SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to ________
Commission File Number: 000-25887
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 36-3681151
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
TEN NORTH DEARBORN STREET
CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip Code)
(312) 683-7100
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No|_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
================================================================================
CLASS OUTSTANDING AS OF NOVEMBER 10, 2000
--------------------------------------------------------------------------------
Common, no par value 4,623,532
================================================================================
<PAGE>
PRIVATEBANCORP, INC.
FORM 10-Q Quarterly Report
Table of Contents
Page
Number
------
Selected Financial Data........................................................1
PART I
Item 1. Financial Statements..................................................3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........24
PART II
Item 1. Legal Proceedings....................................................28
Item 2. Changes in Securities and Use of Proceeds............................28
Item 3. Defaults upon Senior Securities......................................28
Item 4. Submission of Matters to a Vote of Security Holders..................28
Item 5. Other Information....................................................28
Item 6. Exhibits and Reports on Form 8-K.....................................28
Signatures....................................................................29
Exhibit Index.................................................................30
i
<PAGE>
SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
information of PrivateBancorp, Inc. at or for the periods indicated. This
information should be used in conjunction with the unaudited consolidated
financial statements and related notes included pursuant to Item 1 of this
report.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
09/30/00 06/30/00 03/31/00 12/31/99 09/30/99
--------- --------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED STATEMENT OF INCOME DATA:
Interest income:
Loans, including fees...................... $ 13,540 $ 12,167 $ 9,475 $ 7,737 $ 7,006
Federal funds sold and interest-bearing
deposits................................ 357 78 387 115 134
Securities................................. 1,813 1,543 1,385 1,088 1,189
--------- --------- --------- -------- --------
Total interest income................... $ 15,710 $ 13,788 $ 11,247 $ 8,940 $ 8,329
--------- --------- --------- -------- --------
Interest expense:
Interest-bearing demand deposits........... 231 218 191 178 144
Savings and money market deposit
accounts................................ 3,543 3,297 3,098 2,152 2,000
Other time deposits........................ 4,368 3,239 2,766 2,066 1,821
Funds borrowed............................. 1,236 1,027 296 257 201
--------- --------- --------- -------- --------
Total interest expense.................. $ 9,378 $ 7,781 $ 6,351 $ 4,653 $ 4,166
--------- --------- --------- -------- --------
Net interest income........................ 6,332 6,007 4,896 4,287 4,163
Provision for loan losses.................. 383 662 311 437 273
--------- --------- --------- -------- --------
Net interest income after provision for
loan losses............................. 5,949 5,345 4,585 3,850 3,890
--------- --------- --------- -------- --------
Non-interest income:
Banking and trust services................. 732 720 627 535 504
Securities gains and other income.......... 13 31 95 (1) 8
--------- --------- --------- -------- --------
Total non-interest income............... $ 745 $ 751 $ 722 $ 534 $ 512
--------- --------- --------- -------- --------
Non-interest expense:
Salaries and employee benefits............. 2,211 1,818 1,877 1,753 1,309
Severance charge........................... 562 -- -- -- --
Occupancy expense, net..................... 803 764 613 437 401
Data processing............................ 218 190 163 96 135
Marketing.................................. 241 300 304 263 144
Amortization of goodwill................... 206 206 113 -- --
Professional fees.......................... 480 596 575 404 487
Insurance.................................. 84 70 68 82 53
Towne Square Financial Corporation
acquisition............................. -- -- -- -- 1,300
Other expense.............................. 422 508 324 181 517
--------- --------- --------- -------- --------
Total non-interest expense................. 5,227 4,452 4,037 3,216 4,237
--------- --------- --------- -------- --------
Income before income taxes................. 1,467 1,644 1,270 1,168 165
Income tax provision....................... 499 546 421 191 366
--------- --------- --------- -------- --------
Net income.............................. $ 968 $ 1,098 $ 849 $ 977 $ (201)
========= ========= ========= ======== ========
PER SHARE DATA:
Basic earnings................................ $ 0.21 $ 0.24 $ 0.18 $ 0.21 $(0.05)
Diluted earnings.............................. 0.20 0.23 0.18 0.20 (0.05)
Dividends..................................... 0.025 0.025 0.025 0.025 0.025
Book value (at end of period)................. 11.04 10.73 10.57 10.26 10.11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
09/30/00 06/30/00 03/31/00 12/31/99 09/30/99
--------- --------- ---------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities.............................. $ 132,814 $ 96,969 $ 89,924 $ 71,134 $ 77,269
Total loans................................... 584,919 583,522 521,188 397,277 352,236
Total assets.................................. 763,815 723,023 656,981 518,697 449,838
Total deposits................................ 633,007 598,881 578,557 453,092 386,157
Funds borrowed................................ 71,258 68,544 23,328 15,000 15,000
Total stockholders' equity.................... 51,066 49,545 48,498 47,080 46,351
Trust assets under administration............. 785,738 761,829 799,000 729,904 669,000
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(1)..................... 3.59% 3.81% 3.59% 3.85% 3.90%
Net interest spread(2)..................... 3.00 3.22 2.97 3.11 3.17
Non-interest income to average assets...... 0.39 0.44 0.49 0.44 0.45
Non-interest expense to average assets..... 2.76 2.62 2.72 2.65 3.70
Net overhead ratio(3)...................... 2.37 2.18 2.23 2.21 3.25
Efficiency ratio (excluding
special charges)(4)(7)................... 63.9 63.8 69.2 57.5 57.1
Return on average assets (excluding
special charges)(5)(7)................... 0.71 0.65 0.57 0.98 1.04
Return on average equity (excluding
special charges)(6)(7)................... 10.55 9.04 7.20 10.06 10.17
Dividend payout ratio...................... 11.97 10.51 13.52 11.75 NM
Asset Quality Ratios:
Non-performing loans to total loans........ 0.10 0.17 0.30 0.21 0.20
Allowance for loan losses to:
total loans............................. 1.02 1.02 1.09 1.14 1.16
non-performing loans.................... 1058 610 360 548 579
Net charge-offs to average total loans..... 0.23 0.28 0.013 0.008 0.11
Non-performing assets to total assets...... 0.07 0.13 0.24 0.16 0.16
Balance Sheet Ratios:
Loans to deposits.......................... 92.40 97.44 90.08 87.68 91.22
Average interest-earning assets to
average interest-bearing liabilities.... 111.5 112.3 114.0 116.7 115.6
Capital Ratios:
Total equity to total assets............... 6.69 6.85 7.38 9.08 10.30
Total risk-based capital ratio............. 8.51 9.05 9.56 13.96 15.22
Tier 1 risk-based capital ratio............ 6.72 7.17 7.56 12.84 14.09
Leverage ratio............................. 5.54 6.23 6.76 10.77 11.19
</TABLE>
----------
(1) Net interest income divided by average interest-earning assets.
(2) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(3) Non-interest expense less non-interest income divided by average total
assets.
(4) Non-interest expense divided by the sum of net interest income (tax
equivalent) plus non-interest income.
(5) Earnings before special charges divided by average total assets.
(6) Earnings before special charges divided by average common equity.
(7) 2000 performance ratios exclude a third quarter one-time severance charge.
1999 performance ratios exclude special charges related to the Towne Square
Financial Corporation acquisition and St. Louis start-up costs incurred in
the third and fourth quarter, respectively.
