1991. As a
specialist in real estate lending, Mr. Collins has spent more than 20 years
managing diverse real estate transactions and the full range of mortgage
financing. Before joining PrivateBank in 1991, he held senior positions at
several Chicagoland financial institutions, including First Chicago Bank of Oak
Park, First Colonial Bancshares and Avenue Bank of Oak Park.
M. Gail Fitzgerald has been a Managing Director of PrivateBank since 1996.
She serves as the bank's director of Trust and Investment Services. Ms.
Fitzgerald has over 20 years' banking experience, most of which is in the trust
area. She served as Trust Division President of Firstar Bank of Illinois from
1995 to 1996. She also served as Chairman, President, and Chief Executive
Officer of First Colonial Trust Company in Illinois from 1993 to 1995 and
Senior Vice President of First Chicago Trust Company of Illinois from 1988 to
1993.
Hugh H. McLean has been a Managing Director of PrivateBank since 1996. He
serves as head of credit marketing and manager of the Oak Brook office. Prior
to joining the bank, he served as a regional manager with Firstar Bank Illinois
and its predecessor from 1990 to 1996, and as head of a commercial banking
division at American National Bank and Trust Company in Chicago, Illinois, from
1987 to 1990, where he was employed from 1980 to 1990.
Board of Directors
Our Board of Directors currently consists of 15 members divided into three
classes of directors who are elected to hold office for staggered three-year
terms as provided in our Restated Certificate of Incorporation and Amended and
Restated By-laws. Although our charter documents have fixed the size of our
Board at 16 members, there currently is one Class III director vacancy due to
the recent resignation of a director. Those persons currently serving as Class
I directors have been elected to hold office until the annual stockholders'
meeting to be held in 2002; Class II directors have been elected to hold office
until the annual stockholders' meeting to be held in 2000; and Class III
directors have been elected to hold office until the annual stockholders'
meeting to be held in 2001.
Committees of the Board of Directors
We have appointed certain members of our Board to serve on various
committees of the Board of Directors. The Board of Directors has established
three standing committees: (a) the Compensation Committee; (b) the Audit
Committee; and (c) the Planning Committee.
Compensation Committee. The Compensation Committee is responsible for
reviewing the performance of our Chief Executive Officer; reviewing and
recommending the compensation of the company's officers, including the Chief
Executive Officer; recommending and approving stock option grants and
restricted stock awards to management; reviewing and recommending non-cash
compensation programs including stock option grants, 401(k) contributions and
annual bonuses; reviewing and recommending director compensation; and advising
the Chief Executive Officer on miscellaneous compensation issues. The members
of the Compensation Committee are Messrs. Guyette (Chairman), Castellano,
Meagher and Susman and Mrs. Borwell.
Audit Committee. The Audit Committee reports to the Board of Directors in
discharging its responsibilities relating to our accounting, reporting and
financial control practices. The Audit Committee has general
58
<PAGE>
responsibility for oversight of financial controls, as well as our accounting,
regulatory, year 2000 and audit activities, and annually reviews the
qualifications of the independent auditors. The Audit Committee is composed
entirely of outside directors. The members of the Audit Committee are Messrs.
Coleman (Chairman), Beal, Gorman, Guyette and Langley.
Planning Committee. The Planning Committee is responsible for studying
strategic issues prior to submission to the entire Board of Directors for
approval. The Planning Committee consists of Messrs. Mandell (Chairman),
Castellano, Coleman, Gorman, Guyette and Langley.
We have not designated a nominating committee. The entire Board of Directors
acts to nominate persons for election as directors.
Director Compensation
In 1992, we commenced a program of compensating those of our outside
directors who are also outside directors of PrivateBank with stock option
awards in lieu of cash retainers. Our philosophy has been to increase our
directors' equity stake in the company and further enhance the alignment of
their interests with those of our stockholders. The director options have been
granted each year in amounts determined at the discretion of the Board. The
options are fully vested at the end of the year of grant, subject to a full
year of service. In each case, the options have been granted at an exercise
price equal to or greater than the estimated fair market value of our common
stock at the date of grant. Partial awards have been made for partial year
service. As of March 31, 1999, there were outstanding options granted to non-
employee directors pursuant to this program to purchase an aggregate of 179,920
shares of common stock at an average weighted per share exercise price of
$11.13. In March 1999, the Board granted each non-employee director of
PrivateBank an option to purchase 1,500 shares of common stock at the initial
public offering price of shares sold in this offering.
In addition to stock options, non-employee members of PrivateBancorp's Board
of Directors receive fees of $200 for each board meeting attended. The
directors also receive $100 per meeting for attendance at meetings of any
committees of the Board on which they serve. Those directors who serve on the
board of PrivateBank are also entitled to the same meeting fees. During 1998,
the Boards of Directors of each of PrivateBancorp and PrivateBank met monthly.
Total board and committee meeting fees paid in 1998 was $58,800.
We intend to reevaluate the structure of our director compensation program
following the offering and anticipate that we may seek stockholder approval of
a stock-based director compensation plan at our next stockholders' meeting.
Compensation Committee Interlocks and Insider Participation
Messrs. Guyette and Castellano and Ms. Borwell each serve on the
Compensation Committee of our Board of Directors. During our last fiscal year,
each of these individuals has engaged in certain transactions as clients of
PrivateBank, in the ordinary course of PrivateBank's business, including
borrowings, all of which transactions are or were on substantially the same
terms (including interest rates and collateral on loans) as those prevailing at
the time for comparable transactions with unaffiliated persons. In the opinion
of our management, none of these transactions involved more than the normal
risk of collectibility or presented any other unfavorable features. See
"Certain Transactions."
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<PAGE>
Executive Compensation
The following table summarizes the compensation paid by PrivateBancorp and
PrivateBank to the Chairman, President and Chief Executive Officer and the five
other most highly paid executive officers (the "Named Executive Officers")
during 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
---------------------------- ---------------------
Other Annual Securities All Other
Compen- Restricted Underlying Compen-
Name and Principal Salary Bonus sation(1) Stock(2) Options(3) sation
Position Year ($) ($) ($) ($) (#) ($)
------------------ ---- ------- ------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ralph B. Mandell........ 1998 210,000 100,000 18,845 77,000(4) 6,400 34,723(5)
Chairman, President and
CEO
Caren L. Reed........... 1998 146,000 45,000 14,795 -- 4,800 3,200(6)
Vice Chairman
Donald A. Roubitchek.... 1998 138,000 37,000 1,776 22,000(7) 6,400 3,200(6)
Chief Financial Officer
Hugh H. McLean.......... 1998 115,000 35,000 11,756 22,000(7) 5,600 3,005(6)
Managing Director
M. Gail Fitzgerald...... 1998 112,000 40,000 3,206 22,000(7) 5,600 3,067(6)
Senior Trust Officer
and Managing Director
Gary S. Collins......... 1998 112,000 29,000 9,429 22,000(7) 5,600 2,749(6)
Managing Director
</TABLE>
- --------
(1) Represents automobile allowances, life insurance premiums and club
membership dues and fees paid by the company.
(2) Reflects restricted stock awards under our Stock Incentive Plan.
PrivateBancorp has paid regular dividends on all shares of restricted stock
outstanding. These shares of restricted stock are subject to forfeiture
until the fifth anniversary of the grant date.
(3) Options to purchase shares of common stock were granted in 1998 at an
exercise price of $17.1875 (representing 125% of fair market value at the
date of grant) and vest at the end of five years; however, these options
may vest before the fifth anniversary subject to performance-based
acceleration terms providing for complete vesting upon the third or fourth
anniversary of their grant date if the cumulative annualized growth rate of
the fair market value of the common stock (including dividends paid) equals
at least 15% as of such anniversary date.
(4) Represents award of 5,600 shares of restricted stock at a value of $13.75
per share.
(5) Represents (a) matching contributions to the company's 401(k) plan, and (b)
dollar value benefit of accrued imputed interest (assuming full forgiveness
of cumulative accrued interest) relating to a loan from PrivateBancorp in
connection with Mr. Mandell's 1998 stock purchase transaction. See "Certain
Transactions."
(6) Represents matching contributions to the company's 401(k) plan made by the
company for the benefit of the executive officer.
(7) Represents award of 1,600 shares of restricted stock at a value of $13.75
per share.
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<PAGE>
The table below summarizes certain information about the options which we
granted in 1998 to each Named Executive Officer. All options were granted at
per share exercise prices equal to 125% of the fair market value per share on
the date of grant.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Potential
Realizable Value
at Assumed
% of Total Annual Rates of
Number of Options Stock Price
Shares Granted to Exercise Appreciation for
Underlying Employees or Base Option Term ($)
Options in Fiscal Price Expiration ----------------
Name Granted Year ($/Sh) Date 5% 10%
---- ---------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Ralph B. Mandell........ 6,400 11.19% 17.1875 6/24/08 $33,343 $118,249
Caren L. Reed........... 4,800 8.39% 17.1875 6/24/08 25,007 88,687
Donald A. Roubitchek.... 6,400 11.19% 17.1875 6/24/08 33,343 118,249
Gary S. Collins......... 5,600 9.79% 17.1875 6/24/08 29,175 103,468
M. Gail Fitzgerald...... 5,600 9.79% 17.1875 6/24/08 29,175 103,468
Hugh H. McLean.......... 5,600 9.79% 17.1875 6/24/08 29,175 103,468
</TABLE>
The following table summarizes for each Named Executive Officer the number
of shares of common stock subject to outstanding options and the value of such
options that were unexercised at December 31, 1998.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-The-
Shares Options at Money Options at December
Acquired on December 31, 1998 (#) 31, 1998 ($)(2)
Exercise Value ---------------------------- ----------------------------
Name (#) Realized ($) Exercisable/Unexercisable(1) Exercisable/Unexercisable(1)
---- ----------- ------------ ---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Ralph B. Mandell........ -- -- 71,840/10,400 656,190/32,750
Caren L. Reed........... 65,600 533,500 3,840/ 8,000 37,440/26,200
Donald A. Roubitchek.... -- -- 36,736/ 8,400 333,661/16,375
Gary S. Collins......... -- -- 30,016/ 7,200 272,956/13,100
M. Gail Fitzgerald...... -- -- 8,000/13,600 53,000/53,000
Hugh H. McLean.......... -- -- 8,000/13,600 53,000/53,000
</TABLE>
- --------
(1) The numbers and amounts in the above table represent shares of common stock
subject to options granted that were unexercised as of December 31, 1998.
(2) The estimated fair market value of our common stock at December 31, 1998
was $16.00.
Employment Agreements
We have entered into employment agreements, to be effective as of July 1,
1999, with two of our executive officers: Ralph B. Mandell, our Chairman,
President and Chief Executive Officer, and Donald A. Roubitchek, our Chief
Financial Officer. Under the provisions of his agreement, which has a term of
two years, Mr. Mandell is entitled to an annual base salary of $230,000. Mr.
Roubitchek's agreement has a term of one year and provides for an annual base
salary of $145,000. Both Mr. Mandell and Mr. Roubitchek may receive
discretionary bonuses to the extent determined by the Board of Directors and
are entitled to participate in benefit plans and other fringe benefits
available to our managing directors.
Under each agreement, the executive officer's employment may be terminated
by the company at any time for "cause," as defined in the agreements, in which
case, or if the executive resigns from the company without "good reason," the
agreement immediately terminates, and the officer would be entitled only to
unpaid
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<PAGE>
benefits accrued during the term of his employment. If the executive chooses to
resign with good reason, or the company chooses to terminate his employment
without cause, the officer is also entitled to receive severance in the amount
equal to 18 months of his then current base annual salary for Mr. Mandell and
12 months for Mr. Roubitchek, plus a pro rata bonus for the year of termination
based on the prior year's bonus amount, if any. The agreements also provide for
death benefits equal to six months of then current annual base salary.
In the event that Mr. Mandell is terminated after a change in control of the
company, he will be entitled to a lump sum payment equal to three times the sum
of (1) his annual base salary; (2) the greater of (a) his bonus amount, if any,
for the prior year or (b) his average bonus, if any, for the three preceding
years; and (3) the sum of the contributions that would have been made by the
company under any benefit plan and the annual value of any other executive
perquisites. Mr. Roubitchek will be entitled to a lump sum payment equal to
twice the sum of these amounts for him. The agreements entitle the executives
to receive gross up payments to cover any federal excise taxes payable by them
in the event the change in control benefits are deemed to constitute "excess
parachute payments" under Section 280G of the Internal Revenue Code. A change
in control is defined under the agreements as an occurrence of any one of the
following events as determined by our Board:
. if any person, as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act, becomes the beneficial owner of 10% or more of
the total voting power of our then outstanding voting capital stock;
provided, however, that if that person becomes a beneficial owner of 10%
or more of our voting capital stock as a result of an acquisition of
stock directly from the company, or a decrease in the number of
outstanding shares due to a repurchase of shares by the company, it
shall not be considered a change in control;
. if during any period of two consecutive years, those individuals who at
the beginning of the period constitute our Board of Directors cease to
make up a majority of the Board;
. the consummation of a reorganization, merger or consolidation of the
company, or the sale of all or substantially all of our assets;
provided, that so long as more than 50% of the voting stock of the
successor entity is held by stockholders who had been beneficial owners
of our stock immediately before the transaction, and at least a majority
of the board of the successor entity is made up of members of our Board,
the merger or sale shall not be considered a change in control; and
. the approval by our stockholders of a plan of complete liquidation or
dissolution.
The agreements also contain non-compete provisions, which prohibit the
executive from soliciting, either for his own account or for the benefit of any
entity located within a twenty-five mile radius of the company or any of our
subsidiaries, any of our clients or employees. These non-compete provisions
remain in effect for a period of one year after the termination of employment.
The non-compete provisions do not apply in the event of a change in control.
Stock Incentive Plan
We maintain a Stock Incentive Plan pursuant to which we may grant our
executive officers and key employees stock options and restricted stock awards.
We also have a director compensation program for our non-employee directors.
See "Management--Director Compensation." The purpose of the Stock Incentive
Plan is to enhance our ability to attract and retain officers, executives and
key employees and to align the interests of such individuals with those of our
stockholders. The Stock Incentive Plan is administered, construed and
interpreted by the Compensation Committee of the Board of Directors. The
Compensation Committee may at any time alter, amend or terminate the Stock
Incentive Plan provided that no action of the Board may adversely affect a
participant's rights under any previously-granted stock option or restricted
stock award without the consent of the participant. Any amendment to the Stock
Incentive Plan which increases the number of shares of Common Stock which may
be awarded or changes the class of persons eligible to receive awards must be
approved by the company's stockholders within twelve months prior to or after
the effective
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<PAGE>
date of such amendment. Deductions by the company for compensation amounts
under the Stock Incentive Plan are not expected to be limited by Section 162(m)
of the Internal Revenue Code.
There are currently 476,607 shares of common stock remaining available for
issuance under the Stock Incentive Plan. Of such shares, 426,488 are subject to
options that are currently outstanding and 50,119 remain available for future
grant as options or restricted stock awards.
In the event of any change to the outstanding shares of stock of the company
by reason of stock dividend or distribution, recapitalization, merger or
consolidation, the Compensation Committee will adjust the number of shares of
stock which may be issued under the Stock Incentive Plan and will provide for
an equitable adjustment of any outstanding options or restricted stock grants.
