-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UfAyP2hKkD18gH7zuMjStY90L85cMNf5wCmvxJkHNos08jz5mvgJf/N7HMH9wWVH F9NcV4q+wLKJBi0wOsOUBg== 0000913849-01-500048.txt : 20010516 0000913849-01-500048.hdr.sgml : 20010516 ACCESSION NUMBER: 0000913849-01-500048 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIVATEBANCORP INC CENTRAL INDEX KEY: 0000889936 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363681151 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25887 FILM NUMBER: 1636177 BUSINESS ADDRESS: STREET 1: TEN NORTH DEARBORN SUITE 900 CITY: CHICAGO STATE: IL ZIP: 60602 MAIL ADDRESS: STREET 1: TEN NORTH DEARBORN STREET CITY: CHICAGO STATE: IL ZIP: 60602 10-Q 1 f10q_050201.txt 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 March 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from ________ to ________ Commission File Number: 000-25887 --------- PRIVATEBANCORP, INC. (Exact name of Registrant as specified in its charter.) DELAWARE (State or other jurisdiction of 36-3681151 incorporation or organization) (I.R.S. Employer Identification Number) TEN NORTH DEARBORN STREET CHICAGO, ILLINOIS 60602 (Address of principal executive offices) (Zip Code) (312) 683-7100 (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. ================================================================================ CLASS OUTSTANDING AS OF MAY 9, 2001 - -------------------------------------------------------------------------------- Common, no par value 4,686,268 ================================================================================ PRIVATEBANCORP, INC. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS Page Number ------ Selected Financial Data........................................................1 PART I Item 1. Financial Statements..................................................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................14 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 i 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 read in conjunction with the unaudited consolidated financial statements and related notes included pursuant to Item 1 of this report.
QUARTER ENDED ---------------------------------------------------------------- 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00 ----------- ---------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED STATEMENT OF INCOME DATA: Interest income: Loans, including fees ..................... $ 13,061 $ 13,451 $ 13,540 $ 12,167 $ 9,475 Federal funds sold and interest-bearing deposits ............................... 177 236 357 78 387 Securities ................................ 3,202 2,714 1,813 1,543 1,385 --------- --------- --------- --------- --------- Total interest income .................. $ 16,440 $ 16,401 $ 15,710 $ 13,788 $ 11,247 --------- --------- --------- --------- --------- Interest expense: Interest-bearing demand deposits .......... 220 228 231 218 191 Savings and money market deposit accounts . 3,552 3,773 3,543 3,297 3,098 Other time deposits ....................... 4,431 4,263 4,368 3,239 2,766 Funds borrowed ............................ 1,507 1,557 1,236 1,027 296 Trust Preferred interest expense .......... 269 -- -- -- -- --------- --------- --------- --------- --------- Total interest expense ................. $ 9,979 $ 9,821 $ 9,378 $ 7,781 $ 6,351 --------- --------- --------- --------- --------- Net interest income ....................... 6,461 6,580 6,332 6,007 4,896 Provision for loan losses ................. 339 334 383 662 311 --------- --------- --------- --------- --------- Net interest income after provision for loan losses ............................ 6,122 6,246 5,949 5,345 4,585 --------- --------- --------- --------- --------- Non-interest income: Banking, trust services and other income .. 894 951 745 751 630 Securities gains .......................... 186 -- -- -- 92 --------- --------- --------- --------- --------- Total non-interest income .............. $ 1,080 $ 951 $ 745 $ 751 $ 722 --------- --------- --------- --------- --------- Non-interest expense: Salaries and employee benefits ............ 2,434 2,268 2,211 1,818 1,877 Severance charge .......................... -- -- 562 -- -- Occupancy expense, net .................... 888 807 803 764 613 Data processing ........................... 304 249 218 190 163 Marketing ................................. 349 357 241 300 304 Amortization of goodwill .................. 206 206 206 206 113 Professional fees ......................... 538 484 480 596 575 Insurance ................................. 93 81 84 70 68 Other expense ............................. 481 438 422 508 324 --------- --------- --------- --------- --------- Total non-interest expense ................ $ 5,293 $ 4,890 $ 5,227 $ 4,452 $ 4,037 --------- --------- --------- --------- --------- Income before income taxes ................ 1,909 2,307 1,467 1,644 1,270 Income tax provision ...................... 576 797 499 546 421 --------- --------- --------- --------- --------- Net income ................................... $ 1,333 $ 1,510 $ 968 $ 1,098 $ 849 ========= ========= ========= ========= ========= PER SHARE DATA: Basic earnings ............................... $ 0.29 $ 0.33 $ 0.21 $ 0.24 $ 0.18 Diluted earnings ............................. 0.28 0.32 0.20 0.23 0.18 Dividends .................................... 0.025 0.025 0.025 0.025 0.025 Book value (at end of period) ................ 12.15 11.73 11.04 10.73 10.57 QUARTER ENDED ---------------------------------------------------------------- 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00 ----------- ---------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED FINANCIAL DATA (AT END OF PERIOD): Total securities ............................. $ 210,840 $ 172,194 $ 132,814 $ 96,969 $ 89,924 Total loans .................................. 626,900 599,429 584,919 583,522 521,188 Total assets ................................. 873,693 829,509 763,815 723,023 656,981 Total deposits ............................... 695,571 670,246 633,007 598,881 578,557 Funds borrowed ............................... 90,397 96,879 71,258 68,544 23,328 Long-term debt-Trust Preferred Securities .... 20,000 -- -- -- -- Total stockholders' equity ................... 56,946 54,249 51,066 49,545 48,498 Trust assets under administration ............ $ 693,176 $ 777,800 $ 785,738 $ 761,829 $ 798,953 SELECTED FINANCIAL RATIOS AND OTHER DATA: Performance Ratios: Net interest margin(1) .................... 3.35% 3.60% 3.59% 3.81% 3.59% Net interest spread(2) .................... 2.84 3.00 3.00 3.22 2.97 Non-interest income to average assets ..... 0.52 0.48 0.39 0.44 0.49 Non-interest expense to average assets .... 2.55 2.48 2.76 2.62 2.72 Net overhead ratio(3) ..................... 2.03 2.00 2.37 2.18 2.23 Efficiency ratio (excluding special charges)(4)(7) ......................... 67.8 63.0 63.9 63.8 69.2 Return on average assets (excluding special charges)(5)(7) ................. 0.64 0.77 0.71 0.65 0.57 Return on average equity (excluding special charges)(6)(7) ................. 9.86 11.35 10.55 9.04 7.20 Dividend payout ratio ..................... 8.79 7.66 11.97 10.51 13.52 Asset Quality Ratios: Non-performing loans to total loans ....... 0.47% 0.24% 0.10% 0.17% 0.30% Allowance for loan losses to: total loans ............................ 1.03 1.02 1.02 1.02 1.09 non-performing loans ................... 218 423 1,058 610 360 Net charge-offs (recoveries) to average total loans ............................ (0.01) 0.15 0.23 0.28 0.003 Non-performing assets to total assets ..... 0.34 0.17 0.07 0.13 0.24 Balance Sheet Ratios: Loans to deposits ......................... 90.1% 89.4% 92.4% 97.4% 90.1% Average interest-earning assets to average interest-bearing liabilities ........... 110.0 111.5 111.5 112.3 114.0 Capital Ratios: Total equity to total assets .............. 6.52% 6.53% 6.69% 6.85% 7.38% Total risk-based capital ratio ............ 11.00 8.15 8.51 9.05 9.56 Tier 1 risk-based capital ratio ........... 9.14 6.47 6.72 7.17 7.56 Leverage ratio ............................ 7.60 5.54 5.54 6.23 6.76 Ratio of Earnings to Fixed Charges: (8) Including deposit interest ................ 1.19x 1.23x 1.16x 1.21x 1.20x Excluding deposit interest ................ 2.07 2.48 2.19 2.60 5.29
- -------------- (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. 2 (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 and recruitment of new executive officers charge. PRE-TAX AFTER-TAX --------- ----------- One-time charges.... $562 $377 Performance ratios for the third quarter of 2000, including the special charges described above, are as follows: 9/30/00 --------- Efficiency ratio........................ 71.6% Return on average assets................ 0.51 Return on average equity................ 7.60 (8) In computing the ratio of earnings to fixed charges: (a) earnings have been based on income before income taxes and fixed charges, and (b) fixed charges consist of interest and amortization of debt discount and expense including amounts capitalized and the estimated interest portion of rents. 3 PART I ITEM 1. FINANCIAL STATEMENTS PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31, MARCH 31, 2001 2000 2000 ----------- ------------ ----------- (UNAUDITED) (UNAUDITED) ASSETS Cash and due from banks ....................................................... $ 18,045 $ 28,637 $ 16,629 Short-term investments ........................................................ 81 11,876 10,632 --------- --------- --------- Total cash and cash equivalents ............................................ 18,126 40,513 27,261 --------- --------- --------- Available-for-sale securities, at fair value .................................. 210,840 172,194 89,924 Loans, net of unearned discount ............................................... 626,900 599,429 521,188 Allowance for loan losses ..................................................... (6,455) (6,108) (5,670) --------- --------- --------- Net loans ..................................................................... 620,445 593,321 515,518 --------- --------- --------- Goodwill ...................................................................... 11,423 11,629 12,237 Bank premises and equipment, net .............................................. 3,924 4,138 3,211 Accrued interest receivable ................................................... 5,820 5,524 3,945 Other assets .................................................................. 3,115 2,190 4,885 --------- --------- --------- Total assets .................................................................. $ 873,693 $ 829,509 $ 656,981 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits: Noninterest-bearing ........................................................ $ 52,286 $ 61,789 $ 51,451 Interest-bearing ........................................................... 37,213 51,301 36,926 Savings and money market deposit accounts ..................................... 301,569 300,107 277,747 Brokered deposits ............................................................. 86,471 43,842 5,000 Other time deposits ........................................................... 218,032 213,207 207,433 --------- --------- --------- Total deposits ............................................................. 695,571 670,246 578,557 Funds borrowed ................................................................ 90,397 96,879 23,328 Long term debt - Trust Preferred Securities ................................... 20,000 -- -- Accrued interest payable ...................................................... 3,567 3,552 1,614 Other liabilities ............................................................. 7,212 4,583 4,984 --------- --------- --------- Total liabilities ............................................................. $ 816,747 $ 775,260 $ 608,483 --------- --------- --------- STOCKHOLDERS' EQUITY Preferred Stock, 1,000,000 shares authorized .................................. -- -- -- Common stock, without par value, $1 stated value; 12,000,000 shares authorized; 4,685,768, 4,623,532, and 4,590,332 shares issued and outstanding as of March 31, 2001, December 31, 2000 and March 31, 2000, respectively ......................................................... $ 4,686 $ 4,624 $ 4,590 Surplus ....................................................................... 40,646 40,107 39,761 Retained earnings ............................................................. 12,604 11,388 8,159 Accumulated other comprehensive income (loss) ................................. 1,011 (118) (2,292) Deferred compensation ......................................................... (1,051) (802) (695) Loans to officers ............................................................. (950) (950) (1,025) --------- --------- --------- Total stockholders' equity .................................................... 56,946 54,249 48,498 --------- --------- --------- Total liabilities and stockholders' equity .................................... $ 873,693 $ 829,509 $ 656,981 ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 4 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ----------------- 2001 2000 ------- -------- INTEREST INCOME Loans, including fees ............................................... $13,061 $ 9,475 Federal funds sold and interest bearing deposits .................... 177 387 Securities .......................................................... 3,202 1,385 ------- ------- Total interest income ............................................ 16,440 11,247 ------- ------- INTEREST EXPENSE Deposits: Interest-bearing demand .......................................... 220 191 Savings and money market deposit accounts ........................ 3,552 3,098 Other time ....................................................... 4,431 2,766 Funds borrowed ...................................................... 1,507 296 Trust Preferred Securities interest expense ......................... 269 -- ------- ------- Total interest expense .............................................. 9,979 6,351 ------- ------- Net interest income ................................................. 6,461 4,896 Provision for loan losses ........................................... 339 311 ------- ------- Net interest income after provision for loan losses ................. 6,122 4,585 NON-INTEREST INCOME Banking, trust services and other income ............................ 894 630 Securities gains .................................................... 186 92 ------- ------- Total non-interest income ........................................ 1,080 722 ------- ------- NON-INTEREST EXPENSE Salaries and employee benefits ...................................... 2,434 1,877 Occupancy expense, net .............................................. 888 613 Professional fees ................................................... 538 575 Goodwill amortization ............................................... 206 113 Other non-interest expense .......................................... 1,227 859 ------- ------- Total non-interest expenses ...................................... 5,293 4,037 ------- ------- Income before income taxes .......................................... 1,909 1,270 Income tax provision ................................................ 576 421 ------- ------- Net income .......................................................... $ 1,333 $ 849 ======= ======= Basic earnings per share ............................................ 0.29 0.18 Diluted earnings per share .......................................... 0.28 0.18
The accompanying notes to consolidated financial statements are an integral part of these statements. 5 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED OTHER TOTAL COMMON RETAINED COMPREHENSIVE DEFERRED LOANS TO STOCKHOLDERS' STOCK SURPLUS EARNINGS INCOME COMPENSATION OFFICERS EQUITY ------ ------- -------- ------------- ------------ -------- ------------- Balance, January 1, 2000................ $4,590 $39,761 $ 7,425 $(2,812) $ (759) $(1,125) $47,080 Net income............. -- -- 849 -- -- -- 849 Net decrease in fair value of Securities classified as available-for-sale, net of income taxes and reclassification adjustments......... -- -- -- 520 -- -- 520 ------ -------- ------- ------- ------- ------- ------- Total comprehensive income.............. -- -- 849 520 -- -- 1,369 ------ -------- ------- ------- ------- ------- ------- Cash dividends declared ($0.025 per share).......... -- -- (115) -- -- -- (115) Amortization of deferred compensation........ -- -- -- -- 64 -- 64 Repayment of loans to officers............ -- -- -- -- -- 100 100 ------ ------- ------- ------- ------- ------- ------- Balance, March 31, 2000 $4,590 $39,761 $ 8,159 $(2,292) $ (695) $(1,025) $48,498 ====== ======= ======= ======= ======= ======= ======= Balance, January 1, 2001................ $4,624 $40,107 $11,388 $ (118) $ (802) $ (950) $54,249 Net income............. -- -- 1,333 -- -- -- 1,333 Net increase in fair value of securities classified as available-for-sale, net of income taxes and reclassification adjustments......... -- -- -- 1,129 -- -- 1,129 ------ ------- ------- ------- ------- ------- ------- Total comprehensive income.............. -- -- 1,333 1,129 -- -- 2,462 ------ ------- ------- ------- ------- ------- ------- Cash dividends declared ($0.025 per share).......... -- -- (117) -- -- -- (117) Issuance of common stock............... 39 232 -- -- -- -- 271 Awards granted......... 23 307 -- -- (332) -- (2) Amortization of deferred compensation........ -- -- -- -- 83 -- 83 Repayment of loans to officers............ -- -- -- -- -- -- -- ------ ------- ------- ------- ------- ------- ------- Balance, March 31, 2001 $4,686 $40,646 $12,604 $ 1,011 $(1,051) $ (950) $56,946 ====== ======= ======= ======= ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements. 6 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------- 2001 2000 --------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income..................................................................... $ 1,333 $ 849 --------- -------- Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization.................................................. 325 167 Goodwill amortization.......................................................... 206 113 Johnson Bank Illinois fair value accretion, net................................ (73) (83) Amortization of deferred compensation.......................................... 83 64 Provision for loan losses...................................................... 339 311 Gain on sale of securities..................................................... (186) (92) (Decrease) in deferred loan fees............................................... (6) -- (Increase) in accrued interest receivable...................................... (296) (316) (Decrease) Increase in accrued interest payable................................ 15 (52) Decrease (Increase) in other assets............................................ (1,506) 1,039 Increase in other liabilities.................................................. 2,629 2,507 --------- -------- Total adjustments........................................................... 1,530 3,658 --------- -------- Net cash provided by operating activities................................... 2,863 4,507 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities, paydowns, and sales of securities.................... 20,971 11,770 Purchase of securities available-for-sale...................................... (57,720) (9,681) Johnson Bank Illinois acquisition, net of cash received........................ -- (15,753) Net loan principal advanced.................................................... (27,411) (37,530) Bank premises and equipment expenditures....................................... (89) (1,116) --------- -------- Net cash used in investing activities....................................... (64,249) (52,310) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in total deposits................................................. 25,329 33,908 Issuance of common stock....................................................... 271 -- Issuance of Trust Preferred Securities......................................... 20,000 -- Dividends paid................................................................. (117) (115) Net increase (decrease) in funds borrowed...................................... (6,484) (2,912) --------- -------- Net cash provided by financing activities................................... 38,999 30,881 --------- -------- Net (decrease) increase in cash and cash equivalents........................... (22,387) (16,922) Cash and cash equivalents at beginning of year................................. 40,513 44,183 --------- -------- Cash and cash equivalents at end of period..................................... $ 18,126 $ 27,261 ========= ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 7 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 (Chicago)") and The PrivateBank (St. Louis), included herein is unaudited; however, such information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation for the interim periods. The financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The annualized results of operations for the three months ended March 31, 2001, are not necessarily indicative of the results expected for the full year ending December 31, 2001. 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, 2000 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):
THREE MONTHS ENDED MARCH 31, ----------------------- 2001 2000 ------ ----- Net Income........................................................... $1,333 $ 849 ------ ----- Average common shares outstanding.................................... 4,648 4,590 Average common shares equivalent(1).................................. 135 187 ------ ----- Weighted average common shares and common share equivalents.......... 4,783 4,777 ------ ----- Net income per average common share - basic.......................... $ 0.29 $0.18 ------ ----- Net income per average common share - diluted........................ $ 0.28 $0.18 ------ -----