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2000 1999 1999
------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.............................. $ 21,815 $ 14,940 $ 14,284
Short-term investments............................... 4,060 29,243 1,911
-------- -------- --------
Total cash and cash equivalents................... 25,875 44,183 16,195
-------- -------- --------
Available-for-sale securities, at fair value......... 132,814 71,134 77,269
Loans net of unearned discount....................... 584,919 397,277 352,236
Allowance for loan losses............................ (5,991) (4,510) (4,079)
-------- -------- --------
Net loans............................................ 578,928 392,767 348,157
-------- -------- --------
Goodwill............................................. 11,835 -- --
Bank premises and equipment, net..................... 4,386 2,028 1,462
-------- -------- --------
Accrued interest receivable.......................... 5,158 2,870 3,016
Other assets......................................... 4,819 5,715 3,739
-------- -------- --------
Total assets......................................... $763,815 $518,697 $449,838
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing............................... $ 55,831 $ 36,771 $ 35,939
Interest-bearing.................................. 37,747 33,400 26,456
Savings and money market deposit accounts............ 274,025 204,068 187,410
Brokered deposits.................................... 58,303 21,696 --
Other time deposits.................................. 207,101 157,157 136,352
-------- -------- --------
Total deposits.................................... 633,007 453,092 386,157
Funds borrowed....................................... 71,258 15,000 15,000
Accrued interest payable............................. 3,411 1,056 784
Other liabilities.................................... 5,073 2,469 1,546
-------- -------- --------
Total liabilities.................................... $712,749 $471,617 $403,487
-------- -------- --------
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized......... -- -- --
Common stock, without par value, $1 stated value;
12,000,000 shares authorized; 4,623,532, 4,590,332,
and 4,584,092 shares issued and outstanding as of
September 30, 2000, December 31, 1999, and September 30,
1999, respectively................................ $ 4,624 $ 4,590 $ 4,584
Surplus.............................................. 40,107 39,761 39,721
Retained earnings.................................... 9,994 7,425 6,563
Accumulated other comprehensive income............... (1,830) (2,812) (2,569)
Deferred compensation................................ (879) (759) (823)
Loans to officers.................................... (950) (1,125) (1,125)
-------- -------- --------
Total stockholders' equity........................... 51,066 47,080 46,351
-------- -------- --------
Total liabilities and stockholders' equity........... $763,815 $518,697 $449,838
======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
3
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
2000 1999 2000 1999
------- ------- ------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans, including fees.......................................... $35,182 $18,860 $13,540 $7,006
Federal funds sold and interest bearing deposits............... 822 215 357 134
Securities..................................................... 4,741 4,053 1,813 1,189
------- ------- ------- ------
Total interest income........................................ 40,745 23,128 15,710 8,329
INTEREST EXPENSE
Deposits:
Interest-bearing demand...................................... 640 426 231 144
Savings and money market deposit accounts.................... 9,938 5,520 3,543 2,000
Other time................................................... 10,433 5,332 4,368 1,852
Funds borrowed................................................. 2,499 674 1,236 170
------- ------- ------- ------
Total interest expense......................................... 23,510 11,952 9,378 4,166
------- ------- ------- ------
Net interest income............................................ 17,235 11,176 6,332 4,163
Provision for loan losses...................................... 1,356 771 383 273
------- ------- ------- ------
Net interest income after provision for loan losses............ 15,879 10,405 5,949 3,890
------- ------- ------- ------
NON-INTEREST INCOME
Banking and trust services..................................... 2,079 1,412 732 504
Securities gains and other income.............................. 139 58 13 8
------- ------- ------- ------
Total non-interest income.................................... 2,218 1,470 745 512
------- ------- ------- ------
NON-INTEREST EXPENSE
Salaries and employee benefits................................. 5,906 3,403 2,211 1,309
Severance charge............................................... 562 -- 562 --
Occupancy expense, net......................................... 2,180 1,126 803 401
Professional fees.............................................. 1,651 891 480 394
Towne Square acquisition....................................... -- 1,300 -- 1,300
Goodwill amortization.......................................... 525 -- 206 --
Other non-interest expense..................................... 2,892 2,151 965 833
------- ------- ------- ------
Total non-interest expense................................... 13,716 8,871 5,227 4,237
------- ------- ------- ------
Income before income taxes..................................... 4,381 3,004 1,467 165
Income tax provision........................................... 1,466 1,066 499 366
------- ------- ------- ------
Net income..................................................... $ 2,915 $ 1,938 $ 968 $ (201)
======= ======= ======= ======
Basic earnings per share....................................... $0.63 $0.51 $0.21 $(0.05)
Diluted earnings per share..................................... $0.61 $0.48 $0.20 $(0.05)
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
4
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPRE- DEFERRED TOTAL
COMMON RETAINED HENSIVE COMPEN- LOANS TO STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME SATION OFFICERS EQUITY
------ ------- -------- ----------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999........ $3,431 $22,274 $4,913 $ 150 $(544) $ (950) $29,274
Net income...................... -- -- 1,938 -- -- -- 1,938
Net decrease in fair value of
Securities classified as
available-for-sale, net of
income taxes and
reclassification adjustments... -- -- -- (2,719) -- -- (2,719)
------ ------- ------ ------- ----- ------- ------
Total comprehensive income...... -- -- 1,938 (2,719) -- -- (781)
------ ------- ------ ------- ----- ------- -------
Cash dividends declared --
($0.075 per share)............. -- -- (288) -- -- (288)
Issuance of common stock........ 1,153 17,447 -- -- -- -- 18,600
Awards granted.................. -- -- -- -- (448) -- (448)
Amortization of deferred
compensation................... -- -- -- -- 169 -- 169
Loans to officers............... -- -- -- -- -- (175) (175)
------ ------- ------ ------- ----- ------- -------
Balance, September 30, 1999..... $4,584 $39,721 $6,563 $(2,569) $(823) $(1,125) $46,351
====== ======= ====== ======= ===== ======= =======
Balance, January 1, 2000........ $4,590 $39,761 $7,425 $(2,812) $(759) $(1,125) $47,080
Net income...................... -- -- 2,915 -- -- -- 2,915
Net increase in fair value of
securities classified as
available-for-sale, net of
income taxes and
reclassification adjustments... -- -- -- 982 -- -- 982
------ ------- ------ ------- ----- ------- -------
Total comprehensive income...... -- -- 2,915 982 -- -- 3,897
------ ------- ------ ------- ----- ------- -------
Cash dividends declared......... --
($0.075 per share)............. -- -- (346) -- -- (346)
Issuance of common stock........ 34 346 -- -- -- -- 380
Awards granted.................. -- -- -- -- (270) -- (270)
Amortization of deferred
compensation................... -- -- -- -- 150 -- 150
Repayment of loans to officers.. -- -- -- -- -- 175 175
------ ------- ------ ------- ----- ------- -------
Balance, September 30, 2000..... $4,624 $40,107 $9,994 $(1,830) $(879) $ (950) $51,066
====== ======= ====== ======= ===== ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
5
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2000 1999
---------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................. $ 2,915 $ 1,938
---------- --------
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization.......................................................... 816 384
Goodwill amortization.................................................................. 525 --
Johnson Bank Illinois fair value accretion, net........................................ (231) --
Amortization of deferred compensation.................................................. 150 168
Provision for loan losses.............................................................. 1,356 771
Gain on sale of securities............................................................. (92) (58)
Increase (Decrease) in deferred loan fees.............................................. 328 (24)
(Increase) in accrued interest receivable.............................................. (1,529) (752)
Increase in accrued interest payable................................................... 1,744 63
Decrease (Increase) in other assets.................................................... 51 (576)
Increase in other liabilities.......................................................... 2,595 226
---------- --------
Total adjustments................................................................... 5,713 202
Net cash provided by operating activities........................................... 8,628 2,140
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales of securities............................ 18,039 50,020
Purchase of securities available-for-sale.............................................. (57,801) (14,725)
Johnson Bank Illinois acquisition, net of cash received................................ (15,763) --
Capitalization of The PrivateBank (St. Louis).......................................... (8,000) --
Net loan principal advanced............................................................ (102,143) (70,524)
Bank premises and equipment expenditures............................................... (2,396) (258)
---------- --------
Net cash used in investing activities............................................... (168,064) (35,487)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits......................................................... 88,366 21,163
Issuance of common stock............................................................... 109 18,152
Dividends paid......................................................................... (346) (287)
Net increase (decrease) in funds borrowed............................................. 52,999 (5,000)
---------- --------
Net cash provided by financing activities........................................... 141,128 34,028
---------- --------
Net (decrease) increase in cash and cash equivalents................................... (18,308) 681
Cash and cash equivalents at beginning of year......................................... 44,183 15,514
---------- --------
Cash and cash equivalents at end of period............................................. $ 25,875 $ 16,195
========== ========
NON-CASH TRANSACTIONS
(Repayment) Loan to executive officer for purchase of common stock..................... $ (175) $ 175
---------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
6
<PAGE>
PRIVATEBANCORP, INC. AND SUBSIDIARIES
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial information of PRIVATEBANCORP, Inc. (the
"Company") and its Subsidiaries, The PrivateBank and Trust Company (the "Bank"
or "PrivateBank") and The PrivateBank (St. Louis), included herein is unaudited;
however, such information reflects all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair presentation for the interim periods. The financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X.
The annualized results of operations for the nine months ended September
30, 2000, are not necessarily indicative of the results expected for the full
year ending December 31, 2000. The accompanying consolidated financial
statements are unaudited and do not include information or footnotes necessary
for a complete presentation of financial condition, results of operations, or
cash flows in accordance with generally accepted accounting principles. The
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes for the year ended December 31, 1999
included in the Company's Annual Report on Form 10-K (File No. 000-25887).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the reported
period. Actual results could differ from these estimates.
NOTE 2 -- EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per
share (in thousands except per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Income (Loss).............................................. $2,915 $1,938 $ 968 $ (201)
====== ====== ====== ======
Average common shares outstanding.............................. 4,606 3,787 4,628 4,460
Average common shares equivalent(1)............................ 181 253 196 258
------ ------ ------ ------
Weighted average common shares and common share
equivalents................................................. 4,787 4,040 4,824 4,718
====== ====== ====== ======
Net income per average common share - basic.................... $0.63 $0.51 $0.21 $(0.05)
===== ===== ===== ======
Net income per average common share - diluted.................. $0.61 $0.48 $0.20 $(0.05)
===== ===== ===== ======
</TABLE>
----------
(1) Common shares equivalent result from stock options being treated as if
they had been exercised and are computed by application of the treasury
stock method.
Net income for the third quarter ended September 30, 2000 was $968,000, or
$0.20 per diluted share, compared to the third quarter 1999 net loss of
$201,000, or $0.05 loss per diluted share. Excluding special, non-recurring
charges, earnings for the quarter ended September 30, 2000 were $1,345,000 or
$0.28 per diluted share, a 14.0% increase over earnings before special charges
of $1,180,000 for the quarter ended September 30, 1999.