No individual participant in the Stock Incentive Plan may receive options to
purchase more than 100,000 shares of common stock during any calendar year. As
of March 31, 1999, there were outstanding options to purchase an aggregate of
426,488 shares of common stock under the Stock Incentive Plan, at exercise
prices ranging from $6.25 to $18.00. In March 1999, we granted a total of
60,600 stock options, effective upon completion of this offering, at the
initial public offering price. These options vest 50% after two years, 75%
after three years, and are fully vested after four years. A total of 20,400
shares of restricted stock were also granted in March 1999 which will be fully
vested after five years, at which time these shares will no longer be subject
to forfeiture. In connection with the pending acquisition of Towne Square, we
have agreed to grant Mr. Castronovo options to purchase 7,000 shares of our
stock at the initial public offering price and to award him 3,000 shares of
restricted stock. See "Pending Acquisition."
All stock options granted pursuant to the Stock Incentive Plan are evidenced
by agreements stating the number of shares covered thereby, the exercise price,
the period or periods of time within which each option will become fully or
partially exercisable, and whether an option is an "incentive stock option" as
such term is defined in Section 422 of the Internal Revenue Code or a non-
qualified stock option. The Compensation Committee has the authority to
determine exercisability of an option and may in its discretion accelerate the
time or times for exercise. No stock option may be exercisable after the
expiration of 10 years from the date it is granted, and, in the case of an
incentive stock option granted to a 10% stockholder, the option must be
exercised within five years from the date it is granted. The price to be paid
for the shares upon the exercise of each option may not be less than the fair
market value of such shares on the date on which the option is granted, as
determined by the Compensation Committee. An incentive stock option granted to
a 10% stockholder must have an exercise price of at least 110% of the fair
market value of the stock subject to the option as of the date of grant. The
aggregate fair market value (determined as of the time the option is granted)
of stock with respect to which incentive stock options are exercisable for the
first time by an optionee during any calendar year (under all option plans of
the company) may not exceed $100,000, provided that, to the extent that such
limitation is exceeded, any excess options shall be deemed not to be incentive
stock options.
All restricted stock awards granted pursuant to the Stock Incentive Plan are
evidenced by a written grant document in a form approved by the Compensation
Committee. The grant document specifies the period or periods of time within
which each grant of restricted stock will no longer be subject to restrictions
on sale, transfer or alienation of the stock. The grant document shall also
specify the treatment of the stock upon termination of employment before the
restrictions are lifted.
Certain Federal Income Tax Consequences
The following summary discusses certain of the federal income tax
consequences associated with (a) the grant of a stock option under our Stock
Incentive Plan, and (b) the exercise of such option. This summary is limited
and does not describe state or local income or other tax consequences.
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Non-Qualified Stock Options.
The grant of a non-qualified stock option (including any option exceeding
the limitations on incentive stock options described above) will not be a
taxable event to the optionee. Upon the exercise of a non-qualified stock
option, the optionee generally must recognize ordinary compensation income
equal to the difference between the exercise price and the fair market value of
the common stock on the date of exercise. This compensation income will be
subject to applicable withholding. At the time of exercise, the company will
generally be entitled to a tax deduction in the amount of such compensation
income. The optionee's tax basis for the stock received pursuant to the
exercise will equal the sum of the recognized compensation income and the
exercise price.
Incentive Stock Options.
The grant of an incentive stock option will not be a taxable event to the
optionee. In addition, in contrast to the exercise of a non-qualified stock
option, the timely exercise of an incentive stock option will not cause the
optionee to recognize taxable income for regular income tax purposes (although
the employee could be subject to an alternative minimum tax liability as
described below). Also, the company shall not be entitled to a tax deduction
for either the grant or the exercise.
Upon exercise of an incentive stock option by an optionee, the alternative
minimum taxable income of such optionee must be determined as if such incentive
stock option were a non-qualified stock option (see "Non-Qualified Stock
Options," above). Accordingly, such optionee will be required to include as
alternative minimum taxable income the excess (if any) of the value of shares
received upon exercise as of the date such shares are vested over the amount
paid for such shares. Such employee would then be required to pay the greater
of such optionee's regular or alternative minimum tax liability computed with
respect of such year.
If optionee engages in the disqualifying disposition of the stock subject to
an incentive stock option, however, the exercise of the incentive stock option
may give rise to taxable compensation income to the optionee and a tax
deduction to the company. The optionee's sale or exchange of shares required
upon the exercise of an incentive stock option more than one year after the
transfer of the shares to such optionee and more than two years after the date
of grant of the incentive stock option will result in any difference between
the net sale proceeds and the exercise price being treated as long-term capital
gain or loss to the optionee. If such sale or exchange takes place within two
years after the date of the grant of the incentive stock option or within one
year from the date of transfer of the shares to the optionee, the sale or
exchange will generally be a "disqualifying disposition" and will have the
following results: any excess of (x) the lesser of (1) the fair market value of
the shares at the time of exercise and (2) the amount realized on the
disqualifying disposition of the shares over (y) the option exercise price of
such shares, will be ordinary income to the optionee, subject to applicable
withholding taxes, and the company will be entitled to a tax deduction in the
amount of such income. Any further gain or loss after the date of exercise will
generally qualify as capital gain or loss and will not result in any deduction
by the company.
Withholding Taxes.
To the extent that any amount recognized by an optionee upon exercise of an
option is subject to withholding taxes, the company may require the optionee to
pay, in addition to the amount required to exercise the option, the appropriate
amount of withholding. To the extent compensation income is recognized by an
optionee in connection with the exercise of a non-qualified stock option, the
company generally would be entitled to a matching compensation deduction
(assuming the requisite withholding requirements are satisfied).
Restricted Stock Awards.
Ordinarily, the award of restricted stock under the Stock Incentive Plan
will not be a taxable event to the grantee. The grantee will incur ordinary
compensation income, however, when the restrictions on the stock are
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lifted, in an amount equal to the fair market value of the stock at the time
the restrictions are lifted. Similarly, while the company will not be entitled
to a tax deduction for the restricted stock at the time of grant, at the time
the restrictions are lifted, the company will generally be entitled to a tax
deduction in the amount of the then-current fair market value of the stock. Any
dividends paid on restricted stock will be taxable income to the grantee at the
time issued.
As an exception to the above paragraph, under Internal Revenue Code (S)83(b)
a grantee may elect to include in current gross income restricted stock at the
time it is granted. If the grantee makes such an election, the fair market
value of the restricted stock at the time of grant, without regard to any
restrictions, shall be includable in the grantee's gross income. If the
restricted stock is subsequently forfeited by the grantee, either by
termination of employment before restrictions are lifted or otherwise, no
deduction to the grantee's income may be made. If the granted makes an election
under (S)83(b), the company will generally be entitled to a tax deduction at
the time of the grant for the then-current fair market value of the restricted
stock, without regard to restrictions.
CERTAIN TRANSACTIONS
Some of our executive officers and directors are, and have been during the
preceding three years, clients of PrivateBank, and some of our executive
officers and directors are direct or indirect owners of 10% or more of the
stock of corporations which are, or have been in the past, clients of
PrivateBank. As such clients, they have had transactions in the ordinary course
of business of PrivateBank, including borrowings, all of which transactions are
or were on substantially the same terms (including interest rates and
collateral on loans) as those prevailing at the time for comparable
transactions with nonaffiliated persons. In the opinion of our management, none
of the transactions involved more than the normal risk of collectibility or
presented any other unfavorable features. At March 31, 1999, PrivateBank had
$12,148,755 in loans outstanding to certain directors and executive officers
and their business interests of the company and certain executive officers of
PrivateBank.
In May 1998, Ralph B. Mandell, our Chairman, President and Chief Executive
Officer, purchased 72,720 shares of newly issued common stock at $13.75 per
share from PrivateBancorp. The purpose of the transaction was to enhance Mr.
Mandell's interest in the long-term performance of the company and further
align his interests with those of our stockholders. At the request of the Board
of Directors of the company, one of the underwriters, EVEREN Securities, Inc.,
provided a fairness opinion to the company relating to the sale price
established by our Board in connection with the transaction. As part of the
transaction, we loaned Mr. Mandell approximately 95% of the purchase price on a
full recourse basis. The loan matures in five years but becomes payable prior
to the fifth year in the event Mr. Mandell sells any of the 72,720 shares or
Mr. Mandell's employment is terminated. Interest accrues at 5.69% per annum,
compounded annually (the applicable Federal rate), on the principal amount of
the loan; however, provided Mr. Mandell does not sell any of the shares
purchased and remains in our employ, 25% of the accumulated interest on the
loan will be forgiven on the loan's second anniversary, 50% of the accumulated
interest on the loan will be forgiven on its third anniversary, 75% of the
accumulated interest on the loan will be forgiven on its fourth anniversary,
and 100% of the accumulated interest on the loan will be forgiven on the loan's
fifth anniversary. Mr. Mandell pledged all of the shares of common stock
purchased in the transaction as collateral for the loan he received from us,
but he is entitled to vote, and receive dividends on, the shares.
During 1998, we incurred professional fees for services provided by the law
firm Spitzer, Addis, Susman & Krull. Michael B. Susman, who is one of our
directors, is a partner of that firm.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the common stock
as of March 31, 1999, and as adjusted to give effect to the offering assuming
900,000 shares are sold in the offering (assuming no exercise of the over-
allotment option and no additional purchases of shares in the offering by the
persons shown), with respect to (a) each of our directors and Named Executive
Officers; and (b) all of our directors and Named Executive Officers as a group.
<TABLE>
<CAPTION>
Shares
Subject to
Exercisable
Options to Percentage Percentage
Shares of Purchase Total Ownership Ownership
Common Common Beneficial Before After
Stock(1) Stock(2) Ownership Offering(3) Offering(3)
--------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Directors
Ralph B. Mandell** (4).. 221,320 75,840 297,160 8.42% 6.71%
Caren L. Reed** (5)..... 9,600 7,040 16,640 * *
Donald A. Roubitchek**
(6).................... 31,920 38,736 70,656 2.02% 1.61%
Donald L. Beal (7)...... 17,464 12,720 30,184 * *
Naomi T. Borwell (8).... 164,800 12,720 177,520 5.12% 4.07%
William A. Castellano
(9).................... 132,400 12,720 145,120 4.19% 3.32%
Robert F. Coleman (10).. 26,400 12,720 39,120 1.13% *
W. James Farrell........ 10,400 6,240 16,640 * *
John E. Gorman.......... 49,000 8,400 57,400 1.66% 1.32%
Alvin J. Gottlieb....... 105,600 6,240 111,840 3.23% 2.57%
James M. Guyette........ 12,000 12,720 24,720 * *
Philip M. Kayman........ 12,800 12,720 25,520 * *
William R. Langley...... 89,600 68,240 157,840 4.48% 3.57%
Thomas F. Meagher....... 12,500 6,480 18,980 * *
Michael B. Susman....... 22,400 12,720 35,120 1.01% *
Other Named Executive
Officers
Gary S. Collins (11).... 28,180 31,616 59,796 1.72% 1.36%
M. Gail Fitzgerald (12). 13,200 8,000 21,200 * *
Hugh H. McLean (13)..... 45,528 12,000 57,528 1.66% 1.32%
Directors and executive
officers
as a group (18
persons)............... 1,005,112 357,872 1,362,984 35.78% 28.94%
</TABLE>
- --------
*Less than 1%
**Denotes person who serves as director and as an executive officer.
(1) Unless otherwise noted, represents all shares held individually, held in
individual retirement accounts or revocable trusts for the benefit of the
director or executive officer, and held jointly with spouse.
(2) Includes options which are currently exercisable or exercisable within 60
days of the date of this prospectus.
(3) Beneficial ownership percentages are calculated in accordance with SEC
Rule 13d-3 promulgated under the Securities Exchange Act of 1934. Does not
give effect to the planned issuance of shares in the pending acquisition.
See "Pending Acquisition."
(4) Includes 26,600 shares of restricted stock granted to Mr. Mandell under
our Stock Incentive Plan. These shares vest at various dates between 2001
and 2004, and are subject to forfeiture until such time as they vest. Also
included are 72,720 shares which have been pledged as collateral to secure
a loan from the company to Mr. Mandell. See "Certain Transactions." Also
includes 23,600 shares held by Mr. Mandell's spouse. Mr. Mandell's
business address is c/o The PrivateBank & Trust Company, Ten North
Dearborn Street, Chicago, Illinois 60602.
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(5) Includes 9,600 shares of restricted stock granted to Mr. Reed under our
Stock Incentive Plan. These shares vest at various dates between 2001 and
2002, and are subject to forfeiture until such time as they vest.
(6) Includes 13,200 shares of restricted stock granted to Mr. Roubitchek under
our Stock Incentive Plan. These shares vest at various dates between 2001
and 2004, and are subject to forfeiture until such time as they vest. Also
includes 400 shares held by Mr. Roubitchek's children.
(7) Includes 10,364 shares held by Mr. Beal's spouse and children.
(8) Ms. Borwell's address is 1040 N. Lake Shore Drive, Chicago, Illinois
60611.
(9) Includes 14,000 shares held by Mr. Castellano's children.
(10) Includes 800 shares held by Mr. Coleman's spouse and 3,200 shares held by
the Robert F. Coleman & Associates Retirement Savings Plan of which Mr.
Coleman is a participant.
(11) Includes 10,400 shares of restricted stock granted to Mr. Collins under
our Stock Incentive Plan. These shares vest at various dates between 2001
and 2004, and are subject to forfeiture until such time as they vest. Also
includes 4,170 shares owned by Mr. Collins' spouse and children.
(12) Includes 6,800 shares of restricted stock granted to Ms. Fitzgerald under
our Stock Incentive Plan. These shares vest at various dates between 2002
and 2004, and are subject to forfeiture until such time as they vest.
(13) Includes 7,800 shares of restricted stock granted to Mr. McLean under our
Stock Incentive Plan. These shares vest at various dates between 2002 and
2004, and are subject to forfeiture until such time as they vest.
SUPERVISION AND REGULATION
General
Banking is a highly regulated industry. We have attempted to summarize
several applicable statutes and regulations, but you should understand that
these summaries are not complete, and you should refer to the statutes and
regulations for more information. Also, these statutes and regulations are
likely to change in the future, and we cannot predict what effect these
changes, if made, will have on our operations. Finally, please remember that
supervision, regulation and examination of banks and bank holding companies by
bank regulatory agencies are intended primarily for the protection of
depositors rather than stockholders of banks and bank holding companies.
Bank Holding Company Regulation
PrivateBancorp is registered as a "bank holding company" with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") pursuant to the
Bank Holding Company Act of 1956 (the Bank Holding Company Act of 1956 and the
regulations issued thereunder are collectively referred to as the "BHC Act"),
and we are subject to regulation, supervision and examination by, and we are
required to file reports and additional information with the Federal Reserve.
Minimum Capital Requirements. The Federal Reserve has adopted risk-based
capital requirements for assessing bank holding company capital adequacy. These
standards revise the normal definition of capital and establish minimum capital
standards in relation to assets and off-balance sheet exposures, as adjusted
for credit risks. At December 31, 1998, our consolidated assets were
approximately $416 million. Under the Federal Reserve's risk-based guidelines
applicable to the company, capital is classified into two categories.
