-----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, V70dHbKSEtERGfz0SH2li8Oot9KJ9K5OcR1hHVHUmNkatch0wSRDATM+WU8+qT0h SRHHatGkag95oJp4lXnSbw== 0000950131-99-004608.txt : 19990811 0000950131-99-004608.hdr.sgml : 19990811 ACCESSION NUMBER: 0000950131-99-004608 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 19990803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIVATEBANCORP INC CENTRAL INDEX KEY: 0000889936 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363681151 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-83189 FILM NUMBER: 99676997 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 S-4/A 1 FORM S-4/A As filed with the Securities and Exchange Commission on August 3, 1999 Registration No. 333-83189 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to FORM S-4 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 PRIVATEBANCORP, INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 6022 36-3681151 (State or Other Jurisdiction of Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.) Ten North Dearborn Street, Chicago, Illinois 60602, (312) 683-7100 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Donald A. Roubitchek Secretary/Treasurer and Chief Financial Officer PrivateBancorp, Inc. Ten North Dearborn Street Chicago, Illinois 60602 (312) 683-7100 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copy To: Jennifer R. Evans, Esq. Vedder, Price, Kaufman & Kammholz 222 North LaSalle Street Chicago, Illinois 60601 (312) 609-7500 Approximate date of commencement of proposed sale to the public: Upon consummation of the Merger as described in the Registration Statement. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this form is being filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information contained in this prospectus is not complete and may be + +changed. We may not sell these securities until the registration statement + +is filed with the Securities and Exchange Commission becomes effective. This + +prospectus is not an offer to sell these securities and is not soliciting an + +offer to buy these securities in any state where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS Subject to completion; dated August 3, 1999 91,668 Shares of Common Stock [LOGO] PrivateBancorp, Inc. This prospectus relates to our offer to issue 91,668 shares of our common stock to the stockholders of Towne Square Financial Corporation, in connection with the proposed merger of Towne Square with and into PrivateBancorp, Inc. If the merger is approved by the requisite vote of Towne Square stockholders, upon consummation of the merger each issued and outstanding share of Towne Square common stock will be converted into the right to receive 15.278 shares of PrivateBancorp common stock. Our common stock is traded on the Nasdaq National Market under the symbol "PVTB." Investing in our common stock involves risks. See "Risk Factors" beginning on page 7. ------------- The shares of common stock that are being offered are not savings accounts or deposits or other obligations of a bank and are not insured by the Bank Insurance Fund or the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation or any governmental agency. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------- The date of this prospectus is __________, 1999. TABLE OF CONTENTS
Page INFORMATION ABOUT PRIVATEBANCORP............................................ ii WHERE YOU CAN GET MORE INFORMATION.......................................... ii SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........................... iii QUESTIONS AND ANSWERS ABOUT THE MERGER...................................... 1 SUMMARY..................................................................... 3 RISK FACTORS................................................................ 7 RECENT DEVELOPMENTS......................................................... 11 SELECTED CONSOLIDATED FINANCIAL DATA OF PRIVATEBANCORP...................... 12 SELECTED FINANCIAL DATA OF TOWNE SQUARE..................................... 14 MARKET PRICE AND DIVIDEND INFORMATION....................................... 15 PRIVATEBANCORP, INC......................................................... 16 TOWNE SQUARE................................................................ 17 COMPARATIVE PER COMMON SHARE DATA........................................... 18 PROPOSED MERGER............................................................. 19 TERMS OF THE MERGER......................................................... 21 LEGAL MATTERS............................................................... 33 EXPERTS..................................................................... 33 APPENDIX A--PROSPECTUS OF PRIVATEBANCORP, INC. DATED AS OF JUNE 30, 1999 APPENDIX B--DISSENTERS' RIGHTS UNDER DELAWARE LAW
i INFORMATION ABOUT PRIVATEBANCORP On April 27, 1999, we filed a registration statement on Form S-1 with the Securities and Exchange Commission in connection with the initial public offering of our common stock. The Form S-1, as amended, was declared effective on June 29, 1999. The prospectus dated June 30, 1999, which is a part of that registration statement is included as Appendix A to this prospectus, and information about our business, business risks, results of operations, strategic plans, management and principal stockholders, and our capital stock is provided in Appendix A. The entirety of the following sections of Appendix A constitute a part of this prospectus: "Risk Factors"; "Business"; "Management's Discussion and Analysis of Financial Conditions and Results of Operations"; "Management"; "Certain Transactions"; "Principal Stockholders"; "Supervision and Regulation"; "Description of Capital Stock"; and "Consolidated Financial Statements." All Towne Square stockholders are urged to read those sections of Appendix A in their entirety. WHERE YOU CAN GET MORE INFORMATION We have filed a registration statement on Form S-4 in connection with the common stock offered by this prospectus. PrivateBancorp has also filed a registration statement on Form S-1 and a Form 8-A with the SEC in connection with the initial public offering of our common stock, both of which became effective, as amended, on June 29, 1999. This prospectus omits certain information, exhibits and undertakings set forth in the registration statements we have filed with the SEC. Upon the effectiveness of our public offering, we became subject to the informational reporting requirements of Securities Exchange Act of 1934, and we are required to file reports, proxy statements and other information with the SEC. You may inspect and copy any of these materials upon payment of prescribed rates at the Public reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional office of the SEC at the following locations: Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This information is also available on the Internet at the SEC's web site. The address for the web site is: http://www.sec.gov. For further information about PrivateBancorp, reference is made to the registration statements and the exhibits thereto. Statements contained in this prospectus concerning the provisions of any contract, agreement or other document are not necessarily complete, and in each instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the registration statements for a full statement of the provisions thereof. Each such statement in this prospectus is qualified in all respects by such reference. ii SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS We make certain statements in this prospectus that are based upon our current expectations and projections about current events. These statements are not historical facts and may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from our use of the words "estimate," "project," "believe," "intend," "anticipate," "expect" and similar expressions. These forward-looking statements include: . statements of our goals, intentions and expectations; . statements regarding our business plans and growth strategies; . statements regarding the asset quality of our loan and investment portfolios; . estimates of our risks and future costs and benefits; and . statements regarding the effectiveness of our efforts to make our operations year 2000 compliant. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors which could affect the actual outcome of future events: . our ability to successfully integrate the Towne Square business; . fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuations and expense expectations; . adverse changes in the economy of the greater Chicago metropolitan area, our primary market, which might affect our business prospects and could cause credit-related losses and expenses; . the extent of continuing client demand for the high level of personalized service that is the key element of our private banking approach; . adverse developments in our loan and investment portfolios; . difficulties in identifying attractive acquisition opportunities and strategic partners that will complement our private banking approach; . competitive factors in the banking industry, such as the trend towards consolidation in our market; . changes in banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks like ours; and . our effectiveness and that of our suppliers of data processing equipment and services, government agencies, and other third parties in testing and implementing year 2000 compliant hardware, software and systems. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We discuss these uncertainties and others in "Risk Factors" as well as in those sections of the prospectus attached as Appendix A entitled "Risk Factors," "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." iii QUESTIONS AND ANSWERS ABOUT THE MERGER Q: Why are the two companies proposing to merge? A: Management believes the merger affords us an excellent opportunity to expand our franchise in what we believe is an attractive market, the community of St. Charles, Illinois. Because of the similarity of our banking strategies and the compatibility of our management, in lieu of pursuing the development of a de novo, or startup, bank in St. Charles, Towne Square has agreed to merge with us in a stock-for-stock transaction (the "Merger"). Instead of opening a new bank as Towne Square had been in the process of pursuing, the combined entity will establish a new office of PrivateBank in St. Charles. We believe there are significant opportunities for us in St. Charles and the surrounding Fox River Valley communities to grow our private banking business. Q: How will the Merger affect me? A: Under the terms of the Agreement and Plan of Reorganization (the "Merger Agreement"), at the closing Towne Square stockholders will receive 15.278 shares of PrivateBancorp Common Stock in exchange for each share of Towne Square Common Stock they own. PrivateBancorp will not issue fractional shares. Instead, we will round any fractional shares to the nearest whole share. Based on the shares of PrivateBancorp and Towne Square outstanding on the Record Date, upon completion of the Merger persons who are stockholders of PrivateBancorp immediately before the Merger will own approximately 97.9%, and former stockholders of Towne Square will own approximately 2.1%, of the common stock of PrivateBancorp. When the transaction is complete, Towne Square will cease to exist as a separate company. . If at Closing you own 1,000 shares of Towne Square Common Stock, then after the Merger you will receive 15,278 shares of PrivateBancorp Common Stock. The Board of Directors of Towne Square believes the Merger is advisable and recommends voting in favor of the proposed Merger. Q: Where can I get information about PrivateBancorp? A: A prospectus dated June 30, 1999, which was filed with the SEC in connection with the initial public offering of PrivateBancorp's common stock has been attached as Appendix A to this prospectus, and the following sections constitute a part of this prospectus: "Risk Factors"; "Business"; "Management's Discussion and Analysis of Financial Conditions and Results of Operations"; "Management"; "Certain Transactions"; "Principal Stockholders"; "Supervision and Regulation"; "Description of Capital Stock"; and "Consolidated Financial Statements." All Towne Square stockholders are urged to read those sections of the prospectus in their entirety. You should also read "Recent Developments" for information about PrivateBancorp's recently announced second quarter financial results and the anticipated financial impact of the Merger. Q: I am a Towne Square stockholder. Should I send in my stock certificates now? A: No. Before the Merger is completed, Towne Square stockholders must approve the transaction by a majority vote. Towne Square will separately furnish stockholders materials seeking the written consent of stockholders in lieu of a special meeting of stockholders. If the Merger is approved, you will then be sent written instructions for exchanging your stock certificates. 1 Q: Will Towne Square stockholders have appraisal rights? A: Under Delaware law, Towne Square stockholders do have a right to an appraisal of the value of their shares in connection with the merger. Stockholders of PrivateBancorp do not have such rights. Please see "Appraisal Rights" for a discussion of the procedures for exercising such appraisal rights. Q: Will I be entitled to future dividends? A: Holders of PrivateBancorp common stock are entitled to receive dividends that our Board of Directors may declare from time to time. We have paid quarterly dividends on our common stock since the third quarter of 1995, and we expect to continue to pay dividends in the future. However, there can be no assurance that we will continue to pay dividends in the future. Our declaration of dividends is discretionary and will depend on our earnings and financial condition, regulatory limitations, tax considerations and other factors. Pursuant to the terms of the Merger Agreement, Towne Square has agreed not to declare or pay any dividends prior to the effective date of the merger. Towne Square has not declared any dividends since its organization. Q: What are the tax consequences of the Merger to me? A: The exchange of shares by Towne Square stockholders in the Merger will be tax-free to Towne Square stockholders for United States federal income tax purposes. To review the tax consequences to Towne Square stockholders in greater detail, see page 26. Q: When do you expect the Merger to be completed? A: PrivateBancorp and Towne Square are working toward completing the Merger as quickly as possible, and to expect to close the Merger promptly following stockholder approval of the Merger and satisfaction of other closing conditions. PrivateBancorp and Towne Square anticipate completing the Merger early in August 1999. Who Can Help Answer My Questions? If you have more questions about the Merger, you should contact: Thomas N. Castronovo Towne Square Financial Corporation 1536 Fargo Boulevard Geneva, Illinois 60134 or Donald A. Roubitchek PrivateBancorp, Inc. Ten North Dearborn Street Chicago, Illinois 60602 Mr. Roubitchek, the Chief Financial Officer of PrivateBancorp, will also answer questions about PrivateBancorp. 2 SUMMARY The summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. You should read the entire prospectus, including the appendices, before making a decision to invest in our common stock. The Parties PrivateBancorp is a Delaware corporation headquartered in Chicago, Illinois. We are a bank holding company with one bank subsidiary, The PrivateBank and Trust Company, which we formed as a de novo, or start-up, bank in 1991. PrivateBank provides private banking and trust services primarily to affluent professionals, entrepreneurial individuals and their business interests. Our managing directors seek to build strong relationships with clients by emphasizing a consistently superior level of personalized service. We focus on the personal financial services needs of our clients as well as the banking needs of their various business and investment ventures. Clients are teamed with dedicated managing directors so they are dealing directly with our decision makers. In this way, we are able to tailor our loan products and other services to be highly responsive to the individual situation of each client. Since year-end 1995, we have grown our asset base at a compound annual rate of 27.3% to $431.1 million as of March 31, 1999. During the same period, loans have grown at a compound annual rate of 31.6% to $307.8 million, deposits at a compound annual rate of 27.0% to $384.5 million and trust assets under administration at a compound annual rate of 40.2% to $637.4 million. See Appendix A for a more complete description of our business and results of operations and see "Recent Developments" for information about our second quarter financial results. Our executive offices are located at The PrivateBank and Trust Company, Ten North Dearborn Street, Chicago, Illinois 60602. Our telephone number is (312) 683-7100. Towne Square Financial Corporation was formed as a Delaware corporation in March 1999 for the purpose of organizing a de novo, or start-up, bank to be located in St. Charles, Illinois. To date, Towne Square has raised $300,000 in seed capital from a group of six organizers and has developed and began to implement a business plan involving the formation of a local, community-owned bank dedicated to providing private banking services. Prior to entering into the Merger Agreement, Towne Square had taken a number of preliminary steps in connection with the organization of the bank. The executive offices of Towne Square are located at 1536 Fargo Boulevard, Geneva, Illinois 60134. The telephone number is (630) 208-1997. On June 24, 1999, PrivateBancorp entered into a definitive agreement to acquire Towne Square. Because of the similarity of our banking strategies, the compatibility of our management teams, and our shared commitment to personalized banking relationships, Towne Square has agreed to merge with us in a stock-for- stock transaction in lieu of pursuing its de novo strategy. We believe that the transaction affords us an excellent opportunity to expand our private banking business in a rapidly growing market. We will establish a new office of The PrivateBank and Trust Company, our banking subsidiary, in St. Charles, to be managed by Thomas Castronovo, one of the principal founders of Towne Square. Mr. Castronovo has 17 years of prior banking experience and has significant contacts in the St. Charles community. We believe that there are significant opportunities in St. Charles and the surrounding Fox River Valley communities for us to grow our private banking business. We filed the requisite branch applications with the regulators during late June 1999 and hope to open the St. Charles office during the fourth quarter of 1999. Terms of the Merger PrivateBancorp and Towne Square entered into the Merger Agreement, providing, among other things, for the merger of Towne Square with and into PrivateBancorp. The Merger must be approved by holders of the majority of outstanding shares of common stock of Towne Square. See "TERMS OF THE MERGER." 3 Each share of Towne Square common stock which is issued and outstanding immediately prior to the effective time of the Merger shall be converted pursuant to the Merger into and represent the right to receive 15.278 shares of PrivateBancorp Common Stock (the "Merger Consideration"). See "TERMS OF THE MERGER--Merger Consideration." Vote Required The affirmative vote of the holders of a majority of the shares of Towne Square issued and outstanding will be required to approve the Merger Agreement. Approval of the Merger Agreement is a condition to, and is required for, consummation of the Merger. As of June 30, 1999, 6,000 shares of Towne Square common stock were issued, outstanding and entitled to vote. It is anticipated that Towne Square will seek the written consent of stockholders to approve the Merger rather than holding a special meeting of stockholders. Written materials regarding stockholder approval will be furnished separately by Towne Square. Recommendation of the Towne Square Board of Directors The Towne Square Board unanimously recommends that stockholders vote FOR approval and adoption of the Merger Agreement. The Towne Square Board, after consideration of the terms and conditions of the Merger Agreement and other factors deemed relevant believe that the terms of the Merger Agreement are fair and that the Merger is in the best interests of Towne Square and its stockholders. See "PROPOSED MERGER--Towne Square's Reasons for the Merger and Board Recommendation." Interests of Certain Persons in the Merger Pursuant to the Merger Agreement, PrivateBancorp has agreed to enter into a three-year employment agreement with Thomas N. Castronovo, President of Towne Square, to be effective as of the consummation of the Merger. Mr. Castronovo was appointed a managing director of PrivateBank on June 24, 1999, and he is currently working for PrivateBank as an employee-at-will. In addition, certain stockholders of Towne Square have agreed to serve on an advisory board of PrivateBank, the banking subsidiary of PrivateBancorp, and will be compensated independently for their service in this capacity. As a condition to the Merger, PrivateBank will enter into a building lease with Towne Square Realty, L.L.C. for space in a building in St. Charles, Illinois. Towne Square Realty is an Illinois limited liability company whose owners are individuals who are also the stockholders of Towne Square. All of the outstanding shares of Towne Square are currently held by its six directors and officers. See "TERMS OF THE MERGER-- Building Lease," and "--Interests of Certain Persons in the Merger." Dissenters' Rights of Appraisal Holders of Towne Square Common Stock who dissent to the Merger will have a right to an appraisal value of their shares in connection with the Merger. "TERMS OF THE MERGER--Dissenters' Rights of Appraisal." Federal Income Tax Consequences The Merger is structured in a manner intended to qualify as a tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended. Accordingly, as a result of the Merger, Towne Square stockholders will not recognize any income, gain or loss by reason of receiving shares of PrivateBancorp common stock in the Merger, and the shares of PrivateBancorp common stock which Towne Square stockholders are entitled to receive in the Merger will have the same tax basis and holding period as the respective shares of Towne Square common stock surrendered in exchange therefor. As a condition precedent to the consummation of the Merger, PrivateBancorp and Towne Square must each receive an opinion from Vedder, Price, Kaufman & Kammholz, counsel to PrivateBancorp, dated as of the closing date regarding the federal income tax consequences of the Merger. See "TERMS OF THE MERGER--Certain Federal Income Tax Consequences of the Merger." 4 Accounting Treatment Because Towne Square is not yet actively engaged in the business of banking, the Merger will not be accounted for as a business combination. Rather, at the time of closing, PrivateBancorp will incur a one-time, non- recurring charge to earnings in an amount equal to the excess of the value of the PrivateBancorp common stock issued in the Merger over the net assets of Towne Square on the date of closing. See "TERMS OF THE MERGER--Accounting Treatment." Conditions to the Merger Consummation of the Merger is subject to certain conditions, including, among others, the approval of the Merger by the affirmative vote of holders of a majority of the shares of Towne Square Common Stock entitled to vote thereon; the continued effectiveness of the Registration Statement of which this prospectus forms a part; receipt by both parties of an opinion of Vedder, Price, Kaufman & Kammholz, counsel to PrivateBancorp, dated as of the closing date as to the qualification of the Merger as a tax-free reorganization for federal income tax purposes; the absence of any injunction or legal restraint prohibiting consummation of the Merger; and certain other customary closing conditions. There can be no assurance as to when and if all of the conditions will be satisfied (or, where permissible, waived) or that the Merger will be consummated. See "TERMS OF THE MERGER--Conditions to the Merger." Termination The Merger Agreement provides that it may be terminated by either party, whether before or after receipt of stockholder approval, under certain conditions prior to the effective date of the Merger. In the event that the Merger Agreement is terminated, each party has agreed to bear and pay all costs and expenses incurred by it or on its behalf. See "TERMS OF THE MERGER--Merger Consideration"; "--Conditions to the Merger"; "--Termination, Amendment and Waiver." Lease for 24 South Second Street, St. Charles, Illinois As a condition to the consummation of the Merger Agreement, The PrivateBank and Trust Company, the banking subsidiary of PrivateBancorp, shall enter into a building lease with Towne Square Realty, L.L.C. for approximately 6,100 square feet of space on the first floor of the building located at 24 South Second Street, St. Charles, Illinois. PrivateBank shall utilize this space for the operations of its St. Charles office. The term of the lease shall be ten years and three months, commencing August 1, 1999. Towne Square Realty is an Illinois limited liability company whose owners are individuals who are also the stockholders of Towne Square. See "TERMS OF THE MERGER--Building Lease." Employment Agreement and Non-Competition and Support Agreement with Thomas N. Castronovo As a condition to the consummation of the Merger Agreement, PrivateBank will enter into an Employment Agreement and a Non-Competition and Support Agreement with Thomas N. Castronovo, President of Towne Square. The Employment Agreement provides, among other things, that Mr. Castronovo will receive a base salary of $112,000, options to purchase 7,000 shares of common stock, which will be granted under PrivateBancorp's Stock Incentive Plan at a contemplated exercise price equal to the initial public offering price of $18.00 per share, and an award of 3,000 shares of restricted stock. Mr. Castronovo will also be entitled to a bonus of $25,000 for the 1999 calendar year, and a signing bonus in the amount of $150,000, payable in two installments, one-half at the time the St. Charles office is opened and the other half six months later. In addition, PrivateBancorp has provided Mr. Castronovo with an interest-free loan in the amount of $175,000 for the purchase of shares of PrivateBancorp common stock in its initial public offering. This loan shall be repaid with the proceeds of Mr. Castronovo's 1999 bonus and signing bonus. Under the terms of the Non- Competition and Support Agreement, Mr. Castronovo (a) will use his best efforts to support and develop the business of PrivateBank, and (b) during his term of employment with PrivateBank, and for a period of one year after, or for so long as Mr. Castronovo receives severance payments from PrivateBank, will not, for his own account, or on behalf of any entity located within ten miles of the St. Charles office of PrivateBank, solicit any client or employee of PrivateBancorp. See "Terms of the MERGER--Interests of Certain Persons in the Merger." 5 Advisory Board and Support Agreements As a condition to the consummation of the Merger Agreement, certain stockholders of Towne Square will enter into Advisory Board and Support Agreements with PrivateBank which provide that such persons (a) will serve on an advisory board to be established in connection with the formation of the St. Charles office of PrivateBank; (b) will use their best efforts to support and develop the business of the St. Charles office; and (c) during their service on the advisory board, and for a period of at least one year after, will not, for their own accounts, or on behalf of any entity located within ten miles of the St. Charles office of PrivateBank, solicit any client or employee of PrivateBank. The advisory board will also include two additional prominent business people or professionals from the St. Charles area to be mutually selected by PrivateBancorp and Towne Square. See "TERMS OF THE MERGER-- Interests of Certain Persons in the Merger." Stock Transfer Restriction Agreements As a condition to the Merger Agreement, the stockholders of Towne Square shall enter into Stock Transfer Restriction Agreements which provide that (a) an aggregate of approximately 54.5%, or 49,998, of the shares of the common stock to be received in the Merger will be restricted from resale for a period of one year from the effective date of the Merger, and (b) the 41,670 remaining shares will be restricted from resale for a period of three years from the effective date. See "TERMS OF THE MERGER--Interests of Certain Persons in the Merger." Market and Market Prices PrivateBancorp's common stock has been listed on the Nasdaq National Market since June 30, 1999, the first date of trading in connection with its initial public offering. There was no established public trading market for the common stock at the time the proposed Merger was announced publicly. The high and low closing prices of the common stock during the period from June 30, 1999 to July 14, 1999 were $21.00 and $18.00, respectively. On July 14, 1999, the last reported sale price of the common stock was $18.00. The common stock of Towne Square is not traded publicly. As of June 30, 1999, PrivateBancorp had 491 stockholders of record. As of the same date, Towne Square had six stockholders of record. Comparison of Stockholder Rights See "Comparison of Rights of Stockholders of PrivateBancorp and Stockholders of Towne Square" for a summary of material differences between the rights of holders of PrivateBancorp common stock and Towne Square Common Stock. Risk Factors See "Risk Factors" for a discussion of certain factors pertaining to the Merger and the business of PrivateBancorp. 6 RISK FACTORS Investing in our common stock involves risk. The discussion below describes the most significant risk factors related to the offering. You should carefully consider the risks and uncertainties described below and elsewhere in this prospectus, and in the prospectus relating to the initial public offering of our common stock, attached as Appendix A, before deciding to invest in our common stock. If any of these risks or uncertainties actually occur, our business could be adversely affected. In that event, the trading price of our common stock could decline and you could lose all or a part of your investment. This prospectus also contains statements that involve risks and uncertainties which may constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including those described below and elsewhere throughout the prospectus. We depend on key personnel. We are a relatively young organization and are relationship-driven. Our growth and development to date have depended in large part on the efforts of our eleven managing directors, who have primary contact with our clients and are extremely important in maintaining our personalized relationships with our client base and increasing our market presence. The unexpected loss of services of one or more of our key employees could have a material adverse effect on our operations. We have entered into employment contracts with two of our managing directors, Ralph B. Mandell, our Chairman, President and Chief Executive Officer, as well as a co-founder of our company, and Donald A. Roubitchek, our Secretary/Treasurer and Chief Financial Officer. These agreements are effective beginning July 1, 1999. We are dependent on the continued services of Messrs. Mandell and Roubitchek in their roles. We have not entered into employment agreements with any of our other managing directors, nor have we entered into any key man life insurance policies. One of our executive officers, Vice Chairman Caren L. Reed, in addition to his client responsibilities, serves as our chief credit officer. Mr. Reed has indicated that he intends to retire from active management in December 1999. Mr. Reed has agreed to continue to serve as our chief credit officer until we can name a successor so he can assist in the transition process. Our strong credit quality experience to date could be adversely impacted by Mr. Reed's retirement. We may not be able to implement aspects of our growth strategies. A key component of our growth strategy involves the expansion of our business and operations, possibly through the addition of new product lines and the acquisition or establishment of new offices. Implementing this aspect of our growth strategy depends in part on our ability to successfully identify acquisition opportunities and strategic partners that will complement our private banking approach and to successfully integrate their operations with ours. To open new offices, we must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships to make these new facilities cost-effective. We have entered into the Merger Agreement as part of this growth strategy, but we cannot be sure that the St. Charles office will prove to be profitable. We also cannot be sure that we will be able to identify other suitable opportunities for similar expansion, or that if we do, we will be able to successfully integrate these new operations into our business. If we are unable to effectively implement our growth strategies, our business may be adversely affected. Since our business is concentrated in the Chicago metropolitan area, a downturn in the Chicago economy may adversely affect our business. Currently, PrivateBank's lending and deposit gathering activities are concentrated primarily in the greater Chicago metropolitan area. Our success depends on the general economic condition of Chicago and its surrounding areas. Although currently the economy in these areas is favorable, we do not know whether such conditions will 7 continue. Adverse changes in the economy could reduce our growth rate, impair our ability to collect loans, and generally affect our financial condition and results of operations. Our future success is dependent on our ability to compete effectively in the highly competitive banking industry We face substantial competition in all phases of our operations from a variety of different competitors. To date, we have grown our business successfully by focusing on our market niche and emphasizing the high level of service and responsiveness desired by our clients. While it is our intention to continue to operate in our targeted niche, we compete for loans, deposits and other financial services in our geographic market with other commercial banks, thrifts, credit unions and brokerage houses operating in the greater Chicago area. Many of our competitors offer services which we do not, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured, state-chartered banks and national banks. As a result, these nonbank competitors have advantages over us in providing certain services. Our business may be adversely affected by the highly regulated environment in which we operate. We are subject to extensive federal and state legislation, regulation, examination and supervision. This regulation and supervision is primarily intended to protect our clients and their deposits, and not our stockholders. Recently enacted, proposed and future legislation and regulations have had, will continue to have, or may have a material adverse effect on our business and operations. Our success depends on our continued ability to maintain compliance with these regulations, including those pertaining to the Community Reinvestment Act. Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions. We cannot predict what restrictions may be imposed upon us with future legislation. See "Supervision and Regulation." We may be adversely affected by interest rate changes. Our operating results are largely dependent on our net interest income. When interest rates are rising, the interest income we earn on loans and interest-bearing investments may not increase as rapidly as the interest expense paid on our liabilities. As a result, our earnings may be adversely affected. We measure the impact of interest rate changes on our income statement through the use of gap analysis which is a way to measure and manage sensitivity to interest rate fluctuations. The amount of earning assets that reprice or mature during a given time interval is compared to the amount of interest-bearing liabilities that reprice or mature during the same time period. A bank which matches perfectly the maturities of its assets and liabilities has a "gap" position of 1.00. In this instance, under the gap analysis changes in interest rates would have no effect on net interest income because interest income and interest expense change in like amounts. There is an interest rate "gap" if the amounts of repricing assets and liabilities differ for the given time period. A positive gap, or a position greater than 1.00, indicates more assets than liabilities will reprice in that time period, while a negative gap, or a position less than 1.00, indicates more liabilities than assets will reprice. A bank with a positive gap position would benefit from rising interest rates because assets will reprice faster than liabilities, improving net interest income, but net interest income would be reduced when interest rates are falling. Conversely, a bank would benefit from a negative gap position in a falling interest rate environment. We generally operate within guidelines set by our asset/liability policy for maximum interest rate risk exposure, and attempt to maximize our returns within an acceptable degree of risk. Our policy calls for maintaining a gap position at the one year horizon of between 0.70 and 1.30 to allow us to take advantage of anticipated interest rate environments, but within reasonable maximum risk exposures. Given the current interest rate environment and relatively flat yield curve, however, we have recently been operating with a gap position at the low end of our policy limits in light of the available business opportunities. At March 31, 1999, our gap position was 0.697, slightly below our policy limit, reflecting borrowers' general preference for fixed-rate loans or loans adjusting over longer time intervals, and depositors' general preference for shorter term certificates of deposits. Generally speaking, a short-term rise in interest rates will hurt our earnings more than if we were operating within our policy guidelines. 8 We may be adversely affected by government monetary policy. The banking industry is affected by the monetary policies of the Federal Reserve System, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. In setting its policy, the Federal Reserve System may utilize techniques such as the following: . engaging in open market transactions in United States government securities; . setting the discount rate on member bank borrowings; and . determining reserve requirements. These techniques may have an adverse effect on our deposit levels, net interest margin, loan demand or our business and operations. Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio. Lending money is a substantial part of our business. However, every loan we make carries a certain risk of non-payment. This risk is affected by, among other things: . the credit risks of a particular borrower; . changes in economic and industry conditions; . the duration of the loan; and . in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral. We maintain an allowance for loan losses which we believe is appropriate to provide for any potential losses in our loan portfolio. The amount of this allowance is determined by management through a periodic review and consideration of several factors, including: . an ongoing review of the quality, size and diversity of our loan portfolio; . evaluation of non-performing loans; . historical loan loss experience; and . the amount and quality of collateral, including guarantees, securing the loans. Although we believe our loan loss allowance is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses, and there can be no assurance that our allowance will be adequate. Excess loan losses could have a material adverse effect on our financial condition and results of operations. Regulatory restrictions on dividend payments from our subsidiary may affect our ability to pay dividends to our stockholders. We have paid dividends to our stockholders on a regular basis. Although we intend to continue to pay dividends, our ability to do so may be affected by many factors. While in the past we have had available cash at the holding company level to fund dividend payments, we anticipate that in the future we will rely on income earned by PrivateBank as the primary source for dividend payments. PrivateBank is subject to certain restrictions on the amount of dividends it may pay to us without regulatory approval. 9 Our computer systems could experience a security breach. As a service to our clients, we offer PrivateBank Access, our Internet PC banking product. Use of this service involves the transmission of confidential information over public networks. We cannot be sure that advances in computer capabilities, new discoveries in the field of cryptography or other developments will not result in a compromise or breach in the commercially available encryption and authentication technology that we use to protect our clients' transaction data. If we were to experience such a breach or compromise, we could suffer losses and our operations could be adversely affected. We depend on third parties for our data processing needs; and we are in the process of converting to a new provider for our loan and deposit processing requirements. We rely on outside organizations to handle virtually all of the data processing aspects of our business. If these outside organizations experience any type of computer or personnel failure and are unable to properly input or process our information, our operations may be adversely affected. Situations which might impair the ability of our outside data processors to meet our needs include: . computer system failure; . loss of the personnel to handle the requirements of all of its customers; . loss, misapplication or corruption of our data; and . lack of preparation for the "year 2000 issue." If any of these outside organizations cease doing business or are unwilling to renew our contract, we may be adversely affected. In addition, we are currently in the process of transferring our loan and deposit processing requirements to a new third party provider. While we anticipate completing this transition during the third quarter of 1999, we may experience some delays in this process which could have an adverse impact on our operations. We rely on the services of outside investment managers. In our trust and asset management business, which currently is the source of substantially all of our fee income, we do not provide investment management services directly through our own personnel. Rather, we rely on selected outside investment managers to provide investment advice and asset management services to our clients. We cannot be sure that we will be able to maintain these arrangements on favorable terms. Also, many of the investment managers with whom we work are affiliated with our competitors in the financial services field. We cannot be sure that our investment managers will continue to work with us in these arrangements. The loss of any of these outside investment managers may impact our ability to provide our clients with quality service or certain types of portfolio management without incurring the cost of replacing them. Our business may be negatively impacted by the year 2000 issue. The "year 2000 issue", a critical issue in the banking industry and the economy as a whole, has emerged because many existing application software programs and systems use only the last two digits in referring to a year. Therefore, these computer programs do not properly recognize a year beginning with "20" instead of the familiar "19." If not corrected, many computer applications and other technology-based systems could fail or create erroneous results. The effects of this problem will vary from system to system, and the extent of the potential impact of the year 2000 problem is not yet known. The year 2000 problem may adversely affect a bank's operations. We could experience interruptions in PrivateBank's business and suffer significant losses if we, or a supplier or vendor with whom PrivateBank contracts, are unable to achieve year 2000 readiness before January 1, 2000. We are in the process of working with our third party service providers and software vendors to assure that both our holding company and PrivateBank are prepared for the year 2000. 10 Certain provisions of Delaware law and our charter and by-laws may discourage or prevent a takeover of our company and reduce any takeover premium. Our Amended and Restated Certificate of Incorporation, our By-laws and Delaware law all contain provisions that could discourage potential acquisition proposals, or delay or prevent a change in the control of the Company. Provisions in our charter and By-laws designed to discourage or prevent a takeover include: . staggered terms for our directors, which makes it difficult to replace the entire board; . the ability of the Board of Directors to issue shares of preferred stock, which could dilute the voting power and equity interest of holders of the common stock; and . the requirement that holders of 66 2/3% of our outstanding common stock must approve any change of these anti-takeover provisions. Stockholders sometimes realize a significant premium in their stock price when an offer is made to purchase a company. Because we have adopted these provisions, such offers will likely be discouraged, and our stockholders may lose the benefit of any potential premium. There are also state and federal laws which regulate direct and indirect takeover attempts of financial institutions. Our directors and officers may have significant influence on how our common stock is voted. Our directors and executive officers will beneficially own approximately 28.4% of the outstanding shares of our common stock at the closing of the Merger. If our directors and executive officers vote together, they could influence the outcome of certain corporate actions requiring stockholder approval, including the election of directors and the approval or non-approval of significant corporate transactions, such as the merger or sale of all or substantially all of our assets. RECENT DEVELOPMENTS On July 29, 1999, PrivateBancorp reported net income for the quarter ended June 30, 1999 of $1.1 million, or $0.30 per fully diluted share, an increase of 58.4%, or 50.0% per fully diluted share, over the second quarter of 1998. Net income for the six months ended June 30, 1999 was $2.1 million, or $0.58 per fully diluted share, an increase of 68.2%, or 56.8% per fully diluted share, over the same period in 1998. Net interest income totaled $3.6 million in the second quarter of 1999, an increase of 25.11% over the second quarter of 1998. Average earning assets during the period were $417.6 million. The net interest margin averaged 3.61% in the second quarter of 1999, versus 3.76% in the prior year's second quarter. The decrease is attributable to tighter loan spreads due to competitive forces and general interest rate compression partially offset by a higher percentage of loans to total assets. Noninterest income increased by $196,000, or 61.3%, in the second quarter of 1999 versus the second quarter of 1998. This increase was primarily driven by a 66.0% increase in trust fee income that was in turn a result of a 22.2% increase in trust assets under administration and a restructuring of fee agreements. At June 30, 1999, nonperforming loans as a percentage of total loans were 0.24%, versus 0.02% at June 30, 1998. Charge-offs were negligible. The provision for loan losses was $213,000 in the second quarter of 1999 versus $90,000 in the second quarter of 1998. Upon completing the Towne Square acquisition, scheduled for early August 1999, PrivateBancorp will incur a one-time charge to earnings of approximately $1.3 million, an amount equal to the excess of the value of stock issued over the net assets of Towne Square on the date of closing. This charge is nondeductible for tax purposes. See "TERMS OF THE MERGER -- Accounting Treatment; Financial Impact of the Merger." On June 28, 1999, PrivateBancorp common stock split two-for-one. On June 30, 1999, PrivateBancorp completed an initial public offering of 900,000 shares of its common stock, priced at $18 per share. Subsequent to the offering, the shares were listed on the Nasdaq National Market System under the symbol PVTB. The closing date of the offering was July 6, 1999, when these shares were funded. On July 26, 1999, an additional 135,000 shares were funded at the offering price pursuant to the underwriters' exercise of their overallotment option. The following table sets forth selected consolidated financial and other data of PrivateBancorp for the three and six month periods ended June 30, 1999 and June 30, 1998 and should be read in conjunction with our audited Financial Statements and the Notes thereto, included in Appendix A hereto.