Net income for the quarter ended September 30, 2000 included a previously
announced one-time charge of approximately $377,000 after-tax, or $.08 per
diluted share, comprised of severance packages for two departing executives as
well as amounts incurred to secure their replacements. Net income for the
quarter ended September 30, 1999 included an acquisition charge of approximately
$1,382,000 after-tax related to the acquisition of Towne Square Financial
Corporation in St. Charles, Illinois.
7
<PAGE>
Net income for the nine months ended September 30, 2000 was $2,915,000, or
$0.61 per diluted share, compared to $1,938,000, or $0.48 per diluted share,
over the same period last year. Excluding the one-time charges, earnings for the
nine months ended September 30, 2000 were $3,292,000, or $0.69 per diluted
share, compared to $3,320,000 or $0.82 per diluted share, for the same period
last year.
NOTE 3 - NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Related Hedging Activities", amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of SFAS No. 133 -- an Amendment of SFAS No. 133," and SFAS No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," will, on January 1, 2001, require all derivatives to be recorded at
fair value in the balance sheet, with changes in fair value recorded in the
income statement. If derivatives are documented and effective as hedges, the
change in the derivative fair value will be offset by an equal change in the
fair value of the hedged item. All hedge ineffectiveness will be recognized
immediately in earnings. The Statement may be adopted early at the start of a
calendar quarter. The Company does not plan to adopt the Statement early and
adoption is not expected to have a material impact since the Company does not
have derivative instruments or hedging activity.
Effective January 1, 2000, Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", allows mortgage loans that are securitized to be classified as
trading, available for sale, or in certain circumstances, held to maturity.
Since the Company has not securitized loans, this Statement does not currently
impact the Company.
NOTE 4 - OPERATING SEGMENTS
The Company manages its operations in four lines of business: Private
Banking Services (Illinois) ("PrivateBank"), The PrivateBank (St. Louis), Trust
Services and Holding Company activities. For purposes of making operating
decisions and assessing performance, management treats PrivateBank, The
PrivateBank (St. Louis), Trust Services and the Holding Company as four
operating segments. The Company's investment portfolio is included in total
assets of PrivateBank and reported in the results of Private Banking Services
(Illinois). The business segments summarized below and in the following tables
are primarily managed with a focus on various performance objectives including
total assets, total deposits, borrowings, gross loans, total capital and net
income. Indirect costs are allocated to Trust Services from the PrivateBank
based on Trust full time equivalent employees as a percentage of total
PrivateBank employees.
PRIVATE BANKING SERVICES (ILLINOIS)
In the PrivateBank segment, The PrivateBank and Trust Company, through its
main offices located in downtown Chicago as well as five full-service Chicago
suburban locations, provides personal and commercial banking services primarily
to affluent individuals, professionals, entrepreneurs and their business
interests. Until June 23, 2000, the date The PrivateBank (St. Louis) was
established, operations in St. Louis were a loan production office of The
PrivateBank and Trust Company and those activities are reflected in the segment
reporting for PrivateBank. PrivateBank's commercial lending products include
lines of credit for working capital, term loans for equipment and letters of
credit to support the commitments made by its clients. Non-credit products
include lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, other cash management products and insurance.
PrivateBank offers a full range of real estate lending products including fixed
and floating rate permanent and mini-permanent mortgages, construction and
commercial real estate loans. Personal loans include installment loans and lines
of credit, home equity loans and a wide variety of home mortgage loans.
8
<PAGE>
Individual banking services include interest bearing checking, money market
accounts, certificates of deposit, ATM/debit cards and investment brokerage
accounts. Additionally, PrivateBank offers secured and unsecured personal loans
and lines of credit. Through PrivateBank and Trust Company's affiliations with
Mesirow Financial, Inc. and Sterling Investment Services, Inc., clients have
access to insurance products and securities brokerage services. PrivateBank also
offers domestic and international wire transfers and foreign currency exchange.
<TABLE>
<CAPTION>
PRIVATE BANKING SERVICES (ILLINOIS)
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Total gross loans.......................... $575,123 $352,236
Total assets............................... 748,839 449,838
Total deposits............................. 627,191 395,286
Total borrowings........................... 49,008 15,000
Total capital.............................. 65,141 37,178
Year-to-date net income.................... $ 4,616 $ 1,292
</TABLE>
THE PRIVATEBANK (ST. LOUIS)
The PrivateBank (St. Louis), a federal savings bank, was established as a
new bank subsidiary of PrivateBancorp, Inc. on June 23, 2000, upon the Company's
receipt of the final regulatory approval necessary to open a federal savings
bank in St. Louis. The revenues and expenses associated with the St. Louis loan
production office that was operated by PrivateBank prior to June 23, 2000, are
included in Private Banking Services (Illinois).
Commercial lending products include lines of credit for working capital,
term loans for equipment and letters of credit to support the commitments made
by its clients. Non-credit products include lock-box, cash concentration
accounts, merchant credit card processing, electronic funds transfer, other cash
management products and insurance. The PrivateBank (St. Louis) offers a full
range of real estate lending products including fixed and floating rate
permanent and mini-permanent mortgages and construction loans. Personal loans
include installment loans and lines of credit, home equity loans and a wide
variety of home mortgage loans. Individual banking services include interest
bearing checking, money market deposit accounts, certificates of deposit,
ATM/debit cards and investment brokerage accounts. The PrivateBank (St. Louis)
also offers domestic and international wire transfers and foreign currency
exchange.
<TABLE>
<CAPTION>
THE PRIVATEBANK (ST. LOUIS)
----------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Total gross loans.......................... $ 9,795 $--
Total assets............................... 14,022 --
Total deposits............................. 6,288 --
Total borrowings........................... -- --
Total capital.............................. 7,591 --
Year-to-date net loss (since June 23,
2000)................................. (407) --
</TABLE>
9
<PAGE>
TRUST SERVICES
Trust Services include investment management, personal trust and estate
services, custodial services, retirement accounts and brokerage and investment
services. Investment management professionals work with trust clients to define
objectives, goals and strategies of the clients' investment portfolios. Trust
Services personnel assist trust clients with the selection of an outside
portfolio manager to direct account investments. Trust and estate account
administrators work with clients and their attorneys to establish estate plans.
Consistent with the PrivateBank philosophy, Trust Services emphasizes a high
level of personal service, including prompt collection and reinvestment of
interest and dividend income, weekly valuation, tracking of tax information,
customized reporting and ease of security settlement.
<TABLE>
<CAPTION>
TRUST SERVICES
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Trust assets under administration.......... $785,738 $669,000
Year-to-date net income.................... 85 27
</TABLE>
HOLDING COMPANY ACTIVITIES
Holding Company Activities consist of parent company only matters. The
Holding Company's most significant assets are its net investments in its two
banking subsidiaries, The PrivateBank and Trust Company and The PrivateBank (St.
Louis). Holding Company Activities are reflected primarily by operating
expenses. Recurring holding company operating expenses consist of compensation
(amortization of restricted stock awards, other salary expense) and
miscellaneous professional fees.
<TABLE>
<CAPTION>
HOLDING COMPANY ACTIVITIES
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Total assets............................... $ 73,334 $ 46,383
Total borrowings........................... 22,250 --
Interest expense........................... 785 --
Total capital.............................. 51,066 46,351
Year-to-date net loss...................... (1,379) (1,747)
</TABLE>
The following table identifies the significant differences between the sum
of the reportable segments and the reported consolidated results for total
assets:
<TABLE>
<CAPTION>
TOTAL ASSETS
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Sum of reportable segments................. $836,195 $496,221
Adjustments................................ (72,380) (46,383)
-------- --------
Consolidated PrivateBancorp, Inc........... $763,815 $449,838
======== ========
</TABLE>
The adjustments to total assets presented in the table above represent the
elimination of the net investment in banking subsidiaries in consolidation, the
elimination of the Company's cash that is maintained in a subsidiary bank
account, the reclassification of the unearned discount of loans and the
reclassification related to deferred taxes.
10
<PAGE>
NOTE 5 - ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENT
The carrying values and estimated fair values of financial instruments as
of September 30, 2000, have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 1999.
NOTE 6 - OTHER COMPREHENSIVE INCOME
Change in fair value of securities available-for-sale is presented on a net
basis on the Consolidated Statement of Changes in Stockholders' Equity. The
following table discloses the changes in other comprehensive income for the nine
months ended September 30, 2000 and 1999, on a gross basis (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------------
BEFORE TAX NET OF
TAX (BENEFIT) TAX
AMOUNT EXPENSE AMOUNT
------ ------- ------
<S> <C> <C> <C>
Unrealized gains on securities available-for-sale--
Unrealized holding gains.............................. $ 1,580 $ 537 $ 1,043
Less: reclassification adjustment for gain
included in net income............................. 92 31 61
------- ------ -------
Net unrealized gain................................... $ 1,488 $ 506 $ 982
======= ======= =======
SEPTEMBER 30, 1999
-------------------------------
BEFORE TAX NET OF
TAX (BENEFIT) TAX
AMOUNT EXPENSE AMOUNT
------ ------- ------
<S> <C> <C> <C>
Unrealized (losses) on securities available-for-sale--
Unrealized holding (losses)........................... $(4,327) $(1,644) $(2,683)
Less: reclassification adjustment for gain
included in net income............................. 58 22 36
------- ------- -------
Net unrealized (losses)............................... $(4,385) $(1,666) $(2,719)
======= ======= =======
</TABLE>
NOTE 7 - CAPITAL TRANSACTIONS
On June 23, 2000, the Company established The PrivateBank (St. Louis) as a
federal savings bank in St. Louis, Missouri. The PrivateBank (St. Louis) was
capitalized with $8.0 million of borrowed funds drawn from the Company's
revolving credit facility. This facility, entered into with a commercial bank in
February 2000, is a two-year $18 million revolver. The interest rate on
borrowings under the revolving line is based on, at the borrower's option,
either the lender's prime rate or a 90 day LIBOR-based rate. The Company has
committed to raise additional capital by March 31, 2001. The PrivateBank (St.