For bank holding companies, Tier 1, or "core", capital consists of:
. common stockholders' equity;
. perpetual preferred stock (subject to some limitations); and
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. minority interests in the common equity accounts of consolidated
subsidiaries
less:
. goodwill;
. specified intangible assets; and
. specified investments in other corporations.
Tier 2 capital consists of:
. the allowance for loan and lease losses;
. perpetual preferred stock and related surplus;
. hybrid capital instruments;
. perpetual debt securities;
. mandatory convertible debt securities;
. term subordinated debt and related surplus; and
. intermediate-term preferred stock, including related securities.
Under the Federal Reserve's capital guidelines, bank holding companies are
required to maintain a minimum ratio of qualifying total capital to risk-
weighted assets of 8%, of which at least 4% must be in the form of Tier 1
capital. The Federal Reserve also requires a minimum leverage ratio of Tier 1
capital to total assets of 3%. Bank holding companies not rated in the highest
category under the regulatory rating system are required to maintain a leverage
ratio of one percent to two percent above the stated minimum. The 3% Tier 1
capital to total assets ratio is the minimum leverage standard for bank holding
companies, and the Federal Reserve uses this minimum standard in conjunction
with the risk-based ratio in determining the overall capital adequacy of
banking organizations. In addition, the Federal Reserve continues to consider
the Tier 1 leverage ratio in evaluating proposals for expansion or new
activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes that the
foregoing standards are supervisory minimums and that banking organizations
generally are expected to operate well above the minimum ratios. These
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum levels.
As of March 31, 1999, we had regulatory capital in excess of the Federal
Reserve's minimum requirements. Our total risk-based capital ratio at March 31,
1999 was 11.21% and our leverage ratio was 7.53%.
Acquisitions. The BHC Act requires prior Federal Reserve approval for, among
other things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than 5% of the voting shares or substantially all
the assets of any bank or bank holding company, or for a merger or
consolidation of a bank holding company with another bank holding company. With
limited exceptions, the BHC Act prohibits a bank holding company from acquiring
direct or indirect ownership or control of voting shares of any company which
is not a bank or bank holding company and from engaging directly or indirectly
in any activity other than banking or managing or controlling banks or
performing services for its authorized subsidiaries. A bank holding company
may, however, engage in or acquire an interest in a company that engages in
activities which the Federal Reserve has determined, by regulation or order, to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto, such as owning and operating a savings association,
trust company, or investment or financial advisory business. Under the BHC Act
and Federal Reserve regulations, we are prohibited from engaging in tie-in
arrangements in connection with an extension of credit, lease, sale of
property, or furnishing of services. That means that, in most circumstances, we
may not condition a client's purchase of one of our services on the purchase of
another service.
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Interstate Banking and Branching Legislation. Under the Interstate Banking
and Efficiency Act, adequately capitalized and adequately managed bank holding
companies are allowed to acquire banks across state lines subject to various
limitations. In addition, under the Interstate Banking Act, banks are
permitted, under some circumstances, to merge with one another across state
lines and thereby create a main bank with branches in separate states. After
establishing branches in a state through an interstate merger transaction, a
bank may establish and acquire additional branches at any location in the state
where any bank involved in the interstate merger could have established or
acquired branches under applicable federal and state law.
Ownership Limitations. Any person, including that person's associates,
affiliates and groups acting in concert with him or her, who purchases or
subscribes for 5% or more of our common stock may be required to obtain prior
approval of the Commissioner and the Federal Reserve. Under the Illinois
Banking Act, any person who thereafter acquires more than 10% of our stock may
be required to obtain the prior approval of the Commissioner. Under the Change
in Bank Control Act, a person may be required to obtain the prior regulatory
approval of the Federal Deposit Insurance Corporation ("FDIC") and the Federal
Reserve before acquiring the power to directly or indirectly control the
management, operations or policies of PrivateBancorp or PrivateBank or before
acquiring control of 25% or more of any class of PrivateBancorp's or
PrivateBank's outstanding voting stock. In addition, any corporation,
partnership, trust or organized group that acquires a controlling interest in
PrivateBancorp or PrivateBank may have to obtain approval of the Federal
Reserve to become a bank holding company and thereafter be subject to
regulation as a bank holding company.
Dividends. The Federal Reserve has issued a policy statement on the payment
of cash dividends by bank holding companies. In the policy statement, the
Federal Reserve expressed its view that a bank holding company experiencing
earnings weaknesses should not pay cash dividends exceeding its net income or
which could only be funded in ways that weakened the bank holding company's
financial health, such as by borrowing. Additionally, the Federal Reserve
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these
powers is the ability to prohibit or limit the payment of dividends by banks
and bank holding companies.
Under a longstanding policy of the Federal Reserve, PrivateBancorp is
expected to act as a source of financial strength to PrivateBank and to commit
resources to support PrivateBank. The Federal Reserve takes the position that
in implementing this policy, it may require PrivateBancorp to provide financial
support when the company otherwise would not consider itself able to do so.
In addition to the restrictions on dividends imposed by the Federal Reserve,
Delaware law also places limitations on our ability to pay dividends. For
example, we may not pay dividends to our stockholders if, after giving effect
to the dividend, we would not be able to pay our debts as they become due.
Because a major source of our revenue is dividends which we receive and expect
to receive from PrivateBank, our ability to pay dividends will depend on the
amount of dividends paid by PrivateBank. We cannot be sure that PrivateBank
will, in any circumstances, pay such dividends to us.
Bank Regulation
Under Illinois law, PrivateBank is subject to supervision and examination by
the commissioner of the Illinois Office of Banks and Real Estate (the
"Commissioner"). As an affiliate of PrivateBank, PrivateBancorp is also subject
to examination by the Commissioner. PrivateBank is a member of the Federal Home
Loan Bank ("FHLB") of Chicago and may be subject to examination by the FHLB of
Chicago. In addition, the deposits of PrivateBank are insured by the Bank
Insurance Fund ("BIF") thereby rendering PrivateBank subject to the provisions
of the Federal Deposit Insurance Act ("FDIA") and, as a state nonmember bank,
to supervision and examination by the FDIC. The FDIA requires the FDIC approval
of any merger and/or consolidation by or with an insured bank, as well as the
establishment or relocation of any bank or branch office. The FDIC also
supervises compliance with the provisions of federal law and regulations which
place restrictions on loans by FDIC-insured banks to their directors, executive
officers and other controlling persons.
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Furthermore, all banks are affected by the credit policies of other monetary
authorities, including the Federal Reserve, which regulate the national supply
of bank credit. Such regulation influences overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The Federal Reserve's monetary policies have had a
significant effect on the operating results of commercial banks in the past and
we expect this trend to continue in the future.
Dividends. The Illinois Banking Act provides that an Illinois bank may not
pay dividends of an amount greater than its current net profits after deducting
losses and bad debts while such bank continues to operate a banking business.
For the purpose of determining the amount of dividends that an Illinois bank
may pay, bad debts are defined as debts upon which interest is past due and
unpaid for a period of six months or more unless such debts are well-secured
and in the process of collection.
In addition to the foregoing, the ability of the company and PrivateBank to
pay dividends may be affected by the various minimum capital requirements and
the capital and non-capital standards established under the Federal Deposit
Insurance Corporation Improvements Act of 1991 ("FDICIA"), as described below.
Federal Reserve System. PrivateBank is subject to Federal Reserve
regulations requiring depository institutions to maintain noninterest-earning
reserves against their transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve regulations generally require 3% reserves on the
first $47.8 million of transaction accounts plus 10% on the remainder. The
first $4.7 million of otherwise reservable balances (subject to adjustments by
the Federal Reserve) are exempted from the reserve requirements. PrivateBank is
in compliance with that requirement.
Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the
Riegle Community Development and Regulatory Improvement Act of 1994, requires
the Federal Reserve, together with the other federal bank regulatory agencies,
to prescribe standards of safety and soundness, by regulations or guidelines,
relating generally to operations and management, asset growth, asset quality,
earnings, stock valuation, and compensation. The FDIC and the other federal
bank regulatory agencies have adopted a set of guidelines prescribing safety
and soundness standards pursuant to FDICIA. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. In general, the guidelines
require, among other things, appropriate systems and practices to identify and
manage the risks and exposures specified in the guidelines. The guidelines
prohibit excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. In addition, the FDIC adopted regulations
that authorize, but do not require, the FDIC to order an institution that has
been given notice by the FDIC that it is not satisfying any of the safety and
soundness standards to submit a compliance plan. If, after being so notified,
an institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the FDIC must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association
is subject under the "prompt corrective action" provisions of FDICIA. If an
institution fails to comply with such an order, the FDIC may seek to enforce
its order in judicial proceedings and to impose civil money penalties. The FDIC
and the other federal bank regulatory agencies also proposed guidelines for
asset quality and earning standards.
Prompt Corrective Action. FDICIA requires the federal banking regulators,
including the Federal Reserve and the FDIC, to take prompt corrective action
with respect to depository institutions that fall below minimum capital
standards and prohibits any depository institution from making any capital
distribution that would cause it to be undercapitalized. Institutions that are
not adequately capitalized may be subject to a variety of supervisory actions,
including restrictions on growth, investment activities, capital distributions
and affiliate transactions, and will be required to submit a capital
restoration plan which, to be accepted by the regulators, must be guaranteed in
part by any company having control of the institution (for example, the company
or a
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stockholder controlling the company). In other respects, FDICIA provides for
enhanced supervisory authority, including greater authority for the appointment
of a conservator or receiver for under-capitalized institutions. The capital-
based prompt corrective action provisions of FDICIA and their implementing
regulations apply to FDIC-insured depository institutions. However, federal
banking agencies have indicated that, in regulating bank holding companies, the
agencies may take appropriate action at the holding company level based on
their assessment of the effectiveness of supervisory actions imposed upon
subsidiary insured depository institutions pursuant to the prompt corrective
action provisions of FDICIA.
As of March 31, 1999, PrivateBank had capital in excess of the requirements
for a "well-capitalized" institution.
Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured institution,
PrivateBank is required to pay deposit insurance premiums based on the risk it
poses to the insurance fund. The FDIC has authority to raise or lower
assessment rates on insured deposits in order to achieve designated reserve
ratios in the insurance funds and to impose special additional assessments. The
FDICIA assessment rate schedule for BIF-insured deposits provides for an
assessment range of zero to 0.27% (subject to a $2,000 minimum) of deposits
depending on capital and supervisory factors. Each depository institution is
assigned to one of three capital groups: "well capitalized," "adequately
capitalized" or "less than adequately capitalized." Within each capital group,
institutions are assigned to one of three supervisory subgroups: "healthy,"
"supervisory concern" or "substantial supervisory concern." Accordingly, there
are nine combinations of capital groups and supervisory subgroups to which
varying assessment rates would be applicable. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. During 1998, PrivateBank paid deposit insurance premiums in the
aggregate amount of $33,572.
Deposit insurance may be terminated by the FDIC upon a finding that an
institution has engaged in unsafe or unsound practice, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. We do not know any
practice, condition or violation that might lead to termination of our deposit
insurance.
The Economic Growth and Regulatory Paperwork Reduction Act of 1996 provides
that beginning with semi-annual periods after December 31, 1996, BIF deposits
will also be assessed to pay interest on the bonds issued in the late 1980s by
the Financing Corporation (the "FICO Bonds") to recapitalize the now defunct
Federal Savings & Loan Insurance Corporation. For purposes of the assessments
to pay interest on the FICO Bonds, BIF deposits will be assessed at a rate of
20% of the assessment rate applicable to SAIF deposits until December 31, 1999.
After the earlier of December 31, 1999 or the date on which the last savings
association ceases to exist, full pro rata sharing of FICO assessments will
begin. It has been estimated that the rates of assessment for the payment of
interest on the FICO Bonds will be approximately 1.3 basis points for BIF-
assessable deposits and approximately 6.4 basis points for SAIF-assessable
deposits. The payment of the assessment to pay interest on the FICO Bonds
should not materially affect the Bank.
Community Reinvestment. Under the CRA, a financial institution has a
continuing and affirmative obligation to help meet the credit needs of its
entire community, including low- and moderate-income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions, nor does it limit an institution's discretion to develop the
types of products and services that it believes are best suited to its
particular community. However, institutions are rated on their performance in
meeting the needs of their communities. Performance is judged in three areas:
(a) a lending test, to evaluate the institution's record of making loans in its
assessment areas; (b) an investment test, to evaluate the institution's record
of investing in community development projects, affordable housing, and
programs benefiting low or moderate income individuals and business; and (c) a
service test, to evaluate the institution's delivery of services through its
branches, ATMs and other offices. The CRA requires each federal banking agency,
in connection with its examination of a financial institution, to assess and
assign one of four ratings to the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation
of certain
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applications by the institution, including applications for charters, branches
and other deposit facilities, relocations, mergers, consolidations,
acquisitions of assets or assumptions of liabilities, and savings and loan
holding company acquisitions. The CRA also requires that all institutions make
public disclosure of their CRA ratings.
PrivateBank was assigned a "satisfactory" rating in January 1999 as a result
of its last CRA examination. This is the second highest rating a bank may
receive.
Compliance with Consumer Protection Laws. PrivateBank is subject to many
federal consumer protection statutes and regulations including the CRA, the
Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity
Act, the Fair Housing Act, the Real Estate Settlement Procedures Act and the
Home Disclosure Act. Among other things, these acts:
. require banks to meet the credit needs of their communities;
. require banks to disclose credit terms in meaningful and consistent
ways;
. prohibit discrimination against an applicant in any consumer or business
credit transaction;
. prohibit discrimination in housing-related lending activities;
. require banks to collect and report applicant and borrower data
regarding loans for home purchases or improvement projects;
. require lenders to provide borrowers with information regarding the
nature and cost of real estate settlements;
. prohibit certain lending practices and limit escrow account amounts with
respect to real estate transactions; and
. prescribe possible penalties for violations of the requirements of
consumer protection statutes and regulations.
From time to time we have been made aware of certain deficiencies in our
consumer compliance program. Management believes that any deficiencies have
already been or are in the process of being corrected. In the event that
consumer compliance deficiencies were to continue over time, enforcement or
administrative actions by the appropriate federal banking regulators may affect
the implementation of our growth strategies.
Enforcement Actions. Federal and state statutes and regulations provide
financial institution regulatory agencies with great flexibility to undertake
an enforcement action against an institution that fails to comply with
regulatory requirements, particularly capital requirements. Possible
enforcement actions range from the imposition of a capital plan and capital
directive to receivership, conservatorship or the termination of deposit
insurance.
Other. PrivateBank is also subject to state and federal restrictions upon:
. extensions of credit to the company and any non-banking affiliates,
. the purchase of assets from affiliates,
. the issuance of guarantees, acceptances or letters of credit on behalf
of affiliates, and
. investments in stock or other securities issued by affiliates or
acceptance thereof as collateral for an extension of credit.