- ------------------ (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 first quarter ended March 31, 2001 was $1,333,000, or $0.28 per diluted share, an increase of 57.0% as compared to the first quarter 2000 net income of $849,000 or $0.18 per diluted share. NOTE 3 -- NEW ACCOUNTING STANDARDS 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," effective on January 1, 2001, standardize the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the balance sheet and measure them at fair value. Changes in fair value of these instruments must be recorded in the income statement unless 8 specific hedge accounting criteria are met. Adoption of this standard did not have a material impact since the Company does not hold derivative instruments or engage in hedging activity. In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 140 ("FAS No. 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", a replacement of FASB Statement No. 125. The new statement, while largely including the provisions of FAS 125, revises the standards for accounting for securitizations and requires certain disclosures. FAS No. 140 is effective for all transfers of financial assets occurring after March 31, 2001 and for disclosures relating to securitization transactions for fiscal years ending after December 15, 2000. The adoption of FAS 140 is not expected to have a material impact on the Company. NOTE 4 - OPERATING SEGMENTS The Company manages its operations in four lines of business: The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management and Holding Company Activities. For purposes of making operating decisions and assessing performance, management treats The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management and the Holding Company as four operating segments. The Company's investment portfolios are included in total assets and reported in the results of The PrivateBank (Chicago) and The PrivateBank (St. Louis). The business segments summarized below and in the following tables are primarily managed with a focus on various performance objectives including total assets, total deposits, borrowings, gross loans, total capital and net income. THE PRIVATEBANK (CHICAGO) The PrivateBank (Chicago) segment, through its main office 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 for 2000 consisted of a loan production office of The PrivateBank (Chicago) and those activities are reflected in the segment reporting for The PrivateBank (Chicago). The PrivateBank (Chicago)'s commercial lending products include lines of credit for working capital, term loans for equipment and letters of credit to support the commitments made by its clients. Non-credit products include lock-box, cash concentration accounts, merchant credit card processing, electronic funds transfer, other cash management products and insurance. The PrivateBank (Chicago) offers a full range of real estate lending products including fixed and floating rate permanent and mini-permanent mortgages, construction and commercial real estate loans. Personal loans include installment loans and lines of credit, home equity loans and a wide variety of home mortgage loans. Individual banking services include interest bearing checking, money market accounts, certificates of deposit, ATM/debit cards and investment brokerage accounts. Additionally, The PrivateBank (Chicago) offers secured and unsecured personal loans and lines of credit. Through The PrivateBank (Chicago)'s affiliations with Mesirow Financial, Inc. and Sterling Investment Services, Inc., clients have access to insurance products and securities brokerage services. The PrivateBank (Chicago) also offers domestic and international wire transfers and foreign currency exchange. THE PRIVATEBANK (CHICAGO) ------------------------- MARCH 31, ------------------------- 2001 2000 -------- ------- (IN THOUSANDS) Total gross loans.................. $593,927 $521,664 Total assets....................... 835,516 657,241 Total deposits..................... 677,316 579,526 Total borrowings................... 73,897 10,828 Total capital...................... 72,540 59,940 Year-to-date net income............ 2,055 1,111 9 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. The revenues and expenses for 2000 associated with the St. Louis loan production office that was operated by The PrivateBank (Chicago) prior to June 23, 2000 are included in The PrivateBank (Chicago) segment. 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. Commercial lending products provided by The PrivateBank (St. Louis) include lines of credit for working capital, term loans for equipment and letters of credit to support the commitments made by its clients. Non-credit products include lock-box, cash concentration accounts, merchant credit card processing, electronic funds transfer, other cash management products and insurance. Individual banking services include interest bearing checking, money market deposit accounts, certificates of deposit, ATM/debit cards and investment brokerage accounts. The PrivateBank (St. Louis) also offers domestic and international wire transfers and foreign currency exchange. THE PRIVATEBANK (ST. LOUIS) --------------------------- MARCH 31, --------------------------- 2001 2000 ------- ------- (IN THOUSANDS) Total gross loans................... $33,156 $-- Total assets........................ 38,526 -- Total deposits...................... 19,744 -- Total borrowings.................... 11,500 -- Total capital....................... 6,979 -- Year-to-date net loss............... (210) -- WEALTH MANAGEMENT Wealth Management includes investment management, personal trust and estate services, custodial services, retirement accounts and brokerage and investment services. Investment management professionals work with wealth management clients to define objectives, goals and strategies of the clients' investment portfolios. Wealth Management personnel assist trust clients with the selection of an outside portfolio manager to direct account investments. Trust and estate account administrators work with clients and their attorneys to establish estate plans. Consistent with the Company's philosophy, Wealth Management emphasizes a high level of personal service, including prompt collection and reinvestment of interest and dividend income, weekly valuation, tracking of tax information, customized reporting and ease of security settlement. WEALTH MANAGEMENT ------------------------- MARCH 31, ------------------------- 2001 2000 ------- -------- (IN THOUSANDS) Trust assets under administration... $693,176 $798,953 Trust fee revenue................... 691 539 Year-to-date net income............. 182 53 10 The following table indicates the break-down of our trust assets under administration at March 31, 2001 by account classification and related gross revenue for the three months ended March 31, 2001: AT OR FOR THE THREE MONTHS ENDED MARCH 31, 2001 ---------------------------- MARKET VALUE REVENUE ------------ ------- ACCOUNT TYPE (IN THOUSANDS) ------------ Personal trust--managed.............. $253,461 $376 Agency--managed...................... 102,803 148 Custody............................. 303,557 151 Employee benefits--managed........... 33,355 16 -------- ---- Total............................ $693,176 $691 ======== ==== HOLDING COMPANY ACTIVITIES Holding Company Activities consist of parent company only matters. The Holding Company's most significant assets are its net investments in its two banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis). During the first quarter 2001, the Holding Company issued $20.0 million in Trust Preferred Securities which are accounted for as long-term debt and also qualify as Tier 1 and Tier 2 capital. The Tier 1 qualifying amount is limited to 25.0% of Tier 1 capital under Federal Reserve regulations. The excess amount qualifies as Tier 2 capital. Holding Company Activities are reflected primarily by interest expense on borrowings and operating expenses. Recurring holding company operating expenses consist of compensation (amortization of restricted stock awards, other salary expense) and miscellaneous professional fees. HOLDING COMPANY ACTIVITIES -------------------------- MARCH 31, -------------------------- 2001 2000 --------- -------- (IN THOUSANDS) Total assets........................ $82,356 $60,977 Total borrowings.................... 5,000 12,500 Long term debt - Trust Preferred Securities....................... 20,000 -- Interest expense.................... 497 113 Total capital....................... 56,946 48,498 Year-to-date net loss............... (695) (315) The following table identifies the significant differences between the sum of the reportable segments and the reported consolidated results for total assets: TOTAL ASSETS ------------------------- MARCH 31, ------------------------- 2001 2000 -------- -------- (IN THOUSANDS) Sum of reportable segments.......... $956,398 $718,218 Adjustments......................... (82,705) (61,237) --------- --------- Consolidated PrivateBancorp, Inc.... $873,693 $656,981 ======== ======== 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 current and deferred taxes. 11 NOTE 5 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENT The carrying values and estimated fair values of financial instruments as of March 31, 2001, have not materially changed on a relative basis from the carrying values and estimated fair values of financial instruments disclosed as of December 31, 2000. NOTE 6 -- OTHER COMPREHENSIVE INCOME Change in the fair value of securities available-for-sale is presented on a net basis on the Consolidated Statement of Changes in Stockholders' Equity. The following table discloses the changes in other comprehensive income for the three months ended March 31, 2001 and 2000, on a gross basis (in thousands):
MARCH 31, 2001 ---------------------------------------- BEFORE TAX NET OF TAX (BENEFIT) TAX AMOUNT EXPENSE AMOUNT ------ ------- ------ Unrealized gains on securities available-for-sale-- Unrealized holding gains.......................... $1,804 $545 $1,259 Less: reclassification adjustment for gain included in net income......................... 186 56 130 ------ ---- ------ Net unrealized gains.............................. $1,618 $489 $1,129 ====== ==== ======
MARCH 31, 2000 ---------------------------------------- BEFORE TAX NET OF TAX (BENEFIT) TAX AMOUNT EXPENSE AMOUNT ------ ------- ------ Unrealized gains on securities available-for-sale-- Unrealized holding gains.......................... $ 870 $288 $ 582 Less: reclassification adjustment for gain included in net income......................... 92 30 62 ------ ---- ------ Net unrealized gains.............................. $ 778 $258 $ 520 ====== ==== ======
NOTE 7 -- CAPITAL TRANSACTIONS The PrivateBank (St. Louis) was capitalized on June 23, 2000 with $8.0 million of borrowed funds drawn from the Company's revolving credit facility. See Note 9. 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. NOTE 8 - ACQUISITIONS 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, of which $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. See Note 9. The cash portion of the purchase price was funded with $7.5 million out of the remaining proceeds of the Company's 1999 initial public offering and $7.5 million from borrowings under the Company's revolving credit facility with a commercial bank entered into at closing. See Note 9. At closing, Johnson Bank Illinois was merged into The PrivateBank (Chicago). The two acquired offices, located on Chicago's North Shore in Lake Forest and Winnetka, became additional offices of The PrivateBank (Chicago). 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 (Chicago), and is being amortized on the straight line basis over 15 years. 12 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. NOTE 9 -- FUNDS BORROWED A summary of all funds borrowed and outstanding at March 31, 2001, December 31, 2000 and March 31, 2000 is presented in the table below:
CURRENT MARCH 31, DECEMBER 31, MARCH 31, RATE(1) MATURITY 2001 2000 2000 ------- -------- --------- ------------ --------- FUNDS BORROWED: (DOLLARS IN THOUSANDS) Borrowings under revolving line of credit.............................. 7.60% 02/11/02 $ -- $18,000 $ 7,500 Subordinated note...................... 5.89 02/11/07 5,000 5,000 5,000 FHLB floating rate advanced(2)......... 5.23 05/01/01 10,000 10,000 -- FHLB fixed advance..................... 6.50 10/23/05 25,000 25,000 -- FHLB fixed advance..................... 6.21 12/05/03 30,000 30,000 -- FHLB fixed advance..................... 6.49 11/13/01 2,000 2,000 -- FHLB fixed advance..................... 5.91 06/21/02 500 500 -- FHLB fixed advance..................... 5.89 12/20/02 1,000 1,000 -- FHLB fixed advance..................... 5.21 1/22/02 1,000 -- -- FHLB fixed advance..................... 5.33 7/22/02 1,000 -- -- FHLB fixed advance..................... 5.02 3/06/02 1,000 -- -- FHLB fixed advance..................... 5.83 5/22/00 -- -- 2,000 FHLB fixed advance(4).................. 5.40 8/08/02 -- -- 2,000 FHLB fixed advance(4).................. 5.40 8/27/04 -- -- 4,000 Fed funds purchased.................... 5.75 daily 10,000 2,700 -- Demand repurchase agreements........... 3.50 daily 3,897 2,679 2,828 ------- ------- ------- Total funds borrowed................ $90,397 $96,879 $23,328 ======= ======= =======
- ------------------ (1) Reflects the rate in effect as of March 31, 2001. (2) The rate on this FHLB floating rate advance is set at one-month LIBOR minus five basis points. (3) Demand repurchase agreements are a form of retail repurchase agreements offered to certain clients of The PrivateBank (Chicago). Funds are swept each business day from the client's demand deposit account. These amounts are not deposits and are not insured, but are secured by a pool of securities pledged specifically for this purpose. (4) These advances were callable at the option of the issuer. FHLB called these advances in 2000. On February 11, 2000, the Company entered into a two-year, $18.0 million revolving credit facility with a commercial bank. The interest rate on borrowings under this revolving line resets quarterly, and is based on, at our option, either the lender's prime rate or three-month LIBOR plus 120 basis points. The Company has elected to pay interest based on the three-month LIBOR rate plus 120 basis points. The initial rate of interest on the revolver was 7.20%, and most recently reset to 7.60% on January 2, 2001. The collateral for this borrowing consists of the common stock of The PrivateBank (Chicago) and The PrivateBank (St. Louis), which is held in custody by the lender. Upon issuing $20.0 million of trust preferred securities on February 8, 2001, the Company repaid the $18.0 million outstanding under the revolving credit facility and no amounts are outstanding on the credit facility as of March 31, 2001. On February 11, 2000, the Company entered into a subordinated note issued to Johnson International, Inc. in the principal amount of $5.0 million. The interest on the subordinated note is set each quarter based on the three-month LIBOR rate. The note is payable in full on or before February 11, 2007, and provides for certain rate escalation beginning after February 11, 2002. The initial rate of interest on the subordinated note was 6.60% and most recently reset to 5.89% on February 12, 2001. The Company has the right to repay the subordinated note at any time after giving at least 30 days, but not more than 60 days' advance notice. 13 NOTE 10 -- LONG TERM DEBT -- TRUST PREFERRED SECURITIES Effective February 8, 2001, PrivateBancorp Capital Trust I, a newly created Delaware business trust and wholly-owned finance subsidiary of the Company, issued 2,000,000 shares (including the underwriters' over-allotment) of 9.50% trust preferred securities, which represent preferred undivided interests in the assets of the trust. The sole assets of the trust are 9.50% junior subordinated debentures issued by the Company with a maturity date of December 31, 2030. Subject to certain limitations, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for a period not to exceed 20 consecutive quarters. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures at maturity or their earlier redemption. At the option of the Company, the debentures may be redeemed in whole or in part prior to maturity on or after December 31, 2005, if certain conditions are met, and only after the Company has obtained Federal Reserve approval, if then required under applicable guidelines or regulations. The Company has guaranteed the payment of distributions and payments upon liquidation or redemption of the trust preferred securities, in each case to the extent of funds held by the trust. The Company and the trust believe that, taken together, the obligations of the Company under the guarantee, the debentures and other related agreements provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the trust under the trust preferred securities. The trust preferred securities are recorded as long-term debt of the Company. The trust received net proceeds of approximately $18.9 million after deducting underwriting commissions and offering expenses and including the underwriters' over-allotment shares. The preferred securities are eligible for treatment as Tier I capital as allowed by the Federal Reserve. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW PrivateBancorp, Inc. ("the Company") was organized as a Delaware corporation in 1989 to serve as the holding company for a Chicago-based de novo bank designed to provide highly personalized financial services primarily to affluent individuals, professionals, entrepreneurs and their business interests. Through the Company's banking subsidiaries, The PrivateBank and Trust Company ("The PrivateBank (Chicago)") and The PrivateBank (St. Louis), the Company provides its clients with traditional personal and commercial banking services, lending programs, and wealth management services. Using the European tradition of "private banking" as the model, the Company strives to develop a unique relationship with clients, utilizing a team of managing directors to serve the clients' individual and corporate banking needs, and tailoring products and services to meet such needs. Currently, the Company has six Chicago-area offices: Downtown Chicago, Wilmette, Illinois, Oak Brook, Illinois, St. Charles, Illinois, Lake Forest, Illinois, and Winnetka, Illinois. During 2000, the Company expanded to the St. Louis market where it opened a new federal savings bank, The PrivateBank (St. Louis) in June 2000. Managing directors are strategically located at all of these locations. During the first quarter 2001, the Company applied for regulatory approval to establish a new office of The PrivateBank (Chicago) in Geneva, Illinois, which is expected to open during the second quarter 2001. 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 The PrivateBank (Chicago) in Lake Forest and Winnetka, Illinois on Chicago's North Shore. During the second quarter 2000, the Company received regulatory approval to establish a new banking subsidiary and on June 23, 2000, the Company capitalized The PrivateBank (St. Louis). The PrivateBank (St. Louis) became fully operational in June 2000. 14 For financial information regarding the Company's four separate lines of business, The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management and Holding Company Activities, see "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. Non-interest 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 who tends 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 were negatively impacted in 2000 due to the start-up operation in St. Charles, the acquisition of Johnson Bank Illinois, and the opening of The PrivateBank (St. Louis). For the remainder of 2001 we expect to continue to be impacted to some extent by the start-up nature of operations in St. Louis and to a lesser extent, by the new office in Geneva, Illinois. The St. Charles office was first profitable in late 2000 and it is expected that The PrivateBank (St. Louis) will not begin to operate profitably until the last quarter of 2001. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 AND 2000 NET INCOME Net income for the first quarter ended March 31, 2001 was $1,333,000, up 57.0 percent compared to first quarter 2000 net income of $849,000. Earnings increased to $0.28 per diluted share in the first quarter 2001 compared to $0.18 per diluted share in the first quarter 2000. First quarter 2001 net income includes a full quarter of financial results of the former Johnson Bank Illinois locations. Excluding the effect of goodwill amortization and acquisition interest expense attributable to this transaction, the two offices located in Winnetka and Lake Forest contributed $186,242 to the Company's net income in the first quarter 2001 compared to $175,975 for the first quarter ended March 31, 2000. The first quarter 2000 results reflected a partial quarter of results from the Johnson Bank Illinois acquisition. The first quarter 2001 results reflect a change in the Company's methodology for defining the portion of earnings attributable to each of its offices. Results for 2000 were not computed using this new methodology. NET INTEREST INCOME Net interest income is the difference between interest income and fees on earning assets and interest expense on deposits and borrowings. Net interest margin represents net interest income on a tax equivalent basis as a percentage of average earning assets during the period. Net interest margin reflects the spread between average yields earned on interest earning assets and the average rates paid on interest bearing deposits and borrowings. The volume of non-interest bearing funds, largely comprised of demand deposits and capital, also affects the net interest margin. 15 Net interest income was $6.5 million during the three months ended March 31, 2001 compared to $4.9 million for the first quarter 2000, an increase of 32.0%. Average earning assets during the first quarter 2001 were $800.5 million, an increase of 39.8% over the prior year first quarter. The Company's net interest margin (tax equivalent net interest income as a percentage of earning assets) was 3.35% for the three months ended March 31, 2001, compared to 3.59% for the prior year period. The decrease in net interest margin during the quarter as compared to the prior year quarter is attributable to the decrease in the prime interest rate as well as to the issuance of $20 million of trust preferred securities on February 8, 2001. These securities bear interest at the fixed rate of 9.50%. The effect of the trust preferred issuance will be to compress net interest margin in a falling interest rate environment. During the second quarter of 2001, the Company expects to continue to experience declines in net interest margin resulting from decreases in market rates of interest. As interest rates decline, the portion of the Company's loan portfolio that is based on floating rates will re-price downward. Likewise, deposits and floating rate borrowings will re-price downward as well, which will reduce the rates earned on assets. 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):
THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------------------- 2001 2000 -------------------------------- ---------------------------------- AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ---- ------- -------- ---- Short-term investments........... $ 12,326 $ 177 5.75% $ 27,376 $ 387 5.68% Investment securities(1)......... 188,760 3,469 7.35% 92,515 1,605 6.98% Loans, net of unearned discount(2)................... 599,407 13,061 8.78% 452,576 9,475 8.42% -------- ------- -------- ------- Total earning assets............. $800,493 $16,707 8.39% $572,467 $11,467 8.06% ======== ======= ======== ======= Interest-bearing deposits........ $624,986 $ 8,203 5.32% $486,015 $ 6,055 5.01% Funds borrowed................... 91,118 1,507 6.62% 16,201 296 7.35% Long-term debt - Trust Preferred Securities(3)................. 11,556 269 9.31% -- -- -- -------- ------- -------- ------- Total interest-bearing liabilities................... $727,660 9,979 5.55% $502,215 6,351 5.09% ======== ------- ======== ------- Tax equivalent net interest income........................ $ 6,728 $ 5,116 ======= ======= Net interest spread.............. 2.84% 2.97% Net interest margin.............. 3.35% 3.59%
- ------------------ (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 $267,000 and $220,000 in the first quarter of 2001 and 2000, respectively. (2) Nonaccrual loans are included in the average balances and do not have a material effect on the average yield. Interest on non-accruing loans was not material for the periods presented. (3) The trust preferred securities pay a 9.50% fixed rate of interest. The yield above is based on the interest for the original stub period. 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 period's rate. Rate variances are computed using the changes in rate multiplied by the previous period's volume. 16 THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
CHANGE CHANGE DUE TO DUE TO CHANGE TOTAL RATE VOLUME DUE TO MIX CHANGE ------ ------ ---------- ------ (DOLLARS IN THOUSANDS) Short-term investments................ $ 5 $ (211) $ (4) $ (210) Investment securities................. 84 1,656 124 1,864 Loans, net of unearned discount....... 402 3,048 136 3,586 ---- ------ ---- ------ Total interest income.............. $491 $4,493 $256 $5,240 ---- ------ ---- ------ Interest-bearing deposits............. $372 $1,717 $ 59 $2,148 Funds borrowed........................ (29) 1,358 (118) 1,211 Long-term debt - Trust Preferred Securities......................... -- -- 269 269 ---- ------ ---- ------ Total interest expense............. $343 $3,075 $210 $3,628 ---- ------ ---- ------ Net interest income................... $148 $1,418 $ 46 $1,612 ==== ====== ==== ======
PROVISION FOR LOAN LOSSES The Company's provision for loan losses was $339,000 for the first quarter of 2001, compared to $311,000 for the comparable period in 2000. 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. The provision for loan losses reflects management's 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 20. NON-INTEREST INCOME Non-interest income for the quarter grew to $1,080,000, reflecting an increase of $358,000 or 49.6 percent higher compared to the first quarter of 2000. Banking income, comprised of service charges on deposits and other products, increased to $200,000 from $87,500 a year ago quarter, which represents a 128.6 percent increase. The increase in service charge income during the first quarter 2001 as compared to the prior year quarter is due to the implementation of a new service fee structure that became effective in December 2000. Additionally, service charge income recognized at the two North Shore offices contributed to this increase. Trust assets under administration decreased 13.2 percent to $693.2 million at March 31, 2001 compared to $799.0 million at March 31, 2000 attributable primarily to market declines affecting portfolio equity values. Despite the decline in the level of trust assets under administration, trust fee revenue increased by $152,000 to $691,000 for the quarter ended March 31, 2001, an increase of 28.2 percent over the prior year quarter. The increase reflects a change in the mix of trust accounts to more profitable account arrangements. The increase in non-interest income is also attributable to the recognition of $186,000 of net gains related to the sale of investment securities during the first quarter of 2001 as compared to $92,000 recognized during the first quarter of 2000. During the first quarter 2001, the Company was able to take advantage of market volatility to achieve interest rate risk management objectives, realize gains on investments, and purchase investment securities with enhanced return opportunities. 17 NON-INTEREST EXPENSE THREE MONTHS ENDED MARCH 31 ------------------ 2001 2000 ------- ------ (IN THOUSANDS) Salaries and employee benefits...... $2,434 $1,877 Occupancy........................... 888 613 Professional fees................... 538 575 Marketing........................... 349 304 Data processing..................... 304 163 Postage, telephone and delivery..... 180 116 Office supplies and printing........ 82 113 Insurance........................... 93 68 Goodwill............................ 206 113 Other expense....................... 219 95 ------ ------ Total non-interest expense.......... $5,293 $4,037 ====== ====== Non-interest expense increased to $5.3 million in the first quarter of 2001 from $4.0 million in the first quarter of 2000, an increase of 31.1 percent. This increase is due to higher operating and personnel expenses associated with a full quarter of operations in the North Shore locations and being fully operational in St. Louis. The Company's efficiency ratio improved to 67.8 percent for the first quarter 2001 as compared to the 69.2 percent for the first quarter 2000 reflecting the stabilization of start-up expenses related to the Company's recent expansion. On a tax-equivalent basis, this ratio indicates that in the first quarter of 2001, the Company spent 67.8 cents to generate each dollar of revenue, compared to 69.2 cents in the first quarter of 2000. During 2001, we expect to continue to incur operating expenses in excess of revenues for The PrivateBank (St. Louis) and for the new office to be established in Geneva, Illinois. As a result, 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. Salaries and benefits increased 29.7% during the first quarter 2001 as compared to the year ago quarter, reflecting the Company's increased level of full-time equivalent employees to 140 people at March 31, 2001 as compared to 115 people at March 31, 2000. The increase is due primarily to the opening and staffing of The PrivateBank (St. Louis), growth in the number of personnel in the Wealth Management area, and the addition of two senior officers responsible for establishing the Geneva office. The Company expects to receive regulatory approval to open the Geneva, Illinois office during the second quarter 2001, at which time additional personnel will be hired. Occupancy expense increased to $888,000 during the first quarter 2001, reflecting an increase of 44.9% over the prior year quarter. Occupancy expense during the first quarter 2001 reflects the addition of a new floor of office space in the downtown Chicago office, as well as depreciation of certain fixed assets, software and equipment. In connection with the renovation of the Company's information technology platform, the Company has purchased and capitalized new equipment and software that is being depreciated over a period of 3 to 5 years, which has had the effect of increasing occupancy expense during the first quarter 2001. Data processing expenses increased to $304,000 during the quarter, an 86.5% increase over the prior year quarter. The opening of The PrivateBank (St. Louis) in June 2000 required additional data processing support. Additionally, the first quarter 2001 results reflect a full quarter of data processing costs associated with the two North Shore offices that were acquired as part of the Johnson Bank Illinois acquisition on February 11, 2000. Postage, telephone and delivery increased to $180,000 during the first quarter 2001, an increase of 55.2% over the prior year quarter. The addition of The PrivateBank (St. Louis) and the two North Shore offices to The PrivateBank (Chicago) increased the delivery costs related to the processing of transactions, which are sent daily to a third-party processing area. Offices supplies and printing costs decreased to $82,000 during the first quarter 2001, a 27.4% decline as compared to the prior year quarter. During the first quarter 2000, the Company incurred several printing charges 18 associated with supplying the St. Louis office and the two North Shore offices with preprinted forms and letterhead needed for day to day operations of those offices. Insurance expense increased to $93,000, an increase of 36.8% over the prior year quarter. The additions of new offices and employees as well as the establishment of The PrivateBank (St. Louis) have all contributed to increased levels of insurance costs during the first quarter 2001. Goodwill amortization increased to $206,000 during the first quarter 2001, reflecting a full quarter of amortization for the Johnson Bank Illinois acquisition, which closed on February 11, 2000. INCOME TAXES The following table shows the Company's income before income taxes, applicable income taxes and effective tax rate for the three months ended March 31, 2001 and 2000, respectively (in thousands): THREE MONTHS ENDED MARCH 31, ------------------- 2001 2000 ------ ------ Income before taxes......... $1,909 $1,270 Income tax provision........ 576 421 Effective tax rate.......... 30.2% 33.2% The lower effective tax rate for the first quarter 2001 as compared to the prior year quarter is partially attributable to an increase in the amount of federally tax exempt municipal investment securities held in the Company's securities portfolio. Tax-exempt municipal securities increased from $37.4 million at December 31, 2000 to $54.4 million at March 31, 2001. The effective income tax rate varies from statutory rates principally due to certain interest income which is tax-exempt for federal or state purposes, and certain expenses which are disallowed for tax purposes. FINANCIAL CONDITION Total assets were $873.7 million at March 31, 2001, an increase of $44.2 million, or 5.3% over $829.5 million at December 31, 2000 and an increase of $216.7 million, or 33.0% over $657.0 million at March 31, 2000. The balance sheet growth during the quarter was accomplished mainly through loan growth throughout the Company and growth in the investment securities portfolio. The growth in assets was funded through excess liquidity, growth in deposits and an increase in long-term debt that resulted from the issuance of $20.0 million of trust preferred securities. LOANS Total loans increased to $626.9 million, an increase of $27.5 million, or 4.6%, from $599.4 million at December 31, 2000 and an increase of $105.7 million, or 20.3%, from $521.2 million at March 31, 2000. The PrivateBank (St. Louis) had loans outstanding of $33.2 million as of March 31, 2001, growth of $8.0 million since December 31, 2000. The remaining loan growth experienced by the Company since December 31, 2000 of $19.5 million was generated by The PrivateBank (Chicago). All of The PrivateBank (Chicago) offices posted strong gains in loan volume. 19 The following table sets forth the Company's loan portfolio net of unearned discount by category (in thousands) at the following dates: MARCH 31, DECEMBER 31, MARCH 31, 2001 2000 2000 --------- ------------ --------- LOANS Commercial real estate......... $229,842 $206,464 $167,809 Residential real estate........ 84,813 86,052 83,573 Commercial..................... 129,080 137,343 137,660 Personal(1).................... 105,829 108,427 100,921 Construction................... 77,336 61,143 31,225 -------- -------- -------- Total loans................. $626,900 $599,429 $521,188 ======== ======== ======== - ------------------ (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 allowance for loan losses as a percentage of total loans was 1.03% at March 31, 2001, 1.02% at December 31, 2000 and 1.09% at March 31, 2000. The Company believes that the allowance for loan losses is adequate to provide for estimated probable credit losses inherent in the loan portfolio. Recoveries totaled $8,000 in the quarter ended March 31, 2001 versus net charge-offs of $15,000 in the year-earlier period. The provision for loan losses was $339,000 in the first quarter of 2001, versus $311,000 in the first quarter of 2000. 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 three months ended March 31, 2001 and 2000 (in thousands):
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ Balance, January 1.............................................. $6,108 $4,510 Johnson Bank Illinois acquisition allowance for loan loss....... -- 864 Provisions charged to earnings.................................. 339 311 Loans recovered (charged-off)................................... 8 (15) ------ ------ Balance, March 31............................................... $6,455 $5,670 ====== ======
NONPERFORMING LOANS Nonaccrual loans were $117,000 at March 31, 2001 as compared to $24,000 at December 31, 2000 and $1.2 million at March 31, 2000. Nonperforming loans include nonaccrual loans and accruing loans which are 90 days or more delinquent. Loans in this category include those with characteristics such as past maturity more than 90 days, those that have 20 recent adverse operating cash flow or balance sheet trends, or loans that have general risk characteristics that management believes might jeopardize the future timely collection of principal and interest payments. The balance in this category at any reporting period can fluctuate widely based on the timing of cash collections, renegotiations and renewals. Nonperforming loans were $3.0 million at March 31, 2001, compared to $1.4 million at December 31, 2000 and $1.6 million at March 31, 2000. Nonperforming loans were .47%, .24% and .30% of total loans at March 31, 2001, December 31, 2000 and March 31, 2000, respectively. Nonperforming loans were .34%, .17% and .24% of total assets at March 31, 2001, December 31, 2000 and March 31, 2000, respectively. The Company designated $950,000 of loans 90 days past due as nonaccrual loans based on additional information that became available in late April 2001. The Company is in the process of restructuring the loans and does not anticipate losses at this time. In addition, $1.2 million of loans that were performing as of March 31, 2001 have been designated as nonaccrual in early May 2001 based on recent developments. Collection efforts have commenced and the Company has not yet determined the extent of losses to be incurred. INVESTMENT SECURITIES The amortized cost and the estimated fair value of securities at March 31, 2001 and December 31, 2000, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE -------------------------------------------------------- MARCH 31, 2001 -------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- U.S. Government Agency Obligations....... $ 1,875 $ 71 $ -- $ 1,946 U.S. Government Agency Mortgage Backed Securities and Collateralized Mortgage Obligations.................. 103,905 1,054 (97) 104,862 Corporate Collateralized Mortgage Obligations........................... 10,183 129 -- 10,312 Tax Exempt Municipal Securities.......... 54,436 574 (358) 54,652 Taxable Municipal Securities............. 831 62 -- 893 Federal Home Loan Bank Stock............. 35,720 -- -- 35,720 Other.................................... 2,358 105 (8) 2,455 -------- ------ ----- -------- Total.................................... $209,308 $1,995 $(463) $210,840 ======== ====== ===== ========
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE -------------------------------------------------------- DECEMBER 31, 2000 -------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- U.S. Government Agency Obligations....... $ 4,326 $ 73 $ -- $ 4,399 U.S. Government Agency Mortgage Backed Securities and Collateralized Mortgage Obligations.................. 83,858 680 (191) 84,347 Corporate Collateralized Mortgage Obligations........................... 10,189 -- (66) 10,123 Tax Exempt Municipal Securities.......... 37,378 187 (921) 36,644 Taxable Municipal Securities............. 1,083 58 -- 1,141 Federal Home Loan Bank Stock............. 35,175 -- -- 35,175 Other.................................... 365 -- -- 365 -------- ---- ------- -------- Total.................................... $172,374 $998 $(1,178) $172,194 ======== ==== ======= ========
21 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 March 31, 2001, net unrealized gains of $1.5 million resulted in an increase in reported stockholders' equity. This was an increase of $1.1 million from net unrealized losses of $118,000 recorded as part of equity at December 31, 2000. The increase in unrealized gains recorded during the first quarter 2001 reflects the fair value of the municipal investment security portfolio and the U.S. government agency mortgage backed securities and collateralized mortgage obligations portfolio resulting from the decline in market interest rates. Additionally, the Company benefited during the quarter from changes made to the investment security portfolio as a result of its asset/liability management strategies. Securities available for sale increased to $210.8 million at March 31, 2001, up 22.4% from $172.2 million at December 31, 2000. The growth in the investment security portfolio during the first quarter 2001 resulted from the implementation of the Company's asset/liability management strategy. Tax exempt municipal securities increased by $18.0 million, allowing the Company to provide for net interest margin protection in a falling interest-rate environment. U.S. government agency mortgage backed securities and collateralized mortgage obligations increased $20.5 million from December 31, 2000. DEPOSITS AND FUNDS BORROWED The following table presents the balances of deposits by category and each category as a percentage of total deposits at March 31, 2001 and December 31, 2000:
MARCH 31, DECEMBER 31, 2001 2000 --------------------------- ------------------------ PERCENT OF PERCENT OF BALANCE TOTAL BALANCE TOTAL -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Demand......................... $ 52,286 7.5% $ 61,789 9.2% Savings........................ 3,495 0.5 8,242 1.2 Interest-bearing demand........ 37,213 5.4 51,301 7.7 Money market................... 298,074 42.9 297,043 44.3 Certificates of deposit........ 218,032 31.3 208,029 31.0 Brokered deposits.............. 86,471 12.4 43,842 6.6 -------- ----- -------- ----- Total deposits.............. $695,571 100.0% $670,246 100.0% ======== ===== ======== =====
Total deposits of $695.6 million at March 31, 2001 represent an increase of $25.3 million or 3.8% as compared to total deposits as of December 31, 2000. Noninterest-bearing deposits decreased by 15.4% to $52.3 million at March 31, 2001 as compared to December 31, 2000 levels. Interest-bearing demand deposits decreased by 27.5% to $37.2 million as compared to December 31, 2000. Money market accounts increased by $1.1 million to $298.1 million at March 31, 2001 as compared to $297.0 million at December 31, 2000. Other time deposits increased by $10.0 million to $218.0 million at March 31, 2001 as compared to $208.0 million at December 31, 2000. Brokered deposits increased by 97.2% to $86.5 million at March 31, 2001 as compared to $43.8 million at December 31, 2000. The Company continued to utilize brokered deposits during the first quarter 2001 as a source of funding for growth in the loan and investment portfolios. 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) and from the Federal Home Loan Bank of Des Moines (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 2001, the Company has continued to utilize FHLB advances to fund liquidity of the banks. 22 A summary of all funds borrowed and outstanding at March 31, 2001, December 31, 2000 and March 31, 2000 is presented in the table below:
CURRENT MARCH 31, DECEMBER 31, MARCH 31, RATE(1) MATURITY 2001 2000 2000 ------- -------- --------- ------------ --------- FUNDS BORROWED: (DOLLARS IN THOUSANDS) Borrowings under revolving line of credit.............................. 7.60% 02/11/02 $ -- $18,000 $ 7,500 Subordinated note...................... 5.89 02/11/07 5,000 5,000 5,000 FHLB floating rate advanced(2)......... 5.23 05/01/01 10,000 10,000 -- FHLB fixed advance..................... 6.50 10/23/05 25,000 25,000 -- FHLB fixed advance..................... 6.21 12/05/03 30,000 30,000 -- FHLB fixed advance..................... 6.49 11/13/01 2,000 2,000 -- FHLB fixed advance..................... 5.91 06/21/02 500 500 -- FHLB fixed advance..................... 5.89 12/20/02 1,000 1,000 -- FHLB fixed advance..................... 5.21 1/22/02 1,000 -- -- FHLB fixed advance..................... 5.33 7/22/02 1,000 -- -- FHLB fixed advance..................... 5.02 3/06/02 1,000 -- -- FHLB fixed advance..................... 5.83 5/22/00 -- -- 2,000 FHLB fixed advance(4).................. 5.40 8/08/02 -- -- 2,000 FHLB fixed advance(4).................. 5.40 8/27/04 -- -- 4,000 Fed funds purchased.................... 5.75 daily 10,000 2,700 -- Demand repurchase agreements(3)........ 3.50 daily 3,897 2,679 2,828 ------- ------- ------- Total funds borrowed................ $90,397 $96,879 $23,328 ======= ======= =======