Three Months Six Months Ended June 30 Ended June 30 ------------- ------------- 1999 1998 1999 1998 ---- ---- ---- ---- (dollars in thousands, except per share data) Selected Statement of Income Data: Interest income: Loans, including fees.................. $6,218 $4,875 $11,854 $ 9,499 Federal funds sold and interest-bearing deposits............................ 33 413 81 911 Securities.............................. 1,294 698 2,864 1,425 ------ ------ ------- ------- Total interest income............... 7,545 5,986 14,799 11,835 ------ ------ ------- ------- Interest expense.......................... 3,948 3,111 7,786 6,207 ------ ------ ------- ------- Net interest income................. 3,597 2,875 7,013 5,628 Provision for loan losses................. 213 90 498 181 ------ ------ ------- ------- Net interest income after provision for loan losses.................. 3,384 2,785 6,515 5,447 ------ ------ ------- ------- Non-interest income: Banking and trust services.............. 512 320 908 593 Securities gains........................ 4 -- 50 -- ------ ------ ------- ------- Total non-interest income............. 516 320 958 593 ------ ------ ------- ------- Non-interest expense: Salaries and employee benefits.......... 1,088 904 2,203 2,006 Occupancy............................... 373 333 725 667 Other non-interest expense.............. 918 717 1,706 1,281 ------ ------ ------- ------- Total non-interest expense............ 2,379 1,954 4,634 3,954 ------ ------ ------- ------- Income before income taxes............ 1,521 1,151 2,839 2,086 Income tax provision.................. 409 449 700 814 ------ ------ ------- ------- Net income............................ $1,112 $ 702 $ 2,139 $ 1,272 ====== ====== ======= ======= Per Share Data: Basic earnings......................... $ 0.32 $ 0.21 $ 0.62 $ 0.39 Diluted earnings....................... 0.30 0.20 0.58 0.37 Dividends.............................. 0.03 0.02 0.05 0.04 Book value (at end of period).......... 8.68 7.87 Capital Ratios: Total equity to total assets........... 6.83 8.14 Total risk-based capital ratio......... 10.77 11.85 Tier 1 risk-based capital ratio........ 9.63 10.61 Leverage ratio......................... 7.63 8.63
June 30, 1999 December 31, 1998 -------------- ------------------ Selected Balance Sheet Data: (dollars in thousands) Assets: Cash and due from banks................ $ 9,896 $ 11,895 Federal funds sold..................... 995 3,619 Investment securities.................. 89,026 116,891 Loans, net of unearned discount........ 335,306 281,965 Less: Allowance for loan losses...... (3,903) (3,410) -------- -------- Net loans............................ 331,403 278,555 -------- -------- Premises and equipment................. 1,477 1,588 Other assets........................... 5,372 3,760 -------- -------- Total assets......................... $438,169 $416,308 ======== ======== Liabilities and Stockholders' Equity: Non-interest bearing deposits.......... $ 30,462 $ 39,490 Interest bearing demand deposits....... 30,091 26,508 Savings and money market deposits...... 176,482 170,713 Time deposits.......................... 137,997 128,283 -------- -------- Total deposits....................... 375,032 364,994 Funds borrowed......................... 31,000 20,000 Other liabilities...................... 2,171 2,040 -------- -------- Total liabilities.................... 408,203 387,034 Stockholders' equity...................... 29,966 29,274 -------- -------- Total liabilities and stockholders' equity............................. $438,169 $416,308 ======== ========
11 SELECTED CONSOLIDATED FINANCIAL DATA OF PRIVATEBANCORP The following table sets forth selected consolidated financial and other data of PrivateBancorp. The selected statements of condition and statements of income data, insofar as they relate to the five years in the five-year period ended December 31, 1998, have been derived from our consolidated financial statements. The following information should be read in conjunction with our audited Consolidated Financial Statements and the Notes thereto, included in Appendix A hereto. The selected financial data for the three months ended March 31, 1999 and 1998, are derived from our unaudited interim consolidated financial statements. Such unaudited interim financial statements include all adjustments (consisting only of normal, recurring accruals) that we consider necessary for a fair presentation of the financial position and the results of operations as of the dates and for the periods indicated. Information for any interim period is not necessarily indicative of results that may be anticipated for the full year.
Three Months Ended March 31, Year Ended December 31, ------------------- ----------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ------------------- ----------------------------------------------------- (dollars in thousands, except per share data) Selected Statement of Income Data: Interest income: Loans, including fees.................. $ 5,636 $ 4,624 $ 19,619 $ 16,729 $ 12,152 $ 10,053 $ 6,418 Federal funds sold and interest-bearing deposits............................ 48 498 2,181 875 1,392 1,149 358 Securities............................. 1,570 727 3,492 2,519 2,396 1,700 1,265 -------- -------- -------- -------- -------- -------- -------- Total interest income............... 7,254 5,849 25,292 20,123 15,940 12,902 8,041 -------- -------- -------- -------- -------- -------- -------- Interest expense: Interest-bearing demand deposits....... 142 121 487 377 305 276 210 Savings and money market deposit accounts............................ 1,800 1,629 6,651 5,880 4,613 3,484 2,139 Other time deposits.................... 1,752 1,346 6,155 3,821 2,973 2,620 782 Funds borrowed......................... 144 -- 19 3 143 50 62 -------- -------- -------- -------- -------- -------- -------- Total interest expense.............. 3,838 3,096 13,312 10,081 8,034 6,430 3,193 -------- -------- -------- -------- -------- -------- -------- Net interest income................. 3,416 2,753 11,980 10,042 7,906 6,472 4,848 Provision for loan losses................ 285 91 362 603 524 930 305 -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses................... 3,131 2,662 11,618 9,439 7,382 5,542 4,543 -------- -------- -------- -------- -------- -------- -------- Non-interest income: Banking and trust services............. 442 273 1,281 1,210 911 674 414 Securities gains....................... -- -- 40 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total non-interest income........... 442 273 1,321 1,210 911 674 414 -------- -------- -------- -------- -------- -------- -------- Non-interest expense: Salaries and employee benefits......... 1,115 1,102 4,077 3,902 3,411 2,749 2,054 Occupancy.............................. 352 334 1,379 1,274 990 946 745 Data processing........................ 131 120 508 396 334 282 262 Marketing.............................. 153 139 567 500 424 296 272 Amortization of organization costs..... -- -- -- -- 23 280 280 Professional fees...................... 178 94 561 448 326 284 253 Insurance.............................. 41 30 134 115 82 238 342 Other expense.......................... 285 181 864 627 508 434 321 -------- -------- -------- -------- -------- -------- -------- Total non-interest expense.......... 2,255 2.000 8,090 7,262 6,098 5,509 4,529 -------- -------- -------- -------- -------- -------- -------- Income before income taxes.......... 1,318 935 4,849 3,387 2,195 707 428 Income tax provision.................. 291 365 1,839 1,242 762 (403) 3 -------- -------- -------- -------- -------- -------- -------- Net income.......................... $ 1,027 $ 570 $ 3,010 $ 2,145 $ 1,433 $ 1,110 $ 425 ======== ======== ======== ======== ======== ======== ======== Per Share Data: Basic earnings......................... $ 0.30 $ 0.18 $ 0.91 $ 0.69 $ 0.49 $ 0.39 $ 0.17 Diluted earnings....................... 0.28 0.17 0.86 0.65 0.47 0.38 0.16 Dividends.............................. 0.03 0.02 0.08 0.07 0.07 0.03 -- Book value (at end of period).......... 8.71 7.86 8.53 7.67 6.84 6.47 6.13
12
Three Months Ended March 31, Year Ended December 31, ------------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (dollars in thousands, except per share date) Selected Financial Condition Data (at end of period): Total securities/(1)/..................... $105,136 $ 48,322 $116,891 $ 65,383 $ 44,617 $ 38,296 $ 24,669 Total loans............................... 307,766 223,746 281,965 218,495 171,343 126,069 98,380 Total assets.............................. 431,055 331,924 416,308 311,872 246,734 196,917 141,826 Total deposits............................ 384,454 304,660 364,994 285,773 222,571 176,868 122,925 Funds borrowed............................ 10,000 -- 20,000 -- 3,000 700 1,000 Total stockholders' equity................ 30,054 25,400 29,274 24,688 20,222 18,445 17,471 Trust assets under administration......... $637,422 $524,019 $611,650 $469,646 $328,662 $212,456 $168,872 Selected Financial Ratios and Other Data/(2)/: Performance Ratios: Net interest margin/(3)/................ 3.57% 3.65% 3.61% 4.01% 3.73% 3.95% 4.09% Net interest spread/(4)/................ 3.02 2.96 2.98 3.31 3.03 3.16 3.42 Non-interest income to average assets... 0.42 0.34 0.37 0.45 0.42 0.40 0.35 Non-interest expense to average assets.. 2.13 2.49 2.29 2.71 2.79 3.31 3.79 Net overhead ratio/(5)/................. 1.71 2.15 1.91 2.26 2.38 2.90 3.44 Efficiency ratio/(6)/................... 58.45 67.65 60.82 64.53 69.17 77.09 86.07 Return on average assets/(7)/........... 0.97 0.71 0.85 0.80 0.66 0.67 0.36 Return on average equity/(8)/........... 13.84 9.11 11.27 9.49 7.38 6.22 2.94 Dividend payout ratio................... 8.36 10.63 8.74 10.13 12.88 8.03 -- Asset Quality Ratios: Non-performing loans to total loans..... 0.12 0.32 0.36 0.24 0.65 1.90 0.15 Allowance for possible loan losses to: total loans........................... 1.20 1.40 1.21 1.40 1.43 1.55 1.04 non-performing loans.................. 1,025 440 336 578 220 82 711 Net charge-offs to average total loans.. -- -- -- -- 0.02 -- 0.01 Non-performing assets to total assets... 0.08 0.21 0.24 0.17 0.45 1.22 0.10 Balance Sheet Ratios: Loans to deposits....................... 80.1 73.4 77.3 76.5 77.0 71.3 80.0 Average interest-earning assets to average interest-bearing liabilities.. 114.2 117.0 116.4 117.7 118.6 120.7 123.8 Capital Ratios: Total equity to total assets............ 6.97 7.65 7.03 7.92 8.20 9.37 12.32 Total risk-based capital ratio.......... 11.21 11.47 11.53 11.75 12.21 14.56 19.58 Tier 1 risk-based capital ratio......... 10.05 10.22 10.40 10.50 10.96 13.31 18.49 Leverage ratio.......................... 7.53 7.87 7.88 8.70 8.71 9.76 13.03
- ---------------- (1) For all periods after 1994, the entire securities portfolio was classified "Available for Sale." For 1994, the entire securities portfolio was classified "Held to Maturity." (2) Certain financial ratios for interim periods have been annualized. (3) Net interest income divided by average interest-earning assets. (4) Yield on average interest-earning assets less rate on average interest- bearing liabilities. (5) Non-interest expense less non-interest income divided by average total assets. (6) Non-interest expense divided by the sum of net interest income plus non- interest income. (7) Net income divided by average total assets. (8) Net income divided by average common equity. 13 SELECTED FINANCIAL DATA OF TOWNE SQUARE The following table sets forth certain selected financial data of Towne Square as of June 30, 1999, and for the period from its inception until June 30, 1999.
June 30, 1999 ------------- (dollars in thousands) Selected Balance Sheet Data: Assets Cash................................................. $233 ---- Total assets....................................... 233 ==== Liabilities and Stockholders' Equity: Liabilities Total liabilities.................................. $ 10 ---- Stockholders' equity Common stock, $0.01 par value per share; 1,000,000 authorized; 6,000 shares issued and outstanding.... 300 Surplus.............................................. -- Retained earnings (deficit).......................... (77) ---- Total stockholders' equity......................... 223 ---- Total liabilities and stockholders' equity......... $233 ====
Three Months Ended June 30, 1999 ------------- Selected Statement of Income Data: Income Interest income........................................ $ 2,378 -------- Expenses Salaries and employee benefits......................... 21,138 Payroll taxes.......................................... 12,648 Legal fees............................................. 20,000 Accounting fees........................................ 5,000 Marketing and promotion fees........................... 7,437 Professional fees...................................... 7,363 Operating expenses..................................... 867 Other.................................................. 5,000 -------- Total expenses....................................... 79,453 -------- Net income (loss).................................... (77,075) -------- Earnings (loss) per share................................ $ (12.85) ========
14 MARKET PRICE AND DIVIDEND INFORMATION PrivateBancorp Holders of our common stock are entitled to receive dividends that our Board of Directors may declare from time to time. We may only pay dividends out of funds which are legally available for that purpose. Because our consolidated net income consists largely of the net income of PrivateBank, our ability to pay dividends to our stockholders may become dependent upon our receipt of dividends from PrivateBank. PrivateBank's ability to pay dividends is regulated by banking statutes. See "Supervision and Regulation -- Bank Regulation -- Dividends." Our declaration of dividends is discretionary and will depend on our earnings and financial condition, regulatory limitations, tax considerations, and other factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity." We have paid quarterly dividends on our common stock since the third quarter of 1995. While our Board of Directors expects to continue to declare dividends quarterly, there can be no assurance that we will continue to pay dividends at these levels or at all. The following table sets forth the history of per share cash dividends paid on our stock since the beginning of 1997:
1997 First Quarter...................... $0.016 Second Quarter..................... 0.016 Third Quarter...................... 0.019 Fourth Quarter..................... 0.019 1998 First Quarter...................... $0.019 Second Quarter..................... 0.020 Third Quarter...................... 0.020 Fourth Quarter..................... 0.020 1999 First Quarter...................... $0.025 Second Quarter..................... 0.025
As of June 30, 1999, we had 491 stockholders of record. Our common stock is listed on the Nasdaq National Market under the symbol "PVTB" and began trading on June 30, 1999. There was no established public trading market for the common stock at the time that the Merger was first announced. The high and low closing prices of our common stock during the period from June 30, 1999 to August 2, 1999 were $21.00 and $17.50, respectively. On August 2, 1999, the last reported sale price of our common stock was $17.625. Towne Square While holders of Towne Square common stock are entitled to receive such dividends as the Towne Square Board of Directors may declare, Towne Square has not declared nor paid dividends to date. Pursuant to the Merger Agreement, Towne Square has agreed not to pay cash dividends pending the consummation of the Merger. There is no established public trading market for Towne Square common stock. 15 PRIVATEBANCORP, INC. We organized PrivateBancorp as a Delaware corporation in 1989 to provide highly personalized financial services primarily to professionals, entrepreneurial individuals and their closely-held businesses. We were one of the first banks newly formed in the Chicago area in recent years. The organizers had significant senior level banking experience and many potential client contacts from prior banking positions. We believe that as the financial industry has consolidated, many financial institutions have focused on a mass market approach using automated customer service which de-emphasizes personal contact. We believe that the centralization of decision-making power at these large institutions has resulted in disruption of client relationships as frontline bank employees who have limited decision-making authority fill little more than a processor role for their customers. At many of these large institutions, services are provided by employees in the "home office" who evaluate requests without the benefit of personal contact with the customer or an overall view of the customer's relationship with the institution. We believe that this trend has been particularly frustrating to affluent individuals, professionals, owners of closely-held businesses and commercial real estate investors who traditionally were accustomed to dealing directly with senior bank executives. These customers typically seek banking relationships managed by a decision maker who can deliver a prompt response to their requests and custom tailor a banking solution to meet their needs. As smaller, independent banks have been acquired by national, multi-bank holding companies, we believe that the personal relationships that these customers maintained with the management of such banks have eroded, and their individualized banking services have been lost. Through our banking subsidiary, The PrivateBank and Trust Company, we provide our clients with traditional personal and commercial banking services, lending programs, and trust and asset management services. Using the European tradition of "private banking" as our model, we strive to develop a unique relationship with each of our clients, utilizing a team of highly qualified account executives to serve the client's individual and corporate banking needs, and tailoring our products and services to meet such needs. Our managing directors are strategically located in three Chicago-area offices: Downtown Chicago, Wilmette, Illinois, and Oak Brook, Illinois. We opened our flagship Chicago location in 1991. We expanded to our Wilmette office in north suburban Cook County in 1994 after identifying a senior banking officer with existing relationships and client contacts in this North Shore area. We opened the Oak Brook facility in west suburban DuPage County in 1997 with the addition of a managing director who has extensive relationships in that market. Since our start in 1991, we have experienced rapid internal growth. From year-end 1995 to March 31, 1999, our compound annual growth rate in loans was 31.6%, in assets was 27.3%, in deposits was 27.0% and in trust assets under administration was 40.2%. At March 31, 1999, we had total loans of $307.8 million, total assets of $431.1 million, total deposits of $384.5 million, total stockholders' equity of $30.1 million and total trust assets under administration of $637.4 million. See "Recent Developments" for information about our second quarter financial results and the anticipated financial impact of the Merger. On April 27, 1999, we filed a registration statement on Form S-1 with the SEC in connection with the initial public offering of our common stock. The Form S-1 was declared effective on June 29, 1999. The prospectus dated June 30, 1999 which is a part of that registration statement has been attached as Appendix A to this prospectus, and the following sections constitute a part of this prospectus: "Risk Factors"; "Business"; "Management's Discussion and Analysis of Financial Conditions and Results of Operations"; "Management;"; "Certain Transactions"; "Principal Stockholders"; "Supervision and Regulation"; "Description of Capital Stock"; and "Consolidated Financial Statements." All Towne Square stockholders are urged to read those sections of the prospectus in their entirety. 16 TOWNE SQUARE Towne Square Financial Corporation was formed in March 1999 as a Delaware corporation for the purpose of developing a de novo, or start-up, bank in the community of St. Charles, Illinois, a far western suburb of Chicago. As of June 1, 1999, Towne Square had raised initial seed capital of $300,000 from a group of six investors and had developed and began to implement a business plan to start a local bank focused on private banking services. Prior to entering into the Merger Agreement, Towne Square had taken the preliminary steps necessary to obtain the regulatory approvals involved in the de novo bank formation. Towne Square Management The following table sets forth certain information concerning the executive officers and directors of Towne Square, including the number of shares of Towne Square stock beneficially owned by each:
Common Stock of Towne Square Beneficially Owned as of June 30, 1999 -------------------------------------- Percent of Common Name Age Position(s) Number of Shares Stock Outstanding ---- --- ------------------------ ----------------- ----------------- Thomas N. Castronovo 40 President, Director 1,000 16.67% Steven J. Baginski 37 Director 1,000 16.67 John J. Hoscheit 40 Secretary, Director 1,000 16.67 William J. Podl 54 Treasurer, Director 1,000 16.67 Daniel L. Star 53 Director 1,000 16.67 Sean M. Williams 32 Vice President, Director 1,000 16.67
17 COMPARATIVE PER COMMON SHARE DATA The following table sets forth selected comparative per share data for PrivateBancorp common stock (giving effect to the 2-for-1 stock split effective as of June 28, 1999, but not giving effect to Private-Bancorp's initial public offering which closed on July 6, 1999) and Towne Square common stock, on an historical and pro forma combined basis for PrivateBancorp and for Towne Square common stock on a pro forma equivalent basis, giving effect to the Merger. The pro forma combined information is not necessarily indicative of the actual results that would have occurred had the Merger been consummated at the beginning of the periods indicated, or of the future operations of the combined entity.