PrivateBancorp and PrivateBank are subject to restrictions with respect to
engaging in the issuance, underwriting, public sale or distribution of certain
types of securities. In addition, PrivateBank must maintain reserves against
deposits and is subject to restrictions upon:
. the nature and amount of loans which it may make to a single borrower
(and, in some instances, a group of affiliated borrowers),
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. the nature and amount of securities in which it may invest,
. the amount of investment in PrivateBank premises, and
. the manner in and extent to which it may borrow money.
Pending Legislation. Because of the concerns relating to competitiveness and
the safety and soundness of the banking industry, Congress is considering a
number of wide-ranging proposals for altering the structure, regulation and
competitive relationships of the nation's financial institutions. We cannot
predict whether or in what form any of these proposals will be adopted or the
extent to which the proposals will affect our operations, if at all.
Monetary Policy and Economic Conditions
The earnings of banks and bank holding companies are sensitive to changes in
prevailing interest rates and are affected by general economic conditions and
the fiscal and monetary policies of federal regulatory agencies, including the
Federal Reserve. Through changes in the discount rate, availability of
borrowing at the "discount window," open market transactions, and imposition of
changes in the reserve requirements, the Federal Reserve exerts considerable
influence over the cost and availability of funds obtainable for lending or
investing. Monetary policies are used in varying combinations to influence
overall growth and distributions of bank loans, investments and deposits, and
such use may affect interest rates charged on loans or paid on deposits.
Monetary and fiscal policies have affected the operating results of commercial
banks in the past and are expected to do so in the future. We cannot fully
predict the nature or the extent of any effects which fiscal or monetary
policies may have on our business and earnings.
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DESCRIPTION OF CAPITAL STOCK
The information in this prospectus gives effect to a 2-for-1 stock split
effective as of June 28, 1999, and to an amendment to PrivateBancorp's Restated
Certificate of Incorporation to increase the authorized shares approved by
stockholders on April 22, 1999. The amendment was filed on June 25, 1999, with
the Secretary of State of the State of Delaware.
Common Stock
We are authorized to issue 12,000,000 shares of common stock, without par
value, of which 3,451,824 shares were outstanding prior to the offering. As of
March 31, 1999, 632,808 shares of common stock were reserved for issuance upon
the exercise of currently outstanding options. The outstanding shares of common
stock currently are, and the shares of common stock to be issued in the
offering will be (when issued and delivered in accordance with the terms and
conditions of the offering), fully paid and nonassessable. Each share of common
stock has the same relative rights as, and is identical in all respects with,
each other share of common stock. Each holder of record of common stock is
entitled to one vote per share on all matters voted upon by our stockholders.
Upon completion of the public offering, holders of shares of common stock will
have no preemptive, redemption or cumulative voting rights. In the event of
liquidation, the holders of shares of common stock are entitled to share
ratably in any of our assets retained after payment in full of creditors and,
if any preferred stock is then authorized, issued and outstanding, after
payment to holders of such preferred stock but only to the extent of any
liquidation preference.
Dividends. The holders of our common stock are entitled to receive and share
equally in such dividends, if any, declared by the Board of Directors out of
funds legally available therefor. We may pay dividends if, as and when declared
by our Board of Directors. The payment of dividends by the company is subject
to limitations imposed by the Delaware General Corporation Law ("DGCL"). See
"Dividends." If we issue preferred stock, the holders thereof may have a
priority over the holders of the common stock with respect to dividends.
Voting Rights. The holders of our common stock possess voting rights in the
company. Stockholders elect our Board of Directors and act on such other
matters as are required to be presented to them under the DGCL or our Amended
and Restated Certificate of Incorporation, or as are otherwise presented to
them by the Board of Directors. Each holder of common stock will be entitled to
one vote per share and will not have any right to cumulate votes in the
election of directors. Accordingly, holders of more than fifty percent of the
outstanding shares of common stock will be able to elect all of the Directors
to be elected each year. Although there are no present plans to do so, if we
issue preferred stock, holders of the preferred stock may also possess voting
rights. Certain matters require a two-thirds stockholder vote. See "Certain
Anti-Takeover Effects of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated By-laws and Delaware Law."
Liquidation. In the event of any liquidation, dissolution or winding up of
the company, the holders of our common stock would be entitled to receive,
after payment or provision for payment of all of our debts and liabilities, all
of our assets available for distribution. If preferred stock is issued, the
holders thereof may have a priority over the holders of the common stock in the
event of any liquidation or dissolution.
Preemptive Rights and Redemption. Holders of our common stock will not be
entitled to preemptive rights with respect to any shares which we may issue in
the future. The common stock is not subject to mandatory redemption by us.
Preferred Stock
Our Board of Directors is authorized, pursuant to the Amended and Restated
Certificate of Incorporation, to issue 1,000,000 shares of preferred stock,
without par value, in one or more series with respect to which the Board,
without stockholder approval, may determine voting, conversion and other rights
which could adversely affect the rights of the holders of our common stock.
Currently, no shares of our authorized preferred stock are issued or
outstanding. Stockholders will not have preemptive rights to subscribe for
shares of preferred stock.
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The rights of the holders of the common stock would generally be subject to
the prior rights of the preferred stock with respect to dividends, liquidation
preferences and other matters. The dividend rights, dividend rates, conversion
rights, conversion prices, voting rights, redemption rights and terms
(including sinking fund provisions, if any), the redemption price or prices and
the liquidation preferences of any series of the authorized preferred stock and
the numbers of such shares of preferred stock in each series will be
established by the Board of Directors as such shares are to be issued. It is
not possible to state the actual effect of the preferred stock on the rights of
holders of common stock until the Board of Directors determines the rights of
the holders of a series of the preferred stock. However, such effects might
include:
. restrictions on dividends;
. dilution of the voting power to the extent that the preferred stock were
given voting rights;
. dilution of the equity interest and voting power if the preferred stock
were convertible into common stock; and
. restrictions upon any distribution of assets to the holders of common
stock upon liquidation or dissolution until the satisfaction of any
liquidation preference granted to holders of the preferred stock.
Furthermore, although we have no present intention to do so, the Board of
Directors could direct us to issue, in one or more transactions, shares of
preferred stock or additional shares of common stock or rights to purchase such
shares (subject to the limits imposed by applicable laws and the rules of any
stock exchange or automated dealer quotation system to the extent that such
rules may become applicable to, or may be observed by, us) in amounts which
could make more difficult and, therefore, less likely, a takeover, proxy
contest, change in our management or any other extraordinary corporate
transaction which might be opposed by the incumbent Board of Directors. Any
issuance of preferred stock or of common stock could have the effect of
diluting the earnings per share, book value per share and voting power of
common stock held by our stockholders.
Certain Anti-Takeover Effects of the Amended and Restated Certificate of
Incorporation, Amended and Restated By-laws and Delaware Law
General. Certain provisions of our Amended and Restated Certificate of
Incorporation, Amended and Restated By-laws and the DGCL may have the effect of
impeding the acquisition of control of the company by means of a tender offer,
a proxy fight, open-market purchases or otherwise in a transaction not approved
by our Board of Directors. These provisions may have the effect of discouraging
a future takeover attempt which is not approved by our Board of Directors but
which individual stockholders may deem to be in their best interests or in
which stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of our current Board of Directors or
management more difficult.
The provisions of the Amended and Restated Certificate of Incorporation and
Amended and Restated By-laws described below are designed to reduce, or have
the effect of reducing, our vulnerability to an unsolicited proposal for the
restructuring or sale of all or substantially all of our assets or an
unsolicited takeover attempt which is unfair to our stockholders. The following
description of certain of the provisions of our Amended and Restated
Certificate of Incorporation and Amended and Restated By-laws is general, and
you should read it with our Amended and Restated Certificate of Incorporation
and Amended and Restated By-laws.
Authorized Shares. Our Amended and Restated Certificate of Incorporation
authorizes the issuance of 12,000,000 shares of common stock and 1,000,000
shares of preferred stock. We have authorized these amounts to provide our
Board of Directors with flexibility to effect, among other things,
transactions, financings, acquisitions, stock dividends, stock splits and
employee stock options. However, these authorized shares may also be used by
the Board of Directors consistent with its fiduciary duty to deter future
attempts to gain control of the company.
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The Board of Directors also has sole authority to determine the terms of any
one or more series of preferred stock, including voting rights, conversion
rates, and liquidation preferences. As a result of the ability to fix voting
rights for a series of preferred stock, the Board of Directors has the power to
the extent consistent with its fiduciary duty to issue a series of preferred
stock to persons friendly to management in order to attempt to block a merger
or other transaction by which a third party seeks control, and thereby assist
the incumbent Board of Directors and management to retain their respective
positions.
Classified Board of Directors; Filling of Board Vacancies and Qualifying
Shares. Our Board of Directors is divided into three classes, each of which
contains approximately one-third of the whole number of the members of the
Board of Directors. Each class serves a staggered three-year term, with
approximately one-third of the total number of Directors being elected each
year. Under the DGCL, members of a staggered board may only be removed for
cause unless the Certificate of Incorporation provides otherwise. Our Amended
and Restated Certificate of Incorporation does not provide for removal of
directors without cause. The staggered board is intended to provide for
continuity of the Board of Directors and to make it more difficult and time
consuming for a stockholder group to fully use its voting power to gain control
of the Board of Directors without the consent of the incumbent Board of
Directors.
Our Amended and Restated By-laws provide that there shall be sixteen
Directors. Our Amended and Restated By-laws also provide that any vacancy
occurring on the Board of Directors, including a vacancy created by an increase
in the number of directors, will be filled by a majority vote of the directors
then in office. Directors so chosen shall hold office until their successors
are elected and qualified or until their earlier resignation or removal.
No Cumulative Voting; Limitation on Action by Written Consent and
Stockholder Meetings. Our Amended and Restated Certificate of Incorporation
does not provide for cumulative voting. Our Amended and Restated Certificate of
Incorporation and Amended and Restated By-laws also provide that any action
required or permitted to be taken by the stockholders must be effected at an
annual or special meeting and may not be effected by written consent in lieu of
a meeting. Our Amended and Restated By-laws provide that special meetings of
the stockholders may only be called by the Chairman of the Board, the President
or the Secretary at the written request of a majority of the Board of
Directors.
Delaware Business Combination Statute. Section 203 of the DGCL provides
that, subject to certain exceptions specified therein, an "interested
stockholder" of a Delaware corporation shall not engage in any business
combination, including mergers or consolidations or acquisitions of additional
shares of the corporation, with the corporation for a three-year period
following the time that such stockholder becomes an interested stockholder
unless (a) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder, (b) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced (excluding
certain shares), or (c) at or subsequent to such time the business combination
is approved by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Except as otherwise specified in Section 203, an interested
stockholder is defined to include any person that is (x) the owner of 15% or
more of the outstanding voting stock of the corporation, or (y) is an affiliate
or associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date of determination, and the affiliates and
associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. We have not elected to
be exempt from the restrictions imposed under Section 203. The provisions of
Section 203 may encourage persons interested in acquiring us to negotiate in
advance with our Board of Directors since the stockholder approval requirement
would be avoided if a majority of the directors then in office approves either
the business combination or the transaction which results in any such person
becoming an interested
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stockholder. Such provisions also may have the effect of preventing changes in
our management. It is possible that such provisions could make it more
difficult to accomplish transactions which our stockholders may otherwise deem
to be in their best interests.
Amendment of the Restated Certificate of Incorporation and By-laws. Our
Amended and Restated Certificate of Incorporation provides that the affirmative
vote of the holders of at least 66 2/3% of our outstanding voting stock, voting
together as a single class, is required to amend, repeal, or adopt any
provision inconsistent with, the provisions of our Amended and Restated
Certificate of Incorporation classifying directors, eliminating cumulative
voting, prohibiting stockholder action without a meeting or specifying the vote
required to amend such provisions. Our By-laws may be amended by the
stockholders or the Board of Directors; however, the affirmative vote of the
holders of at least 66 2/3% of the outstanding voting stock, voting together as
a single class, is required to amend, repeal, or adopt any provision
inconsistent with, the provisions of the Amended and Restated By-laws
describing how special meetings of the stockholders must be called, prohibiting
stockholder action without a meeting, regarding properly bringing business
before a stockholder meeting, stating the number of and classifying directors,
relating to filling director vacancies, and specifying the vote required to
amend such provisions.
Certain By-Law Provisions. Our Amended and Restated By-laws also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting, to
provide us advance notice of at least 120 days. The notice provision requires a
stockholder who desires to raise new business at an annual stockholder meeting
to provide us certain information concerning the nature of the new business,
the stockholder and such stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide us with certain information concerning the nominee and
such proposing stockholder.
The provisions described above are intended to reduce our vulnerability to
takeover attempts and certain other transactions which have not been negotiated
with and approved by our Board of Directors.
Attempts to take over corporations have become increasingly common. An
unsolicited, nonnegotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the company and our
stockholders to encourage potential acquirors to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage nonnegotiated takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at a price that reflects our true value and that
otherwise is in the best interest of all stockholders.
Limitation of Director Liability and Indemnification
Our Amended and Restated Certificate of Incorporation provides that no
director will be personally liable to the company or our stockholders for
monetary damages for breach of fiduciary duty as a director; provided, however,
that directors will have liability (a) for any breach of a director's duty of
loyalty to the company or our stockholders, (b) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (c) under Section 174 of the DGCL, or (d) for any transaction from which
the director derived an improper personal benefit.
Our Amended and Restated By-laws provide that we will indemnify any person
made or threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director,
officer, employee or agent of the company, or is or was serving at our request
as a director, trustee, officer, employee or agent of another corporation or
other enterprise against expenses actually and reasonably incurred by such
person in connection with such action, suit or proceeding. To the extent that a
person seeking indemnification has been successful on the merits or otherwise
in defense of any action, suit, or proceeding, such person will be indemnified
for his or her expenses which were actually and reasonably incurred. Any
indemnification payment must be authorized upon a determination that the
individual seeking indemnification met the necessary standard of conduct for
such indemnification. Such determination will be made by a majority vote of a
quorum
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consisting of directors not involved with the action, suit or proceeding; a
written opinion of independent legal counsel, if the described quorum cannot be
obtained or if the majority vote of the described quorum directs; a vote of the
stockholders; or a decision of the court in which the action was brought. To
qualify for indemnification, such person must have acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, our best
interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was lawful. Expenses may be paid
by us as they are incurred, in advance of a final disposition, as authorized by
the Board of Directors and upon receipt of an undertaking by the person seeking
indemnification to repay the advanced amount if it is later determined that he
or she was not entitled to indemnification. The indemnification and advancement
of expenses provided by the Amended and Restated By-laws are not to be deemed
exclusive of any other rights to which any person seeking indemnification may
be entitled as a matter of law or under our Amended and Restated Certificate of
Incorporation, the Amended and Restated By-laws, any agreement, vote of
stockholders, any insurance purchased by us, or otherwise, both as to action in
his or her official capacity and as to action in another capacity while holding
such office, and will continue as to a person who has ceased to be such
director, trustee, officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such person.