- ------------------ (1) Reflects the rate in effect as of March 31, 2001. (2) The rate on this FHLB floating rate advance is set at one-month LIBOR minus five basis points. (3) Demand repurchase agreements are a form of retail repurchase agreements offered to certain clients of The PrivateBank (Chicago). Funds are swept each business day from the client's demand deposit account. These amounts are not deposits and are not insured, but are secured by a pool of securities pledged specifically for this purpose. (4) These advances were callable at the option of the issuer. FHLB called these advances in 2000. CAPITAL RESOURCES During the first quarter 2001, the Company completed the issuance of $20.0 trust preferred securities which qualify as Tier 1 capital up to 25.0% of total Tier 1 capital with the remaining amount treated as Tier 2 capital. At March 31, 2001, $18.6 million of the trust preferred securities was treated as Tier 1 capital. Stockholders' equity rose to $56.9 million at March 31, 2001, an increase of $2.7 million from the 2000 year-end level, due to an increase in year-to-date 2001 net income and to an increase in Accumulated Other Comprehensive Gains, reflecting a $1.1 million increase (net of tax) in the fair value of the available-for-sale investment portfolio at March 31, 2001 as compared to the fair value at December 31, 2000. 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. 23 The following table reflects the Company's consolidated measures of capital at March 31, 2001, December 31, 2000 and March 31, 2000:
MARCH 31, DECEMBER 31, MARCH 31, 2001 2000 2000 --------- ----------- --------- Leverage ratio........................ 7.60% 5.54% 6.76% Tier 1 risk-based capital ratio....... 9.14% 6.47% 7.56% Total risk-based capital ratio........ 11.00% 8.15% 9.56% Total equity to total assets.......... 6.52% 6.53% 7.38%
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 March 31, 2001, the Company and each of the banking subsidiaries continued to exceed the minimum levels of all regulatory capital requirements, and were each considered "well capitalized" under all regulatory standards. LIQUIDITY Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for clients' credit needs. The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets. Net cash inflows provided by operations were $2.9 million in the first three months of 2001 compared to a net inflow of $4.5 million a year earlier. Net cash outflows from investing activities were $64.2 million in the first three months of 2001 compared to a net cash outflow of $52.3 million a year earlier. Cash inflows from financing activities in the first three months of 2001 were $39.0 million compared to a net inflow of $30.9 million in the first three months of 2000. 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. During 2001, the Company has continued to utilize brokered deposits as an alternative source of funding. Brokered deposits represented 12.4% of total deposits at March 31, 2001 compared to 6.6% of total deposits at December 31, 2000. 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 complements 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. 24 During any given time period, if the amount of rate sensitive liabilities exceeds the amount of rate sensitive assets, a company would generally be considered negatively gapped and would benefit from falling rates over that period of time. Conversely, a positively gapped company would generally benefit from rising rates. The following tables illustrate the estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of March 31, 2001 and 2000:
MARCH 31, 2001 -------------------------------------------------------------------- TIME TO MATURITY OR REPRICING -------------------------------------------------------------------- (DOLLARS IN THOUSANDS) OVER 5 0-90 DAYS 91-365 DAYS 1-5 YEARS YEARS TOTAL --------- ----------- --------- ------- -------- INTEREST-EARNING ASSETS Loans.............................. $359,259 $ 55,978 $189,182 $ 22,481 $626,900 Investments........................ 37,819 14,072 88,633 68,784 209,308 Federal funds sold................. 81 -- -- -- 81 -------- -------- -------- -------- -------- Total interest-earning assets...... $397,159 $ 70,050 $277,815 $ 91,265 $836,289 ======== ======== ======== ======== ======== INTEREST-BEARING LIABILITIES Interest-bearing demand............ $ -- $ -- $ -- $ 37,213 $ 37,213 Savings and money market........... 213,501 84,573 -- 3,495 301,569 Time deposits...................... 115,045 117,397 37,471 34,590 304,503 Funds borrowed..................... 28,897 3,000 58,500 20,000 110,397 -------- -------- -------- -------- -------- Total interest-bearing liabilities. $357,443 $204,970 $ 95,971 $ 95,298 $753,682 ======== ======== ======== ======== ======== CUMULATIVE Rate sensitive assets (RSA)........ $397,159 $467,209 $745,024 $836,289 Rate sensitive liabilities (RSL)... $357,443 $562,413 $658,384 $753,682 GAP (GAP=RSA-RSL).................. $ 39,716 $(95,204) $ 86,640 $ 82,607 RSA/RSL............................ 111.11% 83.07% 113.16% 110.96% RSA/Total assets................... 45.46% 53.48% 85.27% 95.72% RSL/Total assets................... 40.91% 64.37% 75.36% 86.26% GAP/Total assets................... 4.55% 10.90% 9.92% 9.45% GAP/Total RSA...................... 10.00% 20.38% 11.63% 9.88%
25
MARCH 31, 2000 -------------------------------------------------------------------- TIME TO MATURITY OR REPRICING -------------------------------------------------------------------- (DOLLARS IN THOUSANDS) OVER 5 0-90 DAYS 91-365 DAYS 1-5 YEARS YEARS TOTAL --------- ----------- --------- ------- -------- INTEREST-EARNING ASSETS Loans................................ $285,892 $42,853 $175,753 $ 16,690 $521,188 Investments.......................... 5,428 3,773 26,026 54,697 89,924 Federal funds sold................... 10,632 -- -- -- 10,632 -------- ------- -------- -------- -------- Total interest-earning assets........ $301,952 $46,626 $201,779 $ 71,387 $621,744 ======== ======= ======== ======== ======== INTEREST-BEARING LIABILITIES Interest-bearing demand.............. $ -- $ -- $ -- $ 36,926 $ 36,926 Savings and money market............. 171,725 103,569 -- 2,453 277,747 Time deposits........................ 112,236 89,534 7,106 3,557 212,433 Funds borrowed....................... 19,228 4,100 -- -- 23,328 -------- -------- -------- -------- -------- Total interest-bearing liabilities... $303,189 $197,203 $ 7,106 $ 42,936 $550,434 ======== ======== ======== ======== ======== CUMULATIVE Rate sensitive assets (RSA).......... $301,952 $ 348,578 $550,357 $621,744 Rate sensitive liabilities (RSL)..... $303,189 $ 505,392 $507,498 $550,434 GAP (GAP=RSA-RSL).................... $ (1,237) $(151,814) $ 42,859 $ 71,310 RSA/RSL.............................. 99.6% 69.7% 108.5% 113.0% RSA/Total assets..................... 46.0% 53.1% 83.8% 94.6% RSL/Total assets..................... 46.1% 76.2% 77.2% 83.8% GAP/Total assets..................... 0.2% 23.1% 6.5% 10.9% GAP/Total RSA........................ 0.2% 24.4% 6.9% 11.5%
The following table shows the impact of an immediate 200 basis point change in interest rates, assessed through the use of a simulation model, on the Company's earning asset portfolio as of March 31, 2001 and 2000. The simulation model attempts to measure the effect of rising and falling interest rates over the next two-year horizon in a rapidly changing rate environment.
MARCH 31, ------------------------------------------------------ 2001 2000 ------------------------- ------------------------ +200 BASIS -200 BASIS +200 BASIS -200 BASIS POINTS POINTS POINTS POINTS ---------- ---------- ---------- ---------- Percentage change in net interest income due to an immediate 200 basis point change in interest rates over a two-year time horizon.... -9.1% 10.1% -3.8% 9.3%
This table shows that if there had been an instantaneous parallel shift in the yield curve of +200 basis points on March 31, 2001 and March 31, 2000, the Company would suffer a decline in net interest income of 9.1% and 3.8%, 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 10.1% over a two-year horizon based on March 31, 2001 balances, as compared to 9.3% measured on the basis of the March 31, 2000 portfolio. Changes in the effect on net interest income from a 200 basis point movement at March 31, 2001 as compared to March 31, 2000 are due to the timing and nature of the repricing of rate sensitive assets to rate sensitive liabilities. In each period, the increase in interest income in the reduced rate environment and the decrease in interest income in an increased rate environment is due to our negatively gapped balance sheet within a two-year horizon. In a rates down 200 basis points scenario, rate sensitive liabilities would reprice to reduced rates more quickly than many rate-sensitive assets, resulting in higher net interest income. The increased loss in a rates up 200 26 basis points environment at March 31, 2001 compared to March 31, 2000 is due to the nature of new loan and deposit volume. Customers view the current rate environment as historically low and are locking into longer-term loans and shorter-term deposits. This trend would increase the compression on our margin in a rates up environment. 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. 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. 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; an inability to achieve expected revenues to the full extent expected or within the expected time frame at the St. Louis office; unforeseen developments, delays or difficulties relating to the establishment of a Geneva, Illinois office; 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 PART II ITEM 1. LEGAL PROCEEDINGS Although the Company's subsidiaries may be involved from time to time in routine litigation incidental to their respective businesses, currently there are no material pending legal proceedings to which either the Company or its subsidiaries is a party. 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 3.1 - Amended and Restated Certificate of Incorporation of PrivateBancorp, Inc. (filed as an exhibit to the Company's Form S-1 registration statement (File No. 333-77147) and incorporated herein by reference.) Exhibit 3.2 - [Intentionally left blank] Exhibit 3.3 - Amended and Restated By-laws of PrivateBancorp, Inc. (filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference.) Exhibit 4.1 - Subordinated Note of PrivateBancorp, Inc., dated February 11, 2000, principal amount of $5 million due February 11, 2007, issued to Johnson International, Inc. (filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference.) Exhibit 4.2 - Certain instruments defining the rights of the holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request. Exhibit 10.1 - Lease Agreement for banking facility located at 312 Crescent Place, Geneva, Illinois, dated as of January 9, 2001, by and between The PrivateBank and Trust Company and Shodeen Management Company. (b) Filings on Form 8-K. (1) Current Report on Form 8-K dated January 22, 2001, filed with the SEC on January 22, 2001. 28 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: May 14, 2001 29 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp, Inc. (filed as an exhibit to the Company's Form S-1 registration statement (File No. 333-77147) and incorporated herein by reference). 3.2 [Intentionally left blank] 3.3 Amended and Restated By-laws of PrivateBancorp, Inc. (filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference). 4.1 Subordinated Note of PrivateBancorp, Inc., dated February 11, 2000, principal amount of $5 million due February 11, 2007, issued to Johnson International, Inc. (filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference). 4.2 Certain instruments defining the rights of the holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request. 10.1 Lease Agreement for banking facility located at 312 Crescent Place, Geneva, Illinois, dated as of January 9, 2001, by and between The PrivateBank and Trust Company and Shodeen Management Company. EX-10 2 f10q-ex10_050201.txt EXHIBIT 10.1 RETAIL LEASE AGREEMENT THIS RETAIL LEASE AGREEMENT (the "Lease") is made as of the 9th day of January, 2001, between SHODEEN MANAGEMENT COMPANY, an Illinois corporation, as agent for the beneficiaries of a land trust with Harris Bank St. Charles, pursuant to Trust Agreement dated March 4, 1994, and known as Trust No. 2321 (the "Landlord"), and Private Bank, (the "Tenant"). 1. PREMISES. In consideration of the rents, terms, provisions and covenants of this Lease, Landlord hereby leases unto Tenant and Tenant hereby rents and accepts from Landlord those certain premises containing approximately 1,700 rentable square feet, which are outlined on the floor plan attached hereto as Exhibit "A" and incorporated herein by reference. The Premises are contained in that certain building located at 312 Crescent Place, Geneva, Illinois 60134, Illinois (the "Building"), which Building contains approximately 5,450 rentable square feet of space. The land on which the Building is situated, together with all improvements located thereon (collectively the "Property"), is more particularly described on Exhibit "B" attached hereto and incorporated herein by reference. 2. TERM. ---- (a) Subject to and upon the terms and conditions set forth below, the term of this Lease shall be for a period of Five (5) Lease Years (as hereinafter defined), commencing on the Commencement Date (as hereinafter defined) and ending on last day of the last month of the Fifth (5th) Lease Year. (b) For purposes of this Lease, the following terms shall have the following meanings: (i) "Commencement Date" shall mean the date upon which the Premises are substantially completed (as hereinafter defined). Promptly upon determination of the Commencement Date, Landlord and Tenant shall execute a memorandum, setting forth the Commencement Date and the expiration date of this Lease, in form and substance substantially similar to that attached hereto as Exhibit "C" and incorporated by reference. (ii) "Lease Year" shall mean each twelve (12) month period commencing on the first day of the first full month after the Commencement Date and each anniversary thereafter during the Term (as hereinafter defined) of this Lease; provided, however, that if the Commencement Date is the first day of the month, the first Lease Year shall commence on the Commencement Date. The first Lease Year shall commence on the Commencement Date and end on the last day of the last month of the first Lease Year regardless of whether the first Lease Year is longer than twelve (12) months. (iii) "Term" shall mean the initial term of this Lease and any renewals or extensions thereof. 3. RENTAL. ------ (a) Base Rental. Tenant shall pay to Landlord, as base rental (the "Base Rental") during the Term of this Lease, the aggregate sum of One Hundred Thirty Five Thousand Four Hundred Thirty-Nine and 00100 Dollars ($135,439.00) as follows: (i) an annual sum of Twenty Five Thousand Five Hundred and 00/100 Dollars ($25,500.00) per year during the first (1st) Lease Year, payable in equal monthly installments of Two Thousand One Hundred Twenty-Five and 00/100 Dollars ($2,125.00); (ii) an annual sum of Twenty Six Thousand Two Hundred Sixty-Five and 00/100 Dollars ($26,265.00) per year during the second (2nd) Lease Year, payable in equal monthly installments of Two Thousand One Hundred Eighty-Eight and 75/100 Dollars ($2,188.75); (iii) an annual sum of Twenty Seven Thousand Forty-Seven and 00/100 Dollars ($27,047.00) per year during the third (3rd) Lease Year, payable in equal monthly installments of Two Thousand Two Hundred Fifty-Three and 92/100 Dollars ($2,253.92); (iv) an annual sum of Twenty Seven Thousand Eight Hundred Sixty-Three and 00/100 Dollars ($27,863.00) per year during the fourth (4th) Lease Year, payable in equal monthly installments of Two Thousand Three Hundred Twenty-One and 92/100 Dollars ($2,321.92); (v) an annual sum of Twenty Eight Thousand Six Hundred Ninety-Six and 00/100 Dollars ($28,696.00) per year during the fifth (5th) Lease Year, payable in equal monthly installments of Two Thousand Three Hundred Ninety-One and 33/100 Dollars ($2,391.33). Each such monthly installments shall be due and payable in advance, on or before the first (lst) day of each and every month during the Term, without notice, demand or set-off, provided, however, that the first month's rent shall be due and payable upon execution of this Lease. (b) Additional Rental. Tenant shall pay to Landlord Tenant's Proportionate Share (as hereinafter defined) of the Operating Expenses (the "Additional Rental") payable in equal monthly installments of Six Hundred Twenty-One and 92/100 Dollars ($621.92). If this Lease commences or terminates on a date other than January 1, the annual Operating Expenses shall be prorated by multiplying one-twelfth (1/12) of the annual Operating Expenses by the number of full or partial months between the Commencement Date and December 31 of the year of commencement or between January 1 of the year of termination and the termination date, as the case may be. As used in this Lease, "Proportionate Share" shall mean a percentage factor, determined by dividing the net rentable square footage contained in the Premises by the net rentable square footage contained in the Building. Provided, however, that if the Building is not fully occupied, Tenant's Proportionate Share of the Operating Expenses that vary with the occupancy of the Building shall mean a percentage factor determined by dividing the net rentable 2 square footage contained in the Premises by the average net rentable square footage occupied by tenants in the Building during a calendar year. (i) Operating Expenses. "Operating Expenses" shall include those expenses paid by or on behalf of Landlord in respect to the management, operation, service and maintenance of the Property, including the Premises, in accordance with generally accepted principles of office building management as applied to the operation and maintenance of office buildings similar to the type and nature of the Property and in the general market area as the Property. Operating Expenses shall include, but not be limited to, (A) Real Estate Taxes (as hereinafter defined), (B) premium costs for liability, boiler, extended coverage, casualty and other insurance covering the Property to be maintained by Landlord and required by the terms of this Lease, (C) electricity, gas, water and other utility charges for the Property which are not separately metered to Tenant; (D) repair and maintenance of HVAC systems, elevators, irrigation systems and other mechanical systems; (E) repair and maintenance of the Common Areas (as hereinafter defined) and the Building structure and roof, (F) trash removal and snow removal; (G) janitorial service, (H) wages, salaries and fees of operating, auditing, accounting, maintenance and management personnel in connection with the Property, (I) all payroll charges for such personnel, such as unemployment and social security taxes, workers' compensation, health, accident and group insurance, and other so-called fringe benefits; (J) rental charges for office space chargeable to the operation and management of the Property; (K) license permits and inspection fees; (L) supplies and materials used in the operation and management of the Property; (M) furnishings and equipment not treated by Landlord as capital expenditures of the Property; (N) depreciation and the cost of any labor saving devices that may, from time to time, be placed in operation as a part of Landlord's maintenance program; (O) personal property taxes on property used in the operation, maintenance, service and management of the Property; (P) the cost, as reasonably amortized by Landlord, with interest at the rate of ten per cent (10%) per annum, on the unamortized amount, of any capital improvement made after completion of initial construction of the Building which reduces Operating Expenses, but in an amount not to exceed such reduction for the relevant year; (Q) management fees relating to the Property; (R) the cost of any installation or improvement required by reason of any law, ordinance or regulation, which requirement did not exist on the date of the Lease and is generally applicable to similar office buildings; and (S) all other expenses necessary for the operation and management of the Property. (ii) Real Estate Taxes. "Real Estate Taxes" shall include all taxes, including state equalization factor, if any, and assessments, special or otherwise, exclusive of penalties or discounts levied upon or with respect to the Property, including the Premises, imposed by any federal, state or local governmental agency, and including any use, occupancy, excise, sales or other like taxes (other than general income taxes on rent or other income from the Building). Real Estate Taxes also shall include the expense of contesting the amount or validity of any such taxes, charges or assessments, such expense to be applicable to the period of the item contested. Real Estate Taxes shall not, however, include income, 3 franchise, capital stock, estate or inheritance taxes unless Landlord reasonably determines that such taxes are in lieu of real estate taxes, assessments, rental, occupancy and other like excise taxes. For purposes of this Lease, Real Estate Taxes for any calendar year shall be those taxes the last timely payment date for which occurs within such calendar year. In case of special taxes or assessments payable in installments, only the amount of the installment(s) the last timely payment date for which occurs on or after the first day and on or before the last day of such year shall be included in Real Estate Taxes for that year. Landlord shall retain the sole right to participate in any proceedings to establish or contest the amount of Real Estate Taxes. If a complaint against valuation, protest of tax rates or other action increases or decreases the Real Estate Taxes for any calendar year, resulting