Three Months Ended Year Ended March 31, 1999 December 31, 1998 ------------------ ----------------- PrivateBancorp Historical: Diluted earnings per share............................ $ 0.28 $ 0.86 Cash dividends declared per share..................... 0.03 0.08 Book value per share (at period end).................. 8.71 8.53 Towne Square Historical: Diluted earnings per share............................ -- -- Cash dividends declared per share..................... -- -- Book value per share (at period end).................. -- -- PrivateBancorp Pro Forma Combined: Diluted earnings per share............................ (0.07) 0.48 Cash dividends declared per share..................... 0.03 .07 Book value per share (at period end).................. 8.55 8.34 Towne Square Common Stock - Equivalent Pro Forma Combined: Diluted earnings (loss) per share..................... (1.10) 7.26 Cash dividends declared per share..................... .53 1.14 Book value per share (at period end).................. 130.56 127.34
18 PROPOSED MERGER Background of the Merger Upon learning of Towne Square's plans to form a de novo bank in the St. Charles area, Ralph Mandell, our Chairman and CEO, contacted representatives of the Towne Square group on April 30, 1999 to explore the possibility of a strategic alliance. Our Board approved a letter of intent on May 27, 1999, and after extensive negotiations, we entered into a definitive agreement on June 24, 1999. Our management believes the transaction affords us an excellent opportunity to expand our franchise in an attractive market. We will establish a new office of PrivateBank in St. Charles to be managed by Thomas Castronovo, one of the principal founders of Towne Square who has joined us as a managing director of our banking subsidiary. Mr. Castronovo has 17 years of prior banking experience and has significant contacts in the St. Charles community. We filed the requisite branch applications with the regulators during late June 1999 and currently anticipate opening the St. Charles office during the fourth quarter of 1999. PrivateBancorp's Reasons for the Merger The terms of the Merger are the result of extensive arms' length negotiation between representatives of Towne Square and PrivateBancorp. In approving the transaction on the negotiated terms, and concluding that the transaction is in the best interest of our stockholders, our Board of Directors considered a number of factors, including, among others, the following: . the potential market opportunities offered by St. Charles and the surrounding Fox Valley communities and the opportunity to expand the PrivateBank franchise consistent with our growth strategy; . management's opinion that the transaction affords us a unique opportunity to expand in an attractive market on terms that our Board believed were fair to our stockholders based on a consideration of the potential dilutive effect of the transaction to our stockholders weighed against the potential for a favorable internal return on investment over the longer term; . the significant contacts of Mr. Castronovo, an experienced banking veteran in the Fox Valley area, his perceived compatibility with our management and his willingness to join PrivateBank as a managing director in connection with the transaction; . the competitive advantages of forestalling the Towne Square organizers from pursuing an independent private banking strategy; . the commitment of the Towne Square organizers, all prominent businessmen and professionals from St. Charles, to serve on a Fox Valley advisory board of PrivateBank and to support the efforts of the bank in St. Charles; . the perceived strategic benefits of the Advisory Board and Support agreements to be entered into by the Towne Square organizers in connection with the acquisition; . the value of the preliminary business plan that had been developed by Towne Square, including the identification of an attractive banking location in St. Charles that would be available to PrivateBank at market rates under a ten-year lease; and . that, as a result of the transaction, PrivateBank would expect to be in a position to expedite the organizational activities related to establishing a new banking location and be able to open a banking office in St. Charles during the fourth quarter of 1999. 19 Towne Square's Reasons for the Merger and Board Recommendation The Towne Square Board believes that the Merger is fair to, and in the best interests of, Towne Square and its stockholders. The Towne Square Board unanimously approved the Merger Agreement as being advisable and recommends that stockholders vote "FOR" approval and adoption of the Merger Agreement. The Towne Square Board has evaluated the financial, legal and market conditions bearing on the decision to recommend the Merger. In reaching its conclusion to approve the Merger Agreement and the transactions contemplated thereby, the Towne Square Board consulted with Towne Square management and considered a number of factors, including the following: . the current and prospective environment in which Towne Square originally intended to operate including national and local economic conditions, the competitive environment for financial institutions generally and particularly in the St. Charles and Kane County, Illinois areas, the increased regulatory burden on financial institutions generally and the trend towards consolidation in the financial services industry, particularly in Towne Square's proposed market area; . information concerning the business, operations, asset quality and prospects of PrivateBancorp; . information concerning the preliminary business plan of Towne Square and prospects for opening a de novo bank and raising the capital necessary to do so; . the financial strength of PrivateBancorp; . the review by the Towne Square Board of the financial and other significant terms and provisions of the Merger Agreement; . the Towne Square Board's belief that the terms of the Merger Agreement are attractive in that they would allow Towne Square stockholders to (a) receive the Merger Consideration in stock, thus permitting stockholders to defer any tax liability associated with any gain in the value of their investment; and (b) become stockholders of PrivateBancorp, an institution with a history of strong operations, management and earnings performance and a public market for its stock; . the expectation that we will continue to be able to provide quality products and services to the communities and clients targeted by Towne Square in its preliminary business plan; . the compatibility of our respective business and management philosophies; Certain members of the management of Towne Square have interests in the completion of the Merger in addition to their interests as stockholders generally. Following the Merger, we have agreed to enter into a three-year employment agreement with Thomas N. Castronovo, President of Towne Square. Mr. Castronovo was appointed a managing director of PrivateBank, our banking subsidiary, on June 24, 1999. In addition, we have agreed to appoint an individual designated by Towne Square (who may be a stockholder of Towne Square) to our Board of Directors, and certain stockholders of Towne Square will sit on an advisory board we will establish in connection with the opening of the St. Charles office. As a condition to the consummation of Merger, PrivateBank will enter into a building lease with Towne Square Realty, L.L.C. for approximately 6,100 square feet of space located at 24 South Second Street, St. Charles, Illinois. PrivateBank will utilize this space for the operations of the St. Charles office. Towne Square Realty is an Illinois limited liability company all of whose owners are the stockholders of Towne Square. You may wish to consider such interests in evaluating terms of the Merger. See "--Building Lease" and "--Interests of Certain Persons in the Merger." In reaching its determination to accept the Merger Agreement we proposed, the Towne Square Board did not assign any relative or specific weights to the foregoing factors, and individual directors may have given different weights to different factors. The importance of these factors relative to one another cannot precisely be determined or stated herein and there can be no assurance that the expected results or benefits of the proposed Merger will actually occur. 20 Although there can be no assurance, the Towne Square Board also believes that the Merger will provide Towne Square's stockholders with increased value and liquidity for their stock and will provide its communities and clients with expanded services and products. The Towne Square Board recommends that Towne Square stockholders vote "FOR" approval and adoption of the Merger Agreement. TERMS OF THE MERGER The following description of the Merger is qualified in its entirety by reference to the Merger Agreement, filed as Exhibit 10.11 to the Registration Statement on Form S-1 of PrivateBancorp (file no. 333-77147) and incorporated herein by reference. All Towne Square stockholders are urged to read the Merger Agreement in its entirety. Merger Consideration On the Closing Date (as defined below), subject to the terms and conditions of the Merger Agreement, Towne Square will merge with and into PrivateBancorp, with PrivateBancorp being the continuing and surviving corporation. Our Amended and Restated Certificate of Incorporation and By-laws in effect at the Effective Time will govern the surviving corporation until amended or repealed in accordance with applicable law. Each share of Towne Square Common Stock which is issued and outstanding immediately prior to the Effective Time shall be converted into and represent the right to receive 15.278 (the "Exchange Ratio") shares of our common stock, the value of which is referred to herein as the "Merger Consideration." The Exchange Ratio was determined by dividing $1,650,000 by $18.00, the initial public offering price of our common stock. We will not issue any fractional shares in connection with the Merger. Instead, we will round any fractional shares to the nearest whole share. At June 30, 1999, Towne Square had 6,000 shares of common stock outstanding. Based on this number, and the initial public offering price of $18.00, a total of approximately 91,668 shares of our common stock will be issued in the Merger. Closing Date of the Merger We will close the Merger on a date mutually agreed upon by Towne Square and us, but not later than 3 days following the satisfaction or waiver of all conditions precedent to the consummation of the transactions contemplated by the Merger Agreement. The date and time on which the Merger becomes effective is referred to herein as the "Effective Time." Surrender of Certificates Prior to the Effective Time, we will deliver each Towne Square stockholder instructions for surrendering their stock certificates. You should not send in your stock certificates until you receive our instructions. Upon surrender, we will cancel your Towne Square certificate and issue a certificate for shares of our common stock. No dividends or other distributions declared after the Effective Time with respect to our common stock payable to the holders of record thereof after the Effective Time shall be paid to the holder of any unsurrendered Towne Square stock certificate common stock until such holder of record has surrendered the certificate. Subject to the effect, if any, of applicable law, after the subsequent surrender and exchange of the certificate, the holder will receive any dividends or distributions, without interest, payable with respect to the shares of our common stock represented by that certificate. Conditions to the Merger Consummation of the Merger is subject to the satisfaction of certain conditions unless waived, to the extent waiver is permitted by applicable law. Conditions to our Obligations. Our obligations to effect the Merger are subject to the fulfillment at the Effective Time of the following conditions: 21 . the representations and warranties of Towne Square contained in the Merger Agreement shall have been true in all material respects on the date of the Merger Agreement and shall continue to be true in all material respects at and as of the Effective Time; . Towne Square shall have performed and complied with in all material respects all obligations, agreements and covenants required by the Merger Agreement to be performed or complied with by it on or prior to the Effective Time; . except as contemplated by the Merger Agreement, there shall not have been any action taken, or any statute, rule, regulation or order enacted, promulgated or issued or deemed applicable to the Merger by any federal or state government or governmental agency or instrumentality or court, which would prohibit PrivateBancorp's ownership or operation of all or a material portion of Towne Square's business or assets, whether immediately at the Effective Time or as of some future date, whether specified or to be specified, or which would compel PrivateBancorp to dispose of or hold separate all or a material portion of Towne Square's business or assets, whether immediately at the Effective Time or as of some future date, whether specified or to be specified, as a result of the Merger Agreement, or which would render PrivateBancorp or Towne Square unable to consummate the transactions contemplated by this Merger Agreement; . as of the Closing Date, there shall have been no material adverse change in the operations or financial condition or business prospects of Towne Square; . Towne Square shall have delivered various officers' certificates; . each of the Employment Agreement and Non-Competition and Support Agreement with Thomas N. Castronovo shall be in full force and effect; . each of the Stock Restriction Agreements and the Advisory Board and Support Agreements shall be in full force and effect; and . the Lease Agreement shall be in full force and effect. Conditions to Obligations of Towne Square. The obligations of Towne Square to effect the Merger shall be subject to the fulfillment at the Effective Time of the following conditions: . the representations and warranties of PrivateBancorp contained in the Merger Agreement shall have been true in all material respects on the date of the Merger Agreement and shall continue to be true in all material respects at and as of the Effective Time; . PrivateBancorp shall have performed and complied in all material respects all obligations, covenants, and agreements required by the Merger Agreement to be performed or complied; . PrivateBancorp shall have delivered various certificates of PrivateBancorp's officers and opinions of counsel; . PrivateBancorp shall not have refused to enter into each of the Employment Agreement and Non-Competition and Support Agreement with Thomas N. Castronovo; and . PrivateBancorp shall not have refused to enter into each of the Stock Restriction Agreements, the Advisory Board and Support Agreements and the Lease Agreement. Condition to Obligations of Both Parties. The obligation of each party to consummate the Merger is further conditioned upon the following: . the receipt of all necessary regulatory approvals, if any, excluding the prior regulatory approvals to open the St. Charles office of PrivateBank; 22 . the absence of a stop order suspending effectiveness of the registration statement of which this Prospectus is a part and/or proceedings seeking such a stop order; . the absence of a preliminary or a permanent injunction or other order by any federal or state court, or threat thereof, which prevents the consummation of the Merger; . authorization for listing on the Nasdaq National Market of the shares of our common stock issuable in the Merger; . approval of the Merger and the Merger Agreement by the requisite vote of the stockholders of Towne Square; and . the receipt of an opinion of Vedder, Price, Kaufman & Kammholz as to the tax-free nature of the Merger. Regulatory Approvals We have been advised that there are no regulatory approvals necessary to complete the Merger. Therefore, we intend to proceed with the Merger in the absence of regulatory approvals necessary to open the St. Charles office of PrivateBank, unless any federal or state regulatory entity having jurisdiction over us indicates their opposition to the Merger. See "--Conditions to the Merger," "--Closing Date of the Merger" and "--Termination, Amendment and Waiver." PrivateBancorp and Towne Square have agreed to take all reasonable actions necessary to obtain approvals and comply with the requirements of the FDIC, the Illinois Commissioner of Banks and Real Estate and other governmental entities in order to establish the St. Charles office of PrivateBank. Business Pending the Merger Until the consummation of the Merger, pursuant to the terms of the Merger Agreement, Towne Square has agreed that: . it will cease any and all actions by Towne Square, its stockholders, directors or officers of any business activities, including, but not limited to, the efforts to organize or obtain a charter for an Illinois chartered de novo bank and instead will focus all such actions toward the establishment of a branch office of PrivateBank in the same business purview with the same intended plan of operation as the now abandoned de novo bank business plan; . it will use its best efforts to comply promptly with all requirements which federal or state law may impose on it with respect to the Merger and will promptly cooperate with and furnish information to us in connection with any such requirements imposed upon it in connection with the Merger; . it will use its best efforts to obtain (and to cooperate with us in obtaining) any consent, authorization or approval of, or any exemption by, any governmental authority or agency, or other third party, required to be obtained or made by them in connection with the Merger or the taking of any action contemplated hereby. It will not knowingly or willfully take any action that would adversely affect the ability of such party to perform its obligations under the Merger Agreement; . it will not declare or pay any dividends on or make other distributions with respect of capital stock; . it will not amend its Certificate of Incorporation or by-laws, except as contemplated by the Merger Agreement; and . it will not incur any debts, liabilities or charges from the date of the Merger Agreement. 23 Operations of Towne Square after the Merger In the Merger, Towne Square will be merged with and into PrivateBancorp and the separate corporate existence of Towne Square will cease with PrivateBancorp being the continuing and surviving corporation. None of the officers and directors of Towne Square will continue to serve in those positions following consummation of the Merger. Thomas N. Castronovo, President of Towne Square, has been appointed as a managing director of PrivateBancorp's banking subsidiary, and will enter into a three-year employment agreement with PrivateBank upon closing of the Merger. Certain stockholders of Towne Square will serve in an advisory capacity to PrivateBank, as discussed below, and an individual designated by Towne Square (who may be a Towne Square stockholder) will be appointed to the Board of Directors of PrivateBancorp. Building Lease As a condition to the consummation of the Merger Agreement, PrivateBank will enter into a building lease with Towne Square Realty, L.L.C. for approximately 6,100 square feet of space on the first floor of the building located at 24 South Second Street, St. Charles, Illinois. It is contemplated that PrivateBank will utilize this space for the operations of its St. Charles office. The term of the lease will be ten years and three months, commencing August 1, 1999, and PrivateBank will have the option to extend the term for two additional five-year periods. The monthly base rent for the first fifteen months of the lease is $8,900, with the base rent for each succeeding lease year equal to 102.5% of the prior year's base rent. Towne Square Realty is an Illinois limited liability company all of whose owners are the stockholders of Towne Square. Interests of Certain Persons in the Merger Agreements with Thomas N. Castronovo. As a condition to the consummation of the Merger Agreement, PrivateBank will enter into an Employment Agreement and a Non-Competition and Support Agreement with Thomas Castronovo. Under the terms of the Employment Agreement, which has a three year term and shall automatically be extended for additional one year terms unless terminated pursuant to the provisions thereof, Mr. Castronovo is entitled to an annual base salary of $112,000, any discretionary bonuses determined by our Board of Directors, and participation in benefit plans and other fringe benefits available to our managing directors. For the 1999 calendar year, Mr. Castronovo will receive a bonus of $25,000, payable in January 2000. Mr. Castronovo will also receive a signing bonus in the amount of $150,000, payable in two equal installments, the first upon the opening of our St. Charles office and the second six months later. In addition, we have provided Mr. Castronovo with an interest-free loan, evidenced by a promissory note, in the amount of $175,000 for the purchase of shares of our common stock in our initial public offering. This loan is to be repaid with the proceeds of Mr. Castronovo's 1999 bonus and signing bonus. Under the terms of the note, the loan is due in full on the earlier of (a) the six- month anniversary of the opening of our St. Charles office; (b) December 31, 2000; (c) the termination of Mr. Castronovo's employment; or (d) his sale of such shares. As security for repayment of this loan, we have been granted a continuing lien on and security interest in all Mr. Castronovo's right, title and interest in the shares purchased. Pursuant to the Employment Agreement, we have agreed to grant Mr. Castronovo options to purchase 7,000 shares of our common stock and a restricted stock award of 3,000 shares. Both the option grant and the restricted stock award will be made under our Stock Incentive Plan and the Employment Agreement contemplates an exercise price equal to the initial public offering price of $18.00. Under the Employment Agreement, Mr. Castronovo's employment may be terminated by PrivateBank at any time for "cause," as defined in the Employment Agreement, in which case, or if he resigns from PrivateBank without "good reason," the Employment Agreement immediately terminates, and Mr. Castronovo would be entitled only to unpaid benefits accrued during the term of his employment. If Mr. Castronovo chooses to resign with good reason, or PrivateBank chooses to terminate his employment without cause, Mr. Castronovo will also be entitled to receive severance in the amount equal to at least 12 months of his then current base annual salary, plus a pro rata bonus for the year of termination based on the prior year's bonus amount, if any. The Employment Agreement also provides for death benefits equal to six months of his then current annual base salary. 24 In the event that Mr. Castronovo is terminated after a change in control of PrivateBancorp, he will be entitled to a lump sum payment equal to two times the sum of (1) his annual base salary; (2) the greater of (a) his bonus amount, if any, for the prior year or (b) his average bonus, if any, for the three preceding years; and (3) the sum of the contributions that would have been made by the company under any benefit plan and the annual value of any other executive perquisites. The Employment Agreement entitles Mr. Castronovo to receive gross up payments to cover any federal excise taxes payable by him in the event the change in control benefits are deemed to constitute "excess parachute payments" under Section 280G of the Internal Revenue Code. A change in control is defined under the agreements as an occurrence of any one of the following events as determined by our Board: . if any person, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act, becomes the beneficial owner of 25% or more of the total voting power of our then outstanding voting capital stock; provided, however, that if that person becomes a beneficial owner of 25% or more of our voting capital stock as a result of an acquisition of stock directly from PrivateBancorp, or a decrease in the number of outstanding shares due to a repurchase of shares by PrivateBancorp, it shall not be considered a change in control; . if during any period of two consecutive years, those individuals who at the beginning of the period constitute our Board of Directors cease to make up a majority of the Board; . the consummation of a reorganization, merger or consolidation of PrivateBancorp, or the sale of all or substantially all of our assets; provided, that so long as more than 50% of the voting stock of the successor entity is held by stockholders who had been beneficial owners of our stock immediately before the transaction, and at least a majority of the board of the successor entity is made up of members of our Board, the merger or sale shall not be considered a change in control; and . the approval by our stockholders of a plan of complete liquidation or dissolution. Under the terms of the Non-Competition and Support Agreement, Mr. Castronovo (a) will use his best efforts to support and develop the business of PrivateBank and (b) during his term of employment with PrivateBank, and for a period of one year after, or for so long as Mr. Castronovo receives severance payments from PrivateBank, will not, for his own account, or on behalf of any entity located within ten miles of the St. Charles office, solicit any client or employee of PrivateBank. Advisory Board and Support Agreements. Pursuant to the Advisory Board and Support Agreements, we have agreed to appoint to the Fox Valley Advisory Board of PrivateBank certain stockholders of Towne Square, for the purpose of assisting and advising with respect to forming and operating our St. Charles branch. Advisory board members will each receive a quarterly per meeting fee of $200 for service on the advisory board. The Advisory Board and Support Agreements also provide that during their service on the advisory board, and for a period of at least one year after, each advisory board member agrees that he will not, for his own account, or on behalf of any entity located within ten miles of the St. Charles office of PrivateBank, solicit any client or employee of PrivateBank. It is currently contemplated that those stockholders of Towne Square who will not serve as directors or officers of PrivateBancorp or PrivateBank will serve on the advisory board. The advisory board will also include two additional prominent business people or professionals from the area to be mutually selected by Towne Square and PrivateBancorp in order to draw on the experience and contacts of these individuals in the local community to assist in the development of the St. Charles office. Stock Transfer Restriction Agreements. As a condition to the Merger Agreement, each stockholder of Towne Square will enter into a Stock Transfer Restriction Agreement pursuant to which he will agree not to sell, assign, pledge or otherwise transfer or encumber 54.5% of the PrivateBancorp shares received in the Merger for a period of one year from the closing of the Merger. The remaining 45.5% of the shares will be restricted from resale under the Stock Transfer Restriction Agreements for a period of three years. 25 Termination, Amendment and Waiver Pursuant to the terms and conditions of the Merger Agreement, the Merger Agreement may be terminated at any time prior to the Effective Time by: . the mutual consent of the parties; . the existence of a final and unappealable judicial or regulatory determination that any material provision of the Merger Agreement is illegal, invalid or unenforceable, or denying any regulatory application; . either party for a material breach of a representation, warranty or covenant by the other party if such breach causes the failure to satisfy a condition precedent of the terminating party; or . either party on or after November 1, 1999; The Merger Agreement may be amended by the parties at any time before or after approval of the matters presented in connection with the Merger by the stockholders of Towne Square, but after any such approval, no amendment may be made which changes the form of consideration or adversely affects or decreases the value of the consideration to be provided to Towne Square stockholders pursuant to the Merger or which has a similar effect. At any time prior to the Effective Time, either party may, to the extent legally allowed, extend the time for performance of any of the obligations of the other party, waive any inaccuracies and representations and warranties of the other and waive compliance with any of the agreements or conditions. Certain Federal Income Tax Consequences of the Merger The Merger is structured in a manner intended to qualify as a tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code. Accordingly, it is anticipated that Towne Square and PrivateBancorp will recognize no gain or loss for federal income tax purposes as a result of the Merger and that no gain or loss will be recognized for federal income tax purposes by any Towne Square stockholders upon receipt of our common stock in exchange for Towne Square common stock pursuant to the Merger. We have not asked the Internal Revenue Service (the "Service") to rule upon the tax consequences of the Merger. Instead, Towne Square and PrivateBancorp will use their best efforts to receive an opinion from Vedder, Price, Kaufman & Kammholz, counsel to PrivateBancorp in connection with the Merger, as to certain federal income tax consequences of the Merger. Unlike a ruling from the Service, an opinion of counsel is not binding on the Service and there can be no assurance, and none is hereby given, that the Service will not take a position contrary to one or more positions reflected herein or that the opinion of counsel will be upheld by the courts if challenged by the Service. Each stockholder of Towne Square is urged to consult his or her own tax and financial advisors as to the effect of such federal income tax consequences of the Merger on his or her own particular facts and circumstances and also as to any state, local, foreign or other tax consequences arising out of the Merger. As a condition precedent to the consummation of the Merger, the parties will receive an opinion from Vedder, Price, Kaufman & Kammholz, which will be is based upon various representations and subject to various assumptions and qualifications, that the following federal income tax consequences will result from the Merger: . the Merger will constitute a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code and PrivateBancorp and Towne Square will each be a party to the reorganization; . the exchange in the Merger of our common stock for Towne Square common stock will not give rise to the recognition of any income, gain or loss to PrivateBancorp, Towne Square or the stockholders of Towne Square with respect to such exchange; . the adjusted tax basis of our common stock issuable to Towne Square stockholders in the Merger will equal the adjusted tax basis of the shares of the Towne Square common stock surrendered in exchange therefor; 26 . the holding period of the shares of our common stock received in the Merger will include the period during which the shares of Towne Square common stock surrendered in exchange therefor were held, provided such shares of Towne Square common stock were held as capital assets at the Effective Time; . the adjusted tax basis of the assets of Towne Square in the hands of PrivateBancorp will be the same as the adjusted tax basis of such assets in the hands of Towne Square immediately prior to the exchange; and . the holding period of the assets of Towne Square transferred to us will include the period during which such assets were held by Towne Square prior to the exchange. The foregoing is a description of the material federal income tax consequences of the Merger for Towne Square stockholders who are citizens or residents of the United States and who hold their shares as capital assets, without regard to the particular facts and circumstances of the tax situation of each such stockholder. It does not discuss all of the particular consequences that may be relevant to Towne Square stockholders entitled to special treatment under the Internal Revenue Code (such as insurance companies, financial institutions, dealers in securities, tax-exempt organizations or foreign persons). The summary set forth above does not purport to be a complete analysis of all potential tax effects of the transactions contemplated by the Merger Agreement or the Merger itself. No information is provided herein with respect to the tax consequences, if any, of the Merger under state, local or foreign tax laws. Accounting Treatment; Financial Impact of the Merger Because Towne Square is not yet actively engaged in the business of banking, the Merger will not be accounted for as a business combination. Rather, at the time of closing, we will incur a one-time, nonrecurring charge to earnings in an amount equal to the excess of the value of our stock issued in the Merger over the net assets of Towne Square on the date of closing. We anticipate that the net assets of Towne Square, consisting substantially of cash, will approximate $223,000 at closing. The one-time charge, currently estimated to be approximately $1.29 million, is expected to be recorded during the third quarter of 1999 and will adversely affect our 1999 results of operations. The Merger-related charge will not be a deductible expense for tax purposes. In addition to the Merger-related charge, we will incur additional start-up costs relating to the opening of the St. Charles office. We currently anticipate that the total pre-tax start-up costs will be approximately $430,000, including $75,000 of the signing bonus payable to Mr. Castronovo, and that the majority of these costs will be expensed during 1999. Expenses The Merger Agreement provides, in general, that PrivateBancorp and Towne Square will each pay its own expenses in connection with the Merger and the transactions contemplated thereby, including fees and expenses of its own financial or other consultants, investment bankers, accountants and counsel. PrivateBancorp will pay for the opinion of Vedder, Price, Kaufman & Kammholz with respect to the tax matters discussed above. Vote Required The affirmative vote of the holders of a majority of the shares of Towne Square issued and outstanding will be required to approve the Merger Agreement. Approval of the Merger Agreement is a condition to, and is required for, consummation of the Merger. As of June 30, 1999, 6,000 shares of Towne Square common stock were issued, outstanding and entitled to vote. It is anticipated that Towne Square will seek the written consent of stockholders to approve the Merger rather than holding a special meeting of stockholders. Written materials regarding stockholder approval will be furnished separately by Towne Square. Resale of PrivateBancorp Common Stock As a condition to the Merger Agreement, each stockholder of Towne Square will enter into a Stock Transfer Restriction Agreement pursuant to which he will agree not to sell, assign, pledge or otherwise transfer or encumber 54.5% of the PrivateBancorp shares received in the Merger for a period of one year from the closing of the Merger. The 27 remaining 45.5% of the shares will be restricted from resale under the Stock Transfer Restriction Agreements for a period of three years. Upon the expiration of the restrictive terms of the Stock Transfer Restriction Agreements, shares of PrivateBancorp common stock issued to Towne Square stockholders will be freely transferable without further restriction, except for any shares issued to "affiliates" of Towne Square or PrivateBancorp, as that term is defined under the Securities Act. Shares held by these affiliates may be resold without registration as permitted by Rule 145 of the Securities Act or as otherwise permitted under the Securities Act. In general, under Rule 145 affiliates are entitled to sell, within a three-month period, that number of shares which does not exceed the greater of: . one percent of the outstanding shares of PrivateBancorp common stock; or . the average weekly reported trading volume of PrivateBancorp common stock during the four calendar weeks preceding the sale. Sales made under Rule 145 are also subject to certain requirements pertaining to . limitation on the volume of the sales; . the manner of such sales; and . the availability of current public information about PrivateBancorp. Dissenters' Rights of Appraisal Under Delaware law, any stockholder of Towne Square entitled to receive the Merger Consideration will be entitled to demand the fair cash value of his shares, if he follows prescribed procedures. Stockholders of PrivateBancorp do not have appraisal rights in connection with the Merger. Following is a summary of the applicable provisions of Section 262 of the Delaware General Corporation Law, which describes the appraisal rights of dissenting stockholders. This summary should be read with the full text of Section 262, a copy of which is attached hereto as Appendix B. We urge any Towne Square stockholder who intends to exercise his appraisal rights to review Appendix B carefully and to consult with legal counsel so as to assure strict compliance with its provisions. A vote in favor of the Merger Agreement and the Merger will constitute a waiver of your right to demand appraisal of your Towne Square common stock. Who May Exercise Statutory Appraisal Rights. Under Section 262 of the Delaware General Corporation Law, holders of Towne Square common stock who follow the procedures set forth in the law will be entitled to have their Towne Square common stock appraised by the Delaware Court of Chancery and to receive payment in cash of the "fair value" of their shares, exclusive of any element of value arising from the consummation or expectation of the Merger, together with a fair rate of interest, if any, as determined by the court. Towne Square stockholders considering seeking appraisal rights of their shares should be aware that the fair value of the shares under Section 262 could be more than, less than or equal to the Merger Consideration. Procedure for Exercising Statutory Appraisal Rights. A Towne Square stockholder who wishes to exercise his appraisal rights must: (a) deliver to Towne Square prior to the circulation of the written consent in lieu of special meeting regarding the Merger Agreement a written demand for appraisal of his common stock; and (b) not vote in favor of the Merger Agreement. A Towne Square stockholder wishing to exercise his rights must be the record holder of such shares on the date the written demand is made and must continue to hold such shares of record through the Effective Time of the Merger. Accordingly, if you are a Towne Square stockholder on the date of demand, but subsequently sell or transfer your shares, you will lose your appraisal rights. A demand for appraisal should be executed by or on behalf of the holder of record, as such holder's name appears on the stock certificate. If the Towne Square shares in question are held in a fiduciary or representative capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity. If the shares are 28 owned of record by more than one person, the demand should be executed by or on behalf of all joint owners. All demands for appraisal must be made in writing and must be sent or delivered to Towne Square at 1536 Fargo Boulevard, Geneva, Illinois 60134, Attn.: Secretary. Any holder of Towne Square stock who has demanded an appraisal in compliance with Section 262 will not, from and after the Effective Time of the Merger, be entitled to vote the shares subject to the demand for any purpose or be entitled to the payment of any future dividends or other distributions on the Towne Square common stock. Within ten days after the Effective Time, Towne Square will be required to notify each stockholder who has complied with the provisions of Section 262, and who has not voted in favor of the Merger Agreement and the Merger, of the date that the Merger became effective. Within 120 days after the Effective Time, any stockholder who has complied with the requirements for exercise of statutory appraisal rights will be entitled, upon written request, to receive from Towne Square a statement setting forth the aggregate number of shares of Towne Square common stock not voted in favor of the Merger Agreement and with respect to which demands for appraisal have been received, and the aggregate number of holders of such shares. These statements must be mailed within ten days after a written request therefor has been received by Towne Square or within ten days after the expiration of the period for delivery of demands, whichever is later. Determination of Fair Value. Within 120 days after the Effective Time, Towne Square or any stockholder who has complied with the statutory requirements may file a petition in the Delaware Chancery Court demanding a determination of the fair value of the Towne Square common stock. If a petition for appraisal is timely filed, stockholders entitled to appraisal rights may receive notice of the time and place of a hearing on the petition. After the hearing, the Delaware Chancery Court will determine the stockholders entitled to statutory appraisal rights and the "fair value" of their Towne Square stock. Costs of Appraisal Action. The costs of an appraisal action may be determined by the Chancery Court and taxed upon the parties as it deems equitable. The Chancery Court may also order that all or a portion of the expenses incurred by any stockholder in connection with appraisal, including reasonable attorneys' fees and the fees and expenses of any experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the Towne Square shares entitled to appraisal. Loss of Appraisal Rights. If any stockholder who properly demands appraisal rights of his Towne Square common stock under Section 262 fails to perfect, or effectively withdraws or loses, his right to appraisal, as provided under Delaware law, that stockholder's shares will be converted into the right to receive the Merger Consideration. A stockholder will fail to perfect, or effectively lose, his appraisal rights if, among other things, no petition for appraisal is filed within 120 days after the Effective Time or if the stockholder delivers to Towne Square a written withdrawal of his demand for appraisal and acceptance of the Merger. Comparison of Rights of Stockholders of PrivateBancorp and Stockholders of Towne Square Upon consummation of the Merger, the stockholders of Towne Square who receive PrivateBancorp common stock will become stockholders of PrivateBancorp and their rights will be governed by our Amended and Restated Certificate of Incorporation and our Amended and Restated By-laws, which differ in certain material respects from Towne Square's charter and by-laws. The following comparison of the corporate governance documents of Towne Square and PrivateBancorp is not intended to be complete and is qualified in its entirety by reference to the relevant provisions of the Delaware General Corporation Law, Towne Square's Certificate of Incorporation and By-laws, and our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws. You may inspect the Towne Square charter and By-laws at its executive office, or request delivery of copies from the Secretary of Towne Square. Copies of the PrivateBancorp charter and By-laws are available on the SEC's web site at http://www.sec.gov, or may be requested from the Secretary of PrivateBancorp. See also "DESCRIPTION OF CAPITAL STOCK" in Appendix A. 29 Authorized Capital Stock. Towne Square's authorized capital stock currently consists of 1,000,000 shares of common stock, par value $0.01 per share. As of June 30, 1999, there were 6,000 shares of Towne Square common stock issued and outstanding. The Amended and Restated Certificate of Incorporation of PrivateBancorp authorizes the issuance of 12,000,000 shares of common stock, without par value, of which 4,351,824 shares were outstanding as of June 30, 1999. Both the holders of Towne Square common stock and the holders of PrivateBancorp common stock are entitled to one vote for each share held of record on all matters to be voted on by stockholders. Neither charter permits cumulative voting of shares of common stock with respect to the election of directors, nor do holders of the common stock of either company have any conversion, preemptive or redemptive rights. In the event of the liquidation of either company, the holders of shares of common stock are entitled to share ratably in any assets retained by the respective companies after payment in full of creditors, and, in the case of PrivateBancorp, after payments to holders of any preferred stock then issued and outstanding, to the extent of any liquidation preference, as described below. The charter of PrivateBancorp also authorizes the issuance of 1,000,000 shares of preferred stock, without par value, in one or more series. Our Board, without stockholder approval, may determine voting, conversion and other rights which could adversely affect the rights of the holders of our common stock. Currently, no shares of our authorized preferred stock are issued or outstanding. The rights of the holders of our common stock are generally subject to the prior rights of our preferred stock with respect to dividends, liquidation preferences and other matters. The dividend rights, dividend rates, conversion rights, conversion prices, voting rights, redemption rights and terms (including sinking fund provisions, if any), the redemption price or prices and the liquidation preferences of any series of our authorized preferred stock and the numbers of such shares of preferred stock in each series will be determined by our Board of Directors as such shares are to be issued. Holders of our common stock do not have preemptive rights to subscribe for shares of our preferred stock. The Certificate of Incorporation of Towne Square has not authorized the issuance of any shares of preferred stock. Size and Classification of the Board of Directors. The directors of Towne Square are elected annually by the stockholders to serve until the next annual meeting or until their successors are elected and qualified. Vacancies occurring on Towne Square's Board are filled by a majority of the directors then in office. Currently, the Board of Towne Square is fixed at six. The Board of Directors of PrivateBancorp is divided into three classes, each of which contains approximately one-third of the whole number of the members of the Board of Directors. Each class serves a staggered three-year term, with approximately one-third of the total number of directors being elected each year. Under the Delaware General Corporation Law, members of a staggered board may only be removed for cause, unless the certificate of incorporation states otherwise. Our Amended and Restated Certificate of Incorporation does not provide for removal of directors without cause. The staggered Board is intended to provide for continuity of the Board of Directors and to make it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of our Board of Directors without the consent of the incumbent Board. Our Amended and Restated By-laws provide that there shall be sixteen directors. As with Towne Square, any vacancy occurring on the Board, including a vacancy created by an increase in the number of directors, can be filled only by a majority vote of the directors then in office. Directors so chosen will hold office until their successors are elected and qualified or until their earlier resignation or removal. Nominations for Directors. Under the charter of Towne Square, there are no specific procedures for the nomination for the election of directors by stockholders, therefore directors can be nominated from the floor at the annual meeting of the stockholders. PrivateBancorp's By-Laws provide that nominations for the election of directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors, but only if the stockholder nomination is made in advance in full compliance with certain notice and informational requirements. In light of these requirements, a stockholder may be deterred from nominating an individual for election as a director. This provision is designed to prevent nominations from the floor at the annual meeting without advance notice and requires that sufficient information be provided regarding each nominee. Our Board of Directors believes that such 30 disclosure is beneficial and the elimination of the element of surprise will allow a more reasonable consideration of the qualifications of all nominees. Action by Written Consent. Under the Delaware General Corporation Law and the charter and by-laws of Towne Square, whenever stockholders are required or permitted to take any action by vote, such action may be taken without a meeting by written consent setting forth the action so taken signed by the holders of all shares. PrivateBancorp's charter and by-laws prohibit stockholder action by written consent. The purpose of this limitation is to require that all proposals be addressed at the regularly scheduled meetings of stockholders, thereby creating sufficient opportunity to disseminate information to all stockholders resulting in a more reasonable consideration of matters by our stockholders. Meetings of Stockholders. Special meetings of the stockholders of Towne Square may be called by the president or secretary at the request, in writing, of a majority of the Board of Directors, or at the written request of stockholders owning shares of capital stock equal to 50% of the capital stock issued and outstanding and entitled to vote. The presence in person or by proxy of the holders of a majority of the issued and outstanding Towne Square stock constitutes a quorum. In general, all Towne Square matters requiring stockholder action must be approved by stockholders holding a majority of the outstanding voting stock. However, any merger, consolidation or sale of all, or substantially all, of the assets of Towne Square which has not been previously approved by the Towne Square Board requires the approval of at least 80% of the outstanding shares. Under the terms of PrivateBancorp's by-laws, special meetings of our stockholders may be called at any time by our Chairman, President or Secretary, or at the request of a majority of our directors. A quorum for a meeting of our stockholders generally is a majority of the outstanding shares entitled to vote for the transaction of any business. Except as described below under the subheading "Amendment of the Certificate of Incorporation and By-Laws," a majority of the quorum is generally required for the transaction of any general business. Shareholder Proposals. The Towne Square charter documents provide no specific procedures for the consideration of stockholder proposals, therefore proposals can be introduced from the floor at an annual or special meeting of the stockholders. PrivateBancorp's by-laws establish procedures that must be followed for a stockholder to submit a proposal for consideration at a meeting of the stockholders. No proposal for a stockholder vote may be submitted to the stockholders by a stockholder unless such submitting stockholder has delivered to our Chairman, President or Secretary a written notice of intent to make a proposal or the proposal itself not less than 120 days prior to the date of the meeting. The notice should set forth: (a) a brief description of the business to be brought before the meeting; (b) the name and address of the stockholder making the proposal; (c) the number of shares of PrivateBancorp stock held by the stockholder; and (d) any material interest of the stockholder in such business. If the presiding officer at any stockholders' meeting determines that any such proposal was not made in accordance with these procedures or is otherwise not in accordance with the law, such presiding officer may refuse to permit the matter to come before the meeting. In light of these requirements, a stockholder may be deterred from bringing a matter before the stockholders. This provision is designed to prevent the introduction of matters from the floor at a meeting without advance notice and sufficient information. Our Board of Directors believes that such disclosure is beneficial and the elimination of the element of surprise will allow a more reasonable consideration of the merits of the matter. Indemnification of Officers and Directors and Limitation of Liability. The indemnification and limitation of the liability of officers and directors under the Delaware General Corporation Law and the charter and by-laws of Towne Square is substantially similar to the indemnification and limitation of liability provided by the charter and by-laws of PrivateBancorp. See "DESCRIPTION OF CAPITAL STOCK" in Appendix A for a more detailed discussion of the indemnification provisions of PrivateBancorp. Amendment of the Charter and By-laws. The charter of PrivateBancorp provides that the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock, voting together as a single class, is required to amend, repeal, or adopt any provision inconsistent with, the provisions of our charter classifying directors, establishing cumulative voting, prohibiting stockholder action without a meeting or specifying the vote required to amend such 31 provisions. Our by-laws may be amended by the stockholders or our Board of Directors; however, the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock, voting together as a single class, is required to amend, repeal, or adopt any provision inconsistent with, the provisions of our by-laws prohibiting stockholder action without a meeting, regarding properly bringing business before a stockholder meeting, stating the number of and classifying directors, relating to filling director vacancies, and specifying the vote required to amend such provisions. The charter and by-laws of Towne Square do not contain any supermajority stockholder vote requirement to amend those documents. 32 LEGAL MATTERS Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois 60601, will pass upon the validity of the shares of PrivateBancorp common stock to be issued pursuant to the Merger and certain other legal matters in connection with the Merger for PrivateBancorp. EXPERTS The consolidated financial statements for each of the three years in the three-year period ended December 31, 1998, incorporated by reference in this prospectus, have been audited by Arthur Andersen LLP, independent certified public accountants, as indicated in their report with respect thereto, and are incorporated herein by reference in reliance upon the authority of said firm as experts in giving said report. 33 APPENDIX A PROSPECTUS OF PRIVATEBANCORP, INC., DATED AS OF JUNE 30, 1999 A-1 PROSPECTUS 900,000 Shares [LOGO OF PRIVATEBANCORP INC.] Common Stock This is the initial public offering of our common stock. Our common stock is traded on the Nasdaq National Market under the symbol "PVTB." Investing in the common stock involves risks. See "Risk Factors" beginning on page 11.
