-----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, BbWOkV+XQMkKyRDPb6VfFL2HdSfkLy1xrGAOFX5ScEvOCnSTqJvXt9kvBW737XsC jOmYvFr/pfgcm+M7hoSHQw== 0000913849-01-500126.txt : 20010815 0000913849-01-500126.hdr.sgml : 20010815 ACCESSION NUMBER: 0000913849-01-500126 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1934 Act SEC FILE NUMBER: 000-25887 FILM NUMBER: 1711950 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_081401.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 AUGUST 3, 2001 - -------------------------------------------------------------------------------- Common, no par value 4,718,524 ================================================================================ PRIVATEBANCORP, INC. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS
Page Number ------ Selected Financial Data..........................................................................................2 PART I Item 1. Financial Statements....................................................................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................17 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................29 PART II Item 1. Legal Proceedings......................................................................................32 Item 2. Changes in Securities and Use of Proceeds..............................................................32 Item 3. Defaults upon Senior Securities........................................................................32 Item 4. Submission of Matters to a Vote of Security Holders....................................................32 Item 5. Other Information......................................................................................32 Item 6. Exhibits and Reports on Form 8-K.......................................................................32 Signatures......................................................................................................33
SELECTED FINANCIAL DATA The following table summarizes certain selected unaudited 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 ------------------------------------------------------------- 06/30/01 03/31/01 12/31/00 09/30/00 06/30/00 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED STATEMENT OF INCOME DATA: Interest income: Loans, including fees...................... $12,963 $13,061 $13,451 $13,540 $12,167 Federal funds sold and interest-bearing deposits................................ 31 177 236 357 78 Securities................................. 3,327 3,202 2,714 1,813 1,543 ------- ------- ------- ------- ------- Total interest income................... $16,321 $16,440 $16,401 $15,710 $13,788 ------- ------- ------- ------- ------- Interest expense: Interest-bearing demand deposits........... 255 220 228 231 218 Savings and money market deposit accounts.. 2,861 3,552 3,773 3,543 3,297 Other time deposits........................ 4,479 4,431 4,263 4,368 3,239 Funds borrowed............................. 1,545 1,507 1,557 1,236 1,027 Trust Preferred interest expense........... 475 269 -- -- -- ------- ------- ------- ------- ------- Total interest expense.................. $ 9,615 $ 9,979 $ 9,821 $ 9,378 $ 7,781 ------- ------- ------- ------- ------- Net interest income........................ 6,706 6,461 6,580 6,332 6,007 Provision for loan losses.................. 738 339 334 383 662 ------- ------- ------- ------- ------- Net interest income after provision for loan losses............................. 5,968 6,122 6,246 5,949 5,345 ------- ------- ------- ------- ------- Non-interest income: Banking, trust services and other income... 938 894 951 745 751 Securities gains........................... 353 186 -- -- -- ------- ------- ------- ------- ------- Total non-interest income............... $ 1,291 $ 1,080 $ 951 $ 745 $ 751 ------- ------- ------ ------ ------- Non-interest expense: Salaries and employee benefits............. 1,855 2,434 2,268 2,211 1,818 Severance charge........................... -- -- -- 562 -- Occupancy expense, net..................... 960 888 807 803 764 Data processing............................ 268 304 249 218 190 Marketing.................................. 265 349 357 241 300 Amortization of goodwill................... 206 206 206 206 206 Professional fees.......................... 752 538 484 480 596 Insurance.................................. 88 93 81 84 70 Other expense.............................. 1,015 481 438 422 508 ------- ------- ------- ------- ------- Total non-interest expense................. $ 5,409 $ 5,293 $ 4,890 $ 5,227 $ 4,452 ------- ------- ------- ------- ------- Income before income taxes................. 1,850 1,909 2,307 1,467 1,644 Income tax provision....................... 492 576 797 499 546 ------- ------- ------- ------- ------- Net income.................................... $ 1,358 $ 1,333 $ 1,510 $ 968 $ 1,098 ======= ======= ======= ======= ======= PER SHARE DATA: Basic earnings................................ $ 0.29 $0.29 $0.33 $0.21 $0.24 Diluted earnings.............................. 0.28 0.28 0.32 0.20 0.23 Dividends..................................... 0.025 0.025 0.025 0.025 0.025 Book value (at end of period)................. 12.35 12.15 11.73 11.04 10.73
2
QUARTER ENDED ------------------------------------------------------------- 06/30/01 03/31/01 12/31/00 09/30/00 06/30/00 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED FINANCIAL DATA (AT END OF PERIOD): Total securities.............................. $224,505 $210,840 $172,194 $132,814 $96,969 Total loans................................... 666,710 626,900 599,429 584,919 583,522 Total assets.................................. 944,887 873,693 829,509 763,815 723,023 Total deposits................................ 750,494 695,571 670,246 633,007 598,881 Funds borrowed................................ 106,128 90,397 96,879 71,258 68,544 Long-term debt-Trust Preferred Securities..... 20,000 20,000 -- -- -- Total stockholders' equity.................... 57,826 56,946 54,249 51,066 49,545 Trust assets under administration............. $711,957 $693,176 $777,800 $785,738 $761,829 SELECTED FINANCIAL RATIOS AND OTHER DATA: Performance Ratios: Net interest margin(1)..................... 3.25% 3.35% 3.60% 3.59% 3.81% Net interest spread(2)..................... 2.79 2.84 3.00 3.00 3.22 Non-interest income to average assets...... 0.57 0.52 0.48 0.39 0.44 Non-interest expense to average assets..... 2.39 2.55 2.48 2.76 2.62 Net overhead ratio(3)...................... 1.82 2.03 2.00 2.37 2.18 Efficiency ratio (excluding special charges)(4)(7).......................... 64.5 67.8 63.0 63.9 63.8 Return on average assets (excluding special charges)(5)(7).................. 0.60 0.64 0.77 0.71 0.65 Return on average equity (excluding special charges)(6)(7).................. 9.46 9.86 11.35 10.55 9.04 Dividend payout ratio...................... 8.62 8.79 7.66 11.97 10.51 Asset Quality Ratios: Non-performing loans to total loans........ 0.37% 0.47% 0.24% 0.10% 0.17% Allowance for loan losses to: total loans............................. 1.03 1.03 1.02 1.02 1.02 non-performing loans.................... 282 218 423 1,058 610 Net charge-offs (recoveries) to average total loans............................. 0.18 (0.01) 0.15 0.23 0.28 Non-performing assets to total assets...... 0.26 0.34 0.17 0.07 0.13 Balance Sheet Ratios: Loans to deposits.......................... 88.8% 90.1% 89.4% 92.4% 97.4% Average interest-earning assets to average interest-bearing liabilities............ 110.4 110.0 111.5 111.5 112.3 Capital Ratios: Total equity to total assets............... 6.12% 6.52% 6.53% 6.69% 6.85% Total risk-based capital ratio............. 10.98 11.00 8.15 8.51 8.73 Tier 1 risk-based capital ratio............ 9.17 9.14 6.47 6.72 6.84 Leverage ratio............................. 7.26 7.60 5.54 5.54 5.94 Ratio of Earnings to Fixed Charges: (8) Including deposit interest................. 1.19x 1.19x 1.23x 1.16x 1.21x Excluding deposit interest................. 1.92 2.07 2.48 2.19 2.60