in an increase or decrease in rent hereunder, the Real Estate Taxes for the affected calendar year shall be recalculated accordingly and the resulting increased rent plus the expenses incurred in connection with such contest, or decreased rent, less the expenses incurred in connection with such contest, shall be paid simultaneously with or applied as a credit against, as the case may be, the rent next becoming due. (c) Payment of Proportionate Share. To provide for current payments of Operating Expenses, Tenant shall pay Tenant's Proportionate Share of the Operating Expenses, as estimated by Landlord from time to time, in twelve (12) monthly installments, commencing on the first day of the month following the month in which Landlord notifies Tenant of the amount of its estimated Proportionate Share. Landlord shall estimate the amount of Operating Expenses for each year and then reconcile such estimated expenses in the following year based on actual Operating Expenses for such year paid by Landlord. If Tenant's Proportionate Share of the actual Operating Expenses shall be greater than or less than the aggregate of all installments so paid on account to Landlord for such twelve (12) month period, then within ten (10) days of Tenant's receipt of Landlord's statement of reconciled Operating Expenses, Tenant shall pay to Landlord the amount of such underpayment, or Landlord shall credit Tenant for the amount of such overpayment against the next maturing installment(s) of rent, as the case may be. The obligation of Tenant with respect to the payment of Tenant's Proportionate Share of the Operating Expenses shall survive the termination of this Lease. Any payment, refund, or credit made pursuant to this subparagraph 3(c) shall be made without prejudice to any right of Tenant to dispute the statement as hereinafter provided, or of Landlord to correct any item(s) as billed pursuant to the provisions hereof. Landlord's failure to give such statement shall not constitute a waiver by Landlord of its right to recover rent that is due and payable pursuant to this subparagraph 3(c). (d) Dispute of Operating Expenses. If Tenant questions in writing any such notice of reconciled Operating Expenses (or revised notice thereof), and if the question is not amicably settled between Landlord and Tenant within thirty (30) days alter said notice of reconciled Operating Expenses (or revised notice) has been given, Landlord shall, during the sixty (60) days next following the expiration of such thirty (30) day period, employ an independent certified public accountant to audit Operating Expenses. The determination of such accountant shall be final, conclusive and binding upon Landlord and Tenant. Tenant understands that the actual itemization of, and the amount of individual items constituting, Operating Expenses is confidential; and while Landlord shall keep and make available to such accountant 4 all records in reasonable detail, and shall permit such accountant to examine and audit such of Landlord's records as may reasonably be required to verify such reconciled Operating Expenses, at reasonable times during business hours, Landlord shall not be required to (and the accountant shall not be permitted to) disclose to any person, firm or corporation, including to Tenant, any such details (it being the intent of the parties that such accountant shall merely certify to Landlord and to Tenant the correct amount of adjusted additional Operating Expenses for the calendar year). Any change in the reconciled Operating Expenses required by such accountant's determination shall be made within thirty (30) days after such determination has been rendered. The expenses involved in such determination shall be borne by Tenant and deemed to be Additional Rental under this Lease, unless the results of such audit determine that the difference between the Operating Expenses as determined by the audit and the Operating Expenses as determined by Landlord is greater than five percent (5%) of the Operating Expenses as determined by Landlord, in which case such expenses shall be borne by Landlord. If Tenant does not, in writing, question the reconciled Operating Expenses within thirty (30) days after such notice has been given, Tenant shall be deemed to have approved and accepted such reconciled Operating Expenses. (e) Adjustments to Operating Expenses. If a clerical error occurs or Landlord or Landlord's accountants discover new facts, which error or discovery causes Operating Expenses for any period to increase or decrease, upon notice by Landlord to Tenant of the adjusted additional Operating Expenses for such calendar year, the adjusted additional Operating Expenses shall apply and any deficiency or overpayment of Tenant's Proportionate Share of the Operating Expenses, as the case may be, shall be paid by Tenant or taken as a credit by Tenant according to the provisions set forth above. This provision shall survive the termination of the Lease. (f) Other Charges. All costs, expenses and other sums that Tenant assumes or agrees to pay to Landlord pursuant to this Lease ("Other Charges") shall be deemed rental and, in the event of nonpayment thereof, Landlord shall have all the rights and remedies herein provided for in case of nonpayment of Base Rental and Additional Rental. If a monthly installment of rent is not received on or before the fifth (5th) day of the month in which it is due, other remedies for nonpayment of rent notwithstanding, Tenant shall pay to Landlord, a late charge of five per cent (5%) of such installment as rent for the purpose of defraying Landlord's administrative expenses incident to the handling of such overdue payment, and such past due rent shall bear interest at the greater of (i) a rate of interest equal to fifteen per cent (15%) per annum; or (ii) a rate of interest equal to the prime rate as announced from time to time by The First National Bank of Chicago, plus three per cent (3%) per annum (the "Default Rate"), for each day from the first day of the month through the date such monthly installment of rent is received by Landlord. For purposes of this Lease, "rent" shall mean Base Rental, Additional Rental, Percentage Rental and Other Charges. (g) Place of Payment. Tenant shall pay all rent and other charges due under this Lease without demand, deduction or set off to Landlord at 17 North First Street, Geneva, Illinois 60134, or at such other place as Landlord may designate from time to time hereafter by written notice to Tenant. 5 4. CONSTRUCTION. ------------ (a) Improvements to be Constructed. Landlord, at its own cost and expense, shall perform the work and make the installation in the Premises that are designated as Landlord's Work in Exhibit "D", attached hereto and incorporated herein by reference. Except as expressly set forth in Exhibit "D", Landlord has made no promise to alter, remodel or improve the Premises, the Building or the Property. (b) Work Prior to Commencement Date. All work and installations to the Premises designated in Exhibit "D" shall be substantially completed prior to March 1, 2001 (the "Estimated Completion Date") and the Premises shall be in good and tenantable condition in all respects for occupancy by Tenant for its purposes and uses so long as Tenant shall have approved the plans and specifications for construction and remodeling of the Premises on or before January 26, 2001. Tenant may make changes in said plans and specifications; provided, however, that in such event Tenant shall pay all architectural, engineering, and other fees associated with said changes, and Landlord shall be given a reasonable extension of time to complete Landlord's Work after the Estimated Completion Date. Any extension of time and modifications to plans and specifications shall be in writing, dated and signed by both parties. (If Tenant does not timely submit to Landlord approved plans and specifications, the Commencement Date shall be the Estimated Completion Date and rental shall commence from that date notwithstanding the fact that the Premises are not substantially completed.) The Estimated Completion Date shall be postponed in the event of (i) the unavailability of materials and equipment that have been specified and requested by Tenant or (ii) delays caused by acts of God, strikes and other events beyond the reasonable control of Landlord, and neither circumstance shall give rise to liability of Landlord. (c) Availability of Premises Prior to Commencement Date. If Landlord, at Tenant's request, makes the Premises available to Tenant before the Commencement Date to decorate, furnish, and equip the Premises, Tenant shall not interfere with the completion of Landlord's Work. Tenant's use of the Premises for such work shall not create a landlord-tenant relationship between the parties, or constitute occupancy of the Premises within the meaning of the next sentence, but the provisions of Paragraphs 12 and 13 of this Lease shall apply. (d) Substantial Completion. As used herein, the work in the Premises shall be "substantially completed" when the work has been completed in accordance with the plans and specifications subject to the completion of punch list items, and a certificate of occupancy has been issued. (e) Condition of Premises. Except as otherwise agreed to in writing, Tenant's taking possession of the Premises shall be conclusive evidence against Tenant that the Premises were in good order and satisfactory condition when Tenant took possession. Landlord has made no representation respecting the condition of the Premises, the Building or the Property, except as is expressly set forth in Exhibit "D." At the termination of this Lease, by lapse of time or otherwise, Tenant shall remove all Tenant's property, including but not limited to, trade fixtures, from the Premises, and shall return the Premises broom-clean and in as good a condition as when Tenant took possession or as same may thereafter have been put by Landlord, except for ordinary wear, loss by fire or other casualty, and repairs that Landlord is required to make under this 6 Lease. If Tenant fails to remove any or all of its property upon termination of this Lease, such property shall be deemed to be abandoned and shall become the property of Landlord. (f) Overload. To coordinate orderly move-ins and move-outs, no furniture, freight or equipment of any kind exceeding three hundred (300) pounds shall be brought into the Building without prior notice to Landlord and Landlord shall designate the time and manner of moving of the same. Landlord shall have the right to prescribe the weight, size and position of all safes and other heavy equipment brought into the Building and also the times and manner of moving the same in and out of the Building. Safes or other heavy objects shall, if considered necessary by Landlord, stand on supports of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such safe or property from any cause, and all damage done to the Building by moving or maintaining any such safe or other property shall be repaired at Tenant's expense. 5. USE OF THE PREMISES. ------------------- (a) Use. The Premises shall be used only for the retail sale of banking type practice and for no other purpose or purposes without the prior written consent of Landlord. The Tenant shall not at any time leave the Premises vacant, but shall in good faith continuously throughout the term of this Lease conduct and carry on in the entire Premises the type of business for which the Premises are leased. The Tenant shall operate its business with a complete line of full selection and sufficient stock of first class merchandise of current style and type, attractive displays and in an efficient, high class and reputable manner so as to produce the maximum amount of sales from the Premises, and shall except during reasonable periods of repairing, cleaning and decorating keep the Premises open to the public for business with adequate and competent personnel in attendance on all days and during all hours (including evenings) established by Landlord from time to time as store hours for the Building, and during any other day hours when the Building generally is open to the public for business, except to the extent the Tenant may be prohibited from being open for business by applicable law, ordinance or government regulation. (b) Prohibitions on Use. The Tenant shall not conduct within the Premises any fire, auction or bankruptcy sales or operate within the Premises a "wholesale" or "factory outlet" store, a cooperative store, a "second hand" store, a "surplus" store or a store commonly referred to as "discount house". The Tenant shall not advertise that it sell products or services at "discount", "cut-price", or "cut-rate" prices. The Tenant shall not permit any objectionable or unpleasant odors to emanate for the Premises, nor place or permit any radio, television, loud-speaker or amplifier on the roof or outside the Premises or where the same can be seen or heard from outside the building or distribute leaflets or other advertising material in the Common Area; nor take any other action which in the exclusive judgment of Landlord would constitute a nuisance or would disturb or endanger other tenants of the Building or unreasonably interfere with their use of their respective premises, nor do anything which would tend to injure the reputation of the Building. (c) Display Windows. The Tenant shall maintain all display windows in a neat, attractive condition, and shall keep all display windows, exterior electric signs in front of the Premises lighted from dusk to 10:00 p.m. every day, including Sundays and holidays. 7 (d) Advertising. Tenant shall include the address and identity of its business activities in the Premises in all advertisements made by the Tenant in which the address and identity of any similar local business activity of Tenant is mentioned. (e) Permits. The Tenant shall procure, at its sole expense, any permits and licenses required for the transaction of business in the Premises and otherwise comply with all applicable laws, ordinances and governmental regulations. 6. ALTERATIONS. ----------- (a) Prohibition. Tenant shall not make any alterations, additions or improvements (collectively, the "Alterations") in or to the Premises, or in or to the Building without the express prior written consent of Landlord; provided, however, that Landlord shall not be unreasonable in withholding consent to nonstructural Alterations. (b) Indemnification. In addition to the indemnity set forth in Paragraph 12 of this Lease, Tenant hereby specifically agrees to indemnify and hold harmless Landlord from and against any and all liabilities, costs and expenses of every kind and description, including attorneys' fees, that may arise out of or in any manner be connected with any Alterations made by Tenant. Tenant shall pay the cost of all such Alterations and all costs associated with decorating the Premises that may be occasioned thereby. Upon completion of any such Alterations, Tenant shall furnish Landlord with receipted bills covering all labor and materials used, together with such documentation as is necessary to comply fully with the mechanics' lien law of the state in which the Premises are located. Notice is hereby given that Landlord shall not be liable for any labor or materials furnished or to be furnished to Tenant upon credit, and that no mechanic's or other lien for such labor or material shall attach to or affect the reversion or other estate or interest of Landlord in and to the Premises. (c) Compliance and Supervision of Alterations. All Alterations made by Tenant hereunder shall be installed in a good and workmanlike manner, using only materials of the same or higher quality as those installed in the Building. All Alterations shall comply with all requirements of Landlord's insurance carriers and with all laws, rules, ordinances and regulations of any lawful authority. Tenant shall permit Landlord to supervise construction operations in connection with any such Alterations, if Landlord requests the right to do so (but Landlord shall have no obligation to make such requests, or having done so, to supervise construction). Landlord's supervision of construction shall be done solely for the benefit of Landlord and shall not alter Tenant's liability and responsibility under this Paragraph 6. (d) Landlord's Property. All Alterations, whether temporary or permanent, including hardware, non-trade fixtures and wall and floor coverings, whether placed in or upon the Premises by Landlord or Tenant, shall become Landlord's property and shall remain with the Premises at the termination of this Lease, whether by lapse of time or otherwise, without compensation, allowance or credit to Tenant; provided however, that notwithstanding the foregoing, Landlord may request that any or all of said Alterations in or upon the Premises made by Tenant be removed by Tenant at the termination of this Lease. If Landlord requests such removal or if Tenant removes its trade fixtures, Tenant shall remove the same prior to the end of the Term and shall repair all damage to the Premises, the Building or the Property caused by 8 such removal. Tenant shall not, however, be required to remove pipes and wires concealed in floors, walls or ceilings, provided that Tenant properly cuts and caps the same, and seals them off in a safe, lawful and workmanlike manner, in accordance with Landlord's reasonable requirements and all applicable building codes. If Tenant does not remove any Alterations when requested by Landlord to do so, Landlord may remove the same and repair all damage caused thereby, and Tenant shall pay to Landlord the cost of such removal and repair immediately upon demand therefor by Landlord, plus fifteen percent (15%) of the cost of such removal to reimburse Landlord for its administrative expense. Tenant's obligation to observe or perform this covenant shall survive the expiration or termination of this Lease. (e) Wiring. Landlord will direct electricians as to where and how telephone and computer wires are to be introduced. No boring or cutting for wires will be allowed without Landlord's consent. The location of telephones, call boxes and other office equipment affixed to the Premises shall be subject to Landlord's approval. 7. MECHANICS' LIENS. ---------------- (a) If, because of any act or omission of Tenant, any mechanic's lien or other lien, charge or order for the payment of money shall be filed against any portion of the Premises, Tenant, at its own cost and expense, shall cause the same to he discharged of record within ten (10) days of the filing thereof unless Tenant shall contest the validity of such lien by appropriate legal proceedings diligently conducted in good faith and without expense to Landlord and shall bond or insure Landlord against any such liens; and Tenant shall indemnify and save harmless Landlord against and from all costs, liabilities, suits, penalties, claims and demands, including attorneys' fees, on account thereof. (b) If Tenant shall fail to cause such liens to be discharged of record within the aforesaid ten (10) day period or shall fail to satisfy such liens within ten (10) days after any judgment in favor of such lien-holders from which no further appeal might be taken, then Landlord shall have the right to cause the same to be discharged. All amounts paid by Landlord to cause such liens to be discharged, plus interest on such amounts at the Default Rate shall constitute Other Charges payable by Tenant to Landlord. 8. MAINTENANCE AND REPAIR. ---------------------- (a) Tenant's Maintenance. Tenant, at its sole cost and expense, shall maintain and repair during the Term of this Lease the Premises and every part thereof and any and all appurtenances thereto, including but not limited to, the doors and interior walls of the Premises; special light fixtures; kitchen fixtures; heating, ventilation, or air-conditioning equipment; private bathroom fixtures and any other type of special equipment, together with related plumbing or electrical services; and rugs, carpeting, wall coverings, and drapes within the Premises, whether installed by Tenant or by Landlord on behalf of Tenant, and whether or not such items will become Landlord's property upon expiration or termination of this Lease. Notwithstanding the provisions hereof, in the event that repairs required to be made by Tenant become immediately necessary to avoid possible injury or damage to persons or property, Landlord may, but shall not be obligated to, make repairs to such items at Tenant's expense, which shall constitute Other Charges payable by Tenant to Landlord. Within ten (10) days after Landlord renders a bill for 9 the cost of said repairs, Tenant shall reimburse Landlord. Landlord agrees to replace HVAC unit within the term of this lease if deemed necessary pending Tenant's submitting invoices to Landlord of regular maintenance for the heating and air conditioning company. (b) Landlord's Maintenance. Subject to Paragraph 8(a) above, Landlord shall keep, repair and maintain the Building (including the roof and structural members, the Common Areas, mechanical and electrical equipment, the exterior and architectural finish, and all items except those excepted elsewhere in this Lease) of which the Premises are a part, and the lawn, shrubs and other landscaping on the Property, all in good and tenantable condition during the Term of this Lease. Landlord shall, in addition, supply reasonable snow removal for the walkways of the Property during Normal Business Hours (as hereinafter defined). Tenant shall notify Landlord immediately when any repair to be made by Landlord is necessary. If any portion of the Building or the Premises is damaged through the fault or negligence of Tenant, its agents, employees, invitees or customers, then Tenant shall promptly and properly repair the same at no cost to Landlord; provided, however, that Landlord may, at its option, make such repairs and Tenant shall, on demand, pay the cost thereof, together with interest at the Default Rate to Landlord as Other Charges. Tenant shall immediately give Landlord written notice of any defect or need for repairs, after which notice Landlord shall have reasonable opportunity to repair the same or cure such defect. For the purposes of making any repairs or performing any maintenance, Landlord may block, close or change any entrances, doors, corridors, elevators, or other facilities in the Building or in the Premises, and may close, block or change sidewalks, driveways or parking areas of the Property. Landlord shall not be liable to Tenant, except as expressly provided in this Lease, for any damage or inconvenience and Tenant shall not be entitled to any abatement of rent by reason of any repairs, alterations or additions made by Landlord under this Lease. (c) Inspection. Tenant shall permit Landlord, its agents, employees and contractors, at any time in the event of an emergency, and otherwise at reasonable times, to take any and all measures, including inspections, repairs, alterations, additions and improvements to the Premises or to the Building, as may be necessary or desirable to safeguard, protect or preserve the Premises, the Building or Landlord's interests; to operate or improve the Building; to comply on behalf of Tenant with all laws, orders and requirements of governmental or other authority (if Tenant fails to do so); to examine the Premises to verify Tenant's compliance with all of the terms, covenants, obligations and conditions of this Lease; or to exercise any rights with respect to the Premises that Landlord may exercise in the event of default by Tenant. 