Per Share Total --------- ----------- Public Offering Price.............................. $18.00 $16,200,000 Underwriting Discount.............................. $ 1.26 $ 1,134,000 Proceeds to PrivateBancorp, Inc.................... $16.74 $15,066,000
This is a firm commitment underwriting. We have granted the underwriters a 30-day option to purchase up to 135,000 additional shares of our common stock on the same terms and conditions set forth above to cover over-allotments, if any. The shares of common stock that are being offered are not savings accounts or deposits or other obligations of a bank and are not insured by the Bank Insurance Fund or the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation or any governmental agency. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The underwriters expect to deliver the shares to purchasers on July 6, 1999. EVEREN Securities, Inc. Stifel, Nicolaus & Company Incorporated The date of this prospectus is June 30, 1999 TABLE OF CONTENTS
Page ---- Prospectus Summary........................................................ 4 Risk Factors.............................................................. 11 Special Note Regarding Forward-Looking Statements......................... 17 Pending Acquisition....................................................... 18 Use of Proceeds........................................................... 20 Dividends; No Prior Trading Market........................................ 20 Capitalization............................................................ 21 Dilution.................................................................. 22 Business.................................................................. 23 Selected Consolidated Financial Data...................................... 36 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 38 Management................................................................ 56 Certain Transactions...................................................... 65 Principal Stockholders.................................................... 66 Supervision and Regulation................................................ 67 Description of Capital Stock.............................................. 74 Shares Eligible for Future Sale........................................... 78 Underwriting.............................................................. 81 Legal Matters............................................................. 83 Experts................................................................... 83 Where You Can Get More Information........................................ 83 Index to Consolidated Financial Statements................................ F-1
---------------- Our executive offices are located at The PrivateBank and Trust Company, Ten North Dearborn Street, Chicago, Illinois 60602. Our telephone number is (312) 683-7100. ---------------- You should rely only on the information contained in this document. We have not authorized anyone to provide you with information that is different. The information contained in this document may have changed since the date of this prospectus. This prospectus is not an offer to sell and it is not soliciting an offer to buy the common stock in any state where offers or sales are not permitted. ---------------- Until July 25, 1999 (25 days after the date of this prospectus), all dealers that buy, sell or trade these shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligations to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 3 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary may not contain all the information that may be important to you. You should read the entire prospectus, including the financial statements and related notes, before making a decision to invest in the common stock. Unless we indicate otherwise, all share, per share and financial information in this prospectus: (a) reflects the two-for-one stock split of our common stock effective as of June 28, 1999; and (b) assumes no exercise of the underwriters' option to purchase up to an additional 135,000 shares of common stock from us. PrivateBancorp PrivateBancorp is a Delaware corporation headquartered in Chicago, Illinois. We are a bank holding company with one bank subsidiary, The PrivateBank and Trust Company, which we formed as a de novo, or start-up, bank in 1991. PrivateBank provides private banking and trust services primarily to professionals, entrepreneurial individuals and their business interests. Our managing directors seek to build strong relationships with clients by emphasizing a consistently superior level of personalized service. We focus on the personal financial services needs of our clients as well as the banking needs of their various business and investment ventures. Clients are teamed with dedicated managing directors so they are dealing directly with our decision-makers. In this way, we are able to tailor our loan products and other services to be highly responsive to the individual situation of each client. Since year-end 1995, we have grown our asset base at a compound annual rate of 27.3% to $431.1 million as of March 31, 1999. During the same period, loans have grown at a compound annual rate of 31.6% to $307.8 million, deposits at a compound annual rate of 27.0% to $384.5 million and trust assets under administration at a compound annual rate of 40.2% to $637.4 million. [CHART APPEARS HERE] Total Assets and Total Trust Assets under Administration
Trust Assets Total Assets ------------ ------------ (In Millions) 12/31/91 15.6 32.7 12/31/92 50.0 71.6 12/31/93 138.0 104.0 12/31/94 168.9 141.8 12/31/95 212.5 197.0 12/31/96 328.7 246.7 12/31/97 469.6 311.9 12/31/98 611.7 416.3 12/31/99 637.4 431.1
4 Our Market We have targeted affluent individuals with annual incomes in excess of $150,000, professionals, owners of closely-held businesses and commercial real estate investors because we believe that they have significant unmet demand for personalized services. Demographic data compiled by National Decision Systems, San Diego, California, indicates that there is significant growth potential in the affluent segment of the population. In the metropolitan Chicago area, the number of households with annual incomes greater than $150,000 was estimated at 190,042 in 1998, compared to 63,861 households in 1990. This equates to a compound annual growth rate of 14.6%, versus a growth rate for the total number of households in the metropolitan Chicago area of 0.6%. By 2003, the number of these affluent households in the Chicagoland area is expected to increase to 358,000, representing an annual growth rate of 13.5%, while the aggregate number of households is expected to increase at an annual growth rate of only 0.3%. [CHART APPEARS HERE] - -------- (1) Based on information from the 1990 U.S. census. (2) Estimated by National Decision Systems based on, among other things, (a) a time series of estimates made by the U.S. Census Bureau regarding six counties in the Chicago metropolitan area; and (b) data provided by the Department of Planning of the City of Chicago. (3) Generated by National Decision Systems through the application of an econometric model of the Chicago metropolitan area to the 1998 estimate. The econometric forecasting model considers the impact of various economic factors such as employment, inflation, interest rates and housing starts on future population growth. 5 The PrivateBank and Trust Approach We believe that we have developed a unique approach to private banking designed to provide our clients with unparalleled service. We emphasize personalized client relationships and custom-tailored financial services, complemented by the convenience of technology. The key aspects of our private banking approach are: . Personal Relationships. Each of our clients is matched with a dedicated team of individuals, headed by a managing director who becomes the client's central point of contact with PrivateBank. Through these dedicated teams, we are able to build strong, ongoing, personal relationships with our clients. . Affluent Target Client. We offer our services to those members of the affluent segment of the population who are focused on building and preserving wealth. Our clients include affluent professionals, entrepreneurial individuals and their business interests. . Customized Financial Services. We provide our clients with a wide variety of financial services beyond traditional banking products and are constantly working with our clients to identify their particular needs and to develop and shape our services to meet those needs. . Streamlined Decision-Making Process. Unlike many larger banks, we have not instituted a lengthy chain of command. Our clients deal directly with their dedicated managing directors, whose broad decision-making authority allows them to respond quickly and efficiently. . Enhanced Personal Service through Technology. While we encourage our clients to contact us directly, we also utilize technology to complement and enhance our service. Through PrivateBank Access, an internet banking service, we offer clients the convenience of accessing our services from remote locations at any time. . Extensive Financial Network. To better compete with other financial service providers, we rely on a network of professionals in the financial and investment communities with whom we have developed relationships over the years. This network allows us to deliver to our clients a broad array of diverse, high-quality services, including investment management, insurance and brokerage. Strategy for Growth Our growth strategy entails five key components: . Developing Our Existing Relationships. An important part of our future growth will be the continued development of our existing client relationships. As the needs of our clients change and grow, we hope to grow with them and continue to provide them with our unique, flexible services. . Increasing the Reach of Our Existing Offices. We hope to expand the market presence of our existing offices, especially our Oak Brook, Illinois and Wilmette, Illinois branches. We believe that there is a growing need for private banking services in these regions which is largely unmet, and we hope to capitalize on the experience and reputations of our managing directors in meeting this need. . Opening Additional Offices in the Chicago Metropolitan Area. The success of our Oak Brook and Wilmette offices has confirmed a significant demand by our target clients for specialized private banking services in the Chicago metropolitan area. We have recently undertaken to establish a new office in St. Charles, Illinois to meet this demand, and we will consider opening additional offices as we identify favorable locations and other qualified senior executives to add to our management team. See "Pending Acquisition." . Expanding into New Markets. We believe that the demand for our private banking services is not unique to Chicago. As we identify Midwestern markets that present similar opportunities for growth and development, we intend to pursue selective geographic expansion through acquisitions of existing institutions or by establishing new banking offices. . Expanding into New Product Lines. We intend to identify additional financial services not currently offered by PrivateBank in order to increase our franchise value by diversifying our fee income, strengthening our client relationships and broadening our product line. We may expand our product line by acquisition. We will focus on companies that emphasize quality service and the value of relationships and complement our products and client base. 6 Our Experienced Management Team PrivateBancorp, Inc. was founded in November 1989 by Ralph B. Mandell and William R. Langley. Together, they had previously headed a $1.2 billion publicly traded suburban Chicago bank holding company which they successfully merged into First Chicago Corporation in 1987. As founders of our company, they assembled a team of senior bankers with diverse experience and varied backgrounds. Mr. Mandell, with 34 years in banking, has been instrumental in the development of many of our client relationships, either personally or by providing his assistance. As chief executive officer, he sets the direction of our company and instills our sense of corporate culture. Mr. Langley retired from active management in 1995, but remains on our Board of Directors. Our current management team consists of eleven managing directors, including Mr. Mandell, and six associate managing directors. Our managing directors are senior financial professionals with an average of 27 years of banking and financial experience. Together with our Board of Directors, they currently own an aggregate of 1,079,692 shares of our common stock, which represents approximately 31.3% of the shares currently outstanding. In addition to Mr. Mandell, two other managing directors, Caren L. Reed and Donald A. Roubitchek who have both been involved with the company since 1990, also serve on our Board of Directors. Mr. Reed, our vice chairman and chief credit officer, has spent 43 years in banking and has extensive experience in relationship management and credit administration. Our quality loan portfolio and credit culture was developed under his tutelage. Mr. Roubitchek, our chief financial officer, also serves as our chief administrative and operating officer. Mr. Roubitchek, with 27 years of experience, has been responsible for managing our rapid growth. Of our other three executive officers, Gary S. Collins, a managing director since 1991, has over 24 years of experience and has been responsible for a considerable number of client relationships through his expertise in real estate lending. M. Gail Fitzgerald, a managing director since 1996, has 20 years of trust experience and is our senior trust officer responsible for managing our trust area. Hugh H. McLean, a managing director since 1996, has over 19 years of experience. He serves as head of our credit marketing group and manages our Oak Brook office. 7 The Offering Common stock offered by PrivateBancorp........ 900,000 shares(1) Common stock to be outstanding after the offering..................................... 4,351,824 shares(2) Price to Public............................... $18.00 per share Use of Proceeds............................... We intend to use the net proceeds from the sale of shares of common stock offered hereby for general corporate purposes to support our anticipated future growth. This may include: . funding internal growth at the current locations of our banking subsidiary; . creating new offices in the Chicago metropolitan area; . expanding our presence into new markets located in the Midwest; and/or . acquiring businesses that are complementary to ours. Nasdaq National MarketSM Symbol............... PVTB
- -------- (1) We have granted the underwriters an option, exercisable within 30 days after the date of this prospectus, to purchase up to an additional 135,000 shares of our common stock at the initial public offering price, solely to cover over-allotments, if any. See "Underwriting." (2) This number does not include shares reserved for issuance under our stock- based compensation program and upon the exercise of various other outstanding stock options. Pursuant to the terms of these programs, we are permitted, and in some cases obligated, to issue shares of common stock in addition to the common stock to be outstanding after this offering. If we issue these shares, the percentage of the common stock you own may be diluted. The following is a summary of additional shares of common stock that we have approved for issuance: . 476,607 shares reserved for issuance under a stock incentive plan maintained for the benefit of eligible officers and employees. This number includes (a) 50,119 shares available for future awards, and (b) 426,488 shares issuable upon exercise of currently outstanding options at a weighted average exercise price of $10.37 per share previously granted under the plan. . 206,320 shares reserved for issuance under other outstanding options to purchase common stock that were previously granted to directors and officers. The weighted average exercise price of these options is $10.51 per share. 8 SUMMARY CONSOLIDATED FINANCIAL DATA The following table summarizes certain consolidated financial information of PrivateBancorp. You should read this table in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus.
Three Months Ended March 31, Year Ended December 31, ----------------- --------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- (dollars in thousands, except per share data) Selected Statement of Income Data: Interest income: Loans, including fees.. $ 5,636 $ 4,624 $ 19,619 $ 16,729 $ 12,152 $ 10,053 $ 6,418 Federal funds sold and interest-bearing deposits.............. 48 498 2,181 875 1,392 1,149 358 Securities............. 1,570 727 3,492 2,519 2,396 1,700 1,265 -------- -------- -------- -------- -------- -------- -------- Total interest income.............. 7,254 5,849 25,292 20,123 15,940 12,902 8,041 -------- -------- -------- -------- -------- -------- -------- Interest expense: Interest-bearing demand deposits....... 142 121 487 377 305 276 210 Savings and money market deposit accounts.............. 1,800 1,629 6,651 5,880 4,613 3,484 2,139 Other time deposits.... 1,752 1,346 6,155 3,821 2,973 2,620 782 Funds borrowed......... 144 -- 19 3 143 50 62 -------- -------- -------- -------- -------- -------- -------- Total interest expense............. 3,838 3,096 13,312 10,081 8,034 6,430 3,193 -------- -------- -------- -------- -------- -------- -------- Net interest income.. 3,416 2,753 11,980 10,042 7,906 6,472 4,848 Provision for loan losses................. 285 91 362 603 524 930 305 -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses......... 3,131 2,662 11,618 9,439 7,382 5,542 4,543 -------- -------- -------- -------- -------- -------- -------- Non-interest income: Banking and trust services.............. 442 273 1,281 1,210 911 674 414 Securities gains....... -- -- 40 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Total non-interest income.............. 442 273 1,321 1,210 911 674 414 -------- -------- -------- -------- -------- -------- -------- Non-interest expense: Salaries and employee benefits.............. 1,115 1,102 4,077 3,902 3,411 2,749 2,054 Occupancy.............. 352 334 1,379 1,274 990 946 745 Data processing........ 131 120 508 396 334 282 262 Marketing.............. 153 139 567 500 424 296 272 Amortization of organization costs.... -- -- -- -- 23 280 280 Professional fees...... 178 94 561 448 326 284 253 Insurance.............. 41 30 134 115 82 238 342 Other expense.......... 285 181 864 627 508 434 321 -------- -------- -------- -------- -------- -------- -------- Total non-interest expense............. 2,255 2,000 8,090 7,262 6,098 5,509 4,529 -------- -------- -------- -------- -------- -------- -------- Income before income taxes............... 1,318 935 4,849 3,387 2,195 707 428 Income tax provision... 291 365 1,839 1,242 762 (403) 3 -------- -------- -------- -------- -------- -------- -------- Net income........... $ 1,027 $ 570 $ 3,010 $ 2,145 $ 1,433 $ 1,110 $ 425 ======== ======== ======== ======== ======== ======== ======== Per Share Data: Basic earnings......... $ 0.30 $ 0.18 $ 0.91 $ 0.69 $ 0.49 $ 0.39 $ 0.17 Diluted earnings....... 0.28 0.17 0.86 0.65 0.47 0.38 0.16 Dividends.............. 0.03 0.02 0.08 0.07 0.07 0.03 -- Book value (at end of period)............... 8.71 7.86 8.53 7.67 6.84 6.47 6.13 Selected Financial Condition Data (at end of period): Total securities(1)..... $105,136 $ 48,322 $116,891 $ 65,383 $ 44,617 $ 38,296 $ 24,669 Total loans............. 307,766 223,746 281,965 218,495 171,343 126,069 98,380 Total assets............ 431,055 331,924 416,308 311,872 246,734 196,917 141,826 Total deposits.......... 384,454 304,660 364,994 285,773 222,571 176,868 122,925 Funds borrowed.......... 10,000 -- 20,000 -- 3,000 700 1,000 Total stockholders' equity................. 30,054 25,400 29,274 24,688 20,222 18,445 17,471 Trust assets under administration......... $637,422 $524,019 $611,650 $469,646 $328,662 $212,456 $168,872
- -------- (1) For all periods after 1994, the entire securities portfolio was classified "Available for Sale." For 1994, the entire securities portfolio was classified "Held to Maturity." 9
Three Months Ended March 31, Year Ended December 31, -------------- --------------------------------- 1999 1998 1998 1997 1996 1995 1994 ------ ------ ----- ----- ----- ----- ----- Selected Financial Ratios and Other Data(1): Performance Ratios: Net interest margin(2)..... 3.57% 3.65% 3.61% 4.01% 3.73% 3.95% 4.09% Net interest spread(3)..... 3.02 2.96 2.98 3.31 3.03 3.16 3.42 Non-interest income to average assets............ 0.42 0.34 0.37 0.45 0.42 0.40 0.35 Non-interest expense to average assets............ 2.13 2.49 2.29 2.71 2.79 3.31 3.79 Net overhead ratio(4)...... 1.71 2.15 1.91 2.26 2.38 2.90 3.44 Efficiency ratio(5)........ 58.45 67.65 60.82 64.53 69.17 77.09 86.07 Return on average assets(6)................. 0.97 0.71 0.85 0.80 0.66 0.67 0.36 Return on average equity(7)................. 13.84 9.11 11.27 9.49 7.38 6.22 2.94 Dividend payout ratio...... 8.36 10.63 8.74 10.13 12.88 8.03 -- Asset Quality Ratios: Non-performing loans to total loans............... 0.12 0.32 0.36 0.24 0.65 1.90 0.15 Allowance for possible loan losses to: total loans............... 1.20 1.40 1.21 1.40 1.43 1.55 1.04 non-performing loans...... 1,025 440 336 578 220 82 711 Net charge-offs to average total loans............... -- -- -- -- 0.02 -- 0.01 Non-performing assets to total assets.............. 0.08 0.21 0.24 0.17 0.45 1.22 0.10 Balance Sheet Ratios: Loans to deposits.......... 80.1 73.4 77.3 76.5 77.0 71.3 80.0 Average interest-earning assets to average interest-bearing liabilities............... 114.2 117.0 116.4 117.7 118.6 120.7 123.8 Capital Ratios: Total equity to total assets.................... 6.97 7.65 7.03 7.92 8.20 9.37 12.32 Total risk-based capital ratio..................... 11.21 11.47 11.53 11.75 12.21 14.56 19.58 Tier 1 risk-based capital ratio..................... 10.05 10.22 10.40 10.50 10.96 13.31 18.49 Leverage ratio............. 7.53 7.87 7.88 8.70 8.71 9.76 13.03
- -------- (1) Certain financial ratios for interim periods have been annualized. (2) Net interest income divided by average interest-earning assets. (3) Yield on average interest-earning assets less rate on average interest- bearing liabilities. (4) Non-interest expense less non-interest income divided by average total assets. (5) Non-interest expense divided by the sum of net interest income plus non- interest income. (6) Net income divided by average total assets. (7) Net income divided by average common equity. 10 RISK FACTORS Investing in our common stock involves risk. The discussion below describes the most significant risk factors related to the offering. You should carefully consider these risks and uncertainties before deciding to invest in our common stock. If any of these risks or uncertainties actually occur, our business could be adversely affected. In that event, the trading price of our common stock could decline and you could lose all or a part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including those described below and elsewhere throughout the prospectus. We depend on key personnel. We are a relatively young organization and are relationship-driven. Our growth and development to date have depended in large part on the efforts of our 11 managing directors, who have primary contact with our clients and are extremely important in maintaining personalized relationships with our client base, the key aspect of our business strategy and in increasing our market presence. The unexpected loss of services of one or more of these key employees could have a material adverse effect on our operations. We have entered into employment contracts with Ralph B. Mandell, our Chairman, President and Chief Executive Officer, as well as a co-founder of our company, Donald A. Roubitchek, our Secretary/Treasurer and Chief Financial Officer and two of our managing directors. These agreements are effective beginning July 1, 1999. We are dependent on the continued services of Messrs. Mandell and Roubitchek in their roles. We have not entered into employment agreements with any of our other managing directors, nor have we entered into any key man life insurance policies. See "Management." One of our executive officers, Vice Chairman Caren L. Reed, in addition to his client responsibilities, serves as our chief credit officer. Mr. Reed has indicated that he intends to retire from active management in December 1999. Mr. Reed has agreed to continue to serve as our chief credit officer until we can name a successor so he can assist in the transition process. Our strong credit quality experience to date could be adversely impacted by Mr. Reed's retirement. We may not be able to implement aspects of our growth strategies. A key component of our growth strategy involves the expansion of our business and operations, possibly through the addition of new product lines and the acquisition or establishment of new offices. Implementing this aspect of our growth strategy depends in part on our ability to successfully identify acquisition opportunities and strategic partners that will complement our private banking approach and to successfully integrate their operations with ours. To open new offices such as the pending St. Charles branch successfully, we must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships to make these new facilities cost- effective. See "Pending Acquisition." We cannot be sure that we will be able to identify suitable opportunities for further expansion, or that if we do, that we will be able to successfully integrate these new operations into our business. If we are unable to effectively implement our growth strategies, our business may be adversely affected. Since our business is concentrated in the Chicago metropolitan area, a downturn in the Chicago economy may adversely affect our business. Currently, PrivateBank's lending and deposit gathering activities are concentrated primarily in the greater Chicago metropolitan area. Our success depends on the general economic condition of Chicago and its surrounding areas. Although currently the economy in these areas is favorable, we do not know whether such conditions will continue. Adverse changes in the economy could reduce our growth rate, impair our ability to collect loans, and generally affect our financial condition and results of operations. 11 Our future success is dependent on our ability to compete effectively in the highly competitive banking industry. We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. To date, we have grown our business successfully by focusing on our market niche and emphasizing the high level of service and responsiveness desired by our clients. While it is our intention to continue to operate in our targeted niche, we compete for loans, deposits and other financial services in our geographic market with other commercial banks, thrifts, credit unions and brokerage houses operating in the greater Chicago area. Many of our competitors offer services which we do not, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured, state-chartered banks and national banks. As a result, these nonbank competitors have advantages over us in providing certain services. See "Business--Competition." Our business may be adversely affected by the highly regulated environment in which we operate. We are subject to extensive federal and state legislation, regulation, examination and supervision. This regulation and supervision is primarily intended to protect our clients and their deposits, and not our stockholders. Recently enacted, proposed and future legislation and regulations have had, will continue to have, or may have a material adverse effect on our business and operations. Our success depends on our continued ability to maintain compliance with these regulations, including those pertaining to the Community Reinvestment Act. Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions. We cannot predict what restrictions may be imposed upon us with future legislation. See "Supervision and Regulation." We may be adversely affected by interest rate changes. Our operating results are largely dependent on our net interest income. When interest rates are rising, the interest income we earn on loans and interest- bearing investments may not increase as rapidly as the interest expense paid on our liabilities. As a result, our earnings may be adversely affected. We measure the impact of interest rate changes on our income statement through the use of gap analysis which is a way to measure and manage sensitivity to interest rate fluctuations. The amount of earning assets that reprice or mature during a given time interval is compared to the amount of interest-bearing liabilities that reprice or mature during the same time period. A bank which matches perfectly the maturities of its assets and liabilities has a "gap" position of 1.00. In this instance, under the gap analysis changes in interest rates would have no effect on net interest income because interest income and interest expense change in like amounts. There is an interest rate "gap" if the amounts of repricing assets and liabilities differ for the given time period. A positive gap, or a position greater than 1.00, indicates more assets than liabilities will reprice in that time period, while a negative gap, or a position less than 1.00, indicates more liabilities than assets will reprice. A bank with a positive gap position would benefit from rising interest rates because assets will reprice faster than liabilities, improving net interest income, but net interest income would be reduced when interest rates are falling. Conversely, a bank would benefit from a negative gap position in a falling interest rate environment. We generally operate within guidelines set by our asset/liability policy for maximum interest rate risk exposure, and attempt to maximize our returns within an acceptable degree of risk. Our policy calls for maintaining a gap position at the one year horizon of between 0.70 and 1.30 to allow us to take advantage of anticipated interest rate environments, but within reasonable maximum risk exposures. Given the current interest rate environment and relatively flat yield curve, however, we have recently been operating with a gap position at the low end of our policy limits in light of the available business opportunities. At March 31, 1999, our gap position was 0.697, slightly below our policy limit, reflecting borrowers' general preference for 12 fixed-rate loans or loans adjusting over longer time intervals, and depositors general preference for shorter term certificates of deposits. Generally speaking, a short-term rise in interest rates will hurt our earnings more than if we were operating within our policy guidelines. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations--Asset/Liability Management Policy." We may be adversely affected by government monetary policy. The banking industry is affected by the monetary policies of the Federal Reserve System, which regulates the national money supply in order to mitigate recessionary and inflationary pressures. In setting its policy, the Federal Reserve System may utilize techniques such as the following: . engaging in open market transactions in United States government securities; . setting the discount rate on member bank borrowings; and . determining reserve requirements. These techniques may have an adverse effect on our deposit levels, net interest margin, loan demand or our business and operations. See "Supervision and Regulation." Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio. Lending money is a substantial part of our business. However, every loan we make carries a certain risk of non-payment. This risk is affected by, among other things: . the credit risks of a particular borrower; . changes in economic and industry conditions; . the duration of the loan; and . in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral. We maintain an allowance for loan losses which we believe is appropriate to provide for any potential losses in our loan portfolio. The amount of this allowance is determined by management through a periodic review and consideration of several factors, including: . an ongoing review of the quality, size and diversity of our loan portfolio; . evaluation of non-performing loans; . historical loan loss experience; and . the amount and quality of collateral, including guarantees, securing the loans. Although we believe our loan loss allowance is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses, and there can be no assurance that our allowance will be adequate. Excess loan losses could have a material adverse effect on our financial condition and results of operations. Regulatory restrictions on dividend payments from our subsidiary may affect our ability to pay dividends to our stockholders. We have paid dividends to our stockholders on a regular basis. Although we intend to continue to pay dividends, our ability to do so may be affected by many factors. While in the past we have had available cash at the holding company level to fund dividend payments, we anticipate that in the future we will rely on 13 income earned by PrivateBank as the primary source for dividend payments. PrivateBank is subject to certain restrictions on the amount of dividends it may pay to us without regulatory approval. See "Dividends" and "Supervision and Regulation--Bank Regulation--Dividends." Our computer systems could experience a security breach. As a service to our clients, we offer PrivateBank Access, our internet PC banking product. Use of this service involves the transmission of confidential information over public networks. We cannot be sure that advances in computer capabilities, new discoveries in the field of cryptography or other developments will not result in a compromise or breach in the commercially available encryption and authentication technology that we use to protect our clients' transaction data. If we were to experience such a breach or compromise, we could suffer losses and our operations could be adversely affected. We depend on third parties for our data processing needs; and we are in the process of converting to a new provider for our loan and deposit processing requirements. We rely on outside organizations to handle virtually all of the data processing aspects of our business. If these outside organizations experience any type of computer or personnel failure and are unable to properly input or process our information, our operations may be adversely affected. Situations which might impair the ability of our outside data processors to meet our needs include: . computer system failure; . loss of the personnel to handle the requirements of all of its customers; . loss, misapplication or corruption of our data; and . lack of preparation for the "year 2000 issue." If any of these outside organizations cease doing business or are unwilling to renew our contract, we may be adversely affected. In addition, we are currently in the process of transferring our loan and deposit processing requirements to a new third party provider. While we anticipate completing this transition during the third quarter of 1999, we may experience some delays in this process which could have an adverse impact on our operations. We rely on the services of outside investment managers. In our trust and asset management business, which currently is the source of substantially all of our fee income, we do not provide investment management services directly through our own personnel. Rather, we rely on selected outside investment managers to provide investment advice and asset management services to our clients. We cannot be sure that we will be able to maintain these arrangements on favorable terms. Also, many of the investment managers with whom we work are affiliated with our competitors in the financial services field. We cannot be sure that our investment managers will continue to work with us in these arrangements. The loss of any of these outside investment managers may impact our ability to provide our clients with quality service or certain types of portfolio management without incurring the cost of replacing them. Our business may be negatively impacted by the year 2000 issue. The "year 2000 issue", a critical issue in the banking industry and the economy as a whole, has emerged because many existing application software programs and systems use only the last two digits in referring to a year. Therefore, these computer programs do not properly recognize a year beginning with "20" instead of the familiar "19." If not corrected, many computer applications and other technology-based systems could fail or create erroneous results. The effects of this problem will vary from system to system, and the extent of the potential impact of the year 2000 problem is not yet known. The year 2000 problem may adversely affect a 14 bank's operations. We could experience interruptions in PrivateBank's business and suffer significant losses if we, or a supplier or vendor with whom PrivateBank contracts, are unable to achieve year 2000 readiness before January 1, 2000. We are in the process of working with our third party service providers and software vendors to assure that both our holding company and PrivateBank are prepared for the year 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Our Information Systems and the Year 2000." A trading market for our common stock may not develop, and may be affected by a significant number of shares which will become eligible for public sale after the offering. Our common stock has never been publicly traded, so we cannot predict the extent to which a trading market will develop. In addition, the market price of our common stock could drop as a result of sales of a large number of shares of common stock after this offering. Your ability to resell you shares at or above the initial public offering price may be adversely affected by these factors. Immediately after this offering, assuming no prior exercise of outstanding options, there will be 4,351,824 shares of our common stock outstanding. Unless held by our affiliates, who are subject to certain trading restrictions under the securities laws: . 2,770,550 shares, or 63.6% of the shares outstanding, will immediately be freely tradable in the public market, including all 900,000 shares sold in this offering; and . 81,900 shares, or 1.9% of the total outstanding, will become available for sale beginning in September 1999. Our directors and executive officers, who hold an aggregate of 1,005,112 shares, and certain of our stockholders, who hold an aggregate of 472,662 shares, representing in aggregate 33.9% of the total number of shares that will be outstanding after the offering, have agreed not to offer, sell or contract to sell any of their shares for a period of 180 days after the date of this prospectus without the prior written consent of EVEREN Securities, Inc. Upon expiration of this lock-up period, however, these shares may become available for resale in the public market. See "Shares Eligible for Future Sale." Pursuant to the terms of our Stock Incentive Plan, we have awarded an aggregate of 21,600 shares of restricted stock to certain of our employees who are not executive officers. Although our employees have full voting rights with regard to these shares and may receive any dividends we declare, they may not transfer the shares until they are fully vested. Each restricted stock award will vest in its entirety on the fifth anniversary of the date of grant and is subject to forfeiture until vesting. The shares vest on various dates between 2001 and 2004. A substantial number of shares of our common stock issued pursuant to our Stock Incentive Plan will also become available for resale in the public market at prescribed times. In addition, we intend to register under the Securities Act the shares of common stock reserved for issuance under our stock-based programs. Certain provisions of Delaware law and our charter and by-laws may discourage or prevent a takeover of our company and reduce any takeover premium. Our Amended and Restated Certificate of Incorporation, our By-laws and Delaware law all contain provisions that could discourage potential acquisition proposals, or delay or prevent a change in the control of the Company. Provisions in our charter and By-laws designed to discourage or prevent a takeover include: . staggered terms for our directors, which makes it difficult to replace the entire board; . the ability of the Board of Directors to issue shares of preferred stock, which could dilute the voting power and equity interest of holders of the common stock; and 15 . the requirement that holders of 66 2/3% of our outstanding common stock must approve any change of these anti-takeover provisions. Stockholders sometimes realize a significant premium in their stock price when an offer is made to purchase a company. Because we have adopted these provisions, such offers will likely be discouraged, and our stockholders may lose the benefit of any potential premium. There are also state and federal laws which regulate direct and indirect takeover attempts of financial institutions. Our directors and officers may have significant influence on how our common stock is voted. Our directors and executive officers will beneficially own approximately 28.9% of the outstanding shares of our common stock at the closing of this offering, assuming none of them purchases shares in the offering. If our directors and executive officers vote together, they could influence the outcome of certain corporate actions requiring stockholder approval, including the election of directors and the approval or non-approval of significant corporate transactions, such as the merger or sale of all or substantially all of our assets. You will incur immediate and substantial dilution in your shares. Investors in this offering will experience an immediate and substantial dilution in the book value of the common stock. If you purchase shares of our common stock, and we sell 900,000 shares at the offering price of $18.00 on the cover page of this prospectus, after giving effect to the issuance of 91,668 shares in the pending acquisition, the pro forma net tangible book value of your shares at March 31, 1999 will be $10.04. This is $7.96 less than your purchase price. See "Dilution" and "Pending Acquisition." Management will have substantial discretion over the use of the proceeds of this offering. We have not designated specific uses for all of the net proceeds of this offering. We intend to immediately use $8.0 million of the net proceeds to increase the regulatory capital of our PrivateBank subsidiary to support the growth of our existing banking operations and the planned establishment of a new office in St. Charles, Illinois. The remaining $6,316,000, or approximately 44%, of the proceeds are currently unallocated and will be available to fund future internal growth or expansion of our business through establishment of new banking locations and entering into strategic acquisitions and affiliations, to the extent we identify these opportunities. Accordingly, you must rely upon the judgment of our management who will have significant flexibility with respect to applying the net proceeds. At present, other than the pending acquisition of Towne Square Financial Corporation, we have no plans, agreements or understandings relating to any specific acquisitions or alliances. Although part of our business strategy is to pursue acquisitions and alliances that will broaden our product offerings and add new markets, we cannot be sure that we will find strategic acquisition opportunities at favorable prices, that we will have sufficient capital resources to finance our acquisition strategy, or that any such acquisitions, if consummated, will be successfully integrated with our business operations. 16 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS We make certain forward-looking statements in this prospectus that are based upon our current expectations and projections about current events. You can identify these statements from our use of the words "estimate," "project," "believe," "intend," "anticipate," "expect" and similar expressions. These forward-looking statements include: . statements of our goals, intentions and expectations; . statements regarding our business plans and growth strategies; . statements regarding the asset quality of our loan and investment portfolios; . estimates of our risks and future costs and benefits; and . statements regarding the effectiveness of our efforts to make our operations year 2000 compliant. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors which could affect the actual outcome of future events: . fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuations and expense expectations; . adverse changes in the economy of the greater Chicago metropolitan area, our primary market, which might affect our business prospects and could cause credit-related losses and expenses; . the extent of continuing client demand for the high level of personalized service that is the key element of our private banking approach; . adverse developments in our loan and investment portfolios; . unforeseen developments or delays relating to the pending acquisition of Towne Square Financial Corporation or difficulties relating to the establishment of a St. Charles office; . difficulties in identifying attractive acquisition opportunities and strategic partners that will complement our private banking approach; . competitive factors in the banking industry, such as the trend towards consolidation in our market; . changes in banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks like ours; and . our effectiveness and that of our suppliers of data processing equipment and services, government agencies, and other third parties in testing and implementing year 2000 compliant hardware, software and systems. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. In addition, our past results of operations do not necessarily indicate our future results. We discuss these uncertainties and others in the sections of this prospectus named "Risk Factors," "Business," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 17 PENDING ACQUISITION Effective as of June 24, 1999, we entered into a definitive agreement to acquire Towne Square Financial Corporation, a recently organized Delaware corporation formed for the purpose of developing a de novo, or start-up, bank in the community of St. Charles, Illinois, a far western suburb of Chicago. Demographic data shows that the St. Charles area has been one of the more rapidly growing areas in Illinois in recent years, and our management believes the transaction affords us an excellent opportunity to expand our franchise in an attractive market. Background Upon learning of Towne Square's plans to form a de novo bank in the St. Charles area, Ralph Mandell, our Chairman and CEO, contacted representatives of the Towne Square group to explore the possibility of a strategic alliance. At the time we began discussions with Towne Square on April 30, 1999, the company had already raised initial seed capital from a group of six organizers and developed a business plan to start a local bank focused on private banking services, but had not yet commenced operations nor filed any of the required regulatory applications relating to organization of a new bank. Because of the similarity of our banking strategies and the compatibility of our management, in lieu of pursuing its de novo strategy, Towne Square has agreed to merge with us in a stock-for-stock transaction. The terms of the transaction are the result of extensive arms' length negotiations between the parties. In approving the transaction on the negotiated terms, and concluding that the transaction is in the best interest of our stockholders, our Board of Directors considered a number of factors, including, among others, the following: . the potential market opportunities offered by St. Charles and the surrounding Fox Valley communities and the opportunity to expand the PrivateBank franchise consistent with the Company's growth strategy; . management's opinion that the transaction affords us a unique opportunity to expand in an attractive market on terms that the Board believed were fair to our stockholders based on a consideration of the potential dilutive effect of the transaction to existing stockholders and new investors in this offering in the short term, weighed against the potential for a favorable internal return on investment over the longer term; . the significant contacts of Thomas Castronovo, an experienced banking veteran in the Fox Valley area, his perceived compatibility with management and his willingness to join PrivateBank as a managing director in connection with the transaction; . the competitive advantages of forestalling the Towne Square organizers from pursuing an independent private banking strategy; . the commitment of the Towne Square organizers, all prominent businessmen and professionals from St. Charles, to serve on a Fox Valley advisory board of PrivateBank and to support the efforts of the bank in St. Charles; . the strategic benefits of non-compete agreements to be entered into by the Towne Square organizers in connection with the acquisition; . the value of the preliminary business plan that had been developed by Towne Square, including the identification of an attractive banking location in St. Charles that would be available to PrivateBank at market rates under a ten-year lease; and . that, as a result of the transaction, PrivateBank would expect to be in a position to expedite the organizational activities related to establishing a new banking location and be able to open a banking office in St. Charles during the fourth quarter of 1999. Instead of opening a new bank as Towne Square had planned, we will establish a new office of PrivateBank in St. Charles to be managed by Mr. Thomas Castronovo, one of the principal organizers of Towne Square who will be joining us as a managing director. Mr. Castronovo has 17 years of prior banking experience and has significant contacts in the St. Charles community. Under this arrangement, we believe there 18 are significant opportunities for us in St. Charles and the surrounding Fox River Valley communities to grow our private banking business. We expect to file the requisite branch applications with the regulators during July 1999 and currently anticipate opening the St. Charles office during the fourth quarter of 1999. Terms of the Transaction Pursuant to the contemplated merger, Towne Square will be merged into PrivateBancorp, Towne Square will cease to exist, and PrivateBancorp will continue as the surviving corporation. In exchange for their shares of Towne Square, the stockholders of Towne Square will receive merger consideration equal to an aggregate of approximately 91,668 shares of PrivateBancorp common stock. The exchange ratio was determined by dividing $1,650,000 by the initial public offering price of our stock. Of the shares to be issued in the merger, approximately 55%, or about 50,000 shares, will be subject to a one year restriction on resale and the remainder to a three-year resale restriction. In connection with the transaction, we have agreed to enter into a three- year employment agreement with Mr. Castronovo providing for, among other things, a signing bonus in the amount of $150,000 payable in two installments, one-half at the time we open the St. Charles office and the other half six months later. It is contemplated that Mr. Castronovo's employment agreement will commence upon the closing of the transaction. We have also agreed that Mr. Castronovo will receive options to purchase 7,000 shares, expected to be granted under our Stock Incentive Plan at the initial public offering price, and an award of 3,000 shares of restricted stock which will be subject to forfeiture until fully vested five years after the date of grant. In addition to our employment of Mr. Castronovo, we have agreed that following consummation of the merger we will add to our Board of Directors one individual, who must be acceptable to us, to be designated by the stockholders of Towne Square. Also as part of the transaction, Towne Square will agree, and will cause each of its six organizers also to agree, for a period of at least three years not to compete with our business in the St. Charles market and to support our efforts to develop relationships in the community. We will be forming a St. Charles advisory board, to be comprised of the Towne Square organizers plus two more prominent business people or professionals from the area to be mutually selected, in order to draw on the experience and contacts of these individuals in the local community to assist us in the development of our St. Charles office. Also in connection with the transaction, we will enter into a lease for space in a building recently acquired by the Towne Square organizers which is where we will locate our St. Charles office. The lease will run for ten years and provides for rents not in excess of comparable market rates. Consummation of the merger is subject to effectiveness of a registration statement being filed with the SEC relating to the transaction, the approval of Towne Square's stockholders owning at least a majority of the outstanding shares of Towne Square, and customary closing conditions. It is currently anticipated that the transaction will close during the third quarter of 1999 following completion of this offering. Accounting Treatment; Financial Impact of the Acquisition Because Towne Square is not yet actively engaged in business, the merger transaction will not be accounted for as a business combination. Rather, at the time of closing, we will incur a one-time, nonrecurring charge to earnings in an amount equal to the excess of the value of our stock issued in the merger over the net assets of Towne Square on the date of closing. We anticipate that the net assets of Towne Square, consisting substantially of cash, will approximate $240,000 at closing. The one-time charge, currently estimated to be approximately $1.29 million, is expected to be recorded during the third quarter of 1999 and will adversely affect our 1999 results of operations. The merger related charge will not be a deductible expense for tax purposes. In addition to the merger related charge, we will incur additional start-up costs relating to the opening of the St. Charles office. We currently anticipate that the total pre-tax start-up costs will be approximately $430,000, including $75,000 of the signing bonus payable to Mr. Castronovo, and that the majority of these costs will be expensed during 1999. 19 USE OF PROCEEDS The net proceeds which we will receive from the sale of 900,000 shares of common stock in this offering are estimated to be approximately $14,316,000 (assuming no exercise of the over-allotment option) after deducting underwriting discounts and the aggregate expenses payable by us. Such expenses are currently estimated to be approximately $750,000. We intend to contribute $8.0 million of the net proceeds from this offering to increase the regulatory capital of PrivateBank to support the growth of our existing banking operations and the planned establishment of a new office in St. Charles, Illinois. We are raising the remainder of the proceeds to have funds available for future internal growth or expansion of our business through: . establishing new offices within the Chicago metropolitan area; . expanding our presence into new markets located in the Midwest; and . acquiring or affiliating with companies in businesses complementary to ours. Other than the pending acquisition of Towne Square Financial Corporation, we have not yet identified any specific acquisition or affiliation candidates. Until we have designated the specific use by the company of the remaining proceeds, we intend to deposit these funds in an account of the company at PrivateBank, where we can use them as a temporary funding source for loans or investments of PrivateBank. DIVIDENDS; NO PRIOR TRADING MARKET Holders of our common stock are entitled to receive dividends that our Board of Directors may declare from time to time. We may only pay dividends out of funds which are legally available for that purpose. Because our consolidated net income consists largely of the net income of PrivateBank, our ability to pay dividends to our stockholders may become dependent upon our receipt of dividends from PrivateBank. PrivateBank's ability to pay dividends is regulated by banking statutes. See "Supervision and Regulation--Bank Regulation-- Dividends." Our declaration of dividends is discretionary and will depend on our earnings and financial condition, regulatory limitations, tax considerations, and other factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity." We have paid quarterly dividends on our common stock since the third quarter of 1995. While our Board of Directors expects to continue to declare dividends quarterly, there can be no assurance that we will continue to pay dividends at these levels or at all. The following table sets forth the history of per share cash dividends declared and paid on our stock since the beginning of 1997: 1997 First Quarter............................. $0.016 Second Quarter............................ 0.016 Third Quarter............................. 0.019 Fourth Quarter............................ 0.019 1998 First Quarter............................. $0.019 Second Quarter............................ 0.020 Third Quarter............................. 0.020 Fourth Quarter............................ 0.020 1999 First Quarter............................. $0.025 Second Quarter (1)........................ $0.025
- -------- (1) Payable on June 30, 1999, to stockholders of record on June 7, 1999. As of March 31, 1999, we had 491 stockholders of record. Prior to this offering, there has been no established public trading market for our common stock. We have applied for inclusion of our common stock in The Nasdaq National Market upon completion of this offering. 20 CAPITALIZATION The following tables set forth our total capitalization and capital ratios as of March 31, 1999, and our total capitalization pro forma to give effect to completion of the pending acquisition and pro forma as adjusted to reflect the issuance and sale of 900,000 shares of our common stock which we are offering in this prospectus (assuming the underwriters do not exercise the over- allotment option).
March 31, 1999 --------------------------- Pro Pro Forma As Actual Forma(1) Adjusted ------- -------- -------- (dollars in thousands) Stockholders' equity: Preferred Stock, 1,000,000 shares authorized(2); none designated or outstanding................... $ -- $ -- $ -- Common stock, without par value, 12,000,000 shares authorized(2); 3,451,824 shares, $1.00 stated value, issued and outstanding; 3,543,492 shares outstanding pro forma, and 4,443,492 shares outstanding pro forma as adjusted(3)............. 3,452 3,543 4,443 Surplus........................................... 22,600 24,034 37,450 Retained earnings................................. 5,853 4,568 4,568 Accumulated other comprehensive income, net of tax effect........................................... (58) (58) (58) Deferred compensation............................. (843) (843) (843) Loan to executive officer......................... (950) (950) (950) ------- ------- ------- Total stockholders' equity...................... $30,054 $30,294 $44,610 ======= ======= =======
- -------- (1) Gives effect to completion of the pending acquisition of Towne Square Financial Corporation based on the issuance of 91,668 shares in the transaction as if the transaction had been consummated on March 31, 1999, resulting in a one-time charge to earnings of $1,285,000. See "Pending Acquisition." (2) Gives effect to the amendment to PrivateBancorp's Restated Certificate of Incorporation to increase the authorized shares which was approved by stockholders on April 22, 1999. (3) These share amounts do not include an aggregate of 632,808 shares of common stock issuable upon exercise of outstanding options (after giving effect to option grants through the date of this prospectus), of which 453,408 shares are subject to currently exercisable options. The pro forma amounts also exclude 3,000 shares of restricted stock and 7,000 shares to be subject to options that are expected to be granted in connection with the pending acquisition. See "Pending Acquisition."
March 31, 1999 --------- Capital ratios (at end of period): Total equity to total assets........................................ 6.97% Total risk-based capital ratio...................................... 11.21 Tier 1 risk-based capital ratio..................................... 10.05 Leverage ratio...................................................... 7.53
21 DILUTION As of March 31, 1999, we had an aggregate of 3,451,824 shares of common stock outstanding, and, giving effect to the assumed issuance of 91,668 shares in the pending Towne Square acquisition, the common stock had a net tangible pro forma book value of $8.55 per share. "Net tangible pro forma book value per share" represents our tangible net worth, which is our total assets less our intangibles and total liabilities as adjusted to give effect to the Towne Square acquisition, divided by the total number of shares of common stock outstanding. Net tangible pro forma book value is equal to our reported book value as adjusted to give effect to the Towne Square acquisition. Without taking into account any other changes in net tangible book value after March 31, 1999, other than those resulting from application of the net proceeds we will receive from the sale of 900,000 shares offered hereby (after deduction of the underwriting discount and estimated offering expenses), the net tangible book value at March 31, 1999, would have been $10.04 per share. This represents an immediate increase of $1.49 per share to current stockholders and an immediate dilution in book value of $7.96 per share to new investors. The following table illustrates this per share dilution. Assumed initial public offering price........................ $18.00 Net tangible pro forma book value per share before the offering.................................................. $8.55 Increase per share attributable to investors in the offering.................................................. 1.49 ----- Net tangible pro forma book value per share after the offering.................................................... 10.04 ------ Per share book value dilution to investors in the offering(1)................................................. $ 7.96 ======
- -------- (1) Does not give effect to and assumes no prior exercise of currently outstanding options to purchase up to an aggregate of 632,808 shares of common stock, of which 453,408 are currently exercisable. Further adjusted as of March 31, 1999, to give effect to the exercise of such options in accordance with their terms, the estimated net tangible pro forma book value per share before the offering would be $8.50 and after the offering would be $9.86, and the estimated per share book value dilution to investors in the offering would be $8.14. The following table compares, on a pro forma basis at March 31, 1999: . the total number of shares of common stock purchased from us, giving effect to the assumed issuance of 91,668 shares in the pending Towne Square acquisition; . the total cash consideration paid; and . the average price per share paid by: . existing stockholders; and . new investors. This table assumes the sale of 900,000 shares in the offering, before the deduction of the underwriting discount and estimated offering expenses, and assumes no exercise of stock options outstanding as of March 31, 1999.