We have entered into indemnification agreements with our directors and
executive officers to indemnify them against certain liabilities. Consistent
with the provisions of our Amended and Restated Certificate of Incorporation
and Amended and Restated By-laws, under the terms of the agreements, we will
indemnify our directors and executive officers to the fullest extent permitted
under applicable law against all expenses, liabilities and losses incurred in
connection with any legal proceeding brought against any of them by reason of
their status as directors, officers, employees, agents or fiduciaries of the
company. The expenses, liabilities and losses which we are obligated to pay may
include judgments, fines and amounts paid in settlement of such legal
proceedings by our directors and executive officers so long as they acted in
good faith and in a manner which they reasonably believed was in the best
interests of the company.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Illinois Stock
Transfer Company, Chicago, Illinois.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 4,351,824 of common stock
issued and outstanding (4,486,824 shares if the underwriters exercise their
over-allotment option in full), assuming no exercise of any options. Of these
shares, 2,770,550 shares, including the 900,000 shares to be sold in this
offering (assuming no exercise of the over-allotment option), will be freely
tradeable in the public market without restriction or registration under the
Securities Act, unless held by our "affiliates" as that term is defined under
the Securities Act. The remaining 1,581,274 shares are subject to certain
restrictions on trading, as described below. All shares sold in the Towne
Square transaction will be subject to contractual holding periods of one to
three years. See "Pending Acquisition."
Restricted stock awards granted to our employees.
Pursuant to the terms of our Stock Incentive Plan, we have awarded 21,600
shares of restricted stock to certain of our employees who are not executive
officers. Although our employees have full voting rights with regard to these
shares and may receive any dividends we declare, they may not transfer the
shares until they are fully vested. Each restricted stock award will vest in
its entirety on the fifth anniversary of the date of grant. Unless earlier
forfeited, the awards will vest according to the following schedule:
<TABLE>
<CAPTION>
Year Shares Vested
---- -------------
<S> <C>
2001....................... 4,800
2002....................... 9,600
2003....................... 1,600
2004....................... 5,600
</TABLE>
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Shares held by our executive officers and directors.
Our executive officers and directors currently hold 1,005,112 shares of our
common stock, representing 23.1% of the shares that will be outstanding upon
completion of this offering. Of these shares, 74,400 shares were granted to our
officers pursuant to restricted stock awards and are subject to forfeiture
until the fifth anniversary of the date of grant. These restricted stock awards
will vest between the years 2001 and 2004. The remaining shares held by our
officers and directors may be sold in the public market under the provisions of
Rule 144 of the Securities Act, upon the expiration of certain holding periods
specified in Rule 144.
Lock-up Agreements. Our directors and officers and certain of our
stockholders have entered into lock-up agreements with the underwriters
pursuant to which they have agreed not to offer, sell or contract to sell any
of their shares of common stock for a period of 180 days from the date of this
prospectus without the underwriters' prior written consent. An aggregate of
1,477,774 shares of our common stock are subject to these agreements. Upon the
expiration of this 180-day period, our directors and officers and stockholders
may resell their shares, if vested, subject to the restrictions discussed
below.
Shares Subject to Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an affiliate, is
entitled to sell, within a three-month period, that number of shares which does
not exceed the greater of:
. one percent of the outstanding shares of our common stock (approximately
43,518 shares immediately following the offering); or
. the average weekly reported trading volume of our common stock during
the four calendar weeks preceding the sale.
Sales made under Rule 144 are also subject to certain requirements pertaining
to:
. the manner of such sales;
. notices of such sales; and
. the availability of current public information about us.
Under Rule 144(k), a person other than an affiliate may sell shares freely,
without regard to the above restrictions, if that person has held the shares
for a period of two years or more. Affiliates, such as our directors and
officers, are always subject to these manner of sale and volume restrictions,
regardless of the length of time that they have held their shares.
Currently there are 101,900 shares of our common stock held by non-
affiliates which are subject to the provisions of Rule 144. Of such shares,
20,000 are subject to the lock-up agreements discussed above. Non-affiliates
may sell the remaining shares pursuant to the Rule 144 restrictions beginning
in September 1999, except for 20,000 of these shares that are subject to a
lock-up agreement. All of these shares will be freely tradable by non-
affiliates by December 2000.
Registration Rights of Certain of Our Stockholders.
Pursuant to the terms of our private placement offering materials, we have
granted certain "piggyback" registration rights to holders of 2,769,872 shares
of our common stock. These stockholders, including some of our affiliates, are
entitled to have their shares registered for sale under the Securities Act in
the event that we determine to register shares of our common stock in
connection with an underwritten public offering or otherwise. These rights are
subject to certain limitations and conditions, including:
. our ability to preclude or limit the number of shares which these
stockholders may include in the underwritten offering or registration;
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. the right of the managing underwriter, in its sole discretion, to limit
the number of shares to be underwritten; and
. the requirement that each participating stockholder bear a pro rata
portion of the underwriting discounts and commissions.
Of the shares entitled to these registration rights, all shares held by non-
affiliates are currently tradable pursuant to the terms of Rule 144(k), as
described above. Those shares held by our affiliates are subject to the manner
of sale and volume restrictions of Rule 144, as set forth above. None of the
registration rights with respect to these shares have been exercised in
connection with this offering.
Shares Reserved For Issuance Pursuant to Options.
Effective upon completion of this offering, we will have an aggregate of
632,808 shares reserved for issuance pursuant to outstanding stock options
granted to certain key employees, officers and directors. Options to purchase
453,408 shares are currently exercisable. In addition, there are 50,119 shares
remaining available for future awards under our Stock Incentive Plan, out of
which the option grant and restricted stock award are expected to be made to
Tom Castronovo in connection with the Towne Square Financial Corporation
transaction. We intend to register under the Securities Act the shares of
common stock reserved for issuance under our stock plans, whereupon all of
these shares will be freely tradeable, subject to compliance by affiliates with
the Rule 144 volume and manner of sale limitations.
Our Nasdaq Symbol.
Our common stock has been approved for quotation and trading on The Nasdaq
National MarketSM under the symbol "PVTB."
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below, for whom EVEREN Securities, Inc. and Stifel, Nicolaus
& Company, Incorporated are acting as representatives (the "Representatives"),
have severally agreed to purchase from us, and we have agreed to sell to them,
the respective number of shares of common stock set forth opposite each
underwriter's name below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ -------
<S> <C>
EVEREN Securities, Inc........................................... 298,500
Stifel, Nicolaus & Company, Incorporated......................... 298,500
ABN AMRO Chicago Corporation..................................... 45,000
William Blair & Company, L.L.C................................... 45,000
McDonald Investments Inc., a KeyCorp Company..................... 45,000
Fox-Pitt, Kelton Inc............................................. 28,000
Hoefer & Arnett, Inc............................................. 28,000
Howe Barnes Investments, Inc..................................... 28,000
Loop Capital Markets............................................. 28,000
Ryan, Beck & Co., Inc............................................ 28,000
Wheat First Securities........................................... 28,000
-------
Total........................................................ 900,000
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The nature of the underwriters'
obligation is such that they are committed to purchase and pay for all shares
of common stock (other than those covered by the over-allotment options
discussed below) if any are purchased.
The underwriters propose to offer the shares of our common stock directly to
the public at the initial public offering price set forth on the cover page of
this prospectus, and to certain securities dealers (who may include the
underwriters) at such price, less a concession not in excess of $0.72 per share
of common stock. The underwriters may allow, and such selected dealers may
reallow, a concession not in excess of $0.10 per share of common stock to
certain brokers and dealers. After this offering, the price to the public,
concession, allowance and reallowance may be changed by the Representatives.
The Representatives have informed us that they do not intend to confirm sales
to any account over which they exercise discretionary authority.
We have granted the underwriters an option to purchase up to 135,000
additional shares of common stock at the same price per share as we will
receive for the 900,000 shares that the underwriters have agreed to purchase.
This option is exercisable during the 30-day period after the date of this
prospectus, solely to cover over-allotments, if any. To the extent that the
underwriters exercise this option, each of the underwriters will be committed,
subject to certain conditions, to purchase such additional shares of common
stock in approximately the same proportions as set forth in the above table. If
purchased, the underwriters will sell the additional shares on the same terms
as the 900,000 shares are being sold. If the underwriters exercise the over-
allotment in full, the total public offering price will be $18,630,000, total
underwriting discounts and commissions will be $1,304,100, and total proceeds
to us will be $17,325,900.
The offering of the common stock is made for delivery when, as and if
accepted by the underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offering without notice. The underwriters
reserve the right to reject any order for the purchase of common stock.
Subject to certain exceptions, we have agreed not to issue, and each of our
officers and directors (and certain stockholders of the company) has agreed not
to offer, sell or otherwise dispose of any of our shares of common stock or our
other equity securities for a period of 180 days after the date of this
prospectus (other than shares sold pursuant to this prospectus and shares
issuable in the transaction with Towne Square Financial Corporation) without
the prior written consent of EVEREN Securities.
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Subject to certain exceptions for registration statements on Form S-8, we
have agreed not to file a registration statement relating to any of our shares
of common stock or other equity securities for a period of 180 days after the
date of this prospectus (other than the shares to be issued in this offering
and the shares issuable in the transaction with Towne Square Financial
Corporation) without the prior written consent of EVEREN Securities.
We have agreed to indemnify the underwriters against certain liabilities
under the Securities Act, or to contribute to payments the underwriters may be
required to make in respect thereof.
Prior to this offering, there has been no public market for our common
stock. Consequently, we negotiated the initial public offering price with the
underwriters. Among the factors considered in such negotiations were:
. prevailing market conditions;
. an assessment of our management;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of other companies
which we and the Representatives believe to be comparable to us; and
. estimates of our business potential.
There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price. The
initial public offering price should not be considered an indication of the
actual value of our common stock. Such price is subject to change as a result
of market conditions and other factors. We cannot assure you that our common
stock can be resold at or above the initial public offering price.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of our common stock during and after the offering, such as the
following:
. the underwriters may over-allot or otherwise create a short position in
the common stock for their own account by selling more shares of common
stock than we have been sold to them;
. the underwriters may elect to cover any such short position by
purchasing shares of common stock in the open market or by exercising
the over-allotment option;
. the underwriters may stabilize or maintain the price of our common stock
by bidding for or purchasing shares of common stock in the open market;
. the underwriters may engage in passive market making transactions; and
. the underwriters may impose penalty bids, under which selling
concessions allowed to syndicate members of other broker-dealers
participating in this offering are reclaimed if shares of common stock
previously distributed in the offering are repurchased in connection
with stabilization transactions or otherwise.
The effect of these transactions may be to stabilize or maintain the market
price at a level above that which might otherwise prevail in the open market.
The imposition of a penalty bid may also affect the price of our common stock
to the extent that it discourages resales thereof. No representation is made as
to the magnitude or effect of any such stabilization or other transactions.
Such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
EVEREN Securities has provided in the past, and both Representatives may
provide in the future, investment banking services to PrivateBancorp for which
they have received and would expect to receive customary fees and commissions.
82
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with this offering, including the
validity of the common stock, are being passed upon for the company by Vedder,
Price, Kaufman & Kammholz, Chicago, Illinois. Certain legal matters are being
passed upon for the underwriters by Jenner & Block, Chicago, Illinois.
EXPERTS
The consolidated financial statements for each of the three years in the
three-year period ended December 31, 1998, included in this prospectus, have
been audited by Arthur Andersen LLP, independent certified public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
WHERE YOU CAN GET MORE INFORMATION
We have filed a registration statement on Form S-1 under the Securities Act
with the SEC in connection with the common stock offered by this prospectus.
This prospectus omits certain information, exhibits and undertakings set forth
in the registration statement which we have filed with the SEC. You may inspect
and copy those materials upon payment of prescribed rates, at the Public
Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at the regional office of the SEC at the following locations: Seven World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. This
information is also available on the Internet at the SEC's website. The address
for the web site is: http://www.sec.gov. For further information about the
company, reference is hereby made to the registration statement and the
exhibits thereto. Statements contained in this prospectus concerning the
provisions of any contract, agreement or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the registration statement
for a full statement of the provisions thereof. Each such statement in this
prospectus is qualified in all respects by such reference.