Louis) is a wholly-owned subsidiary of the Company, and its financial condition
and results of operations are included in the Company's consolidated financial
statements.
During the third quarter of 1999, the Company completed its initial public
offering of 1,035,000 shares of its common stock. The initial public offering
price was $18 per share, and the Company received aggregate net proceeds of
approximately $16.7 million after deducting underwriting commissions and
offering expenses and including the underwriters' overallotment shares.
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. Such change in authorized shares and change in
stated value became effective prior to the effectiveness of the registration
statement relating to the Company's initial public offering. On September 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 September
28, 1999, to stockholders of record as of the close of business on September 25,
1999. All references to number of shares,
11
<PAGE>
per share amounts and stock option data in the consolidated financial statements
have been adjusted to reflect the stock split on a retroactive basis.
NOTE 8 - ACQUISITIONS
On August 3, 1999, in a stock-for-stock transaction, the Company completed
its acquisition of Towne Square Financial Corporation, a company then in the
process of forming a de novo bank. At closing, the Company issued 91,668 shares
of common stock and recorded a one-time $1.3 million charge that is
non-deductible for tax purposes.
On February 11, 2000, the Company completed its acquisition of Johnson Bank
Illinois, a unit of Johnson International, Inc., Racine, Wisconsin. At closing,
Johnson Bank Illinois had total assets of approximately $113 million and total
deposits of approximately $77 million. The purchase price was $20 million. $15
million was paid in cash and the remainder was paid in the form of a
LIBOR-based, floating rate subordinated note issued to Johnson International in
the principal amount of $5 million. The interest rate on the subordinated note
is set each quarter based on the 90-day LIBOR rate. The note is payable in full
on or before February 11, 2007, and provides for certain rate escalations
beginning after two years.
The cash portion of the purchase price was funded with $7.5 million out of
the remaining proceeds of the Company's initial public offering and $7.5 million
from borrowings under the Company's revolving credit facility with a commercial
bank entered into at closing. The interest rate on borrowings under the
revolving line is based on, at the borrower's option, either the lender's prime
rate or a 90-day LIBOR-based rate.
At closing, Johnson Bank Illinois was merged into The PrivateBank and Trust
Company. The two acquired offices, located on Chicago's North Shore in Lake
Forest and Winnetka, became additional offices of The PrivateBank and Trust
Company. The Johnson Bank Illinois transaction was accounted for as a purchase.
All assets and liabilities were adjusted to fair value as of the effective date
of the merger creating goodwill in the amount of $12.3 million, which was
pushed-down to The PrivateBank and Trust Company, and is being amortized on the
straight line basis over 15 years. Premiums and discounts related to the Johnson
Bank Illinois transaction were recorded on the balance sheet as fair value
adjustments and amounted to $20,045 and $2,344,041, respectively.
The following table summarizes the unaudited pro forma financial results
for the nine months ended September 30, 2000 and 1999 as if Johnson Bank
Illinois had been acquired on January 1, 1999.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net interest income after provision for loan
losses........................................ $16,309 $12,744
Total non-interest income...................... 2,554 2,440
Total non-interest expense..................... 14,307 12,771
Income taxes................................... 1,665 922
Net income..................................... 2,890 1,491
Diluted earnings per share..................... 0.61 0.37
</TABLE>
The pro forma information is not necessarily indicative of the actual
results of operations which would have occurred had the acquisition of Johnson
Bank Illinois been consummated on January 1, 1999, nor is it indicative of
future operating results.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
PrivateBancorp, Inc. ("the Company") was organized as a Delaware
corporation in 1989 to serve as the holding company for a Chicago-based de novo
bank designed to provide highly personalized financial services primarily to
affluent individuals, professionals, entrepreneurs and their business interests.
Through the Company's banking subsidiaries, The PrivateBank and Trust Company
and The PrivateBank (St. Louis), the Company provides its clients with
traditional personal and commercial banking services, lending programs, and
trust and asset management services. Using the European tradition of "private
banking" as the model, the Company strives to develop a unique relationship with
clients, utilizing a team of managing directors to serve the clients' individual
and corporate banking needs, and tailoring products and services to meet such
needs. Managing directors are strategically located at all of these locations.
Currently, the Company has six Chicago-area offices: Downtown Chicago, Wilmette,
Illinois, Oak Brook, Illinois, St. Charles, Illinois, Lake Forest, Illinois, and
Winnetka, Illinois. The Company recently expanded to the St. Louis market where
it opened a new federal savings bank, The PrivateBank (St. Louis) in June 2000.
A key aspect of the Company's growth strategy is to pursue selective growth
opportunities in other midwestern markets.
The flagship downtown Chicago location opened in 1991. The Company expanded
to Wilmette in north suburban Cook County in 1994 and the Oak Brook facility in
west suburban DuPage County was established in 1997. The Company established the
St. Charles office in January 2000, in connection with its purchase of Towne
Square Financial Corporation (a company in the process of forming a de novo
bank) on August 3, 1999. On February 11, 2000, the Company consummated its
acquisition of Johnson Bank Illinois, adding additional locations of PrivateBank
in Lake Forest and Winnetka, Illinois on Chicago's North Shore.
During the second quarter 2000, the Company received regulatory approval to
create a new subsidiary and on June 23, 2000, the Company capitalized The
PrivateBank (St. Louis). The St. Louis-based bank focuses on clients who are
seeking a higher level of service and a broad array of personalized banking and
wealth management products and services. The PrivateBank (St. Louis) clients
consist of individuals, small to medium-size businesses, commercial real estate
investors and professionals.
For financial information regarding the Company's four separate lines of
business, Private Banking Services (Illinois), The PrivateBank (St. Louis),
Trust Services and Holding Company Activities, see "Note 4 -- Operating
Segments" to the consolidated financial statements of the Company included in
this report.
The profitability of the Company's operations depends on net interest
income, provision for loan losses, non-interest income, and non-interest
expense. Net interest income is the difference between the income the Company
receives on its loan and investment portfolios and its cost of funds, which
consists of interest paid on deposits and borrowings. The provision for loan
losses reflects the cost of credit risk in the loan portfolio. Non-interest
income consists primarily of trust fee income, and to a lesser extent, net
securities gains and fees for ancillary banking services. Noninterest expense
includes salaries and employee benefits as well as occupancy, data processing,
marketing, professional fees, insurance, goodwill and other expenses.
Net interest income is dependent on the amounts and yields of
interest-earning assets as compared to the amounts and rates on interest-bearing
liabilities. Net interest income is sensitive to changes in market rates of
interest as well as to the execution of our asset/liability management strategy.
The provision for loan losses is affected by changes in the loan portfolio,
management's assessment of the collectability of the loan portfolio, loss
experience, as well as economic and market factors.
Non-interest income from fees and deposit service charges are below peer
group levels. This is largely the result of the profile of the Company's typical
client. The clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, the Company does
not earn high service charge income typical of many retail banks.
Non-interest expenses are heavily influenced by the growth of operations.
Growth in the Company directly affects the majority of the Company's expense
categories. Profitability and expense ratios have been negatively
13
<PAGE>
impacted in 2000 due to the start-up operation of the St. Charles office, the
acquisition of Johnson Bank Illinois, and the opening of The PrivateBank (St.
Louis). It is expected that results for the remainder of 2000 will continue to
be impacted to some extent by the start-up nature of operations in St. Charles,
St. Louis and in the new offices acquired through the Johnson Bank Illinois
transaction. The Company currently estimates that the St. Charles office will
first become profitable early in 2001 and that The PrivateBank (St. Louis) will
not begin to operate profitably until the last quarter of 2001.
On June 30, 1999, the Company priced its initial public offering of 900,000
shares of its common stock at $18 per share. The closing date of the offering
was July 6, 1999, when the Company received net proceeds of approximately $14.4
million (after deduction of offering expenses). On July 26, 1999, an additional
135,000 shares were sold pursuant to the underwriters' exercise of their over
allotment option for additional net proceeds of $2.3 million.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Income for the third quarter 2000 was $968,000, or $0.20 per diluted share,
compared to third quarter 1999 net loss of $201,000, or $0.05 loss per diluted
share. Excluding special, non-recurring charges, earnings for the quarter ended
September 30, 2000 were $1,345,000, or $0.28 per diluted share, a 14.0% increase
over earnings of $1,180,000 for the quarter ended September 30, 1999.