- --------------------------------------- 3 - --------------------------------------- (1) Net interest income divided by average interest-earning assets. (2) Yield on average interest-earning assets less rate on average interest-bearing liabilities. (3) Non-interest expense less non-interest income divided by average total assets. (4) Non-interest expense divided by the sum of net interest income (tax equivalent) plus non-interest income. (5) Earnings before special charges divided by average total assets. (6) Earnings before special charges divided by average common equity. (7) 2000 performance ratios exclude a third quarter one-time severance 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: 09/30/00 -------- 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. 4 PART I ITEM 1. FINANCIAL STATEMENTS PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, DECEMBER 31, JUNE 30, 2001 2000 2000 ----------- ------------ -------- (UNAUDITED) (UNAUDITED) ASSETS Cash and due from banks................................. $ 28,515 $ 28,637 $ 18,341 Short-term investments.................................. 7,305 11,876 5,076 -------- -------- -------- Total cash and cash equivalents...................... 35,820 40,513 23,417 -------- -------- -------- Available-for-sale securities, at fair value............ 224,505 172,194 96,969 Loans, net of unearned discount......................... 666,710 599,429 583,522 Allowance for loan losses............................... (6,896) (6,108) (5,951) -------- -------- -------- Net loans............................................... 659,814 593,321 577,571 -------- -------- -------- Goodwill................................................ 11,217 11,629 12,031 Bank premises and equipment, net........................ 4,260 4,138 3,814 Accrued interest receivable............................. 5,992 5,524 4,264 Other assets............................................ 3,279 2,190 4,957 -------- -------- -------- Total assets............................................ $944,887 $829,509 $723,023 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits: Noninterest-bearing.................................. $ 65,373 $ 61,789 $ 49,950 Interest-bearing..................................... 44,436 51,301 34,062 Savings and money market deposit accounts............... 302,258 300,107 257,822 Brokered deposits....................................... 95,740 43,842 60,755 Other time deposits..................................... 242,687 213,207 196,292 -------- -------- -------- Total deposits....................................... 750,494 670,246 598,881 Funds borrowed.......................................... 106,128 96,879 68,544 Long term debt - Trust Preferred Securities............. 20,000 -- -- Accrued interest payable................................ 2,666 3,552 2,439 Other liabilities....................................... 7,773 4,583 3,614 -------- -------- -------- Total liabilities....................................... $887,061 $775,260 $673,478 -------- -------- -------- STOCKHOLDERS' EQUITY Preferred Stock, 1,000,000 shares authorized............ -- -- -- Common stock, without par value, $1 stated value; 12,000,000 shares authorized; 4,680,668, 4,623,532, and 4,615,832 shares issued and outstanding as of June 30, 2001, December 31, 2000 and June 30, 2000, respectively......................................... $ 4,681 $ 4,624 $ 4,616 Surplus................................................. 40,590 40,107 40,048 Retained earnings....................................... 13,845 11,388 9,142 Accumulated other comprehensive income (loss)........... 616 (118) (2,294) Deferred compensation................................... (956) (802) (942) Loans to officers....................................... (950) (950) (1,025) -------- -------- -------- Total stockholders' equity.............................. 57,826 54,249 49,545 -------- -------- -------- Total liabilities and stockholders' equity.............. $944,887 $829,509 $723,023 ======== ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. 5 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------- --------------------------- 2001 2000 2001 2000 -------- -------- -------- -------- INTEREST INCOME Loans, including fees.......................................... $12,963 $12,167 $26,024 $21,642 Federal funds sold and interest bearing deposits............... 31 78 208 465 Securities..................................................... 3,327 1,543 6,529 2,928 ------- ------- ------- ------- Total interest income....................................... 16,321 13,788 32,761 25,035 ------- ------- ------- ------- INTEREST EXPENSE Deposits: Interest-bearing demand..................................... 255 218 475 409 Savings and money market deposit accounts................... 2,861 3,297 6,408 6,395 Other time.................................................. 4,479 3,239 8,915 6,005 Funds borrowed................................................. 1,545 1,027 3,052 1,323 Trust Preferred Securities interest expense.................... 475 -- 744 -- ------- ------- ------- ------- Total interest expense......................................... 9,615 7,781 19,594 14,132 ------- ------- ------- ------- Net interest income............................................ 6,706 6,007 13,167 10,903 Provision for loan losses...................................... 738 662 1,077 973 ------- ------- ------- ------- Net interest income after provision for loan losses............ 5,968 5,345 12,090 9,930 NON-INTEREST INCOME Banking, trust services and other income....................... 938 720 1,832 1,347 Net securities gains........................................... 353 31 539 126 ------- ------- ------- ------- Total non-interest income................................... 1,291 751 2,371 1,473 ------- ------- ------- ------- NON-INTEREST EXPENSE Salaries and employee benefits................................. 1,855 1,818 4,289 3,695 Occupancy expense, net......................................... 960 764 1,848 1,377 Professional fees.............................................. 752 596 1,290 1,171 Goodwill amortization.......................................... 206 206 412 319 Other non-interest expense..................................... 1,636 1,068 2,863 1,927 ------- ------- ------- ------- Total non-interest expenses................................. 5,409 4,452 10,702 8,489 ------- ------- ------- ------- Income before income taxes..................................... 1,850 1644 3,759 2,914 Income tax provision........................................... 492 546 1,068 967 ------- ------- ------- ------- Net income..................................................... $ 1,358 $ 1,098 $ 2,691 $ 1,947 ======= ======= ======= ======= Basic earnings per share....................................... $ 0.29 $ 0.24 $ 0.58 $ 0.42 Diluted earnings per share..................................... 0.28 0.23 0.56 0.41