9. COMMON AREAS. ------------ (a) Grant. During the Term of this Lease, Landlord grants to Tenant, its employees, customers and invitees, a nonexclusive license to use, in common with all others to whom Landlord has granted or may hereafter grant a license to use, the common areas of the Property, including but not limited to, the sidewalks, halls, passages, exits, entrances, stairways, restrooms, parking areas [except as provided for in subparagraph (b) below], driveways and landscaped areas (collectively the "Common Areas") subject to reasonable rules and regulations respecting the Common Areas as Landlord may from time to time promulgate. The Common Areas shall not be obstructed by Tenant or used for any purpose other than for ingress to and egress from the Premises. The Common Areas are not for the use of the general public and 10 Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence, in the judgment of Landlord, shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant's business unless such persons are engaged in illegal activities. Neither Tenant nor its employees, customers or invitees shall go upon the roof or mechanical floors or into mechanical areas of the Building. (b) Parking. Non-exclusive parking will be provided in the parking area of the Property. Upon written notice from Landlord, Tenant shall furnish to Landlord, within five (5) days after receipt of such notice, the state automobile license numbers assigned to the automobiles of Tenant and its employees. Landlord shall not be liable for any vehicle of Tenant or its employees that the Landlord shall have towed from the Premises when illegally parked. Landlord shall have no liability to Tenant for any damages or claims arising from the use of the parking area or roadways by Tenant, other tenants, or their customers, invitees or employees. (c) Right to Change Common Areas. Landlord may do and perform such acts in and to the Common Areas as, Landlord, in its good business judgment, shall determine to be advisable. Landlord hereby reserves the right to make alterations, additions, deletions or changes to the Common Areas, including, but not limited to, changes in its size and configuration. 10. BUILDING SERVICES. ----------------- (a) Gas and Electric. Landlord shall cause gas service and electric power to be provided to the Premises by the applicable utility company. Gas service and electric power furnished by Landlord is intended to be that consumed in normal office use during Normal Business Hours for lighting, heating, ventilating, air conditioning and operating all office equipment. Landlord shall have the right to install a submeter to be furnished and installed as a Tenant Improvement in accordance with Paragraph 4(a) of this Lease. If Tenant refuses to pay for any gas or electrical charges billed directly to Tenant, such refusal shall constitute a breach of the obligation to pay rent under this Lease and shall entitle Landlord to the rights granted in this Lease for such breach. Tenant shall use strict care and caution to ensure that all gas service and electricity is carefully shut off to prevent waste or damage. (b) Water. Landlord shall cause the applicable utility company to provide water for drinking, lavatory and toilet purposes from the regular Building supply (at the prevailing temperature) through fixtures installed by Landlord (or by Tenant with Landlord's prior written consent); provided that Tenant shall reimburse Landlord, at rates fixed by Landlord, for water used by Tenant for supplementary air-conditioning or refrigerating installed by or for Tenant and for any other water used by Tenant (except for public drinking water and public lavatory use). (c) Air-Conditioning and Heat. Landlord shall provide air conditioning and heat to the Building's Common Area for comfortable occupancy during all days the Tenant is open for business subject at all times, however, to restrictions placed upon Landlord by any duly constituted governmental agency and/or by any utility supplier. Tenant shall cooperate fully with Landlord to assure the effective operation of the Building's air-conditioning and heating 11 systems, including the closing of venetian blinds and drapes, and if windows are operable, to keep them closed when the air-conditioning or heating system is in use. Tenant shall not use any apparatus or device in, upon or about the Premises that in any way may increase the amount of such services usually furnished or supplied to tenants in the Building, and Tenant shall not connect any apparatus or device with the conduits or pipes, or other means by which such services are supplied for the purpose of using additional or unusual amounts of such services, without the prior written consent of Landlord. If Tenant uses such services under this provision to excess, Landlord reserves the right to charge Tenant for such services, as rent. If Tenant refuses to make payment upon demand of Landlord, such excess charge shall constitute a breach of the obligation to pay rent under this Lease and shall entitle Landlord to the rights granted in this Lease for such breach. (d) Interruption of Services. Tenant hereby acknowledges that any one or more of the utilities or building services specified in this Paragraph 10 may be interrupted or diminished temporarily by Landlord or other person until certain repairs, alterations or other improvements to the Premises or other parts of the Property can be made or by any event or cause which is beyond Landlord's reasonable control, including, without limitation, any ration or curtailment of utility services; that Landlord does not represent, warrant or guarantee to Tenant the continuous availability of such utilities or building services; and that any such interruption shall not be deemed or construed to be an interference with Tenant's right of possession, occupancy and use of the Premises, shall not render Landlord liable to Tenant for damages or entitle Tenant to any reduction of Base Rental, and shall not relieve Tenant from its obligation to pay Base Rental and to perform its other obligations under this Lease. (e) Energy Curtailment. Landlord and Tenant specifically acknowledge that energy shortages in the region in which the Property is located may from time to time necessitate reduced or curtailed energy consumption on the Property. Tenant shall comply with all such rules and regulations as may be promulgated from time to time by any governmental authority with respect to energy consumption, and during such period of time as such governmental authority may so require, Tenant shall reduce or curtail operations in the Premises as shall be directed by Landlord or such governmental authority. Compliance with such rules and regulations and/or such reduction or curtailment of operation shall not constitute a breach of Landlord's covenant of quiet enjoyment or otherwise invalidate or affect this Lease, and Tenant shall not be entitled to any diminution or abatement in Base Rental during the periods of reduction or curtailment of operations. 11. ESTOPPEL CERTIFICATES. Within ten (10) days after written request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord or to Landlord's mortgagee, prospective mortgagee, land lessor or prospective purchaser of the Property or any part thereof, an estoppel certificate, in form and substance substantially similar to that attached as Exhibit "E" and incorporated herein by reference. Tenant shall make such modifications to such estoppel certificate as may be necessary to make such certificate true and accurate, it being intended that any such statement delivered pursuant to this Paragraph 11 may be relied upon by any such mortgagee, prospective mortgagee, prospective purchaser, or land lessor of the Property. If Tenant fails to provide such estoppel certificate with ten (10) days after Landlord's request, Tenant shall be deemed to have approved the contents of any such certificate submitted to Tenant by Landlord and Landlord is hereby authorized to so certify on behalf of Tenant. 12 12. INDEMNIFICATION, WAIVER OF CLAIMS. --------------------------------- (a) Tenant shall protect, indemnify, and hold harmless Landlord, its agents, servants, employees, officers, directors and partners forever against and from (i) any penalty, damages, charges or costs imposed or resulting from any violation of any law, order or ordinance of any governmental agency, or by the use and occupancy of the Premises by Tenant, whether occasioned by the neglect of Tenant or those holding under Tenant; (ii) all claims, losses, costs, damages and expenses, including attorneys' fees, arising out of or from any accident or other occurrence on or about the Premises or the Property causing injury to any person or property, except caused by the negligent or intentional act or omission of Landlord or its servants, agents or employees; (iii) all claims, losses, costs, damages and expenses, including attorneys' fees, arising out of any failure of Tenant in any respect to comply with or perform all the requirements and provisions of this Lease or arising out of any use of the Premises or the Property by Tenant or any one claiming by, through or under Tenant. (b) Landlord shall not be liable for, and Tenant hereby waives all claims against Landlord, (i) for any and all damage or loss to fixtures, equipment or other property of Tenant and its servants, agents, employees, contractors, suppliers, invitees, patrons and guests, in, upon or about the Premises or the Property; or (ii) for injury or death to any person, occurring in, upon or about the Premises or the Property; resulting from any cause whatever (except caused by the negligent or intentional act or omission of Landlord or its servants, agents or employees), including, but not limited to, water, snow, frost, ice, explosion, falling plaster, fire or gas, smoke or other fumes, nor by reason of the leaking, breaking, backing up or other malfunction of any lines, wires, pipes, tanks, boilers, lifts or any other appurtenances, regardless by whom installed or maintained (Tenant hereby expressly assuming all responsibility for the safety and security of the person and property of Tenant, and its servants, agents, employees, contractors, suppliers, invitees, patrons and guests, while in, upon or about the Premises). The occurrence of any event described in this Paragraph 12 shall not constitute a breach of Landlord's covenant of quiet enjoyment set forth in Paragraph 17. 13. INSURANCE. --------- (a) Tenant's Insurance. Tenant, at its sole cost and expense, shall carry during the entire Term of this Lease, the following types of insurance: (i) Commercial general liability insurance against injuries to persons occurring in, upon or about the Premises, with minimum coverage of One Million Dollars ($1,000,000.00) per occurrence and One Million Dollars ($1,000,000.00) aggregate coverage per one (1) accident or disaster, and One Million Dollars ($1,000,000.00) for property damage; (ii) Fire, extended coverage, vandalism and malicious mischief, and sprinkler damage and all-risk insurance coverage on all personal property, trade fixture, floor coverings, wall coverings, furnishings, furniture, and contents for their full insurable value on a replacement cost basis; 13 (iii) Workers' Compensation or similar insurance, if and to the extent required by law and in form and amounts required by law; (iv) Such other insurance reasonably required by Landlord due to the nature of Tenant's use of the Premises. (b) Landlord as Additional Insured. All such insurance required to be maintained by Tenant shall name Landlord as an additional insured and shall be written with a company or companies reasonably satisfactory to Landlord, having a policyholder rating of at least "A" and be assigned a financial size category of at least "Class XIV" as rated in the most recent edition of "Best's Key Rating Guide" for insurance companies, and authorized to engage in the business of insurance in the state in which the Premises are located. Tenant shall deliver to Landlord copies of such policies and customary insurance certificates evidencing such paid-up insurance. Such insurance shall further provide that the same may not be canceled, terminated or modified unless the insurer gives Landlord and Landlord's mortgagee(s) at least thirty (30) days prior written notice thereof. (c) Landlord's Insurance. Landlord shall maintain in force, at all times during the Term of this Lease, a policy or policies of fire and casualty insurance to the extent of at least eighty percent (80%) of the insurable value of the Building. (d) Increase in Premiums. If insurance premiums payable by Landlord are increased as a result of any breach of Tenant's obligations under this Lease or as a result of Tenant's use and occupancy of the Premises, Tenant shall pay to Landlord an amount equal to any increase in such insurance premiums. 14. WAIVER OF SUBROGATION. Neither Landlord nor Tenant shall be liable to the other for any business interruption or any loss or damage to property or in any manner growing out of or connected with Tenant's use and occupation of the Premises, the Building or the Property or the condition thereof, or of the adjoining property, whether or not caused by the negligence or other fault of Landlord or Tenant or of their respective agents, employees, subtenants, licensees or assignees, provided, however, that this release shall apply only to the extent that such business interruption or loss or damage is covered by insurance, regardless of whether such insurance is payable to or protects Landlord or Tenant or both. Nothing in this Paragraph 14 shall be construed to impose any other or greater liability upon either Landlord or Tenant than would have existed in the absence hereof. Because this Paragraph 14 will preclude the assignment of any claim mentioned in it by way of subrogation (or otherwise) to an insurance company (or any other person), each party to this Lease agrees immediately to give to each insurance company that has issued to it policies of fire and extended coverage insurance, written notice of the terms of the mutual waivers contained in this paragraph, and to have the insurance policies properly endorsed, if necessary, to prevent the invalidation of the insurance coverages because of the mutual waivers contained in this Paragraph 14. 15. HOLDING OVER. If Tenant retains possession of the Premises or any part thereof after the termination of this Lease, Tenant shall, from that day forward, be a tenant from month to month and Tenant shall pay Landlord rent at two (2) times the monthly amount of Base Rental and Additional Rent in effect immediately prior to the termination of this Lease for the 14 time the Tenant remains in possession. No acceptance of rent by, or other act or statement whatsoever on the part of Landlord or its agent or employee, in the absence of a writing signed by Landlord, shall be construed as an extension of or as a consent for further occupancy. Tenant shall indemnify Landlord for all damages, consequential as well as direct, sustained by reason of Tenant's retention of possession. The provisions of this Paragraph 15 do not exclude pursuit of Landlord's right of re-entry or any other right hereunder. 16. ASSIGNMENT AND SUBLEASE. ----------------------- (a) Prohibition. Tenant shall not assign, convey, mortgage, pledge, encumber or otherwise transfer this Lease or any interest therein, sublet the Premises or any part thereof, or permit the use or occupancy of the Premises or any part thereof by anyone other than Tenant, without receiving Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed. Tenant may assign or sublet all or a portion of the premises to a subsidiary or affiliated corporation of Tenant without Landlord's written consent; provided, however, that the net worth of said subsidiary or affiliated corporation is equal to or greater than the net worth of Tenant. A transfer by operation of law, merger or consolidation, or a change of any partnership interest in Tenant or in the ownership of the voting stock of Tenant or any direct or indirect parent of Tenant shall be deemed an assignment for purposes of this Paragraph 16. Any purported transfer, encumbrance, pledge, mortgage, assignment or subletting not in compliance herewith shall be void and of no force or effect. In the event of any assignment, subletting, transfer or occupancy by someone other than Tenant, whether or not expressly or impliedly approved by Landlord, Tenant shall, nevertheless, at all times, remain fully responsible and jointly and severally liable for the payment of the rent and for compliance with all other obligations imposed upon Tenant under the terms, provisions and covenants of this Lease. Any assignment or sublease shall contain a provision whereby the assignee or subtenant agrees to comply with and be bound by all of the terms, covenants, conditions, provisions and agreements of this Lease to the extent applicable, and Tenant shall deliver to Landlord, promptly after execution, an executed copy of each assignment or sublease and an agreement of compliance by each assignee or subtenant. Any sublease shall also contain a provision that in the event of default by Tenant hereunder and a termination of this Lease by Landlord, such subtenant shall, at Landlord's option, attorn to Landlord as if Landlord were the lessor under the sublease. (b) Option to Cancel. Upon receipt of Tenant's written request for Landlord's consent to subletting, assignment, transfer or occupancy by someone other than Tenant, or Tenant's subsidiary or affiliated corporation pursuant to Paragraph 16(a), Landlord shall have the option to cancel this Lease as of the date the requested subletting, assignment, transfer or occupancy by someone other than Tenant is to be effective. Landlord shall exercise its option to cancel this Lease by written notice to Tenant within thirty (30) days after Landlord receives Tenant's request for Landlord's consent. (c) Right to Collect Rents Directly. Upon the occurrence of an "event of default" as set forth in Paragraph 21 hereof, if all or any part of the Premises is then assigned, sublet, transferred or occupied by someone other than Tenant, then, in addition to any other remedies provided in this Lease or provided by law, Landlord, at its option, may collect directly from the assignee, subtenant, transferee or occupant all rent becoming due to Tenant by reason of the assignment, sublease, transfer or occupancy. Any collection directly by Landlord from the 15 assignee or subtenant shall not be construed to constitute a novation or a release of Tenant from the further performance of its obligations under this Lease. (d) Excess Rent. If Tenant assigns this Lease or sublets all or a portion of the Premises for an amount in excess of the Base Rental (or the prorata share of Base Rental in the case of a sublease of a portion of the Premises), then Tenant shall pay to Landlord, as rent, one hundred percent (100%) of such excess received by Tenant. 17. QUIET ENJOYMENT. If Tenant shall pay the rents and other sums due to be paid by Tenant hereunder as and when the same become due and payable, and if Tenant shall keep, observe and perform all of the other terms, covenants and agreements of this Lease on Tenant's part to be kept, observed and performed, Tenant shall, at all times during the Term herein granted, peacefully and quietly have and enjoy possession of the Premises without any encumbrance or hindrance by, from or through Landlord, except for regulations imposed by any governmental or quasi-governmental agency on the occupancy of Tenant or the conduct of Tenant's business operations. 18. COMPLIANCE WITH LAWS AND WITH RULES AND REGULATIONS. --------------------------------------------------- (a) Laws. Tenant, at its sole cost and expense, shall procure any permits and licenses required for the transaction of Tenant's business in the Premises. Tenant, at its sole cost and expense, shall promptly observe and comply with all present and future laws, ordinances, requirements, orders, directives, rules and regulations of all state, federal, municipal and other agencies or bodies having jurisdiction relating to the use, condition and occupancy of the Premises, the Building and the Property at any time in force, applicable to the Premises or to Tenant's use thereof, except that Tenant shall not be under any obligation to comply with any law, ordinance, rule or regulation requiring any structural alteration of the Premises, unless such alteration is required because of a condition that has been created by, or at the instance of, Tenant, or is required by reason of a breach of any of Tenant's covenants and agreements under this Lease. Landlord shall not be required to repair any injury or damage by fire or other cause, or to make any repairs or replacements of any panels, decoration, office fixtures, railing, ceiling, floor covering, partitions, or any other property installed in the Premises by Tenant. (b) Rules and Regulations. Tenant shall comply with all rules and regulations for the Building, which current rules and regulations are attached hereto as Exhibit "F" and with such reasonable modifications thereof and additions thereto as Landlord may make hereafter, from time to time. Notwithstanding anything contained in this Lease, Landlord shall not be responsible nor liable to Tenant, its agents, representatives, employees, invitees or licensees, for the nonobservance by any other tenant of any rules and regulations. 