Shares Total Purchased Consideration Average --------------- ---------------- Price Percent Percent Per Number of Total Amount of Total Share ------ -------- ------- -------- ------- (in thousands, except per share amounts) Existing stockholders.................. 3,543 79.7% $26,272 61.9% $ 7.40 Investors in the offering(1)........... 900 20.3 16,200 38.1 18.00 ----- ----- ------- ----- Total................................ 4,443 100.0% $42,472 100.0% ===== ===== ======= =====
- -------- (1) If the over-allotment option is exercised in full, the number of shares of common stock held by investors in the offering will increase to 1,035,000 shares, or 22.6% of the total shares of common stock outstanding after this offering. 22 BUSINESS Overview We organized PrivateBancorp as a Delaware corporation in 1989 to provide highly personalized financial services primarily to professionals, entrepeneurial individuals and their closely-held businesses. We were one of the first banks newly formed in the Chicago area in recent years. The organizers had significant senior level banking experience and many potential client contacts from prior banking positions. We believe that as the financial industry has consolidated, many financial institutions have focused on a mass market approach using automated customer service which de-emphasizes personal contact. We believe that the centralization of decision-making power at these large institutions has resulted in disruption of client relationships as frontline bank employees who have limited decision-making authority fill little more than a processor role for their customers. At many of these large institutions, services are provided by employees in the "home office" who evaluate requests without the benefit of personal contact with the customer or an overall view of the customer's relationship with the institution. We believe that this trend has been particularly frustrating to affluent individuals, professionals, owners of closely-held businesses and commercial real estate investors who traditionally were accustomed to dealing directly with senior bank executives. These customers typically seek banking relationships managed by a decision maker who can deliver a prompt response to their requests and custom tailor a banking solution to meet their needs. As smaller, independent banks have been acquired by national, multi-bank holding companies, we believe that the personal relationships that these customers maintained with the management of such banks have eroded, and their individualized banking services have been lost. Through our banking subsidiary, The PrivateBank and Trust Company, we provide our clients with traditional personal and commercial banking services, lending programs, and trust and asset management services. Using the European tradition of "private banking" as our model, we strive to develop a unique relationship with each of our clients, utilizing a team of highly qualified account executives to serve the client's individual and corporate banking needs, and tailoring our products and services to meet such needs. Our managing directors are strategically located in three Chicago-area offices: Downtown Chicago, Wilmette, Illinois, and Oak Brook, Illinois. We opened our flagship Chicago location in 1991. We expanded to our Wilmette office in north suburban Cook County in 1994 after identifying a senior banking officer with existing relationships and client contacts in this North Shore area. We opened the Oak Brook facility in west suburban DuPage County in 1997 with the addition of a managing director who has extensive relationships in that market. Since our start in 1991, we have experienced rapid internal growth. From year-end 1995 to March 31, 1999, our compound annual growth rate in loans was 31.6%, in assets was 27.3%, in deposits was 27.0% and in trust assets under administration was 40.2%. At March 31, 1999, we had total loans of $307.8 million, total assets of $431.1 million, total deposits of $384.5 million, total stockholders' equity of $30.1 million and total trust assets under administration of $637.4 million. Our Market In response to the need for individualized banking services, we created The PrivateBank and Trust Company as the first Chicago-based institution dedicated primarily to providing banking services to professionals, entrepreneurial individuals, and their business interests. We targeted the affluent segment of the market because we believe that there is significant unmet demand for personalized services within this segment, and also because we recognize its significant growth potential. According to National Decision Systems, San Diego, California, the number of households in the metropolitan Chicago area with annual incomes greater than $150,000 was estimated at 190,042 in 1998, compared to 63,861 households in 1990. This equates to a compound annual growth rate of 14.6%, versus an annual growth rate for the total number of households in the 23 metropolitan Chicago area of 0.6%. By 2003, the number of these affluent households in the Chicagoland area is expected to increase to approximately 358,000, representing an annual growth rate of 13.5%, while the aggregate number of households is expected to increase at an annual growth rate of 0.3%. The following graph illustrates the size and relative growth of this market: [Performance Graph Appears Here] [PLOT POINTS TO COME] (1) Based on information from the 1990 U.S. census. (2) Estimated by National Decision Systems based on, among other things, (a) a time series of estimates made by the U.S. Census Bureau regarding six of the counties in the Chicago metropolitan area; and (b) data provided by the Department of Planning of the City of Chicago. (3) Generated by National Decision Systems through the application of an econometric model of the Chicago metropolitan area to the 1998 estimate. The econometric forecasting model considers the impact of various economic factors such as employment, inflation, interest rates and housing starts on future population growth. The PrivateBank and Trust Approach We believe that we have developed a unique approach to private banking designed to provide our clients with unparalleled service. We emphasize personalized client relationships and custom-tailored financial services, complemented by the convenience of technology. The key aspects of our private banking approach are: . Personal Relationships. Our approach begins with the development of strong, dedicated relationships with our clients. Each client of PrivateBank is matched with a team of individuals headed by a managing director. This managing director becomes our client's central point of contact with PrivateBank. Our eleven managing directors, who are senior financial professionals with an average 24 of 27 years of banking and financial experience, act as the financial partners of our clients, working with them to identify and service their banking needs. By dedicating a team of executives to each client, we are able to build ongoing relationships which allow our managing directors to use their increasing knowledge of the client's financial history and goals to quickly adapt our services to the client's individual needs. Our clients interact with the same persons at PrivateBank for all types of banking services, enabling them to gain a sense of security and continuity of personal service in their banking relationship. On the basis of this trust and confidence, we seek to expand the scope of services provided to each client, often including banking needs related to the business affairs of our clients. Satisfied clients provide our most fertile source of new business and new client referrals as well. . Affluent Target Client. We believe that the affluent segment of the population, meaning that segment with annual incomes over $150,000, is increasing and is diverse in terms of its overall wealth and financial needs. PrivateBank offers its services to those members of this segment who are focused on building and preserving wealth. Our clients include professionals, entrepreneurial individuals and their business interests. We target service industries such as the accounting, legal and medical professions, as well as owners of closely-held businesses, commercial real estate investors and corporate executives. Although we generally target individuals with high annual incomes and net worths, we recognize the growth potential of certain young professionals and extend our services to those individuals whose income or net worth do not initially meet our criteria. We believe that this segment of the market is most suited to our business and that these individuals are most likely to develop long-term relationships with us. . Customized Financial Services. We realize that many of our clients require a custom solution to their financial needs. In taking a long- term, relationship approach to our clients, we are able to differentiate ourselves from the "one-size-fits-all" mentality of other financial institutions. We offer our clients a wide variety of financial services beyond the traditional banking products and are constantly working to develop and shape our services to meet their growing needs. We take the time to identify our clients' particular needs and tailor our services to meet those needs on an individual customized basis, while maintaining highly competitive rates and fees that take into account the size and profitability of each client relationship. While we are proud of our portfolio of products, we believe that it is our service that distinguishes us from our competition. We encourage our clients to contact us rather than discourage them. We use regular contact as a way to strengthen our relationships, increase services to existing clients and earn referral business. . Streamlined Decision-Making Process. Unlike most larger banks, we have not instituted a lengthy chain of command. Our clients deal directly with their dedicated managing directors, who are given broad decision- making authority. This allows our managing directors to respond quickly and efficiently to our clients' needs. We are able to use a streamlined approach because our organization has many qualified, experienced credit officers. Officers with credit approval authority make themselves available on short notice to help consult on or approve credits when time is of the essence. We use an "on call" approach, rather than structured meetings, to approve credit. As the amount of the credit and the complexity increases, we resort to a more traditional process. . Enhanced Personal Service through Technology. While we encourage our clients to contact us directly, we also utilize technology to complement and enhance our service. We created products such as PrivateBank Access, our internet banking service, MasterMoney debit cards and Private Line Access, our voice-response communication system, to enhance, not replace, personal contact. This technology allows us to offer our clients the convenience of accessing our services from remote locations at any time of day. We believe that our PrivateBank Access product is likely to grow in importance. Our clients may connect to PrivateBank Access directly through our internet website, without the need for the diskettes or software downloads found in some competing PC banking systems. Currently, our product: 25 . accesses deposit and loan information; . allows transfers of funds among accounts; . includes a bill payment service with a variety of options; . allows information to be exported to financial software packages; . includes a help desk which is staffed 92 hours per week; and . sends e-mail messages from clients to PrivateBank personnel. We are working to supplement our website to enhance our service to clients. Some features we are planning include: . applications for our banking products; . access to trust account information; . current deposit rate schedules; and . current mortgage rate schedules. As technology changes, we intend to modify and enhance our electronic banking products. We believe that in the future, a growing number of our clients will desire both personal and electronic services. We intend to work to offer dual-delivery systems providing the quality of service to which PrivateBank clients are accustomed. . Extensive Financial Network. In order to compete with other financial service providers, we rely on a network of professionals in the financial and investment communities with whom we have developed strategic alliances over the years. This enables us to offer our clients a broad array of high quality services. For example, we work with selected investment management firms in providing services to our trust clients. Our clients can either maintain existing investment management relationships when they become our trust clients, or use our preferred providers of investment management services. We believe this choice distinguishes our service from the rigid policies set by some of our competitors. We, in turn, help our clients select a complete package of services best suited to their individual needs without incurring the overhead associated with directly employing diversified portfolio managers. We also have a contractual fee sharing agreement with Mesirow Financial, Inc., an independent insurance brokerage company in the Chicago area. Through this affiliation, we offer a full range of personal and corporate insurance products to our clients. To complement our existing financial products and services, we have a contractual arrangement with Sterling Investment Services, Inc., a registered securities broker-dealer firm, through which we offer our clients on- site securities brokerage services. Strategy for Growth Our growth strategy entails five key components: . Developing Our Existing Relationships. An important part of our future growth will be the continued development of our existing client relationships. As the needs of our clients change and grow, we seek to grow with them and continue to provide them with our custom-tailored, flexible services. For example, we strive to follow our clients from the purchase of their homes, through the financing of their own business, to the development and planning of their estate, continuing the relationship tradition with their children and grandchildren. We believe we have a significant opportunity to further develop our existing client relationships in each of our offices. . Increasing the Reach of Our Existing Offices. In addition to increasing the services provided to our existing clients, we seek to expand the market presence of our existing offices, especially our Oak Brook and Wilmette branches. We believe that the growing need for private banking services in these regions is largely unmet and we have a significant opportunity to increase our client base in these branches. We hope to capitalize on our reputation and the reputations of our managing directors in 26 increasing our market presence. Our managing directors, with their personal and professional contacts in the financial and corporate arenas, have been instrumental in developing our business to date. We encourage our senior executives to attend and host business receptions, charitable activities and promotional gatherings so that we may interact with our clients in a unique and personal manner. We also hope to grow our branch offices through referrals from our existing clients. Referrals have been a significant source of new business for us. We value this system of networking because it allows us to further develop and strengthen our personal and professional relationships with both new and existing clients. . Opening Additional Offices in the Chicago Metropolitan Area. Our experience in our Oak Brook and Wilmette offices demonstrates to us that there exists significant demand by our target client for specialized private banking services in the Chicago metropolitan area. We built these offices around senior executive officers whom we recruited for their strong banking experience and extensive personal and professional contacts in those areas. To increase our market penetration, we have recently negotiated the acquisition of Towne Square Financial Corporation and plan to establish a new office of PrivateBank in St. Charles, Illinois, a far western suburb of Chicago located in the rapidly growing Fox River Valley area. We have recruited one of the organizers of Towne Square, who is an experienced banker with significant contacts in St. Charles and the surrounding communities, to join us as a managing director to head this office. See "Pending Acquisition." We will consider opening additional offices as we identify locations and other senior executives that will maintain our standards for high-quality personalized service. . Expanding into New Markets. We believe the trend toward bank consolidation and centralized decision-making that has created a demand for our private banking services is not unique to Chicago. We believe there is similar demand in other markets within the Midwest and we are interested in expanding in markets that present opportunities for growth and development similar to those in the Chicago market. We intend to pursue selective geographic expansion through possible acquisitions of existing institutions or by establishing new banking offices. . Expanding into New Product Lines. We desire to be the primary source of financial products and services for our clients. By broadening our product line with additional financial services not currently offered by PrivateBank, we believe we can increase our franchise value through diversification of our fee income and strengthening of our client relationships. To achieve this goal, we intend to consider acquisitions, joint ventures or strategic alliances with other companies that emphasize quality service and the value of relationships. Our targets are businesses that complement our services and enable us to broaden our product line to better serve our clients. Our Services We offer banking services to our clients at a personal level. This is not the same as personal banking service. We define private banking as offering banking products and services to our clients when they want it, how they want it and where they want it. We tailor our products and services to fit our clients instead of making our clients fit our products and services. Our services fall into four general categories: . Commercial Services. PrivateBank offers a full range of lending products to businesses owned by or affiliated with our clients. We offer lines of credit for working capital, term loans for equipment and other investment purposes, and letters of credit to support the commitments our clients make. PrivateBank tailors these products to meet the varied needs of the client. Non-credit products we offer include lockbox, cash concentration accounts, merchant credit card processing, electronic funds transfer, other cash management products and insurance. We strive to offer banking packages that are competitive and allow us to provide service to our clients beyond what is expected in our industry. . Real Estate Services. PrivateBank provides real estate loan products to businesses and individuals. Our commercial real estate lending products are designed for real estate investors. We provide a full range of fixed and floating rate permanent and mini-permanent mortgages for our clients to finance a variety of properties such as apartment buildings, office buildings, strip shopping centers, and other income properties. We also provide some construction lending for residential and commercial 27 developments. We believe that our lending products are competitively priced with terms that are tailored to our clients' individual needs. Our residential mortgage products range from 30-year fixed rate products to personal construction lending. The home mortgage market is very competitive and we believe that our service is what separates PrivateBank from our competition. Many mortgage lenders cannot work with borrowers who have non-traditional income sources or non- traditional properties, such as co-ops. Our mortgage lending staff is trained to work with successful individuals who have complex personal financial profiles. We have developed a proficiency for mortgages in excess of $1.0 million per loan and will work with our clients and our market sources to place these loans into the secondary market. Our experience has been that residential lending is an excellent vehicle to attract new clients. . Trust and Asset Management. PrivateBank's trust services include investment management, personal trust and estate services, custodial services, retirement accounts and brokerage and investment services. Our investment management professionals work with our clients to define objectives, goals and strategies for their investment portfolios. PrivateBank assists the client with the selection of an investment manager and works to tailor the investment program accordingly. Our trust and estate account administrators work with our clients and their attorneys to establish their estate plans. We work closely with our clients and their beneficiaries to ensure that their needs are met and to advise them on financial matters. When serving as trustee or executor, we often structure and oversee investment portfolios. We also provide our clients with custodial services for safekeeping of their assets. Consistent with our private banking approach, we emphasize a high level of personal service in our trust area, including prompt collection and reinvestment of interest and dividend income, weekly valuation, tracking of tax information, customized reporting and ease of security settlement. PrivateBank also offers retirement products such as individual retirement accounts and administrative services for retirement vehicles such as profit sharing plans and employee stock option plans, as well as a full line of brokerage and investment products. . Individual Banking Services. Our typical private banking client has several of the following products: interest bearing checking with credit line, money market deposit accounts, certificates of deposit, ATM/debit card, and brokerage accounts. Some of our clients have recently selected our PrivateBank Access Internet PC banking product. In addition to residential mortgages, we provide clients a variety of secured and unsecured personal loans and lines of credit. Through our affiliations with Mesirow and Sterling, we offer insurance products and securities brokerage services. We strive to accommodate the individual needs of each of our clients by offering the convenience of highly personalized services, including domestic and international wire transfers and foreign currency exchange. Lending Activities We work with our clients to provide a full range of commercial, real estate and personal lending products and services. Our loans are concentrated in six major areas: (a) commercial real estate; (b) residential real estate; (c) commercial; (d) personal; (e) home equity; and (f) construction. We have adopted a loan policy that contains general lending guidelines and is subject to review and revision by the Board of Directors. We extend credit consistent with this comprehensive loan policy. We believe the credit quality of our loan portfolio is excellent. The goal of our lending program is to meet the credit needs of our diverse client base while using sound credit principles to protect the quality of our assets. Our business and credit strategy is relationship-driven and we strive to provide a reliable source of credit, a variety of lending alternatives, and sound financial advice. When extending credit, our decision is based upon our client's ability to repay us from non-speculative sources. The quality and integrity of the borrower is crucial in the loan approval process. We monitor the performance of our loan portfolio through regular contacts with our clients, continual portfolio review, careful monitoring of delinquency reports and reliance on our loan review function. We have retained an independent, outside resource to perform our loan review function. Using an outside resource ensures that our loan review process remains independent of the loan production and administration 28 processes. Our loan reviewer examines individual credits to critique individual problems and the entire portfolio to comment on systemic weaknesses. The reviewer reports directly to the audit committee of our Board of Directors on a quarterly basis. In addition to loan review, the loan/investment committee of our Board reviews the adequacy of the allowance for loan losses on a quarterly basis. The committee assesses management's loan loss provisions based on loan review's findings, delinquency trends, historical loan loss experience and current economic trends. Our legal lending limit, based on PrivateBank's financials, is calculated at 20% of capital plus unencumbered reserves. At March 31, 1999, our legal lending limit was approximately $6.6 million. This is the maximum amount of credit that we may commit to any one individual or business entity after aggregating all related credit. Immediately after the offering, our legal lending limit will increase by $1.6 million based on our intention to contribute $8.0 million of the proceeds to the capital of PrivateBank. In addition to our chief credit officer, certain individuals have been designated acting chief credit officers, credit officers, officers with lending authority, and residential real estate lending officers. No single individual has sole authority to approve a loan. As the size of aggregate credit exposure increases, additional officers are required to approve the loan requests. This serves several purposes: (a) larger credits get more scrutiny, (b) most senior credit officers become involved in the decision-making process for the vast majority of dollars loaned without approving a proportionate number of loan requests, and (c) we become more consistent in administration of credit as credit officers experience the dynamics of our overall portfolio and credit culture. We also believe that our past credit approval practices will mitigate the effect of the impending retirement of our chief credit officer because our credit culture is firmly in place. Our chief credit officer, or his designate, is involved in all credit decisions when the aggregate credit exposure is in excess of $250,000. Our loan/investment committee reviews all credit decisions over $1.0 million. Prior approval is required for credit exposure in excess of $4.0 million and for all credits related to our board members or our managing directors. Loans are approved at the bank level by a management loan committee or by small group presentations to credit officers. We believe that this process allows us to be more responsive to our clients' needs by being able to approve credit without waiting for scheduled committee meetings. We also use management committee meetings to discuss complex credits or when we feel that a particular credit may be informative to everyone in the loan approval process. Our lending policy sets guidelines for advance rates on certain types of collateral including accounts receivable, inventory, equipment and real estate that we generally do not exceed absent special circumstances. Under the policy guidelines, the maximum loan-to-value ratios are 80% for accounts receivable, 50% for inventory and 65% for equipment. Under the policy, the maximum loan-to- value ratio for real estate is 80%, but maximum advance rates on real estate will differ depending upon the type of real estate taken as collateral. For example, higher loan-to-value ratios are acceptable for owner-occupied residential properties than non-owner occupied residential or commercial properties. Vacant land commands the lowest advance rate guidelines. We accept primary and secondary liens on properties when appraised values are adequate. Our lending policy also contains advance rate guidelines for securities and other financial instruments taken as collateral, including stocks, bonds, commercial paper, and bank deposit instruments. Under the policy guidelines, maximum loan-to-value ratios should generally not exceed 75% for stocks, 98% for government bonds, 80% for non-governmental bonds, 95% for commercial paper and 100% of bank deposit instruments. Specific collateral requirements are based upon the facts and circumstances of each individual credit decision. The financial strength and ascertainable character of each borrower and guarantor is also a factor in the credit approval process. Because we tend to lend to clients whom we know well, we believe we are in a good position to assess our borrowers' strengths and weaknesses and to make well-informed credit decisions on this basis. We make loans based upon borrowers' available assets and the condition of their financial statements. We do not sell credit life insurance to our borrowers. 29 The following table sets forth our loan portfolio by category as of March 31, 1999:
Percentage March of total 31, 1999 loans -------- ---------- Commercial real estate................................ $108,599 35.3% Residential real estate............................... 62,208 20.2 Commercial............................................ 53,834 17.5 Personal.............................................. 45,122 14.7 Home equity........................................... 19,860 6.4 Construction.......................................... 18,143 5.9 -------- ----- Total loans......................................... $307,766 100.0% ======== =====
Commercial Real Estate Loans. Our commercial real estate portfolio is comprised primarily of loans secured by multi-family housing units located in the Chicago metropolitan area. Other types of commercial real estate collateral include: commercial properties owned by clients housing their manufacturing, warehousing or service businesses, investments in small retail centers, and investments in other business properties. Risks inherent in real estate lending are related to the market value of the property taken as collateral, the underlying cash flows and documentation. It is important to accurately assess property values through careful review of appraisals. Some examples of risky commercial real estate lending include loans secured by properties with widely fluctuating market values or income properties occupied by renters with unstable sources of income, and not perfecting liens on property taken as collateral. We mitigate these risks by understanding real estate values in areas in which we lend, investigating the sources of cash flow servicing the debt on the property and adhering to loan documentation policy. Commercial real estate loan products include mini-permanent and permanent financing, transaction loans to purchase properties prior to permanent financing, and lines of credit secured by commercial real estate portfolios. We typically structure mini-permanent and permanent financing as adjustable rate mortgages ("ARMs"). ARM structure allows our clients to lock in an interest rate for a fixed period of time in order to avoid interest rate risk. The vast majority of our ARM loans have initial fixed pricing for between one to five years. Each ARM loan has language defining repricing beyond the initial fixed pricing term. Transaction loans to purchase commercial property typically have maturities of one year or less. Lines of credit secured by commercial real estate portfolios are typically granted for one year with annual extensions after a successful underwriting review. Interest rates for our lines of credit typically are based on a floating rate formula. In our credit analysis process for commercial real estate loans, we typically review the appraised value of the property, the ability of the property as collateral to service debt, the significance of any outside income of the borrower or income from other properties owned by the borrowers, and the strength of guarantors, if any. Our real estate appraisal policy has been approved by our board loan/investment committee. It addresses selection of appraisers, appraisal standards, environmental issues and specific requirements for different types of properties. Residential Real Estate Loans. Our residential real estate portfolio consists primarily of first and second mortgage loans for 1-4 unit residential properties. We do not originate long-term fixed rate loans for our own portfolio due to interest rate risk considerations. However, we do originate these loans for sale into the secondary market. This is a significant business activity in our residential real estate lending unit. For our own portfolio, we originate ARM loans typically structured with 30 year maturities and initial rates fixed for between one to five years with annual repricing beyond the initial term. Our credit review process mirrors the standards set by traditional secondary market sources. We review appraised value and debt service ratios, and we gather data during the underwriting process in accordance with the various laws and regulations governing residential real estate lending. Our real estate appraisal policy sets specific standards for valuing residential property. 30 We require pre-approval from secondary market sources before we approve loans to be sold into the secondary market. Our internal approval process is less stringent for loans pre-approved by our secondary market sources. This allows us to be responsive to the tight time commitments dictated for locking in rates in the secondary market. We believe that we have a competitive advantage in our ability to offer financing for our clients who have non-traditional income sources or require large mortgage loans. We have developed secondary market sources for mortgages, including several able to provide financing in amounts in excess of $1.0 million per loan which is occasionally required by our clients. By offering our own ARM loans, we can offer credit to individuals who are self-employed or have significant income from partnerships or investments. The secondary market often will not take the time or will be unable to make exceptions for otherwise qualified borrowers. We have experience in making loans to qualified borrowers secured by co-ops. We believe that we are one of a limited number of financial institutions in the Chicago area making these loans. Commercial Loans. Our commercial loan portfolio is comprised of lines of credit for working capital, term loans for equipment and expansion, and letters of credit. These loans are made to businesses affiliated with our clients, or to clients directly for business purposes. The vast majority of our commercial loans are personally guaranteed. Unsecured loans are made to businesses when a guarantor, as a secondary source of repayment, has a significant ability to repay and a significant interest in the business entity. Commercial loans can contain risk factors unique to the business of each borrower. In order to mitigate these risks, we seek to gain an understanding of the business of each borrower, place appropriate value on collateral taken and structure the loan properly to make sure that collateral values are maintained while loans are committed. Appropriate documentation of commercial loans is also important to protect our interests. Our lines of credit typically are limited to a percentage of the value of the assets securing the line, and priced by a floating rate formula. Lines of credit typically are reviewed annually and are supported by accounts receivable, inventory and equipment. Depending on the risk profile of the borrower, we may require periodic aging of receivables, and inventory and equipment listings to verify the quality of the borrowing base prior to advancing funds. Our term loans are typically also secured by the assets of our clients' businesses. Term loans typically have maturities between one to five years, with either floating or fixed rates of interest. Commercial borrowers are required to provide updated personal and corporate financial statements at least annually. Letters of credit are an important product to many of our clients. We issue standby or performance letters of credit, and can service the international needs of our clients through correspondent banks. We use the same underwriting standards for letters of credit as we do for funded loans. Our credit approval process for commercial loans is comprehensive. We typically review the current and future cash needs of the borrower, the business strategy, management's ability, the strength of the collateral, and the strength of the guarantors. While our loan policy has guidelines for advances on different types of collateral, we establish eligible asset values on a case-by-case basis for each borrower. Our officer on the account must be able to validate his or her position during the approval process. Personal Loans. Our personal loan portfolio consists of loans to secure funds for personal investment, loans to acquire personal assets such as automobiles and boats, and personal lines of credit. Quite often, our borrowers prefer not to liquidate assets to secure funds for investment or personal acquisitions. They will use these assets as collateral for personal loans, or if their financial statements and personal reputations are sufficient, we will grant unsecured credit. A key factor in originating personal loans is knowing our borrowers. When personal loans are unsecured, we believe that the character and integrity of the borrower becomes as important as the borrower's financial statement. Our clients request a combination of lines of credit, floating-rate term loans and fixed-rate term loan products. Many of our clients use their personal investment portfolios as collateral for personal loans. Personal lines of credit are used for a variety of purposes such as the comfort of having funds available for future uses or establishing a line of credit as overdraft protection. We respond quickly to the needs of our clients within the limits set by our loan policy. 31 Personal loans are subject to the same approval process as all other types of loans. Each client is underwritten to ensure that they have adequate collateral coverage and/or cash flow. Annual financial statements are required of each personal borrower. Home Equity Loans. Our home equity loan portfolio consists of traditional home equity lines of credit prevalent in the market today. In general, we advance up to 80% on the value of a home, less the amount of prior liens. However, we may vary from that percentage depending on the value of the home, type of dwelling, and the personal financial situation of the borrower. Home equity loans are funded either through draws requested by our client or by special home equity credit drafts that function as bank checks. Home equity loans are approved using the same standards as residential mortgage loans. Our borrower's personal cash flow is compared to debt service requirements to determine our borrower's ability to repay. Home equity loans are competitively priced based using a floating rate formula. Construction Loans. Our construction loan portfolio consists of single residential properties, multi-family properties, and commercial projects. As construction lending has greater inherent risk, we closely monitor the status of each construction loan throughout its term. Typically, we require full investment of the borrower's equity in construction projects prior to injecting our funds. Generally, we do not let our borrowers recoup their equity from the sale proceeds of finished units (if applicable) until we have recovered our funds on the overall project. We use a title company to disburse periodic draws from the construction line to ensure that there will be no title problems at the end of the project. Our construction loans are often the highest yielding loans in our portfolio due to the inherent risks and the monitoring requirements. These loans typically have floating rates, commitment fees and release fees. During our credit approval process, factors unique to construction loans are considered. These include assessment of the market for the finished product, reasonableness of the construction budget, ability of the borrower to fund cost overruns, and the borrower's ability to liquidate and repay the loan at the point when the loan-to-value ratio is the greatest. We seek to manage these risks by, among other things, ensuring that the collateral value of the property throughout the construction process does not fall below acceptable levels, ensuring that funds disbursed are within parameters set by the original construction budget, and properly documenting each construction draw. Due to our more stringent standards for underwriting and monitoring construction loans and the credit profile of our borrowers, we are comfortable with the risk associated with this portfolio and are committed to construction lending as an integral part of our lending program. Investment Activities The objective of our investment policy is to maximize income consistent with liquidity, asset quality, regulatory constraints and asset/liability objectives. The policy is reviewed at least annually by our Board of Directors. The Board is provided monthly information recapping purchases and sales with the resulting gains or losses, average maturity, federal taxable equivalent yields and appreciation or depreciation by investment categories. We invest primarily in direct obligations of the United States, obligations guaranteed as to principal and interest by the United States, obligations of agencies of the United States, bank-qualified obligations of state and local political subdivisions and collateralized mortgage obligations. We also may invest from time to time in corporate debt or other securities as permitted by our investment policy. In addition, we enter into federal funds transactions with our principal correspondent banks, and primarily act as a net seller of such funds. The sale of federal funds are effectively short-term loans from us to other banks. Our investment accounts also include minimal equity investments in the Federal Home Loan Bank of Chicago ("FHLB") and Neighborhood Housing Service ("NHS"). We invest in FHLB in order to be a member, which qualifies us to use their services, including FHLB borrowings. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources." NHS is a not-for-profit organization which helps provide affordable housing to low and moderate income residents in the Chicago area. The size of our investment is proportionate to the volume of loans in certain credit programs offered by NHS. NHS is an important vehicle in our Community Reinvestment Act ("CRA") lending program. 32 Rather than incurring the costs of employing a full-time investment manager with the requisite expertise to establish a diverse investment program, we have engaged two outside investment advisory firms to help us execute our strategy. One firm is responsible for helping us select taxable investment products to meet our investment portfolio objectives. This firm employs a team of professionals who bring us recommendations on a regular basis. Our other advisor is a leading investment manager of tax-exempt portfolios and is well- known to us through his work with our trust clients. Asset/Liability Management Committee We have an asset/liability committee ("ALCO") comprised of selected senior executives who are charged with the dual goals of optimization and stabilization of net interest income over time while adhering to prudent banking practices. ALCO oversees asset growth, liquidity and capital, and directs our overall acquisition and allocation of funds. At our monthly meetings, ALCO reviews issues including: . data on economic conditions; . current interest rate outlook; . current forecast on loans and deposits; . mix of interest rate sensitive assets and liabilities; . bank liquidity position; . investment portfolio purchases and sales; and . other matters as presented. ALCO is also responsible for monitoring compliance with our investment policy. On a monthly basis, ALCO reports to the loan/investment committee who reviews the portfolio of reports we prepare for our Board of Directors and all the decisions made by ALCO affecting net interest income. Trust and Asset Management We offer our clients a wide variety of trust and asset management services designed to meet their individual needs and investment goals. Many of our trust clients have longstanding relationships with our managing directors. In administering a trust, we work closely with our client, the beneficiaries and the trustees' attorneys and accountants on personal and tax matters to assist the client in accomplishing the stated objectives. As fiduciaries of a trust or estate our responsibilities may include: . administering the account pursuant to the applicable document; . collecting, holding and valuing assets; . monitoring investment portfolios; . paying debts, expenses and taxes; . distributing property; and . advising beneficiaries. In addition to trust and estate administration, we offer: . institutional accounts; . guardianship administration; . investment agency accounts; . Section 1031 exchanges; and . custodial accounts. 33 Over the past three years, the average account value of new trusts administered by PrivateBank was approximately $3.0 million. We believe that our trust business will continue to grow as we expand our client base and our clients increasingly reach retirement age and focus on their estate plans. Our investment management philosophy for our trust assets under administration is built on two principles: (a) the preservation of capital, and (b) achievement of maximum total return consistent with each individual client's objectives. We have chosen to outsource the investment management aspect of our business so that we may offer our clients diversity and flexibility of investment representation and to allow us to impartially evaluate investment performance. This structure also allows our clients to independently designate one or more specific advisors enabling them to maintain existing relationships they may have within the financial community. If the client does not have such a relationship in place, we then help them select an investment management firm that will best service their needs. Based on the client's investment strategy and objectives and the account attributes, one or more investment managers will be selected from our list of approved advisors. Our trust policy has established controls over our trust activities to safeguard the assets of our clients against operational and administrative risk. We have a system of internal controls that is designed to keep our operating risk at appropriate levels. Our system of internal controls includes policies and procedures relating to authorization, approval, documentation and monitoring of transactions. Administrative risk is the risk of loss that may occur as a result of breaching a fiduciary duty to a client. To manage this risk, our trust policy has established corporate policies and procedures to ensure that obligations to clients are discharged faithfully and in compliance with applicable legal and regulatory requirements. These policies and procedures provide guidance and establish standards related to the creation, sale, and management of investment products, trade execution, and counterparty selection. Properties We currently have three physical banking locations and are planning to establish a new office location in St. Charles, Illinois, subject to necessary regulatory approvals. See "Pending Acquisition." The main offices of PrivateBancorp and PrivateBank are located in the central business and financial district of Chicago. We lease 20,923 square feet comprising the entire eighth, ninth, and tenth floors and part of the eleventh floor of a building located at Ten North Dearborn Street. This lease expires on or about August 31, 2006. PrivateBank established a north suburban office in the affluent North Shore area located at 517 Green Bay Road, Wilmette, Illinois, in October 1994. PrivateBank leases approximately 5,300 square feet on the first floor of a commercial building. This lease expires on June 30, 1999 and has been renewed for an additional five-year term. In January 1997, we opened a second branch office of PrivateBank in rapidly growing, west suburban DuPage County at 1603 West Sixteenth Street, Oak Brook, Illinois. We lease approximately 4,200 square feet on the first floor of a two- story office building. This lease expires on December 14, 2001. We have a variety of renewal options in each of our properties and certain rights to secure additional space. Competition We do business in the highly competitive financial services industry. PrivateBank's geographic market is primarily the greater Chicago metropolitan area. The financial services industry is comprised of commercial banks, thrifts, credit unions, investment banks, brokerage houses, money managers, and other providers of financial products and services. These firms compete with PrivateBank for one or more of the following: loans, deposits, trust services, or investment products. Some of these firms have business units that promote 34 themselves as "private banks." The typical private banking competitor is a unit of a large commercial bank catering to the upper echelon of that bank's customer base. We view ourselves as the only private bank in the Chicago market focused solely on offering an extended range of traditional banking and trust products to affluent professionals, entrepreneurial individuals and their business interests. While our products may be similar to those of our competitors, we attempt to distinguish ourselves by emphasizing consistent, superior levels of personal service. For commercial and commercial real estate lending, we compete with a number of major Chicago-area financial institutions and suburban banks. For trust services, we compete with the largest Chicago-area banks and some investment managers. For private banking services, we compete with the private banking departments of major Chicago-area financial institutions, some suburban banks, and brokerage houses. For residential mortgage lending, our products compete with banks, savings and loans, mortgage brokers and numerous other financial services firms offering mortgage loans in our market area. Several of our competitors are national or international in scope. Some of our competitors are not subject to the same degree of regulation as that imposed on bank holding companies and Illinois banking organizations. In addition, the larger banking organizations, investment banks and brokerage houses have significantly greater resources than us. As a result, such competitors have advantages over PrivateBank in name recognition and market penetration. Legal Proceedings From time to time, we may be party to various legal proceedings arising in the normal course of our business. Since PrivateBank acts as a depository of funds, we may be named from time to time as a defendant in various lawsuits (such as garnishment proceedings) involving claims to the ownership of funds in particular accounts. We are not currently subject to any pending or threatened material legal proceedings. Employees As of March 31, 1999, we had 76 full-time equivalent employees. The majority of our employees are located at the main office in downtown Chicago. PrivateBank pays the salaries of all of our employees with the exception of Messrs. Mandell and Roubitchek, a portion of whose salaries are paid by the Company. We provide our employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance plans, and 401(k) plans. We consider our relationship with our employees to be good. 35 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial and other data of PrivateBancorp. The selected statements of condition and statements of income data, insofar as they relate to the five years in the five-year period ended December 31, 1998, have been derived from our consolidated financial statements. The following information should be read in conjunction with our audited Consolidated Financial Statements and the Notes thereto, included elsewhere herein. The selected financial data for the three months ended March 31, 1999 and 1998, are derived from our unaudited interim consolidated financial statements. Such unaudited interim financial statements include all adjustments (consisting only of normal, recurring accruals) that we consider necessary for a fair presentation of the financial position and the results of operations as of the dates and for the periods indicated. Information for any interim period is not necessarily indicative of results that may be anticipated for the full year. You should also read the following information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus.