83
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PRIVATEBANCORP, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants............. F-2
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December
31, 1998 and 1997........................................................ F-3
Consolidated Statements of Income for the three months ended March 31,
1999 and 1998 (unaudited) and for the years ended December 31, 1998, 1997
and 1996................................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the three
months ended March 31, 1999 (unaudited) and for the years ended December
31, 1998, 1997 and 1996.................................................. F-5
Consolidated Statements of Cash Flows for the three months ended March 31,
1999 and 1998 (unaudited) and for the years ended December 31, 1998, 1997
and 1996................................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
PrivateBancorp, Inc.:
We have audited the accompanying consolidated balance sheets of
PRIVATEBANCORP, INC. (a Delaware corporation) AND SUBSIDIARY as of December 31,
1998 and 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
PrivateBancorp, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 29, 1999 (except with respect to the matter discussed in Note 19, as to
which the date is June 25, 1999)
F-2
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of March 31, 1999 and December 31, 1998 and 1997
<TABLE>
<CAPTION>
March 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
(unaudited)
ASSETS
<S> <C> <C> <C>
Cash and due from banks-noninterest
bearing............................. $ 8,220,209 $ 11,894,781 $ 9,229,704
Federal funds sold................... 7,759,124 3,619,437 16,976,417
------------ ------------ ------------
Total cash and cash equivalents.. 15,979,333 15,514,218 26,206,121
------------ ------------ ------------
Available-for-sale securities, at
fair value.......................... 105,135,775 116,890,739 65,383,252
------------ ------------ ------------
Loans................................ 307,766,039 281,964,896 218,494,547
Less: Allowance for loan losses.... (3,695,000) (3,410,000) (3,050,000)
------------ ------------ ------------
Net loans.......................... 304,071,039 278,554,896 215,444,547
------------ ------------ ------------
Bank premises and equipment, net..... 1,528,416 1,587,720 1,904,338
------------ ------------ ------------
Accrued interest receivable.......... 2,685,131 2,264,195 1,581,728
------------ ------------ ------------
Other assets......................... 1,654,854 1,496,071 1,352,145
------------ ------------ ------------
Total assets..................... $431,054,548 $416,307,839 $311,872,131
============ ============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Demand deposits:
Noninterest-bearing................ $ 28,178,279 $ 39,490,083 $ 34,233,722
Interest-bearing................... 31,793,923 26,508,202 26,083,741
Savings and money market deposit
accounts............................ 180,871,333 170,713,032 135,624,494
Other time deposits.................. 143,610,570 128,282,346 89,831,506
------------ ------------ ------------
Total deposits................... 384,454,105 364,993,663 285,773,463
Accrued interest payable............. 994,331 720,874 453,056
Funds borrowed....................... 10,000,000 20,000,000 --
Other liabilities.................... 5,552,114 1,319,654 957,857
------------ ------------ ------------
Total liabilities................ 401,000,550 387,034,191 287,184,376
------------ ------------ ------------
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 3,217,184
shares issued and outstanding in
1999, 1998 and 1997, respectively. 3,451,824 3,431,424 3,217,184
Surplus............................ 22,600,302 22,273,902 19,782,477
Retained earnings.................. 5,853,156 4,912,359 2,165,310
Accumulated other comprehensive
income, net of tax effect......... (58,045) 149,471 29,117
Deferred compensation.............. (843,498) (543,767) (506,333)
Loan to executive officer.......... (949,741) (949,741) --
------------ ------------ ------------
Total stockholders' equity....... 30,053,998 29,273,648 24,687,755
------------ ------------ ------------
Total liabilities and
stockholders' equity............ $431,054,548 $416,307,839 $311,872,131
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-3
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998, and
for the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
--------------------- -----------------------------------
1999 1998 1998 1997 1996
---------- ---------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees. $5,635,595 $4,624,309 $19,619,603 $16,729,277 $12,151,454
Federal funds sold and
interest-bearing
deposits............. 48,268 498,263 2,181,013 874,981 1,392,465
Securities............ 1,570,161 726,566 3,491,622 2,518,675 2,396,461
---------- ---------- ----------- ----------- -----------
Total interest
income............. 7,254,024 5,849,138 25,292,238 20,122,933 15,940,380
---------- ---------- ----------- ----------- -----------
Interest expense:
Deposits:
Interest-bearing
demand............. 142,080 121,077 487,073 376,833 304,807
Savings and money
market deposit
accounts........... 1,800,196 1,628,727 6,651,280 5,879,689 4,613,396
Other time.......... 1,751,289 1,346,153 6,154,468 3,821,473 2,972,891
Funds borrowed........ 144,420 -- 19,136 2,903 143,026
---------- ---------- ----------- ----------- -----------
Interest expense.... 3,837,985 3,095,957 13,311,957 10,080,898 8,034,120
---------- ---------- ----------- ----------- -----------
Net interest income. 3,416,039 2,753,181 11,980,281 10,042,035 7,906,260
Provision for loan
losses................. 285,000 91,370 361,986 602,991 523,679
---------- ---------- ----------- ----------- -----------
Net interest income
after provision for
loan losses.......... 3,131,039 2,661,811 11,618,295 9,439,044 7,382,581
---------- ---------- ----------- ----------- -----------
Non-interest Income:
Banking and trust
services............. 441,456 273,243 1,280,585 1,210,273 910,786
Securities gains...... -- -- 39,894 -- --
---------- ---------- ----------- ----------- -----------
Total non-interest
income............. 441,456 273,243 1,320,479 1,210,273 910,786
---------- ---------- ----------- ----------- -----------
Non-interest Expense:
Salaries and employee
benefits............. 1,115,449 1,101,860 4,076,523 3,901,662 3,410,676
Occupancy............. 352,051 333,527 1,379,059 1,274,058 990,098
Data processing....... 131,039 120,490 508,181 395,665 334,211
Marketing............. 152,990 138,793 566,960 500,482 424,235
Amortization of
organizational costs. -- -- -- -- 23,295
Professional fees..... 177,796 93,843 560,715 448,441 325,663
Insurance............. 41,415 30,015 134,365 114,955 82,001
Other................. 284,040 181,668 863,539 626,412 508,292
---------- ---------- ----------- ----------- -----------
Total non-interest
expense............ 2,254,780 2,000,196 8,089,342 7,261,675 6,098,471
---------- ---------- ----------- ----------- -----------
Income before income
taxes.............. 1,317,715 934,858 4,849,432 3,387,642 2,194,896
Income tax provision.... 291,132 364,594 1,839,294 1,242,347 761,873
---------- ---------- ----------- ----------- -----------
Net income............ $1,026,583 $ 570,264 $ 3,010,138 $ 2,145,295 $ 1,433,023
---------- ---------- ----------- ----------- -----------
Basic earnings per
share.................. $ .30 $ .18 $ .91 $ .69 $ .49
========== ========== =========== =========== ===========
Diluted earnings per
share.................. $ .28 $ .17 $ .86 $ .65 $ .47
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1999 and
for the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Year Ended December 31,
Three Months Ended -----------------------------------------------------------------------
March 31, 1999 1998 1997 1996
----------------------- ----------------------- ----------------------- -----------------------
Compre- Compre- Compre- Compre-
hensive hensive hensive hensive
Total Income Total Income Total Income Total Income
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock:
Balance at beginning
of year.............. $ 3,431,424 $ 3,217,184 $ 2,958,272 $ 2,850,672
Issuance of stock..... 20,400 214,240 258,912 107,600
----------- ----------- ----------- -----------
Balance at end of
year................. 3,451,824 3,431,424 3,217,184 2,958,272
----------- ----------- ----------- -----------
Surplus:
Balance at beginning
of year.............. 22,273,902 19,782,477 17,301,302 16,652,652
Issuance of common
stock................ 326,400 2,283,360 2,476,534 648,650
Other................. -- 208,065 4,641 --
----------- ----------- ----------- -----------
Balance at end of
year................. 22,600,302 22,273,902 19,782,477 17,301,302
----------- ----------- ----------- -----------
Retained Earnings
(Deficit):
Balance at beginning
of year.............. 4,912,359 2,165,310 237,373 (1,011,042)
Net income............ 1,026,583 $1,026,583 3,010,138 $3,010,138 2,145,295 $2,145,295 1,433,023 $1,433,023
---------- ---------- ---------- ----------
Dividends paid--
$0.03, $0.08, $0.07
and $0.07 per share
in 1999, 1998, 1997
and 1996,
respectively......... (85,786) (263,089) (217,358) (184,608)
----------- ----------- ----------- -----------
Balance at end of
year................. 5,853,156 4,912,359 2,165,310 237,373
----------- ----------- ----------- -----------
Accumulated Other
Comprehensive Income--
Unrealized Gains
(Losses) on Securities
Available for Sale:
Balance at beginning
of year.............. 149,471 29,117 (56,847) (47,750)
Other comprehensive
income--unrealized
gains (losses) on
securities available
for sale, net of tax
provision (benefit)
of $(132,674),
$76,523, $47,698 and
$(4,685) for the
three months ended
March 31, 1999, and
in 1998, 1997, and
1996, respectively... (207,516) (207,516) 120,354 120,354 85,964 85,964 (9,097) (9,097)
----------- ---------- ----------- ---------- ----------- ---------- ----------- ----------
Comprehensive income.. $ 819,067 $3,130,492 $2,231,259 $1,423,926
========== ========== ========== ==========
Balance at end of
year................. (58,045) 149,471 29,117 (56,847)
----------- ----------- ----------- -----------
Deferred Compensation:
Balance at beginning
of year.............. (543,767) (506,333) (217,750) --
Awards granted........ (346,800) (187,000) (402,500) (277,500)
Amortization of
deferred
compensation......... 47,068 149,566 98,917 33,500
Other................. -- -- 15,000 26,250
----------- ----------- ----------- -----------
Balance at end of
year................. (843,498) (543,767) (506,333) (217,750)
----------- ----------- ----------- -----------
31,003,739 30,223,389 24,687,755 20,222,350
Loan to Executive
Officer:
Loan to
stockholder/chief
executive officer.... (949,741) (949,741) -- --
----------- ----------- ----------- -----------
Total stockholders'
equity at end of
year............... $30,053,998 $29,273,648 $24,687,755 $20,222,350
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-5
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998 and
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Year Ended December 31,
March 31, March 31, -----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows From
Operating Activities:
Net income............. $ 1,026,583 $ 570,264 $ 3,010,138 $ 2,145,295 $ 1,433,023
------------ ------------ ------------- ------------ ------------
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 135,526 122,731 507,853 472,669 329,013
Amortization of
organization costs.. -- -- -- -- 23,295
Amortization of
deferred
compensation........ 47,068 31,938 149,566 98,917 33,500
Provision for loan
losses.............. 285,000 91,370 361,986 602,991 523,679
Gain on sales of
securities.......... (45,564) -- (39,894) -- --
Increase in deferred
loan fees........... -- -- 347,766 85,684 48,883
(Increase) in
deferred income
taxes............... -- -- (290,700) (440,387) (201,729)
(Increase) in accrued
interest receivable. (420,805) (167,272) (682,467) (145,916) (291,010)
Increase in accrued
interest payable.... 273,457 84,944 267,818 60,881 35,506
Decrease in other
assets.............. (28,012) (366,903) 70,251 77,449 105,579
Increase in other
liabilities......... 4,232,460 368,143 569,862 414,712 691
------------ ------------ ------------- ------------ ------------
Total adjustments.. 4,479,130 164,951 1,262,041 1,227,000 607,407
------------ ------------ ------------- ------------ ------------
Net cash provided
by operating
activities........ 5,505,713 735,215 4,272,179 3,372,295 2,040,430
------------ ------------ ------------- ------------ ------------
Cash Flows From
Investing Activities:
Proceeds from
maturities, pay
downs, and sales of
securities............ 14,917,259 32,628,772 85,390,763 11,255,315 25,658,276
Purchase of securities
available for sale.... (3,456,295) (15,400,000) (136,661,479) (31,888,325) (31,992,943)
Net loan principal
advanced.............. (25,801,143) (5,252,823) (63,820,101) (47,240,005) (45,352,131)
Bank premises and
equipment
expenditures.......... (75,075) (47,393) (191,235) (659,401) (901,638)
------------ ------------ ------------- ------------ ------------
Net cash provided
by (used in)
investing
activities........ (14,415,254) 11,928,556 (115,282,052) (68,532,416) (52,588,436)
------------ ------------ ------------- ------------ ------------
Cash Flows From
Financing Activities:
Net increase in total
deposits.............. 19,460,442 18,886,537 79,220,200 63,202,205 45,702,759
Proceeds from funds
borrowed.............. -- -- 20,000,000 -- 3,000,000
Principal reductions
of funds borrowed..... (10,000,000) -- -- (3,000,000) (700,000)
Issuance of common
stock................. -- 124,200 1,360,859 2,347,946 505,000
Dividends paid......... (85,786) (60,629) (263,089) (217,358) (184,608)
------------ ------------ ------------- ------------ ------------
Net cash provided
by financing
activities........ 9,374,656 18,950,108 100,317,970 62,332,793 48,323,151
------------ ------------ ------------- ------------ ------------
Net Increase (Decrease)
in Cash and Cash
Equivalents............ 465,115 31,613,879 (10,691,903) (2,827,328) (2,224,855)
Cash and Cash
Equivalents at
Beginning of Year...... 15,514,218 26,206,121 26,206,121 29,033,449 31,258,304
------------ ------------ ------------- ------------ ------------
Cash and Cash
Equivalents at End of
Year................... $ 15,979,333 $ 57,820,000 $ 15,514,218 $ 26,206,121 $ 29,033,449
============ ============ ============= ============ ============
Cash Paid During Year
For:
Interest............... $ 3,564,874 $ 3,011,013 $ 13,044,139 $ 10,004,288 $ 7,998,614
Income taxes........... 233,880 $ 88,676 1,826,826 1,562,726 977,432
============ ============ ============= ============ ============
Non-Cash Transactions:
Loan to executive
officer for purchase
of common stock....... $ -- $ -- $ 949,741 $ -- $ --
============ ============ ============= ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Accounting Policies:
The consolidated financial statements of PrivateBancorp, Inc. (the
"Company") and Subsidiary have been prepared in conformity with generally
accepted accounting principles and reporting practices prescribed for the
banking industry. A description of the significant accounting policies follows:
a. Consolidation
The consolidated financial statements of the Company and Subsidiary include
the accounts of the Company and its wholly owned subsidiary, The PrivateBank
and Trust Company (the "Bank"). Significant intercompany accounts and
transactions have been eliminated in the preparation of these statements.
b. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods, but not longer than thirty days.
c. Securities
Securities for which management has the intent and ability to hold to
maturity are reported at cost, adjusted for amortization of premium and
accretion of discount. Securities available for sale are reported at fair
value, with unrealized gains and losses and applicable income taxes reported as
other comprehensive income in a separate component of stockholders' equity. At
December 31, 1998 and 1997, all securities held were classified as available
for sale.
Premium and discount on securities are included in interest income on
securities over the period from acquisition to maturity or earlier call date
using the straight-line method, the results of which are not materially
different from those obtained using the level-yield method. The specific
identification method is used to record gains and losses on security
transactions.
d. Loans
Loans are generally reported at the principal amount outstanding, net of
unearned income. Loans originated and intended for sale in the secondary market
are classified as held for sale and reported at the lower of cost or market
value.
Loan origination and commitment fees, offset by certain direct loan
origination costs, are being deferred and the net amount amortized as an
adjustment of the related loan's yield. The Company is generally amortizing
these amounts over the contractual life of the related loans.
Loans are placed on nonaccrual status when, in the opinion of management,
there are doubts as to the collectibility of interest or principal, or when
principal or interest is past due 90 days or more and the loan is not well
secured and in the process of collection. All loans classified as nonaccrual
are considered to be impaired. Any shortfall in the estimated value of an
impaired loan compared with the recorded investment of the loan is identified
as an allocated portion of the allowance for loan losses and is one of the
factors
F-7
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
considered by management in their overall assessment of the adequacy of the
allowance for loan losses. Interest previously accrued but not collected is
reversed and charged against interest income at the time the related loan is
placed on nonaccrual status. Interest payments received on impaired loans are
recorded as reductions of principal if principal payment is doubtful.
e. Allowance for Loan Losses
The allowance for loan losses is determined by management based on factors
such as past loan loss experience, known and inherent risks in the loan
portfolio, the estimated value of any underlying collateral, prevailing
economic conditions and other factors and estimates which are subject to change
over time. Management adjusts the allowance for loan losses by recording a
provision for loan losses in an amount sufficient to maintain the allowance at
a level commensurate with the risks in the loan portfolio. Loans are charged
off when deemed to be uncollectible by management.
f. Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation
and amortization. For financial reporting purposes, depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
g. Organization Costs
Organization costs incurred by the Company in performing activities
necessary to organize the Bank were amortized on a straight-line basis over a
five-year period beginning February 6, 1991, when the Bank commenced
operations.
h. Income Taxes
The Company accounts for income taxes under an asset and liability approach
with the objective of recognizing the amount of taxes payable or refundable for
the current year and deferred tax assets and liabilities for the future tax
consequences that have been recognized in the Company's financial statements or
tax returns. The measurement of tax assets and liabilities is based on tax
rates in enacted tax laws. Deferred tax assets are reduced, if necessary, by
the amount of such benefits that are not expected to be realized based on
available evidence.
i. Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In June, 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." Under SFAS No. 125, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets
when control has been surrendered and derecognizes liabilities when
extinguished. In December, 1996, the FASB issued SFAS No. 127 "Deferral of
Effective Date of Certain Provisions of FASB Statement No. 125" which delayed
the effectiveness of selected provisions of SFAS No. 125 from January 1, 1997
to January 1, 1998. Management adopted SFAS No. 125 upon its effectiveness on
January 1, 1997 and January 1, 1998 as appropriate. The adoption of these
statements had no effect on the Company's reported consolidated financial
position and the results of operations.