The accompanying notes to consolidated financial statements are an integral part of these statements. 6 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED OTHER LOANS TOTAL COMMON RETAINED COMPREHENSIVE DEFERRED 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............. -- -- 1,947 -- -- -- 1,947 Net decrease in fair value of Securities classified as available-for-sale, net of income taxes and reclassification adjustments......... -- -- -- 518 -- -- 518 ------ ------- ------ ------- ------- ------- ------- Total comprehensive income.............. -- -- 1,947 518 -- -- 2,465 ------ ------- ------ ------- ------- ------- ------- Cash dividends declared ($0.05 per share).............. -- -- (230) -- -- -- (203) Issuance of common stock............... 26 287 -- -- -- -- 313 Awards granted......... -- -- -- -- (313) -- (313) Amortization of deferred compensation........ -- -- -- -- 130 -- 130 Repayment of loans to officers............ -- -- -- -- -- 100 100 ------ ------- ------ ------- ------- ------- ------- Balance, June 30, 2000. $4,616 $40,048 $9,142 $(2,294) $ (942) $(1,025) $49,545 ====== ======= ====== ======= ======= ======= ======= Balance, January 1, 2001................ $4,624 $40,107 $11,388 $(118) $(802) $(950) $54,249 Net income............. -- -- 2,691 -- -- -- 2,691 Net increase in fair value of securities classified as available-for-sale, net of income taxes and reclassification adjustments......... -- -- -- 734 -- -- 734 ------ ------- ------ ------- ------- ------- ------- Total comprehensive income.............. -- -- 2,691 734 -- -- 3,425 ------ ------- ------ ------- ------- ------- ------- Cash dividends declared ($0.05 per share).............. -- -- (234) -- -- -- (234) Issuance of common stock............... 57 483 -- -- (364) -- 176 Awards granted......... -- -- -- -- 93 -- 93 Amortization of deferred compensation........ -- -- -- -- 117 -- 117 Repayment of loans to officers............ -- -- -- -- -- -- -- ------ ------- ------ ------- ------- ------- ------- Balance, June 30, 2001. $4,681 $40,590 $13,845 $ 616 $ (956) $ (950) $57,826 ====== ======= ======= ======= ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements. 7 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, -------------------------- 2001 2000 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income..................................................................... $ 2,691 $ 1,947 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization............................................... 673 371 Goodwill amortization....................................................... 412 319 Johnson Bank Illinois fair value accretion, net............................. (145) (175) Amortization of deferred compensation....................................... 117 130 Provision for loan losses................................................... 1,077 973 Net gain on sale of securities.............................................. (539) (92) (Decrease) Increase in deferred loan fees................................... (163) 225 (Increase) in accrued interest receivable................................... (468) (635) (Decrease) Increase in accrued interest payable............................. (886) 772 (Increase) Decrease in other assets......................................... (1,467) 854 Increase in other liabilities............................................... 3,188 1,137 --------- --------- Total adjustments........................................................... 1,799 3,879 --------- --------- Net cash provided by operating activities................................... 4,490 5,826 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities, paydowns, and sales of securities.................... 62,966 14,738 Purchase of securities available-for-sale...................................... (113,626) (20,072) Johnson Bank Illinois acquisition, net of cash received........................ -- (15,753) Capitalization of The PrivateBank (St. Louis).................................. -- (8,000) Net loan principal advanced.................................................... (67,311) (100,423) Bank premises and equipment expenditures....................................... (752) (1,391) --------- --------- Net cash used in investing activities....................................... (118,723) (130,901) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in total deposits................................................. 80,256 54,237 Issuance of common stock....................................................... 269 -- Issuance of Trust Preferred Securities......................................... 20,000 -- Dividends paid................................................................. (234) (230) Net increase in funds borrowed................................................. 9,249 50,302 --------- --------- Net cash provided by financing activities................................... 109,540 104,309 --------- --------- Net (decrease) in cash and cash equivalents.................................... (4,693) (20,766) Cash and cash equivalents at beginning of year................................. 40,513 44,183 --------- --------- Cash and cash equivalents at end of period..................................... $ 35,820 $ 23,417 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 8 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 quarter and the six months ended June 30, 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---------- --------- --------- --------- Net Income............................................... $1,358 $1,098 $2,691 $1,947 Average common shares outstanding........................ 4,682 4,601 4,665 4,596 Average common shares equivalent(1)...................... 173 151 154 171 Weighted average common shares and common share equivalents........................................... 4,855 4,752 4,819 4,767 Net income per average common share - basic.............. $ 0.29 $ 0.24 0.58 $ 0.42 Net income per average common share - diluted............ $ 0.28 $ 0.23 0.56 $ 0.41
- --------------------------------------- (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. 9 NOTE 3 - NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 applies to all business combinations completed after June 30, 2001. All future business combinations must be recorded using the purchase method of accounting. As the Company contemplates further acquisitions as part of its growth strategy, this Statement will likely have an impact on the Company's future financial statements. SFAS No. 142 supercedes APB Opinion No. 17 "Intangible Assets" and addresses the mandatory accounting of intangible assets and goodwill. Adoption of this Statement is required beginning January 1, 2002 in relation to all of the Company's goodwill and intangible assets. Early application of this standard is not permitted. The Statement discontinues the regular amortization of goodwill and a transitional impairment test of goodwill is required as of January 1, 2002. An annual impairment test of goodwill is required every year thereafter. Impairment losses from goodwill recognized in the initial application of this Statement are to be reported as resulting from a change in accounting principal. Impairment losses in subsequent years should be recorded as operating expenses. Goodwill at June 30, 2001 totaled $11.2 million and is currently being amortized using a straight-line method over fifteen years. Goodwill amortization for the six months ended June 30, 2001 totaled $412,000. Although the assessmnent to be required by SFAS No. 142 upon adoption has not yet been completed, under current accounting rules, the Company is also required to write down the value of goodwill if that goodwill becomes impaired and, to date, the Company has not incurred any goodwill impairment. Any future acquisitions completed by the Company will also be subject to this Statement. The Company does not own any other intangible assets. 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 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 did not 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 regards 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) through its main office located in downtown Chicago as well as six 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) 10 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) --------------------------- JUNE 30, --------------------------- 2001 2000 ---------- ---------- (IN THOUSANDS) Total gross loans.................. $ 623,588 $ 578,627 Total assets....................... 893,168 713,875 Total deposits..................... 714,297 598,571 Total borrowings................... 93,378 48,044 Total capital...................... 74,209 61,573 Year-to-date net income............ 3,969 2,713 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) --------------------------- JUNE 30, --------------------------- 2001 2000 ---------- ---------- (IN THOUSANDS) Total gross loans................... $ 43,666 $ 4,894 Total assets........................ 51,644 8,593 Total deposits...................... 36,683 596 Total borrowings.................... 7,500 -- Total capital....................... 