Three Months Ended March 31, Year Ended December 31, ------------- --------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ------ ------ ------- ------- ------- ------- ------ (dollars in thousands, except per share data) Selected Statement of Income Data: Interest income: Loans, including fees... $5,636 $4,624 $19,619 $16,729 $12,152 $10,053 $6,418 Federal funds sold and interest-bearing deposits............... 48 498 2,181 875 1,392 1,149 358 Securities.............. 1,570 727 3,492 2,519 2,396 1,700 1,265 ------ ------ ------- ------- ------- ------- ------ Total interest income. 7,254 5,849 25,292 20,123 15,940 12,902 8,041 ------ ------ ------- ------- ------- ------- ------ Interest expense: Interest-bearing demand deposits............... 142 121 487 377 305 276 210 Savings and money market deposit accounts............... 1,800 1,629 6,651 5,880 4,613 3,484 2,139 Other time deposits..... 1,752 1,346 6,155 3,821 2,973 2,620 782 Funds borrowed.......... 144 -- 19 3 143 50 62 ------ ------ ------- ------- ------- ------- ------ Total interest expense.............. 3,838 3,096 13,312 10,081 8,034 6,430 3,193 ------ ------ ------- ------- ------- ------- ------ Net interest income... 3,416 2,753 11,980 10,042 7,906 6,472 4,848 Provision for loan losses.................. 285 91 362 603 524 930 305 ------ ------ ------- ------- ------- ------- ------ Net interest income after provision for loan losses.......... 3,131 2,662 11,618 9,439 7,382 5,542 4,543 ------ ------ ------- ------- ------- ------- ------ Non-interest income: Banking and trust services............... 442 273 1,281 1,210 911 674 414 Securities gains........ -- -- 40 -- -- -- -- ------ ------ ------- ------- ------- ------- ------ Total non-interest income............... 442 273 1,321 1,210 911 674 414 ------ ------ ------- ------- ------- ------- ------ Non-interest expense: Salaries and employee benefits............... 1,115 1,102 4,077 3,902 3,411 2,749 2,054 Occupancy............... 352 334 1,379 1,274 990 946 745 Data processing......... 131 120 508 396 334 282 262 Marketing............... 153 139 567 500 424 296 272 Amortization of organization costs..... -- -- -- -- 23 280 280 Professional fees....... 178 94 561 448 326 284 253 Insurance............... 41 30 134 115 82 238 342 Other expense........... 285 181 864 627 508 434 321 ------ ------ ------- ------- ------- ------- ------ Total non-interest expense.............. 2,255 2,000 8,090 7,262 6,098 5,509 4,529 ------ ------ ------- ------- ------- ------- ------ Income before income taxes.................. 1,318 935 4,849 3,387 2,195 707 428 Income tax provision.. 291 365 1,839 1,242 762 (403) 3 ------ ------ ------- ------- ------- ------- ------ Net income............ $1,027 $ 570 $ 3,010 $ 2,145 $ 1,433 $ 1,110 $ 425 ====== ====== ======= ======= ======= ======= ====== Per Share Data: Basic earnings.......... $ 0.30 $ 0.18 $ 0.91 $ 0.69 $ 0.49 $ 0.39 $ 0.17 Diluted earnings........ 0.28 0.17 0.86 0.65 0.47 0.38 0.16 Dividends............... 0.03 0.02 0.08 0.07 0.07 0.03 -- Book value (at end of period)................ 8.71 7.86 8.53 7.67 6.84 6.47 6.13
36
Three Months Ended March 31, Year Ended December 31, -------------------- ------------------------------------------------ 1999 1998 1998 1997 1996 1995 1994 --------- --------- -------- -------- -------- -------- -------- (dollars in thousands, except per share data) Selected Financial Condition Data (at end of period): Total securities(1)..... $ 105,136 $ 48,322 $116,891 $ 65,383 $ 44,617 $ 38,296 $ 24,669 Total loans............. 307,766 223,746 281,965 218,495 171,343 126,069 98,380 Total assets............ 431,055 331,924 416,308 311,872 246,734 196,917 141,826 Total deposits.......... 384,454 304,660 364,994 285,773 222,571 176,868 122,925 Funds borrowed.......... 10,000 -- 20,000 -- 3,000 700 1,000 Total stockholders' equity................. 30,054 25,400 29,274 24,688 20,222 18,445 17,471 Trust assets under administration......... $ 637,422 $ 524,019 $611,650 $469,646 $328,662 $212,456 $168,872 Selected Financial Ratios and Other Data(2): Performance Ratios: Net interest margin(3). 3.57% 3.65% 3.61% 4.01% 3.73% 3.95% 4.09% Net interest spread(4). 3.02 2.96 2.98 3.31 3.03 3.16 3.42 Non-interest income to average assets........ 0.42 0.34 0.37 0.45 0.42 0.40 0.35 Non-interest expense to average assets........ 2.13 2.49 2.29 2.71 2.79 3.31 3.79 Net overhead ratio(5).. 1.71 2.15 1.91 2.26 2.38 2.90 3.44 Efficiency ratio(6).... 58.45 67.65 60.82 64.53 69.17 77.09 86.07 Return on average assets(7)............. 0.97 0.71 0.85 0.80 0.66 0.67 0.36 Return on average equity(8)............. 13.84 9.11 11.27 9.49 7.38 6.22 2.94 Dividend payout ratio.. 8.36 10.63 8.74 10.13 12.88 8.03 -- Asset Quality Ratios: Non-performing loans to total loans........... 0.12 0.32 0.36 0.24 0.65 1.90 0.15 Allowance for possible loan losses to: total loans........... 1.20 1.40 1.21 1.40 1.43 1.55 1.04 non-performing loans.. 1,025 440 336 578 220 82 711 Net charge-offs to average total loans... -- -- -- -- 0.02 -- 0.01 Non-performing assets to total assets....... 0.08 0.21 0.24 0.17 0.45 1.22 0.10 Balance Sheet Ratios: Loans to deposits...... 80.1 73.4 77.3 76.5 77.0 71.3 80.0 Average interest- earning assets to average interest- bearing liabilities... 114.2 117.0 116.4 117.7 118.6 120.7 123.8 Capital Ratios: Total equity to total assets................ 6.97 7.65 7.03 7.92 8.20 9.37 12.32 Total risk-based capital ratio......... 11.21 11.47 11.53 11.75 12.21 14.56 19.58 Tier 1 risk-based capital ratio......... 10.05 10.22 10.40 10.50 10.96 13.31 18.49 Leverage ratio......... 7.53 7.87 7.88 8.70 8.71 9.76 13.03
- -------- (1) For all periods after 1994, the entire securities portfolio was classified "Available for Sale." For 1994, the entire securities portfolio was classified "Held to Maturity." (2) Certain financial ratios for interim periods have been annualized. (3) Net interest income divided by average interest-earning assets. (4) Yield on average interest-earning assets less rate on average interest- bearing liabilities. (5) Non-interest expense less non-interest income divided by average total assets. (6) Non-interest expense divided by the sum of net interest income plus non- interest income. (7) Net income divided by average total assets. (8) Net income divided by average common equity. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with "Selected Consolidated Financial Data" and our Consolidated Financial Statements and Notes thereto, each appearing elsewhere in this prospectus. In addition to historical information, the following "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in "Risk Factors" contained elsewhere in this prospectus. Overview PrivateBancorp was organized in 1989 to serve as the holding company for a de novo bank, The PrivateBank and Trust Company which provides personal and commercial banking services to affluent individuals, professionals and their business interests in the Chicago metropolitan area. We opened our flagship Chicago location in 1991, and our full-service offices in the affluent communities of Wilmette, Illinois, a North Shore suburb of Chicago, in 1994, and Oak Brook, Illinois, located in the rapidly growing western suburbs, in 1997. Effective as of June 24, 1999, we entered into a definitive agreement to acquire Towne Square Financial Corporation which we believe provides us an attractive opportunity to establish a new office in St. Charles, Illinois, a far western suburb of Chicago. Upon consummation of the transaction, we will incur a one-time, merger-related charge to earnings, currently estimated to be approximately $1.29 million. See "Pending Acquisition" for a discussion of the anticipated financial impact of this transaction and start-up costs associated with the planned opening of the St. Charles branch. Since inception, we have experienced rapid internal growth as a result of: . developing new banking relationships through the lending expertise of our senior banking officers; . developing new clients primarily through referrals from professional advisors and existing clients; . expanding our products offered and cross-marketing our existing products; . expanding our business lines through strategic partnerships; and . opening new branches. Since year-end 1995, we have grown our asset base at a compound annual rate of 27.3% to $431.1 million as of March 31, 1999. During the same period, loans have grown at a compound annual rate of 31.6% to $307.8 million, deposits at a compound annual rate of 27.0% to $384.5 million and trust assets under administration at a compound annual rate of 40.2% to $637.4 million. Due to our increased size, we expect that these growth rates will moderate over time. The profitability of our operations depends on our net interest income, provision for possible loan losses, non-interest income, and non-interest expense. Net interest income is the difference between the income we receive on our loan and investment portfolios and our cost of funds, which consists of interest paid on deposits and borrowings. The provision for possible loan losses reflects the cost of credit risk in our loan portfolio. Non-interest income consists primarily of trust fee income, and to a lesser extent, \net securities gains and fees for ancillary banking services. Non-interest expense includes salaries and employee benefits as well as occupancy, data processing, marketing, professional fees, insurance, and other expenses. Net interest income is dependent on the amounts and yields of interest- earning assets as compared to the amounts and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and our asset/liability management procedures in coping with such changes. The provision for loan losses is dependent on increases in the loan portfolio, management's assessment of the collectibility of the loan portfolio, loss, experience as well as economic and market factors. We earn trust fees for managing and administering investment funds for a variety of individuals, families and fiduciary relationships. Non-interest expenses are heavily influenced by the growth of operations. Growth in the number of client relationships directly affects the majority of our expense categories. 38 Our primary financial objectives are to continue to grow our loan portfolio while maintaining high asset quality, and to increase non-interest income while maintaining strong expense controls. We have maintained high asset quality while managing rapid internal growth since our inception. We believe our history of strong credit quality is testament to our sound credit practices, as well as evidence that our affluent target client is a better than average credit risk, resulting in lower loan charge-offs and lower loan loss provisions than at traditional banks. The following table shows our growth in loans and our credit quality history:
December 31, March -------------------------------------- 31, 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (dollars in thousands) Average loans, net of unearned discount....... $288,322 $233,987 $195,237 $140,767 $111,637 Net charge-offs to average loans........... -- -- -- 0.02% -- Non-performing loans to total loans............. 0.12% 0.36% 0.24% 0.65% 1.90%
Our non-interest income from fees and deposit service charges are below peer group levels. This is largely the result of the profile of our typical client. Our clients tend to have larger deposit account balances than customers of traditional banks. Because average balances tend to be high, we do not earn high service charge income typical of community banks. In 1998, we entered into an alliance with Mesirow Financial to provide insurance services to our clients. It is expected that fees related to the sale of insurance services will increase in 1999 and future years. Higher account balances result in relatively low levels of transactions per account dollar and therefore our accounts are less costly to maintain. We believe that as we continue to grow, we will continue to experience lower overhead costs than other banks with similar aggregate levels of loans and deposits. We intend to continue to improve our operating efficiency by growing net interest income and non-interest income at a faster rate than non-interest expense, and developing new sources of non-interest income. The following table highlights our improving efficiency measures:
December 31, March 31, ---------------------- 1999 1998 1997 1996 1995 --------- ---- ---- ---- ---- Non-interest expense to average assets.... 2.13% 2.29% 2.71% 2.79% 3.31% Net overhead ratio........................ 1.71 1.91 2.26 2.38 2.90 Efficiency ratio.......................... 58.5 60.8 64.5 69.2 77.1
Results of Operations Net income In 1998, we earned $3.0 million as compared to $2.1 million in 1997. This 40.3% increase in earnings was primarily the result of growth in the balance sheet, particularly in the loan portfolio. Also contributing to improved performance were increases in the investment portfolio, a reduced provision for loan losses, increases in trust fees, and improved operating expense levels which grew at a slower rate than the combined income components. Diluted earnings per share for 1998 were $0.86, as compared to $0.65 for 1997, an increase of 30.3%. The growth rate of diluted earnings per share was lower than the growth rate in earnings due to an increase in the number of shares outstanding between the years and the value of existing stock options. Return on average assets for 1998 was 0.85%, as compared to 0.80% for 1997. Return on average equity for 1998 was 11.27%, as compared to 9.49% for 1997. In 1997, we earned $2.1 million as compared to $1.4 million in 1996. This 49.7% increase was primarily the result of growth in the loan portfolio and other balance sheet categories. Fees from banking and trust services grew by 32.8% in 1997 over 1996, while the provision for loan losses and other expense grew by a combined 18.8%. Diluted earnings per share for 1997 were $0.65, as compared to $0.47 for 1996. Return on 39 average assets for 1997 was 0.80%, as compared to 0.66% for 1996. Return on average equity for 1997 was 9.49%, as compared to 7.38% for 1996. During the first quarter of 1999, we earned $1.0 million as compared to $570,000 during the first quarter of 1998. This 80.1% increase was primarily the result of improvements in net interest income and non-interest income which more than offset increases in the provision for loan losses and non-interest expenses. Tax strategies implemented in late 1998 resulted in a reduced tax provision in the first quarter of 1999 as compared to the first quarter of 1998, despite higher pre-tax earnings. Diluted earnings per share for the first quarter of 1999 was $0.28 as compared to $0.17 for the first quarter of 1998. Annualized return on average assets and annualized return on average equity for the first quarter of 1999 were 0.97% and 13.84%, respectively, as compared to 0.71% and 9.11% for the first quarter of 1998, respectively. Net interest income and net interest margin. In 1998, net interest income increased from 1997 by $1.9 million, or 19.3%, to $12.0 million. During the same period, the net interest margin decreased from 4.01% to 3.61%. Net interest income is affected by both the volume of assets and liabilities we hold, and the corresponding rates earned and paid. Earning assets, on average, grew by $80.3 million in 1998, while yields dropped from 8.03% in 1997 to 7.65% in 1998. Rates earned on assets were affected by a general reduction in interest rate levels. During 1998, the Federal Open Market Committee lowered the target federal funds rate on three separate occasions, by a total of 75 basis points. Similar reductions in Treasury rates, which are used as indices for several loan products, affected the average yield on our loan portfolio. In 1998, average interest-bearing liabilities grew by $71.8 million, while average rates paid on interest bearing liabilities dropped from 4.72% in 1997 to 4.67% in 1998. Due to rate compression and competitive pressures, we were unable to reduce rates paid as quickly or as significantly as experienced on the asset side of the balance sheet. The volume of non-interest bearing funds, largely comprised of demand deposits and capital, also affects the net interest margin. In 1998, the effect of non-interest bearing funds on the net interest margin added 63 basis points to the margin. In 1997, the effect was an addition of 70 basis points to the net interest margin. In 1997, net interest income increased from 1996 by $2.1 million, or 27.0%, to $10.0 million. During the same period, net interest margin increased from 3.73% to 4.01%. Average earning assets grew by $45.7 million, while yields increased from 7.66% in 1996 to 8.03% in 1997. Yields on assets were affected by a slight increase in interest rate levels throughout the year. In 1996, loans comprised 68.5% of earning assets as compared to 77.7% of earning assets in 1997. Comparatively, this had a positive effect on asset yields in 1997. In 1997, interest-bearing liabilities, on average, grew by $40.2 million while average rates paid on interest-bearing liabilities increased from 4.63% in 1996 to 4.72% in 1997. Rates paid increased slightly in all categories in 1997. The effect of non-interest-bearing funds on the net interest margin was 70 basis points in both 1996 and 1997. Net interest income increased by 24.1% from $2.8 million in the first quarter of 1998, to $3.4 million in the first quarter of 1999. Lower interest rate levels and an increased percentage of assets funded by interest-bearing liabilities compressed the net interest margin from 3.65% in the first quarter of 1998, to 3.57% in the first quarter of 1999. The increase in average assets of more than $100 million reflects increases in both loans and investment securities. The average balance of federal funds sold in the first quarter of 1999 was significantly less than in the first quarter of 1998. The cost of interest-bearing liabilities in the first quarter of 1999 was 4.38%, as compared to 4.83% in the first quarter of 1998. 40 Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential The following table sets forth the average balances, the interest earned or paid thereon, and the effective interest rate yield or cost for each major category of interest-earning assets, interest-bearing liabilities and stockholders' equity for the three months ended March 31, 1999 and 1998, and for the years ended December 31, 1998, 1997 and 1996 on a tax-equivalent basis, assuming a 34% tax rate.
Three Months Ended March 31, Year Ended December 31, ----------------------------------------------------- ---------------------- 1999 1998 1998 -------------------------- -------------------------- ---------------------- Average Average Average Average Average Balance Yield/ Balance Yield/ Balance (1) Interest Cost (1) Interest Cost (1) Interest -------- -------- ------- -------- -------- ------- -------- -------- (dollars in thousands) Assets Federal funds sold. $ 4,167 $ 48 4.61% $ 36,775 $ 498 5.42% $ 40,230 $ 2,181 Taxable investment securities........ 112,724 1,570 6.28 48,339 727 6.16 57,427 3,491 Loans, net of unearned discount. 288,322 5,636 7.88 219,133 4,624 8.55 233,987 19,620 -------- ------ -------- ------ -------- ------- Total earning assets......... 405,213 7,254 7.40 304,247 5,849 7.79 331,644 25,292 -------- ------ -------- ------ -------- ------- Cash and due from banks--non-interest bearing........... 11,664 8,784 9,989 Allowance for possible loan losses............ (3,470) (3,082) (3,218) Premises and equipment, net.... 1,569 1,885 1,781 Other assets....... 4,898 3,704 4,187 -------- -------- -------- Total assets.... $419,874 $315,538 $344,383 ======== ======== ======== Liabilities and Stockholders' Equity Deposits-interest bearing: Interest-bearing demand accounts.. $ 27,199 142 2.12% $ 21,742 121 2.26% $ 22,073 487 Savings and money market deposits.. 177,600 1,800 4.11 142,077 1,629 4.65 151,558 6,651 Time deposits..... 139,512 1,752 5.10 96,226 1,346 5.68 111,407 6,155 -------- ------ -------- ------ -------- ------- Total interest- bearing deposits....... 344,311 3,694 4.36 260,045 3,096 4.83 285,038 13,293 -------- ------ -------- ------ -------- ------- Funds borrowed..... 10,485 144 5.07 -- -- 373 19 Term-debt and subordinated debt. -- -- -- -- -- -- -------- ------ -------- ------ -------- ------- Total interest- bearing liabilities.... 354,796 3,838 4.38 -- 3,096 285,411 13,312 -------- ------ -------- ------ -------- ------- Non-interest bearing deposits.. 32,990 28,594 31,335 Other liabilities.. 3,487 3,620 3,246 Stockholders' equity............ 28,601 23,279 24,391 -------- -------- -------- Total liabilities and stockholders' equity......... $419,874 $315,538 $344,383 ======== ======== ======== Net interest income/spread..... $3,416 3.02% $2,753 2.96% $11,980 ====== ==== ====== ==== ======= Net interest margin............ 3.57% 3.65% ==== ==== Year Ended December 31, ------------------------------------------------------------- 1998 1997 1996 ------- -------------------------- -------------------------- Average Average Average Average Average Yield/ Balance Yield/ Balance Yield/ Cost (1) Interest Cost (1) Interest Cost ------- --------- -------- ------- --------- -------- ------- Assets Federal funds sold. 5.35% $ 15,917 $ 875 5.43% $ 26,287 $ 1,393 5.22% Taxable investment securities........ 6.20 40,164 2,519 6.27 38,569 2,396 6.21 Loans, net of unearned discount. 8.40 195,237 16,729 8.60 140,767 12,151 8.51 -------- ------- -------- ------- Total earning assets......... 7.65 251,318 20,123 8.03 205,623 15,940 7.66 -------- ------- -------- ------- Cash and due from banks--non-interest bearing........... 7,642 6,183 Allowance for possible loan losses............ (2,791) (2,198) Premises and equipment, net.... 1,995 1,280 Other assets...... 2,690 2,113 -------- -------- Total assets.... $260,854 $213,001 ======== ======== Liabilities and Stockholders' Equity Deposits-interest bearing: Interest-bearing demand accounts.. 2.21% $ 17,722 377 2.13% $ 14,523 305 2.10% Savings and money market deposits.. 4.39 127,560 5,880 4.61 102,759 4,613 4.48 Time deposits..... 5.53 68,252 3,821 5.60 53,601 2,973 5.54 -------- ------- -------- ------- Total interest- bearing deposits....... 4.67 213,534 10,078 4.72 170,883 7,891 4.61 -------- ------- -------- ------- Funds borrowed..... 5.06 49 3 5.83 2,483 143 5.67 Term-debt and subordinated debt.. -- -- -- -- -- -- -- -------- ------- -------- ------- Total interest- bearing liabilities.... 4.67 213,583 10,081 4.72 173,366 8,034 4.63 -------- ------- -------- ------- Non-interest bearing deposits.. 25,053 20,783 Other liabilities.. 1,645 1,073 Stockholders' equity............ 20,573 17,779 -------- -------- Total liabilities and stockholders' equity......... $260,854 $213,001 ======== ======== Net interest income/spread..... 2.98% $10,042 3.31% $ 7,906 3.03% ===== ======= ===== ======= ===== Net interest margin............ 3.61% 4.01% 3.73% ===== ===== =====
- ---- (1) Average balances were generally computed using daily balances. 41 The following table shows the dollar amount of changes in interest income and interest expense by major categories of interest-earning assets and interest-bearing liabilities attributable to changes in volume or rate or both, for the periods indicated. Volume variances are computed using the change in volume multiplied by the previous year's rate. Rate variances are computed using the changes in rate multiplied by the previous year's volume. The change in interest due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.
Three Months Ended March 31, Year Ended December 31, ----------------------- ------------------------------------------- 1998 Compared to 1997 Compared to 1999 Compared to 1998 1997 1996 ----------------------- --------------------- --------------------- Change Change Change Change Change Change Due to Due to Total Due to Due to Total Due to Due to Total Rate Volume Change Rate Volume Change Rate Volume Change ------- ------ ------ ------ ------ ------ ------ ------ ------ (in thousands) Federal funds sold...... $ (72) $ (378) $ (450) $ (11) $1,317 $1,306 $ 52 $ (570) $ (518) Investment securities... 26 817 843 (30) 1,002 972 23 100 123 Loans, net of unearned discount............... (2,155) 3,167 1,012 (414) 3,305 2,891 96 4,482 4,578 ------- ------ ------ ----- ------ ------ ---- ------ ------ Total interest income.. (2,201) 3,606 1,405 (455) 5,624 5,169 171 4,012 4,183 ------- ------ ------ ----- ------ ------ ---- ------ ------ Interest-bearing demand accounts............... (44) 65 21 14 96 110 4 68 72 Savings and money market deposits............... (995) 1,166 171 (292) 1,063 771 126 1,141 1,267 Time deposits........... (842) 1,248 406 (56) 2,390 2,334 27 821 848 Funds borrowed.......... -- 144 144 -- 16 16 4 (144) (140) ------- ------ ------ ----- ------ ------ ---- ------ ------ Total interest expense. (1,881) 2,623 742 (334) 3,565 3,231 161 1,886 2,047 ------- ------ ------ ----- ------ ------ ---- ------ ------ Net interest income..... $ (320) $ 983 $ 663 $(121) $2,059 $1,938 $ 10 $2,126 $2,136 ======= ====== ====== ===== ====== ====== ==== ====== ======
Provision for loan losses. The provision for loan losses decreased 60.0% from $603,000 in 1997 to $362,000 in 1998. Throughout 1998, the allowance for loan losses was reassessed to determine the appropriate level to be maintained. This analysis was influenced by the following factors: the volume and quality of loans and commitments in the portfolio, loss experience, and economic conditions. The reduced provision, despite an increasing portfolio, reflects management's assessment of the overall risk in the loan portfolio. The provision for loan losses increased from $524,000 in 1996 to $603,000 in 1997. This 15.1% increase was less than the rate of increase of the loan portfolio. The quality of the loan portfolio in 1997 continued to be as strong as experienced in 1996. The provision for loan losses in the first quarter of 1999, was $285,000 as compared to $91,000 in the first quarter of 1998. The reason for this increase was the sharp increase in loan balances of $25.8 million during the first three months of 1999 as compared to $5.3 million in the first three months of 1998. Non-interest income. Our total non-interest income increased 9.2% from $1.2 million in 1997 to $1.3 million in 1998. The largest component of other income is trust fees. Trust fees increased 9.7% from $937,000 in 1997 to $1.0 million in 1998, reflecting growth in trust assets under administration of $141.6 million, or 30.1%, to $611.6 million at year end 1998. Trust assets have more than doubled since mid-1996. This growth is in part attributable to our success in attracting larger blocks of business and the favorable stock market. During 1997, we earned fees of $119,000 while administering a problem account. This account was transferred to another trust institution late in 1997. Without this income in 1997, the increase in trust income in 1998 over 1997 would have been $210,000, or 25.7%. In 1998, we realized gains from securities sales of $40,000. Our non-interest income increased 32.8% from $911,000 in 1996 to $1.2 million in 1997. During this period, trust fees increased 62.4% from $577,000 in 1996 to $937,000 in 1997. Without fees earned on the 42 transferred trust account (on which we earned $59,000 in 1996), our annual increase from 1996 to 1997 would have been 57.9%. In 1997, other income was enhanced by consulting fees of $132,000 which were of a non-recurring nature. Non-interest income increased by 61.9% to $442,000 in the first quarter of 1999, as compared to $273,000 in the first quarter of 1998. The major component of non-interest income, trust fees grew to $320,000 in the first quarter of 1999, as compared to $229,000 in the first quarter of 1998. This 39.7% increase follows similar increases in trust assets under administration. Non-interest expense.
Three Months Ended March Year Ended December 31, 31, ------------- -------------------- 1999 1998 1998 1997 1996 ------ ------ ------ ------ ------ (in thousands) Salaries and employee benefits............... $1,115 $1,102 $4,077 $3,902 $3,411 Occupancy.................................... 352 334 1,379 1,274 990 Data processing.............................. 131 120 508 396 334 Marketing.................................... 153 139 567 500 424 Amortization of organization costs........... -- -- -- -- 23 Professional fees............................ 178 94 561 448 326 Insurance.................................... 41 30 134 115 82 Other expense................................ 285 181 864 627 508 ------ ------ ------ ------ ------ Total non-interest expense................. $2,255 $2,000 $8,090 $7,262 $6,098 ====== ====== ====== ====== ======
Total non-interest expense increased 11.4% from $7.3 million in 1997, to $8.1 million in 1998. Non-interest expense as a percentage of average assets declined from 2.7% in 1997 to 2.3% in 1998, reflecting the increased efficiency of our infrastructure in supporting our growth rate. Similar improvements in efficiency have been achieved in each year of the Company's existence. Non- interest expense increased 19.1% from $6.1 million in 1996, to $7.3 million in 1997. Non-interest expense as a percentage of average assets declined from 2.8% in 1996 to 2.7% in 1997. The efficiency ratio, which measures the percentage of net revenue that is paid as non-interest expense, has improved each year from 69% in 1996, to 65% in 1997, to 61% in 1998. This is an indication that expenses have not grown as quickly as revenues. It also supports the statement that the Company was able to grow into the infrastructure established in its early years. Salaries and employee benefits increased 4.5% to $4.1 million in 1998 from $3.9 million in 1997. Growth from 1996 to 1997 was $491,000, or 14.4%. Staff levels have been kept under control with the number of full time equivalent employees increasing from 59.0 at year-end 1996, to 66.5 at year-end 1997 and 70.5 at year-end 1998. Except for staffing of the Oak Brook facility at year- end 1996, there have been no additions at the executive level for the periods discussed. Staff additions have been necessary to support growth of the business. Occupancy costs related to our facilities showed increases of $105,000, or 8.2% from 1997 to 1998, and $284,000, or 28.7% from 1996 to 1997. The majority of our increase in operating expenses in 1997 was related to the opening of our Oak Brook office in January 1997, and a full year's rent paid in 1997 for an additional floor of the Chicago office. Insurance costs related to our property, liability, and bond coverages increased by $19,000, or 16.5%, from 1997 to 1998. The increased costs are primarily related to increases in coverage commensurate with our growth. Deposit insurance was an insignificant expense in each of the years. Data processing increases for 1997 and 1998 are volume-related. During the third quarter of 1999, we will be converting the processing of our loan and deposit applications to a different service bureau. This is the result 43 of our current processor's announcement that it will be terminating operations in 2000. We expect our data processing expense to increase in 1999 as a result of this conversion, and remain at higher levels in the years to follow. Professional fees which include legal, accounting and consulting services increased by $113,000, or 25.2% from 1997 to 1998, and $122,000, or 37.4% from 1996 to 1997. Reasons for these increases include increased usage of audit and accounting services, consulting services related to regulatory compliance, and in 1998, increases in investment advisory services related to our investment portfolio. Other expenses include office supplies, postage, telephone, delivery, training, director fees, filing fees and duplicating. The majority of increases in these items are related to growth of the Company. Non-interest expense increased by 12.8% to $2.3 million in the first quarter of 1999, as compared to $2.0 million in the first quarter of 1998. This percentage increase was well below increase percentages earned in net interest income and non-interest income. Most notable were increases in professional fees related to bank investment portfolio consultants, year 2000 consultants and internal audit expenses. Provision for income taxes. Our consolidated income tax rate varies from statutory rates principally due to certain interest income which is tax-exempt for federal and state purposes, and our expenses which are disallowed for tax purposes. Increases in our income tax provision for the three years ended December 31, 1998 are primarily related to increases in pre-tax earnings. Income taxes in the first quarter of 1999, included the effect of federally non-taxable interest earned on our municipal bond portfolio and the result of a tax-advantaged investment program initiated in February 1999. Financial Condition Loans. Our loan clients include individuals, partnerships and corporations. Loan types include commercial real estate, which is concentrated in apartment buildings, residential real estate, commercial, personal, home equity, and construction. Loan quality has remained high with low levels of delinquencies and minimal charge-offs. The following table sets forth our loan portfolio by category as of March 31, 1999, and as of December 31 for the previous five fiscal years:
December 31, March ------------------------------------------- 31, 1999 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- ------- (in thousands) Commercial real estate..... $108,599 $ 94,392 $ 55,429 $ 39,452 $ 29,114 $22,402 Residential real estate.... 62,208 54,171 56,307 45,012 25,973 21,696 Commercial................. 53,834 46,800 33,862 28,004 22,906 18,092 Personal................... 45,122 44,094 42,077 35,339 28,150 20,466 Home equity................ 19,860 20,100 20,680 20,683 18,707 11,504 Construction............... 18,143 22,408 10,140 2,853 1,219 747 Bankers' acceptances....... -- -- -- -- -- 3,473 -------- -------- -------- -------- -------- ------- Total loans.............. $307,766 $281,965 $218,495 $171,343 $126,069 $98,380 ======== ======== ======== ======== ======== =======
44 The following table classifies the loan portfolio, by category, at March 31, 1999, by date at which the loans mature:
More than one After year One year From one five ---------------- or less to five years years Total Fixed Variable -------- ------------- -------- -------- ------- -------- (in thousands) Commercial real estate.. $ 16,388 $ 53,400 $ 38,811 $108,599 $36,538 $ 55,673 Residential real estate. 3,142 4,639 54,427 62,208 13,476 45,590 Commercial.............. 32,233 21,236 365 53,834 4,741 16,860 Personal................ 38,018 6,191 913 45,122 1,092 6,012 Home equity............. 1,032 9,941 8,887 19,860 -- 18,828 Construction............ 11,932 5,906 305 18,143 1,993 4,218 -------- -------- -------- -------- ------- -------- Total loans........... $102,745 $101,313 $103,708 $307,766 $57,840 $147,181 ======== ======== ======== ======== ======= ========
Asset Quality. The following table classifies our non-performing loans as of the dates shown:
December 31, March 31, ---------------------------------- 1999 1998 1997 1996 1995 1994 --------- ------ ---- ------ ------ ---- (dollars in thousands) Nonaccrual loans................. $-- $ -- $-- $ -- $2,298 $-- Loans past due 90 days or more... 361 1,016 527 1,116 100 144 ---- ------ ---- ------ ------ ---- Total non-performing loans..... 361 1,016 527 1,116 2,398 144 ---- ------ ---- ------ ------ ---- Other real estate owned.......... -- -- -- -- -- -- ---- ------ ---- ------ ------ ---- Total non-performing assets.... $361 $1,016 $527 $1,116 $2,398 $144 ==== ====== ==== ====== ====== ==== Total non-performing loans to total loans..................... 0.12% 0.36% 0.24% 0.65% 1.90% 0.15% Total non-performing assets to total assets.................... 0.08 0.24 0.17 0.45 1.22 0.10
It is our policy to discontinue the accrual of interest income on any loan for which we have reasonable doubt as to the payment of interest or principal. Nonaccrual loans are returned to an accrual status when the financial position of the borrower indicates there is no longer any reasonable doubt as to the payment of principal or interest. Other than those loans reflected in the table above, we had no significant loans for which the terms had been renegotiated or restructured, or for which we had serious doubts as to the ability of the borrower to comply with repayment terms. We did not have any Other Real Estate Owned as of any of the dates shown. Potential Problem Loans. In addition to those loans reflected in the table above, we have identified some loans through our problem loan identification system which exhibit a higher than normal credit risk. Loans in this category include those with characteristics such as those past maturity more than 90 days, those that have recent adverse operating cash flow or balance sheet trends, or have general risk characteristics that the managing director believes might jeopardize the future timely collection of principal and interest payments. The principal amount of loans in this category as of March 31, 1999 was $960,000. At March 31, 1999, there were no significant loans which were classified by any bank regulatory agency that are not included above as nonaccrual, past due or restructured. Loan Concentrations. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Other than loans made to borrowers residing in the Chicago metropolitan area and our involvement in lending secured by real estate, we had no concentrations of loans exceeding 10% of total loans at March 31, 1999. 45 Allowance for Loan Losses. We believe our loan loss experience to date reflects the high credit quality of our loan portfolio. The following table shows changes in the allowance for loan losses resulting from additions to the allowance and loan charge-offs for each of the periods shown. All charge-offs have been of loans in the personal loan category. There were no recoveries on loans previously charged off in any of the periods. Charge-offs as a percentage of average total loans have been negligible.