F-8
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
j. Earnings per Share
The Company accounts for and reports earnings per share using a dual
presentation of basic and diluted earnings per share. Basic earnings per common
share are determined by dividing earnings by the weighted average number of
common shares. Dilutive stock options are included as share equivalents using
the treasury stock method in determining diluted earnings per share.
k. Comprehensive Income
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components. The statement requires that components of
comprehensive income, as defined, be reported in a financial statement that is
displayed with the same prominence as other financial statements. Management
adopted SFAS No. 130 in 1998 upon its effectiveness, using the statement of
changes in stockholders' equity approach. The adoption of this statement had no
effect on the Company's reported consolidated financial position and the
results of operations. The 1997 and 1996 consolidated financial statements have
been restated to conform to the SFAS No. 130 principles.
l. Derivatives
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
Instruments and for Hedging Activities." It requires that all derivatives be
recognized as assets or liabilities on the balance sheet and be measured at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedging instrument. The statement is effective for fiscal
quarters beginning after June 15, 1999. As the Company and Bank do not own any
derivative instruments, this statement is expected to have no effect on the
Company's reported consolidated financial position and the results of
operations.
m. Use of Estimates in the Preparation of Financial Statements
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 reporting
period. Actual results could differ from these estimates.
n. Reclassifications
Certain reclassifications have been made to prior periods' consolidated
financial statements to place them on a basis comparable with the current
period's consolidated financial statements.
o. Interim Financial Information
The accompanying financial statements as of March 31, 1999 and for the three
months ended March 31, 1999 and 1998 are unaudited and in the opinion of
management, reflect all adjustments that are necessary for a fair presentation
of the Company's financial position, results of operations and cash flows for
the periods then ended. All such adjustments are of a normal and recurring
nature.
F-9
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
2. Operations:
The Company was incorporated under the laws of the State of Delaware on
November 7, 1989. The Bank commenced operations on February 6, 1991, after
having received the approval of various banking regulatory authorities.
The Bank, through its downtown Chicago main office as well as two suburban
branches, provides personal and commercial banking services primarily to
affluent individuals, professionals and their business interests in the Chicago
metropolitan area. In addition to loans and deposits, the Company's services
include trust, investment and insurance products.
3. Earnings Per Share and Stock Split:
The following table contains a reconciliation of the numerators and
denominators used in the computation of basic and diluted earnings per share
for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Weighted
Income Average Shares Per Share
(Numerator) (Denominator) Amount
----------- -------------- ---------
<S> <C> <C> <C>
Year Ended December 31, 1998
Basic Earnings Per Share--Income
available to common stockholders. $3,010,138 3,313,092 $.91
====
Effect of Dilutive Stock Options.. -- 201,436
---------- ---------
Diluted Earnings Per Share--Income
available to common stockholders. $3,010,138 3,514,528 $.86
========== ========= ====
Year Ended December 31, 1997
Basic Earnings Per Share--Income
available to common stockholders. $2,145,295 3,124,464 $.69
====
Effect of Dilutive Stock Options.. -- 161,408
---------- ---------
Diluted Earnings Per Share--Income
available to common stockholders. $2,145,295 3,285,872 $.65
========== ========= ====
Year Ended December 31, 1996
Basic Earnings Per Share--Income
available to common stockholders. $1,433,023 2,939,040 $.49
====
Effect of Dilutive Stock Options.. -- 113,984
---------- ---------
Diluted Earnings Per Share--Income
available to common stockholders. $1,433,023 3,053,024 $.47
========== ========= ====
</TABLE>
On June 25, 1998, the Company's stockholders approved an eight-for-one
common stock split to be distributed in the form of a stock dividend. As a
result of this action, 1,446,473 shares were issued to stockholders of record
on June 25, 1998. Additionally, stated value was changed from $20 to $2.50 per
share, leaving the Company's common stock account unchanged. All references to
number of shares, per share amounts and stock option data in the consolidated
financial statements have been adjusted to reflect the stock split on a
retroactive basis.
F-10
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
4. Securities:
The amortized cost and the estimated fair value of securities as of December
31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
December 31, 1998--
Available for Sale--
U.S. Treasuries......... $ 6,020,730 $ 73,333 $ -- $ 6,094,063
States and political
subdivisions........... 37,709,337 227,188 (132,097) 37,804,428
Collateralized mortgage
obligations............ 61,357,858 117,435 (61,016) 61,414,277
Corporate securities.... 10,242,935 19,565 -- 10,262,500
------------ -------- --------- ------------
Total debt securities... 115,330,860 437,521 (193,113) 115,575,268
Equity securities....... 1,315,471 -- -- 1,315,471
------------ -------- --------- ------------
$116,646,331 $437,521 $(193,113) $116,890,739
============ ======== ========= ============
December 31, 1997--
Available for Sale--
U.S. Treasury and U.S.
Government agencies.... $ 35,948,802 $ 22,365 $ (9,917) $ 35,961,250
Collateralized mortgage
obligations............ 10,501,933 4,256 (93,456) 10,412,733
Corporate securities.... 18,145,287 125,650 (1,368) 18,269,569
------------ -------- --------- ------------
Total debt securities... 64,596,022 152,271 (104,741) 64,643,552
Equity securities....... 739,700 -- -- 739,700
------------ -------- --------- ------------
$ 65,335,722 $152,271 $(104,741) $ 65,383,252
============ ======== ========= ============
</TABLE>
The amortized cost and estimated fair value of securities at December 31,
1998, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because obligors may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------ ------------
<S> <C> <C>
Due within one year............................ $ 6,196,706 $ 6,235,547
Due after one year through five years.......... 2,624,825 2,659,654
Due after five years through ten years......... 8,781,479 8,817,549
Due after ten years............................ 97,727,850 97,862,518
Equity securities.............................. 1,315,471 1,315,471
------------ ------------
$116,646,331 $116,890,739
============ ============
</TABLE>
During 1998, securities were sold for total proceeds of $13,886,279,
resulting in a net gain of $39,894. No securities were sold in 1997 or 1996.
The other comprehensive income--unrealized gain on securities available for
sale is presented on a net basis on the Consolidated Statements of Changes in
Stockholders' Equity. The following table discloses
F-11
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
changes in other comprehensive income for 1998 on a gross basis. As there were
no sales of securities in 1997 or 1996, the gross and net presentations for
these years are the same.
<TABLE>
<CAPTION>
1998
-----------------------------
Before tax Tax Net of Tax
amount Expense Amount
---------- ------- ----------
<S> <C> <C> <C>
Unrealized Gains on Securities Available
for Sale--
Unrealized holding gains................. $236,771 $92,032 $144,739
Less: reclassification adjustment for
gain included in net income............. 39,894 15,509 24,385
-------- ------- --------
Net unrealized gains....................... $196,877 $76,523 $120,354
======== ======= ========
</TABLE>
At December 31, 1998, securities carried at $35,319,869 were pledged to
secure public and trust deposits and for other purposes as required or
permitted by law.
Equity securities consist of Federal Home Loan Bank of Chicago capital stock
and Neighborhood Housing Services certificates. These securities do not have a
readily determinable fair value for purposes of SFAS No. 115 since their
ownership is restricted and they lack a market. Accordingly, such securities
are carried at an amount equal to cost.
In the opinion of management, there were no investments in securities at
December 31, 1998, which constituted an unusual credit risk for the Company.
5. Loans:
Amounts outstanding by selected loan categories at December 31, 1998 and
1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Real estate--
Residential................................... $ 47,746,331 $ 54,129,790
Commercial.................................... 94,392,491 55,429,205
Construction.................................. 22,407,610 10,140,104
Commercial...................................... 46,799,787 33,862,056
Personal........................................ 64,194,340 62,756,792
Held for sale................................... 6,424,337 2,176,600
------------ ------------
$281,964,896 $218,494,547
============ ============
</TABLE>
Loans held for sale are residential real estate loans intended to be sold in
the secondary market. Under the Bank's sales program, such loans are sold at
face value. No lower-of-cost-or-market adjustments were required at December
31, 1998 or 1997.
There were no loans on which the accrual of interest has been discontinued
(impaired loans) at December 31, 1998 and 1997, respectively, as well as at any
time during 1998. The average balance of impaired loans and the related amount
of interest income recognized while such loans were impaired amounted to $2,272
and $0 in 1997.
F-12
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
6. Allowance for Loan Losses:
The changes in the allowance for loan losses for the three years ended
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Beginning balance..................... $3,050,000 $2,450,000 $1,955,000
Loans charged off..................... (1,986) (2,991) (28,679)
Provision for loan losses............. 361,986 602,991 523,679
---------- ---------- ----------
Ending balance........................ $3,410,000 $3,050,000 $2,450,000
========== ========== ==========
</TABLE>
There were no impaired loans at December 31, 1998 and 1997.
7. Bank Premises and Equipment:
Bank premises and equipment at December 31, 1998 and 1997, consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Furniture, fixtures and equipment.................. $2,408,164 $2,230,145
Leasehold improvements............................. 1,344,354 1,331,138
---------- ----------
3,752,518 3,561,283
Accumulated depreciation and amortization.......... 2,164,798 1,656,945
---------- ----------
$1,587,720 $1,904,338
========== ==========
</TABLE>
Included in occupancy expense in the consolidated statements of income is
depreciation and amortization expense of $507,853, $472,669 and $329,013 for
1998, 1997 and 1996, respectively.
The Bank leases its main banking facility and branch facilities under
noncancellable operating lease agreements. The minimum annual rental
commitments under these leases, at December 31, 1998, are as follows:
<TABLE>
<S> <C>
1999.......................... $ 338,527
2000.......................... 319,907
2001.......................... 330,456
2002.......................... 244,404
2003.......................... 254,952
2004 and thereafter........... 689,022
----------
$2,177,268
==========
</TABLE>
Total rent expense included in the consolidated statements of income was
$635,761, $601,461, and $494,757 for 1998, 1997, and 1996, respectively.
F-13
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
8. Income Taxes:
The components of total income tax provision in the consolidated statements
of income for the years ended December 31, 1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Income tax provision--
Current--
Federal............................. $1,758,748 $1,609,697 $963,602
State............................... 371,246 73,037 --
---------- ---------- --------
2,129,994 1,682,734 963,602
---------- ---------- --------
Deferred--
Federal............................. (255,235) (298,018) (201,729)
State............................... (35,465) (142,369) --
---------- ---------- --------
(290,700) (440,387) (201,729)
---------- ---------- --------
Total............................. $1,839,294 $1,242,347 $761,873
========== ========== ========
</TABLE>
The tax effect of fair value adjustments on securities available for sale is
recorded directly to other comprehensive income in a separate component of
stockholders' equity. The net tax provision (benefit) recorded directly to
other comprehensive income amounted to $76,523, $47,698, and $(4,685) in 1998,
1997 and 1996, respectively.
A summary reconciliation of the differences between the total income tax
provision (benefit) and the amounts computed at the statutory federal tax rate
of 34% for the years ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------
<S> <C> <C> <C>
Income tax provision at statutory
federal income tax rate................ $1,648,806 $1,151,798 $746,265
Increase (decrease) in taxes resulting
from:
Tax exempt income..................... (67,264) -- --
State income taxes.................... 221,615 6,525 --
Other................................. 36,137 84,024 15,608
---------- ---------- --------
Total............................... $1,839,294 $1,242,347 $761,873
========== ========== ========
</TABLE>
F-14
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
A net deferred tax asset is included in other assets in the consolidated
balance sheet as a result of temporary differences between the carrying amounts
of assets and liabilities in the financial statements and their related tax
bases. The components of the net deferred tax asset as of December 31, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Gross deferred tax assets--
Allowance for loan losses....................... $1,182,193 $1,041,960
Leasehold improvements.......................... 231,316 159,524
Amortization of restricted stock................ 109,240 51,298
Other........................................... 51,829 36,434
---------- ----------
1,574,578 1,289,216
Valuation allowance............................... -- --
---------- ----------
Gross deferred tax assets......................... 1,574,578 1,289,216
Gross deferred tax liabilities.................... (215,233) (144,048)
---------- ----------
Net deferred tax asset............................ $1,359,345 $1,145,168
========== ==========
</TABLE>
9. Funds Borrowed:
As of December 31, 1998, funds borrowed consisted of a $20 million FHLB term
note, with an interest rate of 5.20%. The term note matured on January 7, 1999.
There were no funds borrowed as of December 31, 1997.
10. Employee Benefit and Incentive Plans:
a. Savings and Profit Sharing Plan
The Bank maintains The PrivateBank and Trust Company Savings and Profit
Sharing Plan (the "Plan") pursuant to Section 401(k) of the Internal Revenue
Code, whereby eligible employees may contribute a percentage of compensation,
but not in excess of the maximum amount allowed under the Code. The Bank can
make discretionary contributions to the Plan as determined and approved by the
Bank's Board of Directors. Total discretionary contributions to the Plan
amounted to $61,462, $47,001, and $43,130 in 1998, 1997 and 1996, respectively.
b. Stock Options
Pursuant to initial stockholder stock option agreements as amended, the
Company granted to each initial stockholder an option to purchase up to the
number of shares equal to that number of shares purchased by the investor in
the initial offering at an exercise price of $6.25 per share. All 80,800 shares
reserved for issuance to these initial stockholders were issued by the Company
in January and February, 1996, upon the exercise of these option agreements.
The Company has stock options outstanding under its Stock Incentive Plan, a
director stock option program and certain compensation replacement options.
As in effect as of December 31, 1998, the Stock Incentive Plan allows up to
15% of the then number of common shares issued and outstanding, plus an
additional 136,000 shares, to be issued under the Plan either pursuant to the
exercise of stock options granted thereunder or as restricted stock awards. The
option price may not be less than the fair market value on the date of grant.
All options have a term of 10 years. Options granted
F-15
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
in 1998 are first exercisable five years from the date of grant or up to two
years earlier if certain conditions for total stockholder return are met.
Options granted in 1997 and prior are first exercisable beginning at least two
years following the date of grant.
Since 1992 the Company has compensated non-employee directors with annual
option grants. The option price of the director options is fair market value
on the date of grant, and the exercise period is 10 years from the date of
grant.
In 1992, the Company granted compensation replacement options to certain
officers of the Company who agreed to reduced cash compensation. The option
price is the fair market value on the date of grant. The compensation
replacement options are exercisable during a 10-year period from the date of
grant.
The following table summarizes the status of the Company's stock option
agreements and stock option program as of December 31, 1998 and 1997, and
changes during the years then ended:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year................ 543,168 $ 7.57 523,264 $ 7.38
Granted............... 80,960 17.19 35,360 11.00
Exercised............. (81,920) 7.02 (15,456) 6.25
Forfeited............. -- --
------- ------ ------- ------
Outstanding at end of
year................... 542,208 $ 9.09 543,168 $ 7.57
======= ====== ======= ======
Options exercisable at
year-end............... 433,808 425,168
======= =======
Weighted average fair
value of options
granted during the
year................... $17.19 $11.00
</TABLE>
The range of exercise prices and weighted average remaining contractual
life for stock options outstanding as of December 31, 1998, was $6.25-$17.19
and 7 years, respectively.
The Company applies APB Opinion 25 in accounting for stock-based
compensation. Accordingly, no compensation expense has been recognized for its
stock option program. Had compensation expense for stock options been
determined based on the fair value at the grant dates for awards under the
stock option program consistent with the method of FASB Statement No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income--
As reported........................... $3,010,138 $2,145,295 $1,433,023
Pro forma............................. 2,869,569 1,996,145 1,282,268
========== ========== ==========
Basic earnings per share--
As reported........................... $ .91 $ .69 $ .49
Pro forma............................. .87 .64 .44
Diluted earnings per share--
As reported........................... $ .86 $ .65 $ .47
Pro forma............................. .82 .61 .42
========== ========== ==========
</TABLE>
F-16
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
In determining the fair value of each option grant for purposes of the above
pro forma disclosures, the Company used an option pricing model with the
following assumptions for grants in 1998 and 1997, respectively: dividend yield
of 0.6% and 0.7% for 1998 and 1997 respectively; risk-free interest rate of
6.0% for both years; and expected lives for both years of 10 years for the
Stock Incentive Plan options, 10 years for the compensation replacement options
and 10 years for the various director options.
c. Restricted Stock
In 1998 and 1997, the Company issued 13,600 and 36,800 shares, respectively,
of restricted stock under the Stock Incentive Plan. These shares had a fair
value of $13.75 and $10.94 per share, respectively, as of the grant date.