19. FIRE AND CASUALTY. ----------------- (a) If the Premises or the Building or any substantial part of either is damaged or destroyed by fire or other casualty, cause or condition whatsoever, and such damage or destruction cannot be repaired within one hundred twenty days (120) days, Landlord may terminate this Lease, by written notice to Tenant given within thirty (30) days after such damage. If the Premises are damaged or destroyed or access thereto or use thereof is affected by the 16 damage, then Landlord's termination shall be effective as of the date of such damage; otherwise said termination shall be effective thirty (30) days after such notice. (b) If the Common Areas in the Building are damaged or destroyed by fire or other casualty, cause or condition whatsoever, to such an extent as to substantially interfere with Tenant's use of the Premises or if the Premises or a substantial part thereof are made untenantable, and such damage or destruction cannot be repaired within one hundred twenty (120) days, then Tenant may terminate this Lease by giving written notice to Landlord within thirty (30) days after such damage, said termination to be effective as of the date of such damage. (c) Unless this Lease is terminated as herein above provided, Landlord shall proceed with due diligence to restore, repair and replace the Premises and the Building to the same condition as they were in as of the Commencement Date. Provided such damage or destruction was not caused or contributed to by an intentional act or negligence of Tenant, its agents, employees, invitees or those for whom Tenant is responsible, from and after the date of such damage to date of completion of said repairs, replacements and restorations, a just proportion of the rent shall abate according to the extent the full use and enjoyment of the Premises are rendered impossible by reason of such damage. Landlord shall be under no duty to restore any alterations, improvements or additions made by Tenant. In all cases, due allowance shall be given to Landlord for any reasonable delays caused by adjustment of insurance loss, strikes, labor difficulties or any cause beyond Landlord's control. 20. EMINENT DOMAIN. -------------- (a) If all the Premises or a substantial part thereof shall be taken for any public or quasipublic use under any statute or by rights of eminent domain or by private purchase in lieu thereof, this Lease shall terminate as of the date of vesting of title. Landlord shall be entitled to receive the entire award paid for such taking or condemnation, Tenant hereby assigning to Landlord all Tenant's right, title and interest therein, if any. Nothing contained herein shall be deemed to give Landlord any interest in or to require Tenant to assign to Landlord any award made to Tenant for the taking of personal property or fixtures belonging to Tenant, for the interruption of or damage to Tenant's business or for Tenant's moving expenses but only if such award shall be in addition to the award for the Property and the Building (or portion thereof) containing the Premises. (b) If fifty percent (50%) or more of the Building other than the Premises shall be condemned, taken or purchased in lieu thereof, then Landlord may terminate this Lease by notifying Tenant of such termination within sixty (60) days after the date of vesting of title. This Lease shall expire on the date specified in such notice of termination, which date shall be not less than sixty (60) days after the giving of such notice. The rent hereunder shall be apportioned as of such termination date. (c) Any such taking, condemnation or temporary requisition which does not result in a termination of this Lease, as hereinbefore provided in this Paragraph 20, shall not be cause for any reduction or diminution of the rental payment hereunder. 17 21. DEFAULT. ------- (a) If (i) Tenant fails to pay when due any rent, or any other sums required to be paid hereunder by Tenant; or (ii) Tenant defaults in the performance or observance of any other agreement or condition on its part to be performed or observed, and Tenant shall fail to cure said default within twenty (20) days after receipt of written notice thereof by Landlord; or (iii) Tenant files a voluntary petition in bankruptcy or is adjudicated a bankrupt or insolvent, or files any petition or answer seeking any arrangement, composition, liquidation or dissolution under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors or seeks or consents to or acquiesces in the appointment of any trustee, receiver or liquidator of Tenant or of all or any substantial part of its properties, or of the Premises, or makes any general assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due; or (iv) a court enters an order, judgment or decree approving a petition filed against Tenant seeking any arrangement, composition, liquidation, dissolution or similar relief under any present or future federal, state or other statute, law or regulation relating to bankruptcy, insolvency or other relief for debtors, and such order, judgment or decree shall remain unvacated or unstayed for an aggregate of sixty (60) days; or (v) Tenant falls to operate or closes its business upon the Premises, for reasons other than fire or other casualty or condemnation, for a period of fifteen (15) consecutive days; or (vi) Tenant abandons or vacates the Premises, then in any such event and at any time thereafter, Landlord may, without further notice to Tenant, and in addition to and not in lieu of any other rights or remedies available to Landlord at law or in equity, exercise any one or more of the following rights: (b) Landlord may (A) terminate this Lease and the tenancy created hereby by giving notice of such election to Tenant, and (B) reenter the Premises, by summary proceedings or otherwise, remove Tenant and all other persons and property from the Premises and store such property in a public warehouse or elsewhere at the sole cost and expense of and for the account of Tenant without Landlord being deemed guilty of trespass or becoming liable for any loss or damage occasioned thereby; or (c) Landlord may reenter and take possession of the Premises, without terminating this Lease and without relieving Tenant of its obligations under this Lease, and divide or subdivide the Premises in any manner Landlord may desire and lease or let the Premises or portions thereof alone or together with other premises, for such term or terms (which may be greater or less than the balance of the remaining portion of the Term of this Lease) and on such terms and conditions (which may include concessions or free rent and alterations of the Premises) as Landlord, in its discretion, may determine. (d) If this Lease is terminated by Landlord pursuant to this Paragraph 21, Tenant nevertheless shall remain liable for any Base Rental, Additional Rental, Percentage Rental (based upon the Percentage Rental paid during the prior Lease Year) and Other Charges required to be paid hereunder and damages that may be due or sustained prior to such termination, and for all reasonable costs, fees and expenses incurred by Landlord in pursuit of its remedies hereunder, including attorneys', brokers' and other professional fees (all such rents, damages, costs, fees and expenses being referred to herein collectively as "Termination Damages") plus additional damages (the "Liquidated Damages") which are hereby stipulated to 18 be equal to the present value of Base Rental, Additional Rental, Percentage Rental and Other Charges required to be paid hereunder that, but for termination of this Lease, would have become due during the remainder of the Term, plus the unamortized portion of tenant improvements and leasing commissions, less the fair rental rate for the remainder of the Term of this Lease discounted at the current five (5) year treasury bill rate. Termination Damages and Liquidated Damages shall be due and payable immediately upon demand by Landlord following any termination of this Lease pursuant to this Paragraph 21. (e) If Landlord reenters and takes possession of the Premises pursuant to this Paragraph 21, without terminating this Lease, and relets the Premises or any part thereof (which Landlord shall have no obligation to do), the net rentals from such letting shall be applied first to the costs, fees and expenses incurred by Landlord in pursuit of its remedies hereunder, including attorneys', brokers' and other professional fees, in renting the Premises or part thereof to others from time to time (including the cost and expense of making such improvements to the Premises as may be necessary, in Landlord's sole discretion, to enable Landlord to relet same). The balance, if any, shall be applied by Landlord from time to time on account of the rent and other payments due from Tenant hereunder, with the right reserved to Landlord to bring such actions or proceedings for the recovery of any deficits remaining unpaid as Landlord may deem favorable from time to time without being obligated to await the end of the Term for the final determination of Tenant's account. Any balance remaining, however, after full payment and liquidation of Tenant's account as aforesaid shall be paid to Tenant with the right reserved to Landlord at any time to give notice in writing to Tenant of Landlord's election to cancel and terminate this Lease and the giving of such notice and the simultaneous payment by Landlord to Tenant of any credit balance in Tenant's favor that may at the time be owing to Tenant shall constitute a final and effective cancellation and termination of this Lease and the obligations hereunder on the part of either party to the other. Landlord shall not be liable for, nor shall Tenant's obligations be diminished by reason of, any failure by Landlord to relet the Premises or any failure of Landlord to collect any rent due upon such reletting. (f) Upon the termination of this Lease or of Tenant's right to possession of the Premises by lapse of time or earlier termination as herein provided, Tenant shall remove its property from the Premises. Any such property of Tenant not removed from the Premises by Tenant within thirty (30) days after the end of the term or of Tenant's right to possession of the Premises, however terminated, whichever occurs earlier, shall be conclusively deemed to have been forever abandoned by Tenant and either may be retained by Landlord as its property or may he disposed of in such manner as Landlord may see fit. (g) Notwithstanding anything contained herein, if Landlord shall have given written notice of three (3) defaults in any twelve (12) month period, no further prior notice by Landlord shall be required for Landlord to declare this Lease to be in default. (h) If Tenant at any time fails to make any payment or perform any other act on its part to be made or performed under this Lease, Landlord may, but shall not he obligated to, and after reasonable notice or demand and without waiving or releasing Tenant from any obligation under this Lease, make such payment or perform such other act to the extent Landlord may deem desirable, and in connection therewith to pay expenses and employ counsel. Tenant shall pay upon demand all of Landlord's costs, charges and expenses, including the fees of 19 counsel, agents and others retained by Landlord, incurred in enforcing Tenant's obligations hereunder or incurred by Landlord in any litigation, negotiations or transactions in which Tenant causes Landlord, without Landlord's fault, to become involved or concerned, which amount shall be deemed to be rent due and payable by Tenant, upon demand by Landlord, and Landlord shall have the same rights and remedies for the nonpayment thereof, as in the case of default in the payment of rent. (i) All rights and remedies of Landlord herein enumerated shall be cumulative, and none shall exclude any other right or remedy allowed by law. In addition to the other remedies in this Lease provided, Landlord shall be entitled to the restraint by injunction of the violation or attempted violation of any of the covenants, agreements or conditions of this Lease. 22. WAIVER OF DEFAULT OR REMEDY. No waiver of any covenant or condition or of the breach of any covenant or condition of this Lease shall be taken to constitute a waiver of any subsequent breach of such covenant or condition nor to justify or authorize the nonobservance on any other occasion of the same or of any other covenant or condition hereof, nor shall the acceptance of rent by Landlord at any time when Tenant is in default under any covenant or condition hereof be construed as a waiver of such default or of Landlord's right to terminate this Lease on account of such default, nor shall any waiver or indulgence granted by Landlord to Tenant be taken as an estoppel against Landlord, it being expressly understood that if at any time Tenant shall be in default in any of its covenants or conditions hereunder an acceptance by Landlord of rental during the continuance of such default or the failure on the part of Landlord promptly to avail itself of such rights or remedies as Landlord may have, shall not be construed as a waiver of such default, but Landlord may at any time thereafter, if such default continues, terminate this Lease or assert any other rights or remedies available to it on account of such default in the manner hereinbefore provided. 23. FORCE MAJEURE. If Landlord or Tenant shall be delayed, hindered in or prevented from the performance of any act required hereunder (other than the payment of rent and other charges payable by Tenant) by reason of strikes, lockouts, labor troubles, inability to procure materials, failure of power, riots, insurrection, the act, failure to act or default of the other party, war or any other reason beyond the reasonable control of the party who is seeking additional time for the performance of such act, then performance of such act shall be excused for the period of the delay and the period for the performance of any such act shall be extended for a reasonable period, in no event to exceed a period equivalent to the period of such delay. No such interruption of any service to be provided by Landlord shall ever be deemed to be an eviction, actual or constructive, or disturbance of Tenant's use and possession of the Premises, the Building or the Property. 24. SUBORDINATION OF LEASE. ---------------------- (a) This Lease shall be subject and subordinate to any first mortgage, first deed of trust or land lease now existing upon or that may be hereafter placed upon the Premises and the Property and to all advances made or to be made thereon and all renewals, modifications, consolidations, replacements or extensions thereof and the lien of any such first mortgage, first deed of trust or land lease shall be superior to all rights hereby or hereunder vested in Tenant, to 20 the full extent of all sums secured thereby, and the Tenant's rights hereunder shall not be disturbed as long as it is not in default. In confirmation of such subordination, Tenant shall, on request of Landlord or the holder of any such mortgages, deed(s) of trust and land leases, execute and deliver to Landlord within ten (10) days any instrument of subordination, non-disturbance and attornment that Landlord or such holder may reasonably request. (b) If the interest of Landlord under this Lease shall be transferred by reason of foreclosure, deed in lieu of foreclosure, or other proceedings for enforcement of any first mortgage or deed of trust on the Premises, Tenant shall be bound to the transferee (the "Purchaser") under the terms, covenants and conditions of this Lease for the balance of the Term remaining, and any extensions or renewals, with the same force and effect as if the Purchaser were the landlord under this Lease, and at the option of Purchaser, Tenant shall attorn to the Purchaser (including the mortgagee under any such mortgage, if it be the Purchaser), as its landlord, the attornment to be effective and self-operative without the execution of any further instruments upon the Purchaser succeeding to the interest of Landlord under this Lease. The respective rights and obligations of Tenant and the Purchaser upon the attornment, to the extent of the then remaining balance of the Term of this Lease, and any extensions and renewals, shall be and are the same as those set forth in this Lease. 25. NOTICES AND CONSENTS. All notices contemplated by Illinois Forcible Entry and Detainer Law shall be given in accordance with such law. All other notices, demands, requests, consents and approvals that may or are required to be given by either party to the other shall be in writing and shall be served when sent by United States certified or registered mail, postage prepaid, or by overnight courier or personal delivery by designated agent at premise or other known address associated with such (a) if for Tenant, addressed to Tenant at the Building, or at such other place as Tenant may from time to time designate by notice to Landlord, or (b) if for Landlord, addressed to Shodeen Management Company, 17 North First Street, Geneva, Illinois 60134, or at such other place as Landlord may from time to time designate by notice to Tenant. All consents and approvals provided for herein must be in writing to be valid. All such other notices shall be deemed to have been given if addressed and mailed as above provided and shall be effective on the date two (2) days after deposit in the United States mail or one (1) day after deposit with an overnight courier, or at the time of delivery if personally served. 26. SECURITY DEPOSIT. ---------------- (a) Tenant has deposited with Landlord the sum of Two Thousand Seven Hundred Forty-Six and 92/100 Dollars ($2,746.92) as security for the full and faithful performance of every provision of this Lease to be performed by Tenant. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent, Landlord may use, apply or retain all or any part of this security deposit for the payment of any rent or any other sum in default or for the payment of any other amount that Landlord may spend or become obligated to spend by reason of Tenant's default, or to compensate Landlord for any other loss, cost or damage that Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the security deposit to its original amount and Tenant's failure to do so shall be a default under this Lease. Landlord shall not, unless otherwise required by law, be required to keep this 21 security deposit separate from Landlord's general funds, nor pay interest to Tenant. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the security deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last transferee of Tenant's interest hereunder) at the expiration of the Term and upon Tenant's vacation of the Premises. In the event of bankruptcy or other debtor-creditor proceedings against Tenant, such security deposit shall be deemed to be applied first to the payment of rent and other charges due Landlord for all periods prior to filing of such proceedings. (b) Landlord may deliver the security deposit to the purchaser of Landlord's interest in the Premises in the event that such interest be sold and thereupon Landlord shall be discharged from any further liability with respect to such deposit, and this provision shall also apply to any subsequent transferees of Landlord. 27. MISCELLANEOUS TAXES. Tenant shall pay, prior to delinquency, all taxes assessed against or levied upon its occupancy of the Premises, or upon the fixtures, furnishings, equipment and all other personal property of Tenant located in the Premises, if nonpayment thereof shall give rise to a lien on the Premises, and when possible Tenant shall cause said fixtures, furnishings, equipment and other personal property to be assessed and billed separately from the property of Landlord. In the event any or all of Tenant's fixtures, furnishing, equipment and other personal property, or upon Tenant's occupancy of the Premises, shall be assessed and taxed with the property of Landlord, Tenant shall pay to Landlord its share of such taxes within ten (10) days after delivery to Tenant by Landlord of a statement in writing setting forth the amount of such taxes applicable to Tenant's fixtures, furnishings, equipment or personal property. 28. BROKERAGE COMMISSION. Except for Shodeen Management Company, Landlord and Tenant represent and warrant each to the other that each has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction. Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. The provisions of this Paragraph 28 shall survive the termination of this Lease. 