6,870 7,962 Year-to-date net loss............... (288) (38) 11 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 --------------------------- JUNE 30, --------------------------- 2001 2000 ---------- ---------- (IN THOUSANDS) Trust assets under administration... $ 712,000 $ 762,000 Trust fee revenue................... 1,398 1,090 Year-to-date net income............. 300 87 The following table indicates the break-down of our trust assets under administration at June 30, 2001 by account classification and related gross revenue for the six months ended June 30, 2001: AT OR FOR THE SIX MONTHS ENDED JUNE 30, 2001 --------------------------- MARKET VALUE REVENUE -------------- ---------- ACCOUNT TYPE (IN THOUSANDS) ------------ Personal trust-managed............... $ 263,449 $ 760 Agency-managed....................... 107,709 317 Custody.............................. 307,089 295 Employee benefits-managed............ 33,753 26 --------- ------- Total............................. $ 712,000 $ 1,398 ========= ======= 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 of subordinated debentures 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. 12 HOLDING COMPANY ACTIVITIES -------------------------- JUNE 30, -------------------------- 2001 2000 ---------- ----------- (IN THOUSANDS) Total assets....................... $ 83,082 $ 70,375 Total borrowings................... 5,250 20,500 Long term debt - Trust Preferred Securities...................... 20,000 -- Interest expense................... 1,036 371 Total capital...................... 57,827 49,545 Year-to-date net loss.............. (1,290) (814) The following table identifies the significant differences between the sum of the reportable segments and the reported consolidated results for total assets: TOTAL ASSETS ---------------------------- JUNE 30, ---------------------------- 2001 2000 ------------ ----------- (IN THOUSANDS) Sum of reportable segments.......... $ 1,027,894 $ 792,843 Adjustments......................... (83,007) (69,820) ----------- ---------- Consolidated PrivateBancorp, Inc.... $ 944,887 $ 723,023 =========== ========== 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. NOTE 5 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENT The carrying values and estimated fair values of financial instruments as of June 30, 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 six months ended June 30, 2001 and 2000, on a gross basis (in thousands):
JUNE 30, 2001 --------------------------------------------- BEFORE TAX NET OF TAX (BENEFIT) TAX AMOUNT EXPENSE AMOUNT ----------- --------- ---------- Net unrealized gains on securities available-for-sale-- Net unrealized holding gains...................... $1,564 $ 444 $1,120 Less: reclassification adjustment for gain included in net income......................... 539 153 386 ------ ------ ------ Net unrealized gains.............................. $1,025 $ 291 $ 734 ====== ====== ======
13
JUNE 30, 2000 --------------------------------------------- BEFORE TAX NET OF TAX (BENEFIT) TAX AMOUNT EXPENSE AMOUNT ----------- --------- ---------- Net unrealized gains on securities available-for-sale-- Net unrealized holding gains...................... $ 877 $ 298 $ 579 Less: reclassification adjustment for gain included in net income......................... 92 31 61 ------ ------ ------ Net unrealized gains.............................. $ 785 $ 267 $ 518 ====== ====== ======
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. 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. 14 NOTE 9 -- FUNDS BORROWED A summary of all funds borrowed and outstanding at June 30, 2001, December 31, 2000 and June 30, 2000 is presented in the table below:
CURRENT JUNE 30, DECEMBER 31, JUNE 30, RATE(1) MATURITY 2001 2000 2000 ------- -------- ---- ---- ---- (DOLLARS IN THOUSANDS) FUNDS BORROWED: Borrowings under revolving line of credit............................. 4.93% 02/11/02 $ 250 $ 18,000 $ 15,500 Subordinated note..................... 4.57 02/11/07 5,000 5,000 5,000 FHLB floating rate advanced(2)........ 6.77 05/01/01 -- 10,000 10,000 FHLB fixed advance.................... 6.50 10/23/05 25,000 25,000 -- FHLB fixed advance.................... 6.49 11/13/01 2,000 2,000 -- FHLB fixed advance.................... 6.21 12/05/03 30,000 30,000 30,000 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.................... 5.40 08/27/00 -- -- 4,000 FHLB fixed advance.................... 5.33 07/22/02 1,000 -- -- FHLB fixed advance.................... 5.21 01/22/02 1,000 -- -- FHLB fixed advance.................... 5.02 03/06/02 1,000 -- -- FHLB fixed advance.................... 4.30 02/01/02 25,000 -- -- FHLB fixed advance.................... 4.21 05/13/02 1,000 -- -- Fed funds purchased................... 4.16 Daily 10,000 2,700 2,400 Demand repurchase agreements.......... 3.00 Daily 3,378 2,679 1,644 -------- -------- -------- Total funds borrowed............... $106,128 $ 96,879 $ 68,544 ======== ======== ======== - --------------------------------------- (1) Reflects the rate in effect as of June 30, 2001, or at maturity, if the advance matured prior to June 30, 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.
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 4.93% on June 26, 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. In June 2001, the Company increased the borrowings on the credit facility to $250,000 for general business purposes. 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 reset 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 4.57% on May 11, 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. 15 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. A portion of the preferred securities is eligible for treatment as Tier I capital as allowed by the Federal Reserve. 16 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 seven Chicago-area offices: Downtown Chicago, Wilmette, Illinois, Oak Brook, Illinois, St. Charles, Illinois, Lake Forest, Illinois, Winnetka, Illinois, and Geneva, Illinois. During 2000, the Company expanded to the St. Louis market where it opened a new federal savings bank, The PrivateBank (St. Louis). Managing directors are strategically located at all of these locations. 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. In May 2001, The PrivateBank (Chicago) opened a new office in Geneva, Illinois. 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 unaudited 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. 17 RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 NET INCOME Net income for the second quarter ended June 30, 2001, was $1,358,000, up 24% compared to second quarter 2000 net income of $1,098,000. Earnings increased to $0.28 per diluted share in the second quarter 2001 compared to $0.23 per diluted share in the second quarter 2000. Net income for the six months ended June 30, 2001 increased 38.2% to $2,691,000, or $0.56 per diluted share, compared to $1,947,000, or $0.41 per diluted share, for the same period last year. The increase in net income on a year to date basis as compared to the same period in 2000 highlights the impact of strong balance sheet and revenue growth. 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. Net interest income was $6.7 million during the three months ended June 30, 2001 compared to $6.0 million for the second quarter 2000, an increase of 12%. Average earning assets during the second quarter 2001 were $864.0 million, an increase of 33.3% over the prior year second quarter. The Company's net interest margin (tax equivalent net interest income as a percentage of earning assets) was 3.25% for the three months ended June 30, 2001, compared to 3.81% for the prior year period. The continuing decline in market interest rates during the quarter resulted in compression of net interest margin as compared to the first quarter of 2001 and the prior year second quarter. During the third quarter of 2001, the Company expects to continue to experience declines in net interest margin if market rates of interest continue to decline. 