During 1997, 1,600 restricted shares were forfeited. These shares carry voting
and dividend rights. Sale of the shares is restricted prior to vesting. Subject
to continued employment, vesting occurs five years from the date of grant.
Shares issued under the plan are recorded at their fair market value on the
date of grant with a corresponding charge to deferred compensation. The
deferred compensation, a component of stockholders' equity, is being amortized
as compensation expense on a straight-line basis over the vesting period.
Included in salaries and employee benefits in the consolidated statements of
income is compensation expense for restricted shares of $149,566, $98,917, and
$33,500 for 1998, 1997, and 1996 respectively.
11. Related-Party Transactions:
An analysis of loans made to directors and executive officers of the Company
and the Bank follows:
<TABLE>
<S> <C>
Balance, December 31, 1997................................... $11,308,339
Additions.................................................. 3,226,741
Collections................................................ (3,791,197)
-----------
Balance, December 31, 1998................................... $10,743,883
===========
</TABLE>
Directors and executive officers of the Company and Bank were clients of and
had transactions with the Bank in the ordinary course of business during the
period presented above and additional transactions may be expected in the
future. In management's opinion, all outstanding loans, commitments and deposit
relationships included in such transactions were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with others, and did not involve more than a normal
risk of collectibility or other unfavorable features.
In addition to the loans reflected above, in June, 1998, the Company made a
$949,741 loan to the chief executive officer of the Company and the Bank, the
proceeds of which were put towards the purchase of $1 million of common stock
of the Company. The loan has a five year term but is payable sooner under
certain conditions. The loan bears interest at the rate of 5.69% per annum.
Provided that the officer remains employed by the Bank, the loan agreement
calls for forgiveness of 0% up to 100% of the interest based on how many years
the loan remains outstanding. The loan is reflected in the consolidated
financial statements as a reduction in stockholders' equity.
The Company is the general partner in a partnership for investment purposes.
Through a contractual arrangement, the Bank's trust department maintains the
partnership's records and earns an administrative fee from the partnership.
During 1998, the Bank began offering insurance products to its clients
through a strategic alliance with a Chicago based financial services firm which
is a stockholder of the Company. In addition, this financial
F-17
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
services firm serves as an insurance agency in coordinating certain insurance
coverage for the Company and Bank. During 1998, the Bank earned commission
revenue of $5,761 for referred business and paid $131,690 in fees to this
financial services firm for insurance and related services.
During 1998 and 1997, the Bank acquired selected furniture with a total cost
of $2,655 and $71,875, respectively, through related parties.
The Bank incurred professional fees in 1998, 1997 and 1996 for services
provided by one law firm, whose partner is a director of the Company and the
Bank.
12. Credit-Related Instruments:
The Company has, through its subsidiary Bank, credit-related instruments
with off-balance-sheet risk in the normal course of business to meet the
financing needs of its clients. These financial instruments include commitments
to extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the consolidated financial statements. Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties failed to
completely perform as contracted.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments, assuming that the amounts are fully advanced and that collateral
or other security is of no value. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments. At December 31, 1998 and 1997, the Bank had the following
categories of credit-related financial instruments (at contract amount):
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Commitments to extend credit..................... $97,487,444 $67,184,442
Standby letters of credit........................ 10,147,140 2,971,656
</TABLE>
Commitments to extend credit are agreements to lend to a client as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each client's
creditworthiness on a cash-by-case basis. The amount of collateral obtained, if
deemed necessary, upon extension of credit is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a client to a third party. Those guarantees are
primarily issued to support commercial business activities of Bank clients. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to clients. The Bank holds
collateral supporting those commitments for which collateral is deemed
necessary.
13. Concentrations of Credit Risk:
Loan concentrations are defined as amounts loaned to a multiple number of
borrowers engaged in similar activities, which would cause them to be similarly
impacted by economic or other conditions. The Bank grants
F-18
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
loans to clients located primarily in the metropolitan Chicago area. There are
no other significant concentrations of loans and commitments to make loans
other than the categories of loans disclosed in Note 5.
14. Estimated Fair Value of Financial Instruments:
The following presents the carrying value and estimated fair value of the
various classes of financial instruments, all nontrading, held by the Company,
through its subsidiary Bank, at December 31, 1998 and 1997. This information is
presented solely for compliance with SFAS No. 107 and is subject to change over
time based on a variety of factors. Because no active market exists for a
significant portion of the financial instruments presented below and the
inherent imprecision involved in the estimation process, management does not
believe the information presented reflects the amounts that would be received
if the Company's assets and liabilities were sold nor does it represent the
fair value of the Company as an entity.
Where possible, the Company has utilized quoted market prices to estimate
fair value. Since quoted market prices were not available for a significant
portion of the financial instruments, the fair values were approximated using
discounted cash flow techniques. Fair value estimates are made at a specific
point in time, based on judgments regarding future expected loss experience,
current economic conditions, risk conditions, risk characteristics of various
financial instruments and other factors. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular financial instrument. These estimates
are subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets--
Cash and cash
equivalents.......... $ 15,514,218 $ 15,514,218 $ 26,206,121 $ 26,206,121
Securities............ 116,890,739 116,890,739 65,383,252 65,383,252
Net loans............. 278,554,896 281,547,896 215,444,547 216,343,547
Accrued interest
receivable........... 2,264,195 2,264,195 1,581,728 1,581,728
Liabilities--
Deposits with no
stated maturity...... 236,711,317 236,711,317 195,941,957 195,941,957
Time deposits......... 128,282,346 128,506,346 89,831,506 89,905,506
------------ ------------ ------------ ------------
Total deposits...... 364,993,663 365,217,663 285,773,463 285,847,463
------------ ------------ ------------ ------------
Accrued interest
payable................ 720,874 720,874 453,056 453,056
Funds borrowed.......... 20,000,000 20,000,000 -- --
============ ============ ============ ============
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments. These assumptions were based on
subjective estimates of market conditions and perceived risks of the financial
instruments at a certain point in time.
a. Cash and Cash Equivalents, Accrued Interest Receivable and Interest Payable
For these short-term instruments, the carrying value approximates fair value
because these instruments are short-term in nature and do not present
unanticipated credit concerns.
F-19
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
b. Securities
For securities held to maturity or available for sale, fair values are based
on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
instruments.
c. Net Loans
The fair value of performing loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loan. The
estimate of maturity is based on the Company's and the industry's historical
experience with repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending conditions.
Fair value for significant nonaccrual (impaired) loans is based on estimated
cash flows which are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined using available
market information and specific borrower information.
d. Deposit Liabilities
The fair value of deposits with no stated maturity, such as non-interest-
bearing deposits, interest-bearing deposits, savings and money market deposit
accounts, is equal to the amount payable on demand as of year-end. The fair
value of certificates of deposit is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
e. Funds Borrowed
Rates currently available to the Company and Bank for debt with similar
terms and remaining maturities are used to estimate fair value of existing
debt.
f. Unrecognized Financial Instruments
The fair value of unrecognized financial instruments, including commitments
to extend credit, standby letters of credit and financial guarantees, is
insignificant and, therefore, not presented.
15. Regulatory Requirements:
The Bank is subject to federal and state laws, which restrict the payment of
dividends to the Company. Based on these restrictions, at January 1, 1999, the
Bank could have declared approximately $6,954,418 in dividends without
requesting approval of the applicable federal or state regulatory agency.
The Bank is required to maintain noninterest-bearing cash balances with the
Federal Reserve based on the types and amounts of deposits held. During 1998
and 1997, the average balances maintained to meet the requirement were $829,000
and $649,000, respectively.
The Company and Bank are subject to various regulatory capital requirements
as established by the applicable federal or state banking regulatory
authorities. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific capital
guidelines that
F-20
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items. The quantitative measures for capital adequacy
require the Company and Bank to maintain minimum amounts and ratios of total
and Tier 1 capital to risk weighted assets and of Tier 1 capital to average
assets (leverage). The Company's and Bank's capital components,
classification, risk weightings and other factors are also subject to
qualitative judgments by regulators. Failure to meet minimum capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a material effect on the Company's financial statements. Management
believes that as of December 31, 1998, the Company and Bank meet all minimum
capital adequacy requirements to which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action and management believes that no events or changes in
conditions have occurred subsequent to such notification to change the Bank's
category.
The following table presents selected capital information for the Company
(Consolidated) and Bank as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- -------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- ------
(000's) (000's) (000's)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998--
Total risk-based capital--
Consolidated............ $34,978 11.53% $24,274 8.00%
Bank.................... 31,473 10.41 24,188 8.00 $30,235 10.00%
Tier 1 risk-based
capital--
Consolidated............ 31,568 10.40% 12,137 4.00%
Bank.................... 28,063 9.29 12,094 4.00 18,141 6.00%
Tier 1 (leverage)
capital--
Consolidated............ 31,568 7.88% 16,018 4.00%
Bank.................... 28,063 7.27 15,456 4.00 19,320 5.00%
As of December 31, 1997--
Total risk-based capital--
Consolidated............ $28,159 11.75% $19,165 8.00%
Bank.................... 25,837 10.79 19,164 8.00 23,955 10.00%
Tier 1 risk-based
capital--
Consolidated............ 25,164 10.50% 9,582 4.00%
Bank.................... 22,843 9.54 9,582 4.00 14,373 6.00%
Tier 1 (leverage)
capital--
Consolidated............ 25,164 8.70% 11,563 4.00%
Bank.................... 22,843 8.16 11,208 4.00 14,011 5.00%
</TABLE>
16. Operating Segments:
As noted in Note 2, 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.
F-21
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
The financial information contained in the Company's consolidated financial
statements, such as net interest income, other income, net income and total
assets, is used by management as a key input in evaluating the performance of
the Company and Bank on an aggregate basis.
17. Contingent Liabilities
Because of the nature of its activities, the Company is from time to time
involved in legal actions that arise in the normal course of business. In the
judgment of management, after consultation of legal counsel, none of the
litigation to which the Company or its subsidiary is a party will have a
material effect, either individually or in the aggregate, on the consolidated
financial position or results of operations.
18. Privatebancorp, Inc. (Parent Company Only)--Condensed Financial Statements:
PRIVATEBANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
As of December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ----------- -----------
<S> <C> <C>
Cash and due from banks--bank subsidiary............... $ 668,753 $ 1,766,193
Investment in bank subsidiary.......................... 28,269,290 22,871,969
Other assets........................................... 353,350 67,149
----------- -----------
Total assets....................................... $29,291,393 $24,705,311
=========== ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Other liabilities...................................... $ 17,745 $ 17,556
----------- -----------
Total liabilities...................................... 17,745 17,556
Stockholders' equity................................... 29,273,648 24,687,755
----------- -----------
Total liabilities and stockholders' equity......... $29,291,393 $24,705,311
=========== ===========
</TABLE>
F-22
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
PRIVATEBANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating income:
Interest income--other................... $ 31,523 $ -- $ --
Total.................................. 31,523 -- --
---------- ---------- ----------
Operating expense:
Amortization of deferred compensation.... 149,566 98,917 33,500
Amortization of organization costs....... -- -- 23,295
Other.................................... 225,853 67,974 23,788
---------- ---------- ----------
Total.................................. 375,419 166,891 80,583
---------- ---------- ----------
(Loss) before income taxes and equity
in undistributed net income of bank
subsidiary............................ (343,896) (166,891) (80,583)
Income tax (benefit)....................... (134,119) (56,743) (34,546)
---------- ---------- ----------
(Loss) before equity in undistributed
net income of bank subsidiary......... (209,777) (110,148) (46,037)
---------- ---------- ----------
Equity in undistributed net income of bank
subsidiary................................ 3,219,915 2,255,443 1,479,060
---------- ---------- ----------
Net income............................. $3,010,138 $2,145,295 $1,433,023
========== ========== ==========
</TABLE>
The Parent Company Only Statements of Changes in Stockholders' Equity are
the same as the Consolidated Statements of Changes in Stockholders' Equity.
F-23
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998 and 1997
PRIVATEBANCORP, INC. (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 3,010,138 $ 2,145,295 $ 1,433,023
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities--
Equity in net income of bank
subsidiary......................... (3,219,915) (2,255,443) (1,479,060)
Amortization of organization costs.. -- -- 23,295
Amortization of deferred
compensation....................... 149,566 98,917 33,500
(Increase) decrease in other assets. (135,187) (57,731) 2,474
Increase (decrease) in other
liabilities........................ 189 49,593 (27,398)
----------- ----------- -----------
Total adjustments................. (3,205,347) (2,164,664) (1,447,189)
----------- ----------- -----------
Net cash (used in) operating
activities....................... (195,209) (19,369) (14,166)
----------- ----------- -----------
Cash flows from investing activities:
Net (increase) in capital investments
in bank subsidiary................... (2,000,000) (2,000,000) --
----------- ----------- -----------
Net cash (used in) investing
activities........................... (2,000,000) (2,000,000) --
----------- ----------- -----------
Cash flows from financing activities:
Issuance of common stock.............. 1,360,859 2,347,946 505,000
Dividends paid........................ (263,090) (217,358) (184,608)
----------- ----------- -----------
Net cash provided by financing
activities....................... 1,097,769 2,130,588 320,392
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ (1,097,440) 111,219 306,226
Cash and cash equivalents at beginning
of year................................ 1,766,193 1,654,974 1,348,748
----------- ----------- -----------
Cash and cash equivalents at end of
year................................... $ 668,753 $ 1,766,193 $ 1,654,974
=========== =========== ===========
Other cash flow disclosures:
Income tax payment (receipt).......... $ 1,826,826 $ 1,562,726 $ 977,432
=========== =========== ===========
Non-cash transactions:
Loan to executive officer for purchase
of common stock...................... $ 949,741 $ -- $ --
=========== =========== ===========
</TABLE>
F-24
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
December 31, 1998 and 1997
19. Subsequent Event:
During March and April, 1999, the Company's Board of Directors and
stockholders approved an increase in the number of authorized shares to
12,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
Board also approved a change in the per share stated value of the common stock
from $2.50 to $1.00 per share, and declared a two-for-one common stock split to
be effected in the form of a stock dividend. Such change in authorized shares
and change in stated value became effective prior to the effectiveness of the
registration statement covering the Company's initial public offering. On June
24, 1999 to effect a two-for-one stock split, the Company's Board of Directors
declared a one-for-one stock dividend on its common stock payable on June 28,
1999 to stockholders of record as of the close of business on June 25, 1999.
All references to number of shares, per share amounts and stock option data in
the consolidated financial statements have been adjusted to reflect the stock
split on a retroactive basis.
F-25
<PAGE>
[Logo of PrivateBancorp, Inc.]