Net income for the quarter ended September 30, 2000 included a previously
announced one-time charge of approximately $377,000 after-tax, or $.08 per
diluted share, comprised of severance packages for two departing executives as
well as amounts incurred to secure their replacements. Net income for the
quarter ended September 30, 1999 included an acquisition charge of approximately
$1,382,000 after-tax related to the acquisition of Towne Square Financial
Corporation in St. Charles, Illinois. Third quarter 2000 net income includes a
full quarter of financial results of the former Johnson Bank Illinois locations
subsequent to their acquisition on February 11, 2000. Excluding the effect of
goodwill amortization and acquisition interest expense associated with this
transaction, the two offices located in Winnetka and Lake Forest have
contributed $857,000 to the Company's net income on a year-to-date basis and
$332,000 for the third quarter ended September 30, 2000.
For the nine months ended September 30, 2000, net income totaled
$2,915,000, or $0.61 per diluted share, compared to $1,938,000, or $0.48 per
diluted share, for the comparable period in 1999. Excluding the one-time
charges, earnings for the nine months ended September 30, 2000 were $3,292,000
or $0.69 per diluted share, compared to $3,320,000 or $0.82 per diluted share
for the same period last year. The decrease in earnings is primarily due to
increasing operating expenses associated with the Company's expansion strategy
which more than offset the Company's growth in net interest income and
non-interest income for the nine months ended September 30, 2000 as compared to
the same period in 1999.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees on
earning assets and interest expense on deposits and borrowings. Net interest
margin represents the net interest income on a tax equivalent basis as a
percentage of average earning assets during the period. Net interest margin
reflects the spread between average yields earned on interest earning assets and
the average rates paid on interest bearing deposits and borrowings. The volume
of non-interest bearing funds, largely comprised of demand deposits and capital,
also affects the net interest margin.
Net interest income was $6.3 million and $4.2 million during the three
months ended September 30, 2000 and 1999, respectively, an increase of 52.1%.
Average earning assets during the third quarter 2000 were $717.2 million, an
increase of 63.3% over the prior year third quarter. The Company's net interest
margin (tax equivalent net interest income as a percentage of earning assets)
was 3.59% for the three months ended September 30, 2000, compared to 3.90% for
the prior year period. The decrease in net interest margin is largely due to the
availability of non-interest bearing funding in the prior year quarter from the
Company's initial public offering which closed in July, 1999. The net proceeds
of approximately $16.7 million were initially invested in interest earning
assets until fully utilized in connection with expansion activities. During the
fourth quarter 2000, the Company expects to continue to experience margin
pressure as increases in interest rates paid on deposits and other funding
sources are likely to exceed the effect
14
<PAGE>
of higher rates earned on assets. The Company expects to fund new loan growth in
the remainder of 2000 out of deposit growth, supplemented by short-term
borrowings and brokered deposits at prevailing market rates.
Net interest income was $17.2 million for the nine months ended September
30, 2000, compared to $11.2 million for the nine months ended September 30,
1999. Average earning assets increased by $226.9 million over the prior year
period in 1999. The Company's net interest margin was 3.64% for the nine months
ended September 30, 2000 compared to 3.71% for the prior year period. Although
rising interest rates have improved the yield on average earning assets,
interest expense on deposits and other borrowed funds have also increased,
resulting in reduced net interest spread compared to the 1999 period. Total net
interest margin is relatively unchanged between the nine-month periods. Despite
the reduction in net interest spread between the nine-month periods, total net
interest margin is relatively unchanged primarily due to an increase in non-
interest-bearing deposits resulting from the Johnson Bank Illinois acquisition.
The following tables present a summary of the Company's net interest income
and related net interest margin, calculated on a tax equivalent basis (dollars
in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------- -------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Short-term investments..................... $ 18,026 $ 822 5.99% $ 5,786 $ 215 4.95%
Investment securities(1)................... 101,780 5,400 7.07% 97,965 4,647 6.33%
Loans, net of unearned discount............ 526,969 35,182 8.83% 316,102 18,861 7.96%
-------- ------- -------- -------
Total earning assets....................... $646,775 $41,404 8.48% $419,853 $23,723 7.53%
======== ======= ======== =======
Interest bearing deposits.................. $526,162 $20,950 5.30% $346,014 $11,278 4.35%
Funds borrowed............................. 48,501 2,560 6.93% 17,284 674 5.20%
-------- ------- -------- -------
Total interest bearing liabilities......... $574,663 $23,510 5.44% $363,298 11,952 4.39%
======== ------- ======== -------
Tax equivalent net interest income......... $17,894 $11,771
======= =======
Net interest spread........................ 3.04% 3.14%
Net interest margin........................ 3.64% 3.71%
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
----------------------------- -------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Short-term investments..................... $ 21,561 $ 357 6.47% $ 10,370 $ 134 5.04%
Investment securities(1)................... 113,009 2,033 7.19% 86,451 1,424 6.59%
Loans, net of unearned discount............ 582,614 13,540 9.16% 346,724 7,006 7.96%
-------- ------- -------- -------
Total earning assets....................... $717,184 $15,930 8.77% $443,545 $ 8,564 7.63%
======== ======= ======== =======
Interest bearing deposits.................. $576,890 $ 8,141 5.60% $355,602 $ 3,965 4.42%
Funds borrowed............................. 66,587 1,237 7.27% 14,700 201 5.34%
-------- ------- -------- -------
Total interest bearing liabilities......... $643,477 9,378 5.77% $370,302 $ 4,166 4.46%
======== ------- ======== -------
Tax equivalent net interest income ........ $ 6,552 $ 4,398
======= =======
Net interest spread........................ 3.00% 3.17%
Net interest margin........................ 3.59% 3.90%
</TABLE>
----------
(1) Interest income on tax advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
approximately $220,000 and $235,000 in the third quarter of 2000 and 1999,
respectively, and $659,000 and $594,000 for the nine months ended 2000 and
1999, respectively.
15
<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 a mix
of both, for the periods indicated. Volume variances are computed using the
change in volume multiplied by the previous year's rate. Rate variances are
computed using the changes in rate multiplied by the previous year's volume.
THREE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
CHANGE CHANGE CHANGE TOTAL
DUE TO RATE DUE TO VOLUME DUE TO MIX CHANGE
----------- ------------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term investments............... $ 37 $ 142 $ 44 $ 223
Investment securities................ 130 440 39 609
Loans, net of unearned discount...... 1,046 4,720 768 6,534
------- -------- ------- -------
Total interest income............... 1,213 5,302 851 7,366
------- -------- ------- -------
Interest bearing deposits............ 1,055 2,459 662 4,176
Funds borrowed....................... 71 696 269 1,036
------- -------- ------- -------
Total interest expense.............. 1,126 3,155 931 5,212
------- -------- ------- -------
Net interest income.................. $ 87 $ 2,147 $ (80) $ 2,154
======= ======== ======= =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
CHANGE CHANGE CHANGE TOTAL
DUE TO RATE DUE TO VOLUME DUE TO MIX CHANGE
----------- ------------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term investments............... $ 45 $ 454 $ 108 $ 607
Investment securities................ 543 181 29 753
Loans, net of unearned discount...... 2,059 12,566 1,696 16,321
------- -------- ------- -------
Total interest income............... 2,647 13,201 1,833 17,681
------- -------- ------- -------
Interest bearing deposits............ 2,461 5,867 1,344 9,672
Funds borrowed....................... 224 1,215 447 1,886
------- -------- ------- -------
Total interest expense.............. 2,685 7,082 1,791 11,558
------- -------- ------- -------
Net interest income.................. $ (38) $ 6,119 $ 42 $ 6,123
======= ======== ======= =======
</TABLE>
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses was $383,000 for the third quarter
of 2000, compared to $273,000 for the comparable period in 1999. The Company's
provision for loan losses was $1,356,000 for the nine months ended September 30,
2000 compared to $771,000 for the comparable period in 1999. Increases in the
provision for loan losses compared to the prior year periodS are related to the
growth in the loan portfolio.
The Company provides for an adequate allowance for loan losses that are
probable and inherent in the portfolio. Increases in the provision for loan
losses reflect the latest assessment of the inherent losses in the loan
portfolio. A discussion of the allowance for loan losses and the factors on
which provisions are based begins on page 19.
16
<PAGE>
NON-INTEREST INCOME
Non-interest income for the quarter was $745,000, reflecting an increase of
$233,000, or 45.5% higher than the $512,000 amount reported in the third quarter
of 1999. The increase is primarily attributable to increases in service charge
income and trust fee revenues. Service charge income increased $93,000 over the
prior year quarter primarily due to fees earned on accounts related to the
former Johnson Bank Illinois offices in Winnetka and Lake Forest. Trust fee
revenue increased to $565,000 compared to $429,000 in the prior year quarter.
Trust assets under administration increased 17.4% to $785.7 million at September
30, 2000 compared to $669.0 million at September 30, 1999. The majority of this
increase is attributable to trust business added in connection with the Johnson
Bank Illinois acquisition.