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, which will reduce the rates earned on assets. Net interest income on a tax equivalent basis was $13.8 and $11.3 million for the six months ended June 30, 2001 and 2000, respectively. Net interest margin was 3.30% for the six months ended June 30, 2001 compared to 3.68% for the prior year period. The decrease in net interest margin during the six months ended June 30, 2001 as compared to the six months ended June 30, 2000 is attributable to the decreases in market rates during the year as well as to the issuance of $20.0 million of trust preferred securities on February 8, 2001. These securities bear interest at a 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. 18 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 JUNE 30, -------------------------------------------------------------------------- 2001 2000 ------------------------------------- ---------------------------------- AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ---- ------- -------- ---- Short-term investments............ $ 2,724 $ 31 4.46% $ 5,103 $ 78 6.08% Investment securities(1).......... 212,536 3,711 6.98% 98,938 1,763 7.13% Loans, net of unearned discount(2) 648,759 12,963 7.96% 544,207 12,167 8.91% -------- -------- -------- -------- Total earning assets.............. $864,019 $ 16,705 7.71% $648,248 $ 14,008 8.61% ======== ======== ======== ======== Interest-bearing deposits......... $651,838 $ 7,595 4.67% $515,103 $ 6,754 5.26% Funds borrowed.................... 110,708 1,545 5.52% 62,361 1,027 6.52% Long-term debt - Trust Preferred Securities..................... 20,000 475 9.50% -- -- -- -------- -------- ------- ------- Total interest-bearing liabilities $782,546 9,615 4.92% $577,464 7,781 5.39% ======== -------- ======== ------- Tax equivalent net interest income $ 7,090 $ 6,227 ======== ======= Net interest spread............... 2.79% 3.22% Net interest margin............... 3.25% 3.81% SIX MONTHS ENDED JUNE 30, ---------------------------------------------------------------------------- 2001 2000 ------------------------------------ ------------------------------------- AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ---- ------- -------- ---- Short-term investments............ $ 7,498 $ 208 5.51% $ 16,240 $ 465 5.67% Investment securities(1).......... 200,363 7,177 7.16% 95,725 3,366 7.04% Loans, net of unearned discount(2) 624,220 26,024 8.35% 498,155 21,642 8.65% -------- -------- -------- ------- Total earning assets.............. $832,081 $ 33,409 8.04% $610,120 $25,473 8.32% ======== ======== ======== ======= Interest-bearing deposits......... 638,487 15,797 4.99% $500,580 $12,809 5.13% Funds borrowed.................... 100,967 3,052 6.01% 39,345 1,323 6.65% Long-term debt - Trust Preferred -- -------- Securities(3).................. 15,801 744 9.37% -- -- -------- -------- -------- ------- Total interest-bearing liabilities $755,255 19,593 5.22% $539,925 14,132 5.24% ======== -------- ======== ------- Tax equivalent net interest income $ 13,816 $11,341 ======== ======= Net interest spread............... 2.82% 3.08% Net interest margin............... 3.30% 3.68% - --------------------------------------- (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 $384,000 and $219,000 in the second quarter of 2001 and 2000, respectively, and $649,000 and $439,000 for the six months ended 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 period from February 8, 2001 to June 30, 2001.
19 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. THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
CHANGE CHANGE DUE TO DUE TO CHANGE TOTAL RATE VOLUME DUE TO MIX CHANGE ---- ------ ---------- ------ (DOLLARS IN THOUSANDS) Short-term investments................ $ (21) $ (36) $ 10 $ (47) Investment securities................. (37) 2,019 (34) 1,948 Loans, net of unearned discount....... (1,289) 2,323 (238) 796 ------- ------- ------- ------- Total interest income.............. (1,247) 4,306 (262) 2,697 ------- ------- ------- ------- Interest-bearing deposits............. (758) 1,793 (194) 841 Funds borrowed........................ (155) 786 (113) 518 Long-term debt - Trust Preferred Securities......................... -- -- 475 475 ------- ------- ------- ------- Total interest expense............. (913) 2,579 168 1,834 ------- ------- ------- ------- Net interest income................... $ (434) $ 1,727 $ (430) $ 863 ======= ======= ======= ======= SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 CHANGE CHANGE DUE TO DUE TO CHANGE TOTAL RATE VOLUME DUE TO MIX CHANGE ---- ------ ---------- ------ (DOLLARS IN THOUSANDS) Short-term investments................ $ (13) $ (246) $ 2 $ (257) Investment securities................. 57 3,653 101 3,811 Loans, net of unearned discount....... (741) 5,407 (284) 4,382 ------- ------- ------- ------- Total interest income.............. (697) 8,814 (181) 7,936 ------- ------- ------- ------- Interest-bearing deposits............. (348) 3,508 (172) 2,988 Funds borrowed........................ (125) 2,032 (178) 1,729 Long-term debt - Trust Preferred Securities......................... -- -- 744 744 ------- ------- ------- ------- Total interest expense............. (473) 5,540 394 5,461 ------- ------- ------- ------- Net interest income................... $ (224) $ 3,274 $ (575) $ 2,475 ======= ======= ======= =======
PROVISION FOR LOAN LOSSES The Company's provision for loan losses was $738,000 for the second quarter of 2001, compared to $662,000 for the comparable period in 2000. The Company's provision for loan losses was $1.1 million for the six months ended June 30, 2001 compared to $973,000 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. 20 The Company maintains an adequate allowance for loan losses that are probable and inherent in the portfolio. The provision for loan losses is the result of 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 24. NON-INTEREST INCOME Non-interest income for the quarter grew to $1.3 million, reflecting an increase of $540,000 or 71.9% higher compared to the first quarter of 2000. Banking income, comprised of service charges on deposits and other products, increased to $212,000 from $168,200 a year ago quarter, which represents a 26.0% increase. The increase in service charge income during the second 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. Trust assets under administration decreased 6.6% to $712.0 million at June 30, 2001 compared to $762.0 million at June 30, 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 $157,000 to $708,000 for the quarter ended June 30, 2001, an increase of 29.0% over the prior year quarter. The increase reflects a continued change in the mix of trust accounts to more profitable account arrangements. The increase in non-interest income is also attributable to gains on securities. Net securities gains totaled $353,000 during the second quarter of 2001, compared to none in the second quarter of 2000. During the second quarter 2001, the Company was able to take advantage of volatility in the financial markets while repositioning its investment portfolio for protection in the declining market rate environment. Non-interest income increased approximately $898,000 or 61.0% to $2.4 million for the first half of 2001, as compared to $1.5 million for the comparable period in 2000. Trust income increased by $308,000 to $1.4 million for the six months ended June 30, 2001, reflecting an increase of 28.3% over the six months ended June 30, 2000. Banking services income increased by approximately $179,000 to $434,000 for the six months ended June 30, 2001 as compared to $256,000 for the six months ended June 30, 2000. Net securities gains for the six months ended June 30, 2001 were $539,000 compared to $126,000 for the comparable prior year period. During the six months ended June 30, 2001, the Company was able to take advantage of market interest rate volatility to achieve interest rate risk management objectives, realize gains on investments and purchase investment securities with enhanced return opportunities. NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ --------------------- 2001 2000 2001 2000 ---- ---- ---- ---- (IN THOUSANDS) (IN THOUSANDS) Salaries and employee benefits........ $ 1,855 $ 1,818 $ 4,289 $ 3,695 Occupancy............................. 960 764 1,848 1,377 Professional fees..................... 752 596 1,290 1,171 Marketing............................. 265 300 614 609 Data processing....................... 268 190 572 353 Postage, telephone and delivery....... 200 167 381 283 Office supplies and printing.......... 110 122 192 235 Insurance............................. 88 70 181 138 Goodwill.............................. 206 206 412 319 Other expense......................... 705 219 923 309 -------- -------- -------- ------- Total non-interest expense............ $ 5,409 $ 4,452 $ 10,702 $ 8,489 ======== ========= ========= =======