29. HAZARDOUS DEVICES AND CONTAMINANTS. ---------------------------------- (a) Prohibition. Tenant and its agents, employees, contractors and invitees shall not use, store, release, generate or depose of or permit to be used, stored, released, generated or disposed of any Contaminants (as hereinafter defined) on or in the Premises. (b) Indemnification. Tenant shall indemnify and hold harmless Landlord, its agents, servants, employees, officers and directors forever from and against any and all liability, claims, demands and causes of action, including, but not limited to, any and all liability, claims, demands and causes of action by any governmental authority, property owner or any other third person and any and all expenses, including attorneys' fees [including, but not limited to, attorneys' fees to enforce Tenant's obligation of indemnification under this Paragraph 29(b)], relating to any environmental liability resulting from (i) any Release (as hereinafter defined) of any Contaminant at the Premises or emanating from the Premises to adjacent properties or the 22 surrounding environment during the Term of this Lease; (ii) during the Term of this Lease, any generation, transport, storage, disposal, treatment or other handling of any Contaminant at the Premises, including, but not limited to, any and all off-site transport, storage, disposal, treatment or other handling of any Contaminant generated, produced, used and/or originating in whole or in part from the Premises; and (iii) any activities at the Premises during the Term of this Lease that in any way might be alleged to fail to comply with any Requirements of Law. (c) Definitions. ----------- (i) "Contaminant" shall mean any substance or waste containing hazardous substances, pollutants, and contaminants as those terms are defined in the federal Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. and any substance similarly defined or identified in any other federal, provincial or stare laws, rules or regulations governing the manufacture, import, use, handling, storage, processing, release or disposal of substances or wastes deemed hazardous, toxic, dangerous or injurious to public health or to the environment. This definition includes friable asbestos and petroleum or petroleum-based products. (ii) "Requirements of Law" shall mean any federal, state or local law, rule, regulation, permit, agreement, order or other binding determination of any governmental authority relating to the environment, health or safety. (iii) "Release" shall have the same meaning as in the federal Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C. Section 9601, et seq. 30. SIGNS; STORE FRONTS. The Tenant shall not, without Landlord's prior written consent (a) make any changes to or paint the store front, or (b) install any exterior lighting, decorations or paintings; or (c) erect or install any signs, windows or door lettering, placards, decorations or advertising media of any type which can be viewed from the exterior of the Premises, excepting only dignified displays of customary type for its display windows. All signs, decorations and advertising media shall conform in all respects to the sign criteria established by the Landlord for the Building from time to time in the exercise of its sole discretion, and shall be subject to the prior written approval of Landlord as to construction, method of attachment, size, shape, height, lighting, color and general appearance. All signs shall be kept in good condition and in proper operating order at all times. Landlord reserves the right to designate a uniform type of sign for the Building to be installed and paid for by Tenant. The Tenant agrees to have erected and/or installed and fully operative on or before the Commencement Date of this lease all signs in accordance with landlord's sign criteria. The Tenant, upon vacation of the Premises, or the removal or alteration of its sign for any reason, shall be responsible for the repair, painting, and/or replacement of the building fascia surface where signs are attached. The Tenant shall be responsible for having signs which comply with all applicable laws. 31. LOCKS. No additional locks or similar devices shall be attached to any door or window without Landlord's prior written consent. Except for those keys provided by Landlord, 23 no keys for any door shall be made. If more than two keys for one lock are desired, Landlord will provide the same upon payment by Tenant. All keys must be returned to Landlord at the expiration or Termination of this Lease. Tenant shall see that the doors and windows, if operable, of the Premises are closed and securely locked before leaving the Building. 32. PLUMBING. Tenant must observe strict care and caution that all water faucets and water apparatus are shut off before Tenant or its employees leave the Building to prevent waste or damage. Plumbing fixtures and appliances shall be used only for purposes for which constructed, and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed therein. Damage resulting to any such fixtures or appliances from misuse by Tenant shall be paid by Tenant and Landlord shall not in any case be responsible therefor. 33. CERTAIN RIGHTS RESERVED TO LANDLORD. Landlord reserves the following rights: (a) To name the Building and to change the name or street address of the Building; (b) To designate all sources furnishing sign painting and lettering, ice, drinking water, towels, toilet supplies, shoe shining, vending machines, mobile vending service, catering, and like services used on the Premises or in the Building; (c) On reasonable prior notice to Tenant, to exhibit the Premises to prospective tenants during the last twelve (12) months of the Term, and to exhibit the Premises to any prospective purchaser, mortgagee, or assignee of any mortgage on the Property and to others having a legitimate interest at any time during the Term; and (d) To install vending machines of all kinds in the Property, including, without limitation, and to provide mobile vending service therefor, and to receive all of the revenue derived therefrom; provided, however, that no vending machines shall be installed by Landlord nor shall any mobile vending service be provided therefor, unless Tenant so requests. 34. MISCELLANEOUS. ------------- (a) No receipt of money by Landlord from Tenant alter the termination of this Lease or after the service of any notice or after the commencement of any suit, or after final judgment for possession of the Premises shall reinstate, continue or extend the Term of this Lease or affect any such notice, demand or suit or imply consent for any action for which Landlord's consent is required. (b) The term "Landlord" as used in this Lease, so far as covenants or agreements on the part of Landlord are concerned, shall be limited to mean and include only the owner (or ground lessor, as the case may be) for the time being of the Premises. If the Premises or the underlying lease, if any, be sold or transferred, the seller thereof shall be automatically and entirely released of all covenants and obligations under this Lease from and after the date of conveyance or transfer, provided the purchaser on such sale has assumed and agreed to carry out all covenants and obligations contained in this Lease to be performed on the part of Landlord hereunder, it being hereby agreed that the covenants and obligations, contained in this Lease to 24 be performed on the part of Landlord, hereunder it being hereby agreed that the covenants and obligations contained in this Lease shall be binding under Landlord, its successors and assigns, only during their respective successive period of ownership. (c) It is understood that Landlord may occupy portions of the Building in the conduct of Landlord's business. In such event, all references herein to other tenants of the Building shall be deemed to include Landlord as occupant. (d) All of the covenants of Tenant hereunder shall be deemed and construed to be "conditions" as well as "covenants" as though the words specifically expressing or implying covenants and conditions were used in each separate instance. (e) In the event of variation or discrepancy among counterparts, Landlord's original copy of this Lease shall control. (f) This Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, provided that this provision shall in no manner enlarge Tenant's rights of assignment, which right of assignment has been restricted under the foregoing provisions of this Lease. (g) Landlord represents that to the best of its knowledge Landlord has received no notice of violation of the Americans with Disabilities Act from any governmental body having jurisdiction for such matters. 35. RELATIONSHIP OF PARTIES. Any intention to create a joint venture, partnership or principal and agent relationship between the parties hereto is hereby expressly disclaimed. This Lease shall create the relationship of landlord and tenant between Landlord and Tenant. 36. GENDER AND NUMBER. Whenever words are used herein in any gender, they shall be construed as though they were used in the gender appropriate to the context and the circumstances, and whenever words are used herein in the singular or plural form, they shall be construed as though they were used in the form appropriate to the context and the circumstances. 37. TOPIC HEADINGS. Headings and captions in this Lease are inserted for convenience and reference only and in no way define, limit or describe the scope or intent of this Lease nor constitute any part of this Lease and are not to be considered in the construction of this Lease. 38. COUNTERPARTS. Several copies of this Lease may be executed by all of the parties. All executed copies constitute one and the same Lease, binding upon all parties. 39. ENTIRE AGREEMENT. This Lease contains the entire understanding between the parties and supersedes any prior understanding or agreements between them respecting the subject matter. No representations, arrangement, or understandings except those filly expressed herein, are or shall be binding upon the parties. No changes, alterations, modifications, additions or qualifications to the terms of this Lease shall be made or be binding unless made in writing and signed by each of the parties. 25 40. RECORDING. The parties agree that this Lease shall not be recorded. 41. GOVERNING LAW, INVALIDITY OF ANY PROVISIONS. This Lease shall be subject to and governed by the laws of the state in which the Premises are located. If any term or provision of this Lease or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the other terms of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 42. EXCULPATION. This Lease is executed by Shodeen Management Company, not individually, but solely on behalf of, and as the authorized agent for Harris Bank St. Charles, as Trustee of Trust No. 2321, and inconsideration for entering into this Lease, Tenant hereby waives any rights to bring a cause of action against Shodeen Management Company (except for any cause of action based upon lack of authority or fraud), and all persons dealing with Landlord must look solely to the Property for the enforcement of any claim against Landlord, and the obligations hereunder are not binding upon, nor shall resort be had to the private property of any of, the trustees, officers, directors, employees or agents of Landlord. IN WITNESS WHEREOF, the parties have executed this Lease as of the day and year first above written. LANDLORD: SHODEEN MANAGEMENT COMPANY Date: February 6, 2001 By: /s/ Eric Shodeen ---------------------------- --------------------------- Title: President TENANT: PRIVATE BANK Date: January 26, 2001 By: /s/ Tom Castronovo ---------------------------- --------------------------- Title: President 26 LEASE ADDENDUM The Lease dated January 9, 2001 between SHODEEN MANAGEMENT COMPANY, an Illinois corporation, as agent for the beneficiaries of a land trust with Harris State Bank of St. Charles, Illinois, pursuant to Trust Agreement dated March 4, 1994 and known as Trust NO.2321 (the "Landlord"), and Private Bank, (the "Tenant"). In the event of a conflict between the preprinted form and the terms and conditions of this lease addendum, the lease addendum shall be deemed controlling. 1. OPTION TO RENEW Tenant shall have the right to renew this Lease for Two (2) additional period of Five (5) years commencing upon the expiration of the original term of this Lease or the expiration of the initial renewal term, as the case may be. Such option shall be deemed effectively exercised only if Tenant has given Landlord written notice not later than One Hundred Eighty (180) days prior to the expiration of the renewal term. All terms and provisions of this Lease shall be applicable during such renewal term, and shall be increased as follows:
1ST OPTION PERIOD: ANNUAL SCHEDULED PAYABLE IN EQUAL MONTHLY YEAR BASE RENT INSTALLMENTS OF One $29,597.00 $2,466.42 Two $30,481.00 $2,540.08 Three $31,399.00 $2,616.58 Four $32,334.00 $2,694.50 Five $33,303.00 $2,775.25 2ND OPTION PERIOD: One $34,306.00 $2,858.83 Two $35,343.00 $2,945.25 Three $36,397.00 $3,033.08 Four $37,485.00 $3,123.75 Five $38,607.00 $3,217.25
27 2. FEDERAL DEPOSIT INSURANCE CORPORATION APPROVAL Upon execution of this Lease document, Tenant has forty-five (45) days to receive approval from the Federal Deposit Insurance Corporation to establish a Banking facility at the Leased location. If the Federal Deposit Insurance Corporation does not approve the Leased sight this lease is not enforceable to either party. If approval is granted from the Federal Deposit Insurance Corporation, Tenant will have forty-five (45) days to complete Tenant Improvements at which time rent will be due and owing. LANDLORD: SHODEEN MANAGEMENT COMPANY By: /s/ Eric Shodeen --------------------------- Title: President TENANT: PRIVATE BANK By: /s/ Tom Castronovo --------------------------- Title: President 28 RIDER TO RETAIL LEASE AGREEMENT ------------------------------- This Rider to Retail Lease Agreement is made this 25th day of January 2001, between Shodeen Management Company, an Illinois Corporation, as duly authorized agent for the beneficiaries of a Land Trust with Harris Bank, St. Charles, pursuant to Trust Agreement dated March 4, 1994 and known as Trust Number 2321 (the "Landlord") and the Private Bank and Trust Company ( the "Tenant"). 1. This Rider is incorporated in the Retail Lease Agreement entered into between Landlord and Tenant with respect to 1,700 rentable square feet located within the building commonly known as 312 Crescent Place, Geneva, Illinois 60134. To the extent that the provisions of this Rider conflict with the provisions of said Agreement, the provisions of this Rider shall prevail. 2. Landlord represents that title to the building is currently held by Harris Bank Land Trust Number 2321 dated March 4, 1994 and that Shodeen Management Company is the duly authorized agent of said Land Trust having full power to enter into this Agreement on behalf of said Land Trust. 3. That is anticipated that the Commencement Date shall be March 1, 2001. In the event however that Tenant is not able to obtain FDIC approval for this Lease by March 1, 2001, Tenant shall be entitled to declare this Lease null and void. 4. The "Term of the Lease" shall be for an initial five year period as defined in the Lease. Thereafter, Tenant shall have the option of extending the Lease for two consecutive five year periods. In order to exercise the given option Tenant must provide Landlord written notice of its intent to do so at least one hundred and twenty days (120) days prior to the end of a given term or option. In each Lease Year during the option, annual base rent shall increase by three percent (3%) over the prior year's base rent. 5. Landlord make the following representation to Tenant: A. That the premises on the Commencement Date, with the exception of Tenant's improvements, the premises shall be in compliance with all applicable building codes, zoning, laws, and governmental regulations. Further Landlord represents to Tenant that the building in which the Premises is located is structurally sound, the roof is free from leaks, and the HVAC, plumbing and electrical systems are in good working order. Landlord further represents that Tenant's proposed use of the Premises as a banking facility is permitted by the applicable zoning provision. B. Prior to the Commencement Date Landlord shall cause the existing automatic teller machine ("ATM") located on the premises to be removed as part of Landlord's work. The space where the ATM is located will be restored to its original condition in a workmanlike manner. 29 6. During the term of this Lease Landlord will not permit any other Tenant of the building to engage in any banking, mortgage services, insurance sales, securities brokerage, or operate and automatic teller machine. 7. Landlord consents that as part of Tenant's work Tenant shall be entitled to remove two of the current entrance doors to the Leased Premises on the condition that said work shall be acceptable to the City and its Fire Inspector. 8. Landlord represents that the utilities to each leased space within the building are separately metered. Furthermore Landlord represents that the utilities servicing the Premises are available for immediate hook-up. 9. Tenant's proportionate share of Additional Rent (including Operating Expenses and Real Estate Taxes) shall be allocated based on the total "rentable square footage" which is 5,450 square feet as opposed to the total square footage of leased space that is actually rented at any given time. 10. In the event of a dispute over operating expenses as referenced in Paragraph 3(d) a Certified Public Accountant shall be mutually agreed to by the parties. 11. The late payment charge for monthly payments of rent as referenced in Paragraph 3(f) shall apply if the rent is ten days late. 12. All of Landlord's work shall be performed in a workmanlike manner in compliance with all applicable building codes and governmental regulations. 13. Tenant shall be provided access to the Leased Premises prior to the Commencement Date to perform Tenant's improvements. Prior to having access to the Premises, Tenant shall provide a Certificate of Insurance to Landlord. 14. Under Paragraph 5(a), the permitted use shall include any banking, mortgage services, insurance sales, securities brokerage and the operation of an automatic teller machine. 15. Due to the fact that this is not a percentage lease, beginning with the third sentence in Paragraph 5(a) the balance of this paragraph is deleted. 16. The term "exclusive" in the third to last line of Paragraph 5 (b) is charged to "reasonable". 17. In Paragraph 5(c) a period is inserted after the work "condition" and the balance of the sentence is deleted. 18. Paragraph 5(d) is deleted. 19. Landlord shall be obligated to provide an Occupancy Permit related to Landlord's work for the Premises and pay the cost of obtain permits necessary to perform Landlord's work hereunder. 30 20. At the end of the Lease Tenant shall be entitled to remove all of its banking fixtures including any safes installed on the Leased Premises. 21. Although Tenant will be responsible for normal repairs and maintenance to HVAC, heating, plumbing, and electrical systems, Landlord shall be responsible for the cost of the replacement of same on the condition that Tenant provide Landlord with evidence of proper maintenance by a reputable contractor. 22. Landlord's maintenance obligation shall include the parking areas outside and the exterior of the buildings. 23. In the course of performing its maintenance obligations, landlord shall not unreasonably interfere for an extended period of time with Tenant's access to the parking areas or the Premise. 24. Due to the fact that Tenant's use of the Premises as a banking facility, absent and emergency, the Landlord will not access the Leased Premises without prior notice to and consent from Tenant. 25. Tenant further shall be entitled to install on the Premises locks, video surveillance, an exterior satellite dish, and other security equipment as Tenant reasonably deems necessary n the operation of its business. The location of any exterior improvements shall first be approved by Landlord, which consent shall not be unreasonably withheld. 26. Landlord shall not modify in any significant way the current parking areas servicing the building or Premises nor shall Landlord significantly modify the ingress or egress to the Premises. 27. Landlord will use its best efforts not to cause an interruption in the utility services to the Leased Premises. 28. In the event that either party breaches its obligations under the Lease the breaching party shall be liable to the non-breaching party for its attorney's fees. 29. In Paragraph 12(b) Landlord's obligation for indemnity shall include any damages resulting from Landlord's breach of the Lease. 30. The provisions or Paragraph 16(b) shall be inapplicable in the event that the proposed sublet or assignment is to a bank or other entity that has acquired the Tenant or substantially all of the Tenant's assets. 31. In the event eminent domain proceedings are instituted, Tenant shall be entitled to recover any damages from the condemning municipality incurred by Tenant as a result of said proceedings. 32. Tenant shall be entitled to retain the services of an ATM vender as Tenant reasonably selects in its own judgment. 31 33. Landlord's contribution of $15.00 per square foot for Tenant's Improvements shall be paid to Tenant and upon receipt of an application for payment submitted by Tenant which includes bills for the cost of the Tenant Improvements, sworn statements and final waivers from all contractors. 34. In addition to the Tenant Improvements allowance referenced above, Landlord Improvements shall include the following: A. Supplying two ADA compliant bathrooms in the facility. B. Removal of the existing refrigeration equipment from the Premises and restoring the Premises to a "vanilla box status" including installation of the grid ceiling in the area where the refrigeration equipment is removed. C. Removal of the current ATM as referenced above. 35. In the event that Landlord's work is not completed by the Commencement Date, Tenant's obligation to pay rent shall abate until said work is completed. 36. There are thirty-four (34) existing parking spaces in the common area. Tenant shall be entitled to have its employees park within those parking spaces without time restrictions during normal business hours. 37. Notwithstanding anything in the Lease to the contrary, the Tenant shall be entitled to determine its own hours of operation. 38. Tenant, upon receipt of building permit issued by the City of Geneva will have a ninety (90) day rent abatement to construct Premise as agreed upon by Tenant and Landlord. Upon the ninety-first (91st) day or upon the business opening, whichever comes first, rent will be due and owing. If the ninety-first (91st) day falls in the middle of the month, a prorated amount will be due for the remaining portion of the month. LANDLORD: SHODEEN MANAGEMENT COMPANY By: /s/ Eric Shodeen --------------------------- Title: TENANT: PRIVATE BANK AND TRUST COMPANY By: /s/ Tom Castronovo --------------------------- Title: 32 -----END PRIVACY-ENHANCED MESSAGE-----