Non-interest income increased approximately $748,000 or 50.9%, to
$2,218,000 for the first nine months of 2000, as compared to $745,000 for the
comparable period in 1999. Trust income increased by $461,200 to $1,655,361 for
the nine months ended September 30, 2000, an increase of 38.6% over the nine
months ended September 30, 1999. Service charge revenue increased by $218,854 to
$423,015 for the nine months ended September 30, 2000 compared to $204,161 for
the nine months ended September 30, 1999. This increase is primarily
attributable to the addition of the former Johnson Bank Illinois offices. The
Company recognized $92,000 in securities gains during the first nine months of
2000.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ---------------------
2000 1999 2000 1999
------ ------ ------- ------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits................... $2,211 $1,309 $ 5,906 $3,403
Severance charge................................. 562 -- 562 --
Towne Square Acquisition......................... -- 1,300 -- 1,300
Occupancy........................................ 803 401 2,180 1,126
Professional fees................................ 480 394 1,651 891
Marketing........................................ 241 144 845 429
Data processing.................................. 218 135 571 382
Postage, telephone and delivery.................. 147 94 430 254
Office supplies and printing..................... 100 63 335 171
Insurance........................................ 84 53 222 132
Goodwill......................................... 206 -- 525 --
Other expense.................................... 175 344 489 783
------ ------ ------- ------
Total non-interest expense....................... $5,227 $4,237 $13,716 $8,871
====== ====== ======= ======
</TABLE>
Non-interest expense for the third quarter of 2000 increased by 23.4% or
$990,000 as compared to the year earlier quarter. The third quarter 2000 was
impacted by a one-time special charge relating to severance packages for two
departing executives and costs incurred in connection with the recruitment and
hiring of their replacements. The third quarter 1999 reflects a one-time special
charge of approximately $1.4 million related to the Towne Square Financial
Corporation acquisition in St. Charles, Illinois. The one-time charge of $1.4
million includes direct costs incurred in connection with the acquisition.
Excluding one-time charges, non-interest expense increased 62.1% to $4.7
million for the third quarter of 2000 compared to $2.9 million in the prior year
quarter. A portion of the increase is attributable to goodwill amortization of
$206,000 recorded during the third quarter resulting from the Johnson Bank
Illinois acquisition, which closed on February 11, 2000. The remainder of the
increase over the prior year level is also primarily due to expenses incurred in
connection with the Company's expansion initiatives. Non-interest expense for
the third quarter 2000 includes operating expenses of $256,000 and $644,000
related to the St. Charles and the St. Louis offices, respectively. The Company
expects fourth quarter operating expenses for The PrivateBank (St. Louis) to
exceed third quarter levels. Additionally, the third quarter 2000 results
reflect the addition of the two new locations acquired through the Johnson Bank
Illinois transaction which increased operating expenses by $630,000 for the
quarter ended September 30, 2000.
17
<PAGE>
The remaining increase in non-interest expense of approximately $64,000 is due
to overall growth in salaries and benefits, professional services and marketing
costs at the existing PrivateBank offices.
Excluding the effects of one time charges during 2000 and 1999, the
Company's efficiency ratio was 63.9% for the third quarter 2000 as compared to
57.1% for the 1999 third quarter. On a tax-equivalent basis, this ratio
indicates that in the third quarter of 2000 the Company spent 63.9 cents to
generate each dollar of revenue, compared to 57.1 cents in the third quarter of
1999. The Company expects the efficiency ratio to remain high until business
development efforts at the new offices generate revenue sufficient to offset the
related operating expenses.
For the third quarter of 2000, salaries and benefits increased by
approximately $902,000 reflecting the Company's increased level of full time
equivalent employees to 134 people versus 77 at September 30, 1999. The increase
is due primarily to the increased number of employees, including the senior
officers responsible for opening the St. Charles and St. Louis offices, as well
as the addition of employees from the Johnson Bank Illinois acquisition. The
main office in Chicago has also experienced growth in personnel during 2000 in
response to the overall growth of the organization and to increased staffing
needs to support a public company.
During the quarter ended September 30, 2000, professional fees increased by
21.8% to $480,000 compared to the prior year quarter fees of $394,000, primarily
due to higher legal, accounting and information-system consultation services.
Marketing expenses increased by $97,000 due to the use of a public relations
firm and investments in new marketing materials describing the Company's new
offices and products.
INCOME TAXES
The following table shows the Company's income before income taxes,
applicable income taxes and effective tax rate for the nine months ended
September 30, 2000 and 1999, respectively (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
------ ------
<S> <C> <C>
Income before taxes.............................. $4,381 $3,004
Income tax provision............................. 1,466 1,066
Effective tax rate............................... 33.5% 35.5%
</TABLE>
The higher effective tax rate in the 1999 period is primarily due to the
special charge related to the Towne Square acquisition being non-deductible for
tax purposes. The effective income tax rate varies from statutory rates
principally due to certain interest income which is tax-exempt for federal or
state purposes, and certain expenses (including the Towne Square Corporation
acquisition charge) which are disallowed for tax purposes. During 1999, the
Company initiated a tax-advantaged investment program and increased the
Company's municipal bond portfolio.
FINANCIAL CONDITION
Total assets were $763.8 million at September 30, 2000, an increase of
$314.0 million, or 69.8% over $449.8 million a year earlier, an increase of
$245.1 million, or 47.3% over $518.7 million at December 31, 1999. The balance
sheet growth was accomplished mainly through the acquisition of Johnson Bank
Illinois, loan growth throughout the Company, and increased borrowings used to
capitalize The PrivateBank (St. Louis).
LOANS
Total loans increased to $584.9 million, an increase of $232.7 million, or
66.1%, from $352.2 million at September 30, 1999, an increase of $187.6 million,
or 47.2%, from $397.3 million at December 31, 1999.
18
<PAGE>
The following table sets forth the Company's loan portfolio net of unearned
discount by category (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2000 1999 1999
------------- ------------ -------------
<S> <C> <C> <C>
LOANS:
Commercial real estate................ $198,773 $146,368 $125,923
Residential real estate............... 87,156 72,972 66,287
Commercial............................ 144,321 67,026 62,410
Personal(1)........................... 103,567 81,893 76,340
Construction.......................... 51,102 29,018 21,276
-------- -------- --------
Total loans........................ $584,919 $397,277 $352,236
======== ======== ========
</TABLE>
----------
(1) Includes home equity loans and overdraft lines.
ALLOWANCE FOR LOAN LOSSES
Loan quality is continually monitored by management and reviewed by the
loan/investment committees of the boards of directors of the banks on a monthly
basis. The amount of additions to the allowance for loan losses which is charged
to earnings through the provision for loan losses is determined based on a
variety of factors, including assessment of the credit risk of the portfolio,
delinquent loans, evaluation of current economic conditions in the market area,
actual charge-offs during the year and historical loss experience.
The Company maintains an allowance for loan losses sufficient to absorb
credit losses inherent in the loan portfolio. The allowance for loan losses
represents the Company's estimate of probable losses in the portfolio at each
balance sheet date and is supported by all available and relevant information.
The allowance for the loan losses contains provisions for probable losses that
have been identified relating to specific borrowing relationships as well as
probable losses inherent in the loan portfolio and credit undertakings that are
not specifically identified. The Company believes that the allowance for loan
losses is adequate to provide for estimated probable credit losses inherent in
the loan portfolio.
The allowance for loan losses as a percentage of total loans was 1.0% at
September 30, 2000, 1.1% at December 31, 1999 and 1.2% at September 30, 1999.
Net charge-offs for the nine months ended September 30, 2000 and 1999 were
$739,000 and $102,000, respectively. The increase in net charge-offs during 2000
is due primarily to a single commercial credit relationship. In management's
judgment, an adequate allowance for loan losses has been established. Management
judges the adequacy of the allowance by formally reviewing and analyzing
potential problem credits, which entails assessing current and historical loss
experience, loan portfolio trends, prevailing economic and business conditions,
specific loan review and other relevant factors.
Following is a summary of changes in the allowance for loan losses for the
nine months ended September 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Balance, January 1.............................................. $4,510 $3,410
Johnson Bank Illinois acquisition allowance for loan loss....... 864 --
Provisions charged to earnings ................................ 1,356 771
Loans charged-off (net)......................................... (739) (102)
------ ------
Balance, September 30........................................... $5,991 $4,079
====== ======
</TABLE>
NONACCRUAL AND NONPERFORMING LOANS
Nonaccrual loans decreased to $324,000 at September 30, 2000 as compared to
$569,000 at September 30, 1999 and $600,000 at December 31, 1999.
19
<PAGE>
Nonperforming loans include nonaccrual loans and accruing loans which are
90 days or more delinquent. Nonperforming loans were $566,000 at September 30,
2000, compared to $823,000 at December 31, 1999 and $704,000 at September 30,
1999. Nonperforming loans were .10%, .21% and .20% of total loans at September
30, 2000, December 31, 1999 and September 30, 1999, respectively. Nonperforming
loans were .07%, .16% and .16% of total assets at September 30, 2000, December
31, 1999 and September 30, 1999, respectively.