Non-interest expense increased to $5.4 million in the second quarter of 2001 from $4.5 million in the second quarter of 2000, an increase of 21.5%. This increase is due to higher operating expenses associated with being fully operational in St. Louis. The Company's efficiency ratio was 64.5% for the second quarter 2001 as compared to the 63.8% for the second quarter 2000. On a tax-equivalent basis, this ratio indicates that in the second quarter of 2001, the Company spent 64.5 cents to generate each dollar of revenue, compared to 63.8 cents in the second quarter of 21 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 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 2.0% during the second quarter 2001 as compared to the year ago quarter, reflecting the Company's increased level of full-time equivalent employees to 143 people at June 30, 2001 as compared to 133 people at June 30, 2000. The increase is due primarily to the full effect of the Johnson Bank Illinois acquisition and the opening and staffing of The PrivateBank (St. Louis), and the addition of two senior officers responsible for establishing the Geneva office. Occupancy expense increased to $960,000 during the second quarter 2001, reflecting an increase of 25.7% over the prior year quarter. Occupancy expense during the second quarter 2001 reflects the addition of a new floor of office space in the downtown Chicago office dedicated specifically to the Wealth Management Department, the addition of new office space in Geneva, Illinois, 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 second quarter 2001. Data processing expenses increased to $268,000 during the quarter, a 41.1% increase over the prior year quarter. The opening of The PrivateBank (St. Louis) in June 2000 requires additional data processing support on a monthly basis. Additionally, the second quarter 2001 results reflect data processing costs associated with the opening of the Geneva office. Postage, telephone and delivery increased to $200,000 during the second quarter 2001, an increase of 19.8% over the prior year quarter. The addition of The PrivateBank (St. Louis) and the Geneva office to The PrivateBank (Chicago) increased the delivery costs related to the processing of transactions, which are sent daily to a third-party processing area. In addition, postal rates increased effective January 1, 2001. Office supplies and printing costs decreased to $110,000 during the second quarter 2001, a 9.8% decline as compared to the prior year quarter. During the second quarter 2000, the Company incurred one-time supplies and printing costs associated with the opening of The PrivateBank (St. Louis). Insurance expense increased to $88,000, an increase of 25.7% over the prior year quarter. The additions of a new office and employees as well as the establishment of The PrivateBank (St. Louis) have all contributed to increased levels of insurance costs during the second quarter 2001. Included in other non-interest expense during the second quarter ended June 30, 2001 were non-recurring charges in the amount of $561,000 related to the resolution of certain items associated with prior systems conversions. Non-interest expense increased to $10.7 million for the first six months of 2001 from $8.5 for the first six months of 2000, an increase of 26.1%. This increase is due to expenses incurred in connection with the Company's expansion initiatives, namely the opening of two new offices through the Johnson Bank Illinois acquisition, the expansion of the St. Louis office and the opening of the Geneva office. The Company's efficiency ratio remained level at 66.1% for the first six months of 2001 as compared to 66.2% for the first six months of 2000 Salaries and benefits increased 16.1% during the first six months of 2001 as compared to last year, reflecting the Company's increased level of full-time equivalent employees to 143 people at June 30, 2001 as compared to 133 people at June 30, 2000. The increase is due primarily to the full effect of the Johnson Bank Illinois acquisition, the opening and staffing of the PrivateBank (St. Louis), and the addition of two senior officers responsible for establishing the Geneva office. Occupancy expense increased to $1.9 million for the first six months of 2001, from $1.4 million for the first six months of 2000, reflecting an increase of 34.2%. The rental of an additional floor in the downtown Chicago office, the addition of office space in Geneva and the depreciation of certain fixed assets, software and equipment comprise this increase. 22 During the six months ended June 30, 2001, professional fees increased by $119,000 over the prior year's first six months. The 10.2% increase in professional fees reflects increased legal, accounting and information-system consultation services. Office supplies and printing expenses decreased 18.3% for the first six months of 2000 from the year-ago period's level of $235,000 to $192,000, reflecting an improvement in cost controls. Data processing fees increased from $353,000 for the first six months of 2000 to $572,000 for the first six months of 2001, an increase of 62.0%, attributable to increased demand from new branch offices. INCOME TAXES The following table shows the Company's income before income taxes, applicable income taxes and effective tax rate for the six months ended June 30, 2001 and 2000, respectively (in thousands): SIX MONTHS ENDED JUNE 30, ----------------------- 2001 2000 ------- ------- Income before taxes.......... $ 3,759 $ 2,914 Income tax provision......... 1,068 967 Effective tax rate........... 28.4% 33.2% The lower effective tax rate for the second 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 $78.0 million at June 30, 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. 23 FINANCIAL CONDITION Total assets were $944.9 million at June 30, 2001, an increase of $115.4 million, or 13.9% over $829.5 million at December 31, 2000, and an increase of $221.9 million, or 30.7% over $723.0 million at June 30, 2000. The balance sheet growth during the six months ended June 30, 2001 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 $666.7 million, an increase of $67.3 million, or 11.2%, from $599.4 million at December 31, 2000 and an increase of $83.2 million, or 14.3%, from $583.5 million at June 30, 2000. The PrivateBank (St. Louis) had loans outstanding of $43.7 million as of June 30, 2001, growth of $18.5 million since December 31, 2000. The remaining loan growth experienced by the Company since December 31, 2000 of $48.8 million was generated by The PrivateBank (Chicago). All of The PrivateBank (Chicago) offices posted strong gains in loan volume. The following table sets forth the Company's loan portfolio net of unearned discount by category (in thousands) at the following dates: JUNE 30, DECEMBER 31, JUNE 30, 2001 2000 2000 ---- ---- ---- LOANS Commercial real estate........ $240,200 $206,464 $200,088 Residential real estate....... 90,466 86,052 92,006 Commercial.................... 134,626 137,343 153,416 Personal(1)................... 117,230 108,427 99,191 Construction.................. 84,188 61,143 38,821 -------- -------- -------- Total loans................ $666,710 $599,429 $583,522 ======== ======== ======== - --------------------------------------- (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 Company maintains an allowance for loan losses sufficient to absorb credit losses inherent in the loan portfolio. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are made in the amount determined necessary to maintain an adequate allowance 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 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 June 30, 2001, 1.02% at December 31, 2000 and 1.02% at June 30, 2000. The Company believes that the allowance for loan losses is adequate to provide for estimated probable credit losses inherent in the loan portfolio. Net charge-offs totaled $297,000 for the quarter ended June 30, 2001 versus net charge-offs of $381,000 in the year earlier period. The provision for loan losses was $738,000 in the second quarter of 2001, versus $662,000 in the second 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. 24 Following is a summary of changes in the allowance for loan losses for the six months ended June 30, 2001 and 2000 (in thousands):
JUNE 30, JUNE 30, 2001 2000 --------- -------- Balance, January 1.............................................. $ 6,108 $ 4,510 Johnson Bank Illinois acquisition allowance for loan loss....... -- 864 Provisions charged to earnings.................................. 1,077 973 Loans recovered (charged-off)................................... (289) (396) ------- ------- Balance, June 30................................................ $ 6,896 $ 5,951 ======= =======
NONPERFORMING LOANS Nonaccrual loans were $1.5 million at June 30, 2001 as compared to $24,000 at December 31, 2000 and $635,000 at June 30, 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 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 $2.4 million at June 30, 2001, compared to $1.4 million at December 31, 2000 and $991,000 at June 30, 2000. Nonperforming loans were .37%, .24% and .17% of total loans at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. Nonperforming loans were .26%, .17% and .13% of total assets at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. Subsequent to June 30, 2001, the Company designated approximately $700,000 of loans that were performing as of June 30, 2001 to nonaccrual status based on recent developments that became available in late July, 2001. Collection efforts continue 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 June 30, 2001 and December 31, 2000, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE --------------------------------------------------------- JUNE 30, 2001 --------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------- ----------- ---------- ---------- U.S. Government Agency Obligations....... $ 369 $ 29 $ -- $ 398 U.S. Government Agency Mortgage Backed Securities and Collateralized Mortgage Obligations.................. 80,811 672 (164) 81,319 Corporate Collateralized Mortgage Obligations........................... 24,900 82 -- 24,982 Tax Exempt Municipal Securities.......... 77,864 661 (521) 78,004 Taxable Municipal Securities............. -- -- -- -- Federal Home Loan Bank Stock............. 36,381 -- -- 36,381 Other.................................... 3,247 174 -- 3,421 -------- -------- ------- -------- Total.................................... $223,572 $ 1,618 $ (685) $224,505 ======== ======== ======= ========
25
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 ======== ==== ======= ========
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 June 30, 2001, net unrealized gains of $933,000 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 in the first six months of 2001 reflects the effect of declining interest rates on tax exempt municipal securities, corporate collateralized mortgage obligations, and other various securities in the portfolio. Additionally, the Company benefited from changes made to the investment portfolio as a result of asset/liability management strategies. Securities available for sale increased to $224.5 million at June 30, 2001, up 30.4% from 172.2 million at December 31, 2000. The growth in the investment security portfolio since December 31, 2000 resulted from the continued implementation of the Company's asset/liability management strategy. Tax exempt municipal securities increased by $41.4 million, allowing the Company to provide for net interest margin protection in a falling interest-rate environment. Corporate collateralized mortgage obligations increased $14.9 million in the first six months of 2001. DEPOSITS AND FUNDS BORROWED The following table presents the balances of deposits by category and each category as a percentage of total deposits at June 30, 2001, December 31, 2000 and June 30, 2000:
JUNE 30, DECEMBER 31, JUNE 30, 2001 2000 2000 -------------------- ---------------------- --------------------- PERCENT PERCENT PERCENT BALANCE OF TOTAL BALANCE OF TOTAL BALANCE OF TOTAL ------- -------- ------- -------- ------- -------- (DOLLARS IN THOUSANDS) Demand...................... $ 65,373 8.7% $ 61,789 9.2% $ 49,950 8.3% Savings..................... 9,413 1.3% 8,242 1.2% 7,402 1.3% Interest-bearing demand..... 44,436 5.9% 51,301 7.7% 34,062 5.7% Money market................ 298,078 39.7% 297,043 44.3% 250,420 41.8% Certificates of deposit..... 237,454 31.6% 208,029 31.0% 196,311 32.8% Brokered deposits........... 95,740 12.8% 43,842 6.6% 60,755 10.1% -------- ----- -------- ----- -------- ----- Total deposits........... $750,494 100.0% $670,246 100.0% $598,900 100.0% ======== ===== ======== ===== ======== =====
26 Total deposits of $750.5 million at June 30, 2001 represent an increase of $80.3 million or 12.0% as compared to total deposits of $670.2 million as of December 31, 2000. Noninterest-bearing deposits increased by 5.8% to $65.4 million at June 30, 2001 as compared to $61.8 million at December 31, 2000. Interest-bearing demand deposits decreased by 13.4% to $44.4 million as compared to $61.8 million at December 31, 2000. Money market accounts increased by $1.0 million to $298.1 million at June 30, 2001 as compared to $297.0 million at December 31, 2000. Certificates of deposits increased by $29.4 million to $237.5 million at June 30, 2001 as compared to $208.0 million at December 31, 2000. Brokered deposits increased by 118.4% to $95.7 million at June 30, 2001 as compared to $43.8 million at December 31, 2000. The Company continued to utilize brokered deposits during the second 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 the 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. A summary of all funds borrowed and outstanding at June 30, 2001, December 31, 2000 and June 30, 2000 is presented in the table below:
CURRENT JUNE 30, DECEMBER 31, JUNE 30, RATE(1) MATURITY 2001 2000 2000 ------- -------- ---- ---- ---- (DOLLARS IN THOUSANDS) FUNDS BORROWED: Borrowings under revolving line of credit............................. 4.93% 02/11/02 $ 250 $ 18,000 $ 15,500 Subordinated note..................... 4.57 02/11/07 5,000 5,000 5,000 FHLB floating rate advanced(2)........ 6.77 05/01/01 -- 10,000 10,000 FHLB fixed advance.................... 6.50 10/23/05 25,000 25,000 -- FHLB fixed advance.................... 6.49 11/13/01 2,000 2,000 -- FHLB fixed advance.................... 6.21 12/05/03 30,000 30,000 30,000 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.................... 5.40 08/27/00 -- -- 4,000 FHLB fixed advance.................... 5.33 07/22/02 1,000 -- -- FHLB fixed advance.................... 5.21 01/22/02 1,000 -- -- FHLB fixed advance.................... 5.02 03/06/02 1,000 -- -- FHLB fixed advance.................... 4.30 02/01/02 25,000 -- -- FHLB fixed advance.................... 4.21 05/13/02 1,000 -- -- Fed funds purchased................... 4.16 Daily 10,000 2,700 2,400 Demand repurchase agreements.......... 3.00 Daily 3,378 2,679 1,644 -------- -------- -------- Total funds borrowed............... $106,128 $ 96,879 $ 68,544 ======== ======== ======== - --------------------------------------- (1) Reflects the rate in effect as of June 30, 2001, or at maturity, if the advance matured prior to June 30, 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.