INVESTMENT SECURITIES
The amortized cost and the estimated fair value of securities at
September 30, 2000, December 31, 1999 and September 30, 1999, were as follows
(in thousands):
<TABLE>
<CAPTION>
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
---------------------------------------------------
SEPTEMBER 30, 2000
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury............................. $ -- $ -- $ -- $ --
U.S. Government Agency Obligations........ 85,394 419 (546) 85,267
Municipals................................ 37,157 4 (2,317) 34,844
Other(1).................................. 13,035 -- (332) 12,703
-------- ---- ------- --------
$135,586 $423 $(3,195) $132,814
======== ==== ======= ========
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
---------------------------------------------------
DECEMBER 31, 1999
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury............................. $ -- $ -- $ -- $ --
U.S. Government Agency Obligations........ 26,695 -- (708) 25,987
Municipals................................ 37,116 9 (3,511) 33,614
Other(1).................................. 11,933 -- (400) 11,533
-------- ---- ------- -------
$ 75,744 $ 9 $(4,619) $71,134
======== ==== ======= =======
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE
---------------------------------------------------
SEPTEMBER 30, 1999
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury............................. $ -- $ -- $ -- $ --
U.S. Government Agency Obligations........ 31,287 22 (450) 30,859
Municipals................................ 38,342 49 (3,617) 34,774
Other(1).................................. 11,851 -- (215) 11,636
-------- ---- -------- --------
$ 81,480 $ 71 $(4,282) $ 77,269
======== ==== ======== ========
</TABLE>
----------
(1) Represents corporate and equity securities.
All securities are classified as available-for-sale and may be sold as part
of the Company's asset/liability management strategy in response to changes in
interest rates, liquidity needs or significant prepayment risk. Securities
available-for-sale are carried at fair value, with related unrealized net gains
or losses, net of deferred income taxes, recorded as an adjustment to equity
capital. At September 30, 2000, net unrealized losses of $1.8 million resulted
in a decrease in reported stockholders' equity. This was a decrease of $739,000
from net unrealized losses of $2.6 million recorded as part of equity at
September 30, 1999, and a decrease of $982,000 from net unrealized losses of
$2.8 million recorded as part of stockholders' equity at December 31, 1999.
20
<PAGE>
Securities available for sale increased to $132.8 million at September 30,
2000, up 86.7% from $71.1 million at December 31, 1999 and up 71.9% from $77.3
million at September 30, 1999. The general increase in investment securities is
the result of the acquisition of the Johnson Bank Illinois portfolio. Following
the acquisition of Johnson Bank Illinois, the Company sold approximately $9.7
million of the former Johnson Bank Illinois investment securities portfolio as
part of the Company's realignment of its available-for-sale investment
securities portfolio. The proceeds from the sale of investment securities were
reinvested in U.S. government agency securities. The Company purchased
approximately $35.0 million in government agency securities during the third
quarter 2000 in connection with execution of the Company's interest rate risk
management strategy.
U.S. government agency securities and collateralized mortgage obligations
increased 228.1% to $85.3 million at September 30, 2000 from $26.0 million at
December 31, 1999. The increase in U.S. government agency securities resulted
from the Johnson Bank Illinois acquisition in addition to the investment
securities that were purchased in the third quarter 2000. Municipal securities
increased by $1.2 million at September 30, 2000 as compared to the year-end 1999
amount of $33.6 million. Municipal securities at September 30, 2000 remained
relatively unchanged compared to $34.8 million at September 30, 1999. Corporate
and equity securities increased slightly due to the Johnson Bank Illinois
acquisition.
DEPOSITS AND FUNDS BORROWED
Total deposits of $633.0 million at September 30, 2000 represent an
increase of $179.9 million or 39.7% from $453.1 million at December 31, 1999,
and a 63.9% increase from $386.2 million at September 30, 1999.
Non-interest-bearing deposits were $55.8 million at September 30, 2000,
approximately $19.0 million more than the $36.8 million reported at December 31,
1999, and $19.9 million more than at September 30, 1999. Interest-bearing demand
deposits increased 12.9% to $37.7 million at September 30, 2000 compared to
December 31, 1999, and 42.3% over September 30, 1999. Savings and money market
deposit accounts increased by approximately $69.9 million to $274.0 million at
September 30, 2000 as compared to December 31, 1999, and $86.6 million more than
the amount reported at September 30, 1999. Other time deposits increased by
approximately $49.9 million to $207.1 million as compared with the December 31,
1999 balance of $157.2 million, and $70.7 million over the September 30, 1999
balance of $136.4 million. Brokered deposits increased to $58.3 million at
September 30, 2000 from $21.7 million at December 31, 1999. There were no
brokered deposits at September 30, 1999.
The Company's membership in the Federal Home Loan Bank System gives it the
ability to borrow funds from the Federal Home Loan Bank of Chicago (FHLB) for
short- or long-term purposes under a variety of programs. The Company has
periodically used services of the FHLB for short-term funding needs and other
correspondent services.
During 2000, the company has increased its utilization of FHLB advances to
fund loan growth. Management anticipates that its reliance on FHLB borrowings as
a funding source will likely increase further during the fourth quarter to the
extent that rates on FHLB advances continue to be more attractive than deposit
pricing. FHLB borrowings totaled $15.0 million at December 31, 1999 and
September 30, 1999 and represented fixed advances maturing in less than three
months. At September 30, 2000, the Company had $40.0 million of FHLB borrowings
outstanding as follows:
<TABLE>
<CAPTION>
DEBT TYPE AMOUNT CONTRACTUAL RATE MATURITY CALLABLE
--------- ------ ---------------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed advance $30,000 6.91% 12/06/00 N/A
Callable floating-rate advance 10,000 LIBOR minus 5 basis points 05/01/01 11/01/00
</TABLE>
At September 30, 2000, repurchase agreements of approximately $2.0 million
were outstanding in addition to $7.0 million of fed funds purchased for
liquidity purposes. At December 31, 1999 and September 30, 1999, no repurchase
agreements and no fed funds purchased were outstanding.
On February 11, 2000, to effect the Johnson Bank Illinois acquisition, the
Company borrowed $7.5 million under a new, two-year, $18.0 million revolving
credit facility at an initial rate of 7.20%. During the second quarter 2000, the
Company increased borrowings under the revolving credit facility by
approximately $8.0 million in order to capitalize The PrivateBank (St. Louis).
During the third quarter 2000 the Company increased borrowings under the
revolving credit facility by approximately $1.75 million for business operating
purposes. The interest rate on borrowings under the revolving line is based on,
at the borrower's option, either the lender's prime rate or a 90-day
21
<PAGE>
LIBOR-based rate. The Company also entered into a subordinated note issued to
Johnson International in the principal amount of $5.0 million as part of the
$20.0 million purchase price. The interest rate on the subordinated note is set
each quarter based on the 90-day LIBOR rate. The initial rate of interest on the
subordinated note was 6.60%. The interest rate on the revolving line reset to
7.98% on July 3, 2000 and the interest rate on the subordinated note reset to
7.18% on August 11, 2000.
CAPITAL RESOURCES
Stockholders' equity rose to $51.1 million, an increase of $4.0 million
from the 1999 year-end level, due to year-to-date 2000 net income and to a
decrease in Accumulated Other Comprehensive Loss, reflecting a $1.0 million
increase (net of tax) in the fair value of the available-for-sale investment
portfolio at September 30, 2000 as compared to the fair value at December 31,
1999.
The Company and its banking subsidiaries are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings and other factors, and the regulators can lower classifications in
certain areas. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
The prompt corrective action regulations provide five classifications,
including well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If a banking
subsidiary is not "well capitalized," regulatory approval is required to accept
brokered deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion and plans for capital restoration are required.
The following table reflects the Company's consolidated measures of capital
at September 30, 2000, December 31, 1999 and September 30, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2000 1999 1999
------------- ------------ -------------
<S> <C> <C> <C>
Leverage ratio........................ 5.54% 10.77% 11.19%
Tier 1 risk-based capital ratio....... 6.72% 12.84% 14.09%
Total risk-based capital ratio........ 8.51% 13.96% 15.22%
Total equity to total assets.......... 6.69% 9.08% 10.30%
</TABLE>
To be considered "well-capitalized," an entity must maintain a leverage
ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and
a total risk-based capital ratio of at least 10.0%. To be "adequately
capitalized," an entity must maintain a leverage ratio of at least 4.0%, a Tier
1 risk-based capital ratio of at least 4.0%, and a total risk-based capital
ratio of at least 8.0%.
At September 30, 2000, the Company continued to exceed the minimum levels
of all regulatory capital requirements, and was considered "adequately
capitalized" under regulatory standards. At September 30, 2000, the Company's
total risk-based capital ratio was 8.51%. With the exception of the total
risk-based capital ratio, the Company exceeded the "well capitalized" levels of
its regulatory capital requirements. The Company has committed to the Federal
Reserve Bank of Chicago to raising its capital ratios above the
"well-capitalized" thresholds under all regulatory standards by March 31, 2001.
At September 30, 2000 the banking subsidiaries were considered
"well-capitalized" under all regulatory standards, including total risk-based
capital ratio.
LIQUIDITY
Liquidity measures the ability of the Company to meet maturing obligations
and its existing commitments, to withstand fluctuations in deposit levels, to
fund its operations and to provide for clients' credit needs. The liquidity of
the Company principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of deposits and
borrowings and its ability to borrow funds in the money or capital markets.