27 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 June 30, 2001, $19.1 million of the trust preferred securities was treated as Tier 1 capital. Stockholders' equity rose to $57.8 million at June 30, 2001, an increase of $3.6 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 $734,000 increase (net of tax) in the fair value of the available-for-sale investment portfolio at June 30, 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. The following table reflects the Company's consolidated measures of capital at June 30, 2001, December 31, 2000 and June 30, 2000: JUNE 30, DECEMBER 31, JUNE 30, 2001 2000 2000 ------- ----------- --------- Leverage ratio.................... 7.26% 5.54% 5.94% Tier 1 risk-based capital ratio... 9.17% 6.47% 6.84% Total risk-based capital ratio.... 10.98% 8.15% 8.73% Total equity to total assets...... 6.12% 6.53% 6.85% 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 June 30, 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 $4.5 million in the first six months of 2001 compared to a net inflow of $5.8 million a year earlier. Net cash outflows from investing activities were $118.7 million in the first six months of 2001 compared to a net cash outflow of $130.9 million a year earlier. Cash inflows from financing activities in the first six months of 2001 were $109.5 million compared to a net inflow of $104.3 million in the first six months of 2000. 28 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 12.8% of total deposits at June 30, 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. 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 June 30, 2001 and December 31, 2000:
JUNE 30, 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.............................. $390,118 $ 60,717 $182,609 $ 33,266 $666,710 Investments........................ 34,902 25,722 49,600 113,347 223,571 Federal funds sold................. 7,305 -- -- -- 7,305 -------- -------- -------- -------- -------- Total interest-earning assets...... $432,325 $ 86,439 $232,209 $146,613 $897,586 ======== ======== ======== ======== ======== INTEREST-BEARING LIABILITIES Interest-bearing demand............ $ -- $ -- $ -- $ 44,436 $ 44,436 Savings and money market........... 195,535 102,543 -- 4,180 302,258 Time deposits...................... 117,473 140,590 47,336 33,028 338,427 Funds borrowed..................... 18,628 27,500 60,000 20,000 126,128 -------- -------- -------- -------- -------- Total interest-bearing liabilities. $331,636 $270,633 $107,336 $101,644 $811,249 ======== ======== ======== ======== ======== CUMULATIVE Rate sensitive assets (RSA)........ $432,325 $518,764 $750,973 $897,586 Rate sensitive liabilities (RSL)... $331,636 $602,269 $709,605 $811,249 GAP (GAP=RSA-RSL).................. $100,689 $(83,505) $ 41,368 $ 86,337 RSA/RSL............................ 130.36% 86.13% 105.83% 110.64% RSA/Total assets................... 45.75% 54.90% 79.48% 94.99% RSL/Total assets................... 35.10% 63.74% 75.10% 85.86% GAP/Total assets................... 10.66% 8.84% 4.38% 9.14% GAP/Total RSA...................... 23.29% 16.10% 5.51% 9.62%
29
DECEMBER 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................................ $340,187 $ 50,032 $174,428 $ 34,782 $599,429 Investments.......................... 1,882 6,578 65,078 98,836 172,374 Federal funds sold................... 11,876 -- -- -- 11,876 -------- --------- -------- -------- -------- Total interest-earning assets........ $353,945 $ 56,610 $239,506 $133,618 $783,679 ======== ========= ======== ======== ======== INTEREST-BEARING LIABILITIES Interest-bearing demand.............. $ -- $ -- $ -- $ 51,301 $ 51,301 Savings and money market............. 192,462 104,510 72 3,063 300,107 Time deposits........................ 112,398 119,823 23,260 1,568 257,049 Funds borrowed....................... 38,379 2,000 56,500 -- 96,879 -------- --------- -------- -------- -------- Total interest-bearing liabilities... $343,239 $ 226,333 $ 79,832 $ 55,932 $705,336 ======== ========= ======== ======== ======== CUMULATIVE Rate sensitive assets (RSA).......... $353,945 $ 410,555 $650,061 $783,679 Rate sensitive liabilities (RSL)..... $343,239 $ 569,572 $649,404 $705,336 GAP (GAP=RSA-RSL).................... $ 10,706 $(159,017) $ 657 $ 78,343 RSA/RSL.............................. 103.12% 72.08% 100.10% 111.11% RSA/Total assets..................... 42.67% 49.49% 78.37% 94.48% RSL/Total assets..................... 41.38% 68.66% 78.29% 85.03% GAP/Total assets..................... 1.29% 19.17% 0.08% 9.44% GAP/Total RSA........................ 3.02% 38.73% 0.10% 10.00%
The following table shows the impact of an immediate 200 basis point change in interest rates as of June 30, 2001 and December 31, 2000. The effects are determined through the use of a simulation model based on the Company's earning asset and interest-bearing liability portfolios, assuming the size of these portfolios remains constant from the balance sheet date throughout the two-year measurement period. The simulation assumes that assets and liabilities accrue interest on their current pricing basis. Assets and liabilities then reprice based on their terms and remain at that interest rate through the end of the measurement period. The model attempts to illustrate the potential change in net interest income if the foregoing occurred.
JUNE 30, 2001 DECEMBER 31, 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.... -7.2% 8.0% -9.6% 9.3%
This table shows that if there had been an instantaneous parallel shift in the yield curve of +200 basis points on June 30, 2001 and December 31, 2000, the Company would suffer a decline in net interest income of 7.2% and 9.6%, respectively over each two-year period. Conversely, a shift of -200 basis points would increase net interest income 8.0% over a two-year horizon based on June 30, 2001 balances, as compared to 9.3% measured on the basis of the December 31, 2000 portfolio. Changes in the effect on net interest income from a 200 basis point movement at June 30, 2001, compared to December 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 net 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 with a two-year horizon. The 30 difference in the effect on net interest income at June 30, 2001 as compared to December 31, 2000 are due to the differences in the timing, balances, and current rates versus simulated rates of repricing assets and liabilities. Additionally, Management constantly monitors the interest rate environment and the Company's near term gap, ninety days or less. As shown in the Company's gap analysis, the Company is asset sensitive for this time period and would likely benefit from an increase in rates. 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, Missouri and Geneva, Illinois offices; 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. 31 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 (a) The Annual Meeting of Stockholders was held on April 26, 2001. (b) At the Annual Meeting of Stockholders, the following matters were submitted to and approved by a vote of Stockholders: (1) The election of five Class III directors for a term ending at the Annual Meeting of Stockholders to be held in 2004: Directors Votes For Votes Withheld --------- --------- -------------- Robert F. Coleman 4,083,084 17,894 James M. Guyette 4,033,884 67,094 Philip M. Kayman 4,083,084 17,894 Thomas F. Meagher 4,083,084 17,894 William J. Podl 4,083,084 17,894 (2) Ratification of the appointment of Arthur Andersen LLP as the Company's independent auditors for the fiscal year ending December 31, 2001: Votes For Votes Against Abstentions --------- ------------- ----------- 4,066,963 31,875 2,140 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] 32 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. (b) Filings on Form 8-K. (1) Current Report on Form 8-K dated April 23, 2001, filed with the SEC on April 23, 2001. 33 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: August 14, 2001 34 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. -----END PRIVACY-ENHANCED MESSAGE-----