22
<PAGE>
Net cash inflows provided by operations were $8.6 million in the first nine
months of 2000 compared to a net inflow of $2.1 million a year earlier. Net cash
outflows from investing activities were $168.1 million in the first nine months
of 2000 compared to a net cash outflow of $35.5 million a year earlier. Cash
inflows from financing activities in the first nine months of 2000 were $141.1
million compared to a net inflow of $34.0 million in the first nine months of
1999.
In the event of short-term liquidity needs, the banking subsidiaries may
purchase federal funds from correspondent banks. Membership in the Federal Home
Loan Bank System gives the banking subsidiaries the ability to borrow funds from
the FHLB for short- or long-term purposes under a variety of programs.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT POLICY
As a continuing part of its financial strategy, the Company attempts to
manage the impact of fluctuations in market interest rates on its net interest
income. This effort entails providing a reasonable balance between interest rate
risk, credit risk, liquidity risk and maintenance of yield. Asset/liability
management policy is established by the Company's Board of Directors and is
monitored by management. The Company's asset/liability policy sets standards
within which it is expected to operate. These standards include guidelines for
exposure to interest rate fluctuations, liquidity, loan limits as a percentage
of funding sources, exposure to correspondent banks and brokers, and reliance on
non-core deposits. The policy also states the reporting requirements to the
Board of Directors. The investment policy compliments the asset/liability policy
by establishing criteria by which the Company may purchase securities. These
criteria include approved types of securities, brokerage sources, terms of
investment, quality standards, and diversification.
The Company measures the impact of interest rate changes on its income
statement through the use of gap analysis. The gap represents the net position
of assets and liabilities subject to repricing in specified time periods. During
any given time period, if the amount of rate sensitive liabilities exceeds the
amount of rate sensitive assets, a company would generally be considered
negatively gapped and would benefit from falling rates over that period of time.
Conversely, a positively gapped company would generally benefit from rising
rates. The following tables illustrate the estimated interest rate sensitivity
and periodic and cumulative gap positions calculated as of September 30, 2000
and 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------------------------------------------------------
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
0-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS TOTAL
--------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans.................................... $326,195 $ 45,849 $197,551 $ 15,059 $584,654
Investments.............................. 4,167 3,817 64,947 65,204 138,135
Federal funds sold....................... 4,060 -- -- -- 4,060
-------- --------- -------- -------- --------
Total interest-earning assets............ $334,422 $ 49,666 $262,498 $ 80,263 $726,849
======== ========= ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand.................. $ 280 $ -- $ -- $ 37,467 $ 37,747
Savings and money market................. 167,771 103,553 -- 2,700 274,024
Time deposits............................ 107,715 122,659 33,349 1,645 265,368
Funds borrowed........................... 53,808 17,250 -- -- 71,058
-------- --------- -------- -------- --------
Total interest-bearing liabilities....... $329,574 $ 243,462 $ 33,349 $ 41,812 $648,197
======== ========= ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA)............. $334,422 $ 384,088 $646,586 $726,849
Rate sensitive liabilities (RSL)........ $329,574 $ 573,036 $606,385 $648,197
GAP (GAP=RSA-RSL).................... $ 4,848 $(188,948) $ 40,201 $ 78,652
RSA/RSL.................................. 101.47% 67.03% 106.63% 112.13%
RSA/Total assets......................... 44.61% 51.24% 86.26% 96.96%
RSL/Total assets......................... 43.97% 76.44% 80.89% 86.47%
GAP/Total assets......................... 0.65% 25.21% 5.36% 10.49%
GAP/Total RSA............................ 1.45% 49.19% 6.22% 10.82%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------------------------------------
TIME TO MATURITY OR REPRICING
-----------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
0-90 DAYS 91-365 DAYS 1-5 YEARS OVER 5 YEARS TOTAL
--------- ----------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans.................................... $180,774 $ 9,121 $ 98,463 $ 62,615 $350,973
Investments.............................. 7,415 15,318 18,659 40,088 81,480
Federal funds sold....................... 1,911 -- -- -- 1,911
-------- --------- -------- -------- ---------
Total interest-earning assets............ $190,100 $ 24,439 $117,122 $102,703 $434,364
======== ========= ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing demand.................. $ -- $ -- $ -- $ 26,456 $ 26,456
Savings and money market................. 187,410 -- -- -- 187,410
Time deposits............................ 78,374 54,408 3,570 -- 136,352
Funds borrowed........................... 15,000 -- -- -- 15,000
-------- --------- -------- -------- --------
Total interest-bearing liabilities....... $280,784 $ 54,408 $ 3,570 $ 26,456 $365,218
======== ========= ======== ======== ========
CUMULATIVE
Rate sensitive assets (RSA)........... $190,100 $ 214,539 $331,661 $434,364
Rate sensitive liabilities (RSL)...... $280,784 $ 335,192 $338,762 $365,218
GAP (GAP=RSA-RSL).................. $(90,684) $(120,653) $ (7,101) $ 69,146
RSA/RSL.................................. 67.7% 64.0% 97.9% 118.9%
RSA/Total assets......................... 42.3% 47.7% 73.7% 96.6%
RSL/Total assets......................... 62.4% 74.5% 75.3% 81.2%
GAP/Total assets......................... 20.2% 26.8% 1.6% 15.4%
GAP/Total RSA............................ 20.9% 27.8% 1.6% 15.9%
</TABLE>
The following table shows the impact of an immediate 200 basis point change
in interest rates, assessed through the use of a simulation model, that attempts
to measure the effect of rising and falling interest rates over the next two-
year horizon in a rapidly changing rate environment.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------------ ------------------------
+200 BASIS -200 BASIS +200 BASIS -200 BASIS
POINTS POINTS POINTS POINTS
---------- ---------- ---------- ----------
<S> <C> <C> <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....... -3.21 8.94 -11.6% 13.8%
</TABLE>
This table shows that if there had been an instantaneous parallel shift in
the yield curve of +200 basis points on September 30, 2000 and September 30,
1999, the Company would suffer a decline in net interest income of 3.21% and
11.6%, respectively, over a two-year horizon based on its net earning asset
portfolios on such dates. Conversely, a like shift of -200 basis points would
increase net interest income by 8.94% over a two-year horizon based on September
30, 2000 balances, down from 13.8% measured on the basis of the September 30,
1999 portfolio.
Changes in the effect on net interest income from a 200 basis point
movement at September 30, 2000 as compared to September 30, 1999 are due
partially to the addition of assets and liabilities from the Johnson Bank
Illinois acquisition. As these assets and liabilities are more fixed rate in
nature the impact of changed rates over a two-year horizon shows a reduced
effect at September 30, 2000 as compared to September 30, 1999. In addition, the
Company increased its term borrowings and brokered deposits during 2000. These
additional funding sources mature or reprice within three months to three years.
As a result, changed rates show a reduced dollar impact over a two-year horizon
at September 30, 2000 compared to September 30, 1999. In addition, management's
likely reaction to changes in interest rates is incorporated in assumptions made
in these calculations. Differences in these assumptions between the reporting
periods have also had the effect of reducing the impact of a changing interest
rate environment.
25
<PAGE>
The preceding sensitivity analysis is based on numerous assumptions
including the nature and timing of interest rate levels including the shape of
the yield curve, prepayments on loans and securities, changes in deposit levels,
pricing decisions on loans and deposits, reinvestment/replacement of asset and
liability cash flows and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how client
preferences or competitor influences might change.
26
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and is including this statement for purposes of
these safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, can generally be identified by use of the words "believe,"
"expect," "intend," "anticipate," "estimate," "project," or similar expressions.
The Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material adverse
effect on the operations and future prospects of the Company include, but are
not limited to, fluctuations in market rates of interest and loan and deposit
pricing; a deterioration of general economic conditions in the Company's market
areas; legislative or regulatory changes; adverse developments in the Company's
loan or investment portfolios; significant increases in competition; and the
possible dilutive effect of potential acquisitions or expansions. These risks
and uncertainties should be considered in evaluating forward-looking statements
and undue reliance should not be placed on such statements.
27
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which either the Company
or its subsidiaries is a party other than ordinary routine litigation incidental
to their respective businesses.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10.1 - Letter Agreement dated September 26, 2000 by
and between the Company, The PrivateBank and Trust Company and
Donald A. Roubitchek.
Exhibit 27 - Financial Data Schedule.
(b) Filings on Form 8-K.
(1) Current Report on Form 8-K dated July 24, 2000,
filed with the SEC on July 24, 2000.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIVATEBANCORP, INC.
(Registrant)
By: /s/ Ralph B. Mandell
----------------------------------------
Ralph B. Mandell,
Chairman, President and
Chief Executive Officer
By: /s/ Gary L. Svec
----------------------------------------
Gary L. Svec,
Chief Financial Officer
(principal financial officer)
By: /s/ Lisa M. O'Neill
----------------------------------------
Lisa M. O'Neill,
Controller
(principal accounting officer)
Date: November 14, 2000
29
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Letter Agreement dated September 26, 2000 by and between the
Company, The PrivateBank and Trust Company and Donald A.
Roubitchek.
27 Financial Data Schedule
30