December 31, March 31, ------------------------------------------- 1999 1998 1997 1996 1995 1994 --------- -------- -------- -------- -------- ------- (in thousands) Balance at beginning of period.................. $ 3,410 $ 3,050 $ 2,450 $ 1,955 $ 1,025 $ 728 Loans charged-off: Commercial real estate... -- -- -- -- -- -- Residential real estate.. -- -- -- -- -- -- Commercial............... -- -- -- -- -- -- Personal................. -- 2 3 29 -- 8 Home equity.............. -- -- -- -- -- -- Construction............. -- -------- -------- -------- -------- -------- ------- Total loans charged- off................... -- 2 3 29 -- 8 -------- -------- -------- -------- -------- ------- Provision for loan losses.................. 285 362 603 524 930 305 -------- -------- -------- -------- -------- ------- Balance at end of period. $ 3,695 $ 3,410 $ 3,050 $ 2,450 $ 1,955 $ 1,025 ======== ======== ======== ======== ======== ======= Average total loans...... $288,987 $234,486 $195,605 $141,043 $111,855 $80,717 ======== ======== ======== ======== ======== =======
The following table shows our allocation of the allowance for loan losses by specific category at the end of each of the periods shown. We considered various qualitative and quantitative factors about the loan portfolio which we deemed relevant.
December 31, March 31, ------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 1994 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- % of % of % of % of % of % of Total Total Total Total Total Total Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance Amount Allowance ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- (dollars in thousands) Commercial real estate.......... $ 928 25.1% $ 732 21.5% $ 429 14.1% $ 295 12.0% $ 226 11.6% $ 174 17.0% Residential real estate.......... 303 8.2 277 8.1 306 10.0 254 10.4 142 7.3 125 12.2 Commercial....... 833 22.5 693 20.3 464 15.2 422 17.2 913 46.7 271 26.4 Personal......... 509 13.8 545 16.0 1,037 34.0 973 39.7 392 20.1 290 28.3 Home equity...... 217 5.9 201 5.9 201 6.6 184 7.5 164 8.4 105 10.2 Construction..... 185 5.0 236 6.9 106 3.5 28 1.1 13 0.7 7 0.7 Unallocated...... 720 19.5 726 21.3 507 16.6 294 12.0 105 5.4 53 5.2 ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total........... $3,695 100.0% $3,410 100.0% $3,050 100.0% $2,450 100.0% $1,955 100.0% $1,025 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Control of our loan quality is continually monitored by management and is reviewed by the loan/investment committee of the Board of Directors of PrivateBank on a monthly basis. The amount of additions to the allowance for loan losses which are charged to earnings through the provision for loan losses are determined based on a variety of factors, including assessment of the credit risk of the portfolio, delinquent loans, an evaluation of current and prospective economic conditions in the market area, actual charge-offs during the year and historical loss experience. We maintain an allowance for loan losses sufficient to absorb credit losses inherent in our loan portfolio. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is supported by all available 46 and relevant information. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships as well as probable losses inherent in our loan portfolio and credit undertakings that are not specifically identified. We believe that the allowance for loan losses is adequate to provide for estimated probable credit losses inherent in our loan portfolio. Investment Securities. Investments are substantially comprised of federal funds sold and securities. "Federal funds sold" are overnight investments in which, except for cash reserves, all remaining funds are invested. Our securities portfolio is primarily comprised of U.S. Treasury securities and agency obligations, municipal bonds, collateralized mortgage obligations, and corporate securities. In the fourth quarter of 1998, we invested in municipal bonds to take advantage of their favorable taxable equivalent yields. Equity securities consist of minimal investments in the FHLB and NHS. All of our investment securities are classified as "available for sale" to give us the flexibility to alter the composition of our portfolio, and are carried at fair value. The table below shows the estimated fair value of investment securities at the dates indicated, presented by category.
December 31, March 31, ------------------------ 1999 1998 1997 1996 --------- -------- ------- ------- (in thousands) Available-for-Sale U.S. Treasury securities and U.S. Government agency obligations......................... $ 5,058 $ 6,095 $ 6,066 $ 7,095 State and political subdivision obligations. 40,608 37,804 -- -- Collateralized mortgage obligations......... 47,536 61,414 40,308 14,171 Corporate debt securities................... 10,280 10,263 18,269 21,951 Equity securities........................... 1,654 1,315 740 1,400 -------- -------- ------- ------- Total investment securities............... $105,136 $116,891 $65,383 $44,617 ======== ======== ======= =======
Maturities of investment securities, by category, as of March 31, 1999, are shown in the following table.
Within From one From five to After Equity one year to five years ten years ten years securities Total -------- ------------- ------------ --------- ---------- -------- (in thousands) U.S. Treasury securities and U.S. Government agency obligations..... $4,039 $1,019 $ -- $ -- $ -- $ 5,058 State and political subdivision obligations............ 451 2,598 2,764 34,795 -- 40,608 Collateralized mortgage obligations............ -- -- 4,707 42,829 -- 47,536 Corporate debt securities............. -- -- -- 10,280 -- 10,280 Equity securities....... -- -- -- -- 1,654 1,654 ------ ------ ------ ------- ------ -------- Total investment securities........... $4,490 $3,617 $7,471 $87,904 $1,654 $105,136 ====== ====== ====== ======= ====== ========
The weighted average yield (computed on a tax equivalent basis) for each range of maturities of securities, by category, is shown below as of March 31, 1999:
Within From one From five to After Equity one year to five years ten years ten years securities Total -------- ------------- ------------ --------- ---------- ----- U.S. Treasury securities and U.S. Government agency obligations..... 6.02% 5.80% -- -- -- 5.97% State and political subdivisions obligations............ 4.82 5.27 5.98% 7.09% -- 6.88 Collateralized mortgage obligations............ -- -- 5.22 5.88 -- 5.81 Corporate debt securities............. -- -- -- 7.05 -- 7.05 Equity securities....... -- -- -- -- 6.10% 6.10 ---- ---- ---- ---- ---- ---- Total investment securities........... 5.90% 5.42% 5.50% 6.50% 6.10% 6.36% ==== ==== ==== ==== ==== ====
47 Deposits. In 1998, total deposits increased by $79.2 million, or 27.7%, to $365.0 million. Over each of the past three years, our deposits have grown at rates in excess of 25% per year. We rely upon our clients to provide funds to support our lending and investment activities. Our deposit mix is substantially comprised of interest-bearing deposits. As a client service, we facilitate quick and convenient transfers of funds to checking accounts on an as-needed basis. This contributes to our clients keeping account balances that we believe to be in excess of those at most other financial institutions. While these larger, interest-bearing accounts tend to increase our cost of funds, we are able to support our asset base with a smaller number of accounts to service, at a lower cost per dollar of deposits, than at similar banks of similar asset size. For the period ended March 31, 1999, the average aggregate balance per client relationship was approximately $94,000. The following table presents the balances of deposits by category, and each category as a percentage of total deposits, at March 31, 1999 and at December 31, 1998, 1997 and 1996.
December 31, ----------------------------------------------------- March 31, 1999 1998 1997 1996 ----------------- ----------------- ----------------- ----------------- Percent Percent Percent Percent Balance of Total Balance of Total Balance of Total Balance of Total -------- -------- -------- -------- -------- -------- -------- -------- (dollars in thousands) Demand.................. $ 32,582 8.5% $ 39,490 10.8% $ 34,234 12.0% $ 21,177 9.5% Savings................. 499 0.1 482 0.1 640 0.2 258 0.1 Interest-bearing demand. 27,390 7.1 26,508 7.3 26,084 9.1 17,263 7.8 Money market............ 180,372 46.9 170,231 46.6 134,985 47.3 122,589 55.1 Certificates of deposit. 143,611 37.4 128,283 35.2 89,830 31.4 61,284 27.5 -------- ----- -------- ----- -------- ----- -------- ----- Total deposits........ $384,454 100.0% $364,994 100.0% $285,773 100.0% $222,571 100.0% ======== ===== ======== ===== ======== ===== ======== =====
The aggregate amounts of time deposits, in denominations of $100,000 or more, by maturity, are shown below as of the dates indicated:
December 31, March ------------------------ 31, 1999 1998 1997 1996 -------- -------- ------- ------- (in thousands) Three months or less................... $ 89,109 $ 67,922 $37,389 $26,833 Over three through six months.......... 16,478 18,974 16,200 7,638 Over six through twelve months......... 14,348 17,664 16,100 9,353 Over twelve months..................... 1,248 904 941 400 -------- -------- ------- ------- Total................................ $121,183 $105,464 $70,630 $44,224 ======== ======== ======= =======
Over the past several years, in a low interest rate, relatively flat yield curve environment, our clients have chosen to keep the maturities of their deposits short. We expect these short-term certificates of deposit to be renewed on terms and with maturities similar to those currently in place. In the event that certain of these certificates of deposits are not renewed and the funds are withdrawn from the bank, we will replace those deposits with other forms of borrowed money or capital as discussed below, or liquidate assets to reduce our funding needs. Liquidity and Capital Resources The following table reflects various measures of our capital at March 31, 1999, and at December 31, 1998, 1997 and 1996:
December 31, March 31, ------------------- 1999 1998 1997 1996 --------- ----- ----- ----- Total equity to total assets............... 6.97% 7.03% 7.92% 8.20% Total risk-based capital ratio............. 11.21 11.53 11.75 12.21 Tier 1 risk-based capital ratio............ 10.05 10.40 10.50 10.96 Leverage ratio............................. 7.53 7.88 8.70 8.71
48 At March 31, 1999, we exceeded the minimum levels of all regulatory capital requirements, and PrivateBank was considered "well-capitalized" under regulatory standards. Based on guidelines established by the Federal Reserve Bank, a bank holding company is required to maintain a leverage ratio (Tier 1 capital/total assets less intangibles) of 4.0%, a ratio of Tier 1 capital to risk-based assets of 4.0% and a ratio of total capital to risk-based assets of 8.0%. Since inception, we have raised over $22 million in a series of common stock offerings to provide the necessary capital to support our growth. The proceeds of these common stock offerings have been the principal source of funds at the holding company level. We have regularly infused capital into our bank subsidiary as and when needed to maintain adequate capital ratios and have tended to retain the balance of the holding company funds on deposit in a non- interest bearing account at PrivateBank to be available for its funding and liquidity purposes. The following table shows the funds we have raised through private placements of our common stock:
Number of Price Per Gross Proceeds Net Proceeds Shares Sold Share to Company to Company Date of Offering ----------- --------- -------------- ------------ (dollars in thousands, except per share amounts) 4Q 1989................. 80,800 $ 6.25 $ 505 $ 505 1Q 1991................. 1,334,400 6.25 8,340 8,340 3Q 1992................. 412,208 6.88 2,834 2,781 2Q 1994................. 1,023,264 7.81 7,994 7,877 2Q 1997................. 208,256 10.94 2,278 2,251 4Q 1998................. 46,000 16.00 736 736
Liquidity management at PrivateBank involves planning to meet anticipated funding needs at a reasonable cost. Liquidity management is guided by policies, formulated and monitored by our senior management and the Bank's asset/liability committee, which takes into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. PrivateBank's principal sources of funds are deposits, short-term borrowings and capital contributions by the Company out of the proceeds of our common stock offerings. PrivateBank's core deposits, the most stable source of liquidity for PrivateBank due to the nature of long-term relationships generally established with clients, are available to provide long-term liquidity. At March 31, 1999, 61.1% of our total assets were funded by core deposits. At December 31, 1998, 62.5% of our total assets were funded by core deposits. At December 31, 1997 and 1996, 69.5% and 72.8% of total assets were funded by core deposits, respectively. We periodically use services of the FHLB for short-term funding needs and other correspondent services. At March 31, 1999, we had a short-term advance of $10.0 million outstanding at 5.00% with a maturity of April 5, 1999, and at December 31, 1998, we had a short-term advance of $20.0 million at 5.20% which matured on January 7, 1999. In addition, we periodically use the FHLB to supply letters of credit as collateral to support public fund deposits. At March 31, 1999, we had FHLB letters of credit of $17.3 million outstanding. At December 31, 1998, we had no FHLB letters of credit outstanding. We pay 0.125% per annum for FHLB letters of credit. The following table shows our maximum availability for and usage of FHLB advances and letters of credit.
Availability Usage Date ------------ ------- (in thousands) March 31, 1999.............. $52,117 $27,340 December 31, 1998........... 45,842 20,000 December 31, 1997........... 32,673 7,905 December 31, 1996........... 25,214 10,890
Liquid assets refers to money market assets such as federal funds sold, as well as available-for-sale securities. Net liquid assets represent the sum of the liquid asset categories less the amount of assets pledged to 49 secure public funds. At March 31, 1999, net liquid assets were approximately $83.1 million. At December 31, 1998, net liquid assets totaled approximately $104.5 million, compared to approximately $76.2 million at December 31, 1997 and $55.4 million at December 31, 1996. PrivateBank accepts deposits from a variety of municipal entities. Typically, these municipal entities require that banks pledge marketable securities to collateralize these public deposits. The State of Illinois also accepts FHLB letters of credit as collateral. At March 31, 1999 and December 31, 1998, 1997 and 1996, PrivateBank had approximately $9.7 million, $15.0 million, $13.1 million and $11.5 million, respectively, of securities collateralizing such public deposits. Deposits requiring pledged assets are not considered to be core deposits, and the assets that are pledged as collateral for these deposits are not deemed to be liquid assets. Our Information Systems and the Year 2000 The year 2000 issue is a computer programming concern that centers on the inability of certain computer systems to recognize the year 2000 and other year 2000-sensitive dates. Many existing computer programs and systems were originally programmed to accept only six-digit date fields. In these systems, the calendar year is identified by the last two digits only. This problem may leave these programs and computers unable to distinguish between dates in the twentieth and twenty-first centuries. For example, some computers will treat "00" as the year 1900, rather than 2000. These computers may also be unable to correctly identify the year 2000 as a leap year. The inability of these computer systems to recognize dates could result in the failure of critical applications of the generation of inaccurate results. Therefore, these systems must be replaced or upgraded to become compliant with the year 2000 and to avoid these errors. Like most providers of financial services, we are particularly sensitive to the year 2000 issue because our operations depend on computer-generated financial information. Software, hardware and equipment both within and outside of our direct control, and third parties with whom we electronically or operationally interact may be adversely affected by this issue. These third parties include our clients as well as third party vendors providing data processing services, information systems management, computer system maintenance and credit bureau information. In addition, under certain circumstances, failure to address adequately the year 2000 issue could adversely affect the viability of our suppliers and creditors and the creditworthiness of our borrowers. If not adequately addressed, the year 2000 issue could have a significant adverse effect on our products, services and competitive condition and ultimately our financial condition and results of operations. Regulatory Oversight. Regulators of financial institutions have increased their focus on year 2000 compliance issues, have issued guidance concerning the responsibilities of senior management and directors and are conducting periodic examinations to ascertain the state of year 2000 compliance readiness. The Federal Financial Institutions Examination Council ("FFIEC") has issued a number of interagency statements on Year 2000 Project Management Awareness. These statements require financial institutions to, among other things, examine the year 2000 implications of their reliance on vendors and with respect to data exchange and the potential impact of the year 2000 issue on their customers, suppliers and borrowers. These statements also require each federally regulated financial institution to survey its exposure, measure its risk and prepare a plan to address the year 2000 issue. In addition, the federal banking regulators have issued safety and soundness guidelines to be followed by insured depository institutions to ensure resolution of any year 2000 problems. The federal banking agencies have asserted that year 2000 testing and certification is a key safety and soundness issue in conjunction with regulatory examinations. Consequently, an institution's failure to appropriately and timely address the year 2000 issue could result in supervisory action, including the reduction of the institution's supervisory ratings, which almost certainly would involve the denial of future applications for approval of mergers or acquisitions until compliance is achieved. In certain egregious situations, civil money penalties may be imposed. Our Readiness. At the direction of our Board of Directors, we have established a year 2000 readiness committee and have engaged consultants qualified to help us address our year 2000 issues. Our consultants are experienced with technology issues and year 2000 compliance, and have worked closely with our year 2000 50 readiness committee. We also engaged an outside consulting firm to perform an independent review of our year 2000 planning. The firm evaluated our program through review of our written procedures, discussion with our year 2000 project leader and personnel, and observation of our compliance efforts. Based on the consultants' report to management, management considers our program to address adequately our potential exposure to the year 2000 issue, but has determined to make certain suggested procedural changes, none of which we consider significant. Following the guidelines established by the FFIEC, we have broken down our compliance efforts into six stages: awareness, assessment, renovation, validation, implementation and contingency planning. . Awareness. During our awareness phase, we educated ourselves on the issues and risks associated with the year 2000 problem. We also identified the aspects of our operations which are year 2000 sensitive. . Assessment. During this stage, we were able to determine the scope of our entire year 2000 readiness project. We reviewed our systems, equipment, vendors, client exposure, counterparties and fiduciary risk. As part of this stage, we established a formal liquidity risk management plan, which included a contingency plan to aid in mitigating risks involved with potential withdrawal of client funds before or after the year 2000 rollover date. This plan has been approved by our Board of Directors. . Renovation. For most companies, this phase is time consuming and complicated. It involves upgrading or replacing all sensitive systems and equipment. Because we rely on third party vendors for virtually all of our systems and for our data processing needs, our internal renovations were minimal. We have undertaken efforts to ensure that our third party vendors are also year 2000 compliant. We have polled each of our third party vendors regarding their compliance efforts, and our year 2000 project manager monitors the year 2000 readiness and financial status of all of our vendors at least on a quarterly basis. However, we cannot be sure that each of our third party vendors will complete their compliance efforts in a timely manner or successfully maintain year 2000 readiness. We consider those third party vendors who provide us significant services to be "mission critical" to our operations. As of May 28, 1999, we had received responses to our inquiries regarding their year 2000 compliance efforts from 100% of them, and each of them claims to be year 2000 compliant. In connection with our inquiries and their responses, we have also completed an assessment of the financial and operational capabilities of each of these "mission critical" vendors. Although we do not have any contractual assurances that our "mission critical" vendors are or will be year 2000 compliant, based on their responses and our assessments, we believe each of them has taken appropriate steps to prepare for the year 2000, and that we will have no material exposure from our vendors involving the year 2000 issue. We have also undertaken to assess the year 2000 readiness of our significant borrowers and other clients consistent with the guidelines of the banking regulations. Each of these clients has been contacted regarding the year 2000 issue and the need for readiness. Management continues to solicit client response and to monitor clients' preparedness for year 2000. Failure of clients to prepare for year 2000 could have a significant adverse effect on their operations and profitability, potentially causing their ability to repay loans to be impaired, which could adversely affect our results. At this time, we are unable to estimate with reliability the extent to which our significant borrowers and other clients are susceptible to potential problems relating to the year 2000 issue, or to quantify the potential impact to us in this case. . Validation. We have completed the validation, or testing, phase of our readiness project. Using a comprehensive test plan developed with our consultants, we have tested, either individually or in collaboration with our third party vendors, each system and piece of equipment currently in place in our offices for year 2000 readiness and compatibility with other systems with which they interface. Our plan, which we modeled on FFIEC recommendations, indicates, on a system-by- system basis, the methods used to validate each system and includes procedures for documenting test results. Our 51 consultants have monitored the maintenance of process controls throughout the testing process. Our internal auditors have reviewed the results of our year 2000 testing. We are currently in the process of transferring our loan and deposit processing to a new provider. Our conversion date is scheduled for the end of August 1999. We have been working with our new vendor since early April 1999. The pre-conversion preparation process is approximately 50% complete. Through the use of proxy testing, we will be validating the results of our new vendor's year 2000 readiness. This validation process has not yet begun but will be completed before the actual conversion date. In addition, we have received contractual assurances from this new data processing provider that its software systems are and will be year 2000 compliant. However, if this vendor ultimately fails to be prepared for the year 2000, we have by contract waived any rights to claim damages from them. Our business may be disrupted in the event of failure of the data processing system to handle the century date change successfully, and we could be materially adversely affected in this event. . Implementation. We have completed the testing and have implemented necessary changes to computer hardware, network equipment and operating systems owned by us and located in our offices. We are currently using most of these systems in their year 2000 compliant version. As we continue to evaluate and modify these systems as needed, we will use our best efforts to maintain our year 2000 compliance. Because virtually all of our year 2000-related software modifications are handled by third- party processing services, and because we have no control over the renovation of software code, we will continue to monitor software application upgrade releases from our vendors and the year 2000 implications of such releases. We will continue to implement such changes as are necessary based on the results of our validation efforts and our ongoing monitoring efforts. . Contingency. The final stage of our readiness project involves the creation of a business continuity plan which outlines how our operations will continue in the event that we are unable to ensure that all of our operations will be compliant, or if we experience a failure of any of our systems. Our business continuity plan is completed and we expect to have our business resumption validation procedures completed prior to June 30, 1999. In our business continuity plan, we identify possible scenarios which could be the result of year 2000 failures. These scenarios include malfunction of automated systems, loss of electrical power and extraordinary needs for cash. In each case, our plan considers solutions including use of electronic and manual alternatives to our primary operating systems, operating from alternative physical sites and acquiring replacements for equipment. During the third quarter of 1999, where practical, we will selectively test our business resumption validation procedures. The Costs of Our Compliance Efforts. We estimate that the entire cost of our year 2000 readiness project will be approximately $650,000. These costs include: . upgrades of existing systems and equipment; . acquisitions of new systems and equipment; . consultant fees and expenses; and . allocated personnel costs. Through March 31, 1999, we have spent approximately $400,000 toward our year 2000 readiness. The Risks Involved in Our Efforts. Although we are working closely with our consultants, our third party vendors and our regulators to upgrade our systems and operations, there can be no assurance that all of our operations will be year 2000 compliant. In the event of system failure, either internally, or on the part of one or more of our vendors, our operations may be adversely affected. We may experience an interruption in our business and incur significant losses. 52 Asset/Liability Management Policy As a continuing part of our financial strategy, we attempt to manage the impact of fluctuations in market interest rates on our net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Asset/liability management policy is established by our Board of Directors and monitored by management. Our asset/liability policy sets standards within which we are expected to operate. These standards include guidelines for exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers, and reliance on non-core deposits. Our policy also states the reporting requirements to our Board of Directors. Our investment policy complements our asset/liability policy by establishing criteria by which we may purchase securities. These criteria include approved types of securities, brokerage sources, terms of investment, quality standards, and diversification. The following table illustrates our estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of March 31, 1999.
Time to Maturity or Repricing --------------------------------------- 0-90 91-365 1-5 Over 5 Days Days Years Years Total -------- --------- -------- -------- -------- (dollars in thousands) Interest-Earning Assets: Loans...................... $163,231 $ 22,535 $107,224 $ 14,732 $307,722 Investments................ 9,717 27,096 30,736 37,682 105,231 Federal funds sold......... 7,759 -- -- -- 7,759 -------- --------- -------- -------- -------- Total interest-earning assets.................. $180,707 $ 49,631 $137,960 $ 52,414 $420,712 ======== ========= ======== ======== ======== Interest-Bearing Liabilities: Interest-bearing demand.... $ -- -- -- 27,390 $ 27,390 Savings and money market... 138,109 42,263 -- 499 180,871 Time deposits.............. 100,815 $ 39,452 $ 3,344 -- 143,611 Funds borrowed............. 10,000 -- -- -- 10,000 -------- --------- -------- -------- -------- Total interest-bearing liabilities............. $248,924 $ 81,715 $ 3,344 $ 27,889 $361,872 ======== ========= ======== ======== ======== Cumulative: Rate sensitive assets (RSA)..................... $180,707 $ 230,338 $368,298 $420,712 Rate sensitive liabilities (RSL)..................... $248,924 $ 330,639 $333,983 $361,872 GAP (GAP = RSA-RSL)...... $(68,217) $(100,301) $ 34,315 $ 58,840 RSA/RSL...................... 72.6% 69.7% 110.3% 116.3% RSA/Total assets............. 41.9 53.4 85.4 97.6 RSL/Total assets............. 57.7 76.7 77.4 84.0 GAP/Total assets............. 15.8% 23.3% 8.0% 13.7% GAP/RSA...................... 16.2 23.8 8.2 14.0
We measure the impact of interest rate changes on our income statement through the use of gap analysis. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. During any given time period, if the amount of rate sensitive liabilities exceeds the amount of rate sensitive assets, a company would generally be considered negatively gapped and would benefit from falling rates over that period of time. Conversely, a positively gapped company would generally benefit from rising rates. We have structured the assets and liabilities of our company to mitigate the risk of either a rising or falling interest rate environment. We manage our gap position at the one year horizon. Depending upon our assessment of economic factors such as the magnitude and direction of projected interest rates over the short- and long-term, we generally operate within guidelines set by our asset/liability policy and attempt to maximize 53 our returns within an acceptable degree of risk. Our policy states that we shall maintain a gap position at the one year horizon of between 0.70 and 1.30. Our position at March 31, 1999 was 0.697 and was outside of the guidelines of our policy. We have continued to maintain our gap position near the low end set by our policy guidelines and expect to continue to operate in this manner as long as the general rate structure of the economy and our business opportunities remain consistent. Therefore, generally speaking, a short-term rise in interest rates will hurt earnings, while a short-term drop in interest rates would help earnings. Interest rate changes do not affect all categories of assets and liabilities equally or simultaneously. There are other factors which are difficult to measure and predict that would influence the effect of interest rate fluctuations on our income statement. For example, a rapid drop in interest rates might cause our loans to repay at a more rapid pace and certain mortgage- related investments to prepay more quickly than projected. This could mitigate some of the benefits of falling rates as are expected when negatively gapped. Conversely, a rapid rise in rates could give us an opportunity to increase our margins and stifle the rate of repayment on our mortgage-related loans which would increase our returns. The following table shows the "rate shock" results of a simulation model that attempts to measure the effect of rising and falling interest rates over a two-year horizon in a rapidly changing rate environment.
+200 Basis -200 Basis Points Points ---------- ---------- Percentage change in net interest income due to an immediate 200 basis point change in interest rates over a two-year time horizon...................... -8.7% +10.3%
This table shows that if there was an instantaneous, parallel shift in the yield curve of +200 basis points, we would suffer a decline in net interest income of 8.7% over a two year horizon. Conversely, a like shift of -200 basis points would increase net interest income by 10.3% over a two year horizon. We used a sensitivity model which simulated these interest rate changes on our earning assets and interest-bearing liabilities. This process allows us to explore the complex relationships among the financial instruments in various interest rate environments. The preceding sensitivity analysis is based on numerous assumptions including: the nature and timing of interest rate levels including the shape of the yield curve, prepayments on loans and securities, changes in deposit levels, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows and others. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how client preferences or competitor influences might change. Interest rate exposure is measured by the potential impact on our income statement of possible changes in interest rates. We use information from our gap analysis and rate shock calculations as input to help manage our exposure to changing interest rates. During the past year, we have managed our balance sheet in a negatively gapped position, reflecting our outlook that the U.S. economy will be stable with general interest rate levels stable to falling. We recognized opportunities to extend maturities on assets to take advantage of higher interest rates at longer maturities. We use our rate shock information to tell us how much exposure we have to rapidly changing rates. Based on historical information and our assessment of future interest rate trends, we do not believe there is a substantial risk of rapidly rising rates, which would negatively impact our income statement. Conversely, we also believe there is minimal likelihood of rapidly falling rates, which would positively impact our income statement. We feel that more likely scenarios include gradual changes in interest rate levels. We continue to monitor our gap and rate shock reports to detect changes to our exposure to fluctuating rates. We have the ability to 54 shorten or lengthen maturities on newly acquired assets, sell investment securities, or seek funding sources with different maturities in order to change our asset and liability structure for the purpose of mitigating the effect of interest rate risk. Inflation Our consolidated financial statements and the related notes thereto, presented elsewhere in this prospectus, have been prepared in accordance with generally accepted accounting principles and practices within the banking industry. Under these principles and practices, we are required to measure our financial position in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the general level of inflation. Over short periods of time, interest rates may not necessarily move in the same direction or in the same magnitude as inflation. Recent Accounting Pronouncements We follow generally accepted accounting principles in the preparation of our financial statements. There have been several recent authoritative accounting pronouncements issued by the Financial Accounting Standards Board that we have adopted or will adopt in the future: . Effective January 1, 1999, Reporting on the Costs of Start-Up Activities (AICPA Statement of Position 98-5) requires start-up costs and organizational costs to be charged to expense when incurred. This new accounting standard will apply to start-up costs associated with our planned St. Charles office, currently anticipated to approximate $430,000 pre-tax. See "Pending Acquisition." . Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 125) requires that after a transfer of financial assets, we must continue to recognize the financial and servicing assets we control and the liabilities incurred until control has been surrendered and liabilities extinguished. Our adoption of SFAS No. 125 had no effect on our reported consolidated financial position and results of operations. . Reporting Comprehensive Income (SFAS No. 130) establishes standards for reporting and display of comprehensive income and its components. Our adoption of SFAS No. 130 had no effect on the reported consolidated financial position and results of operations. . Accounting for Derivatives Instruments and for Hedging Activities (SFAS No. 133) will be effective for our fiscal quarters beginning after June 15, 1999. SFAS No. 133 requires that all derivatives be recognized as assets or liabilities on the balance sheet and be measured at fair value. Currently, however, we do not own any derivative instruments. Accordingly, this statement is not expected to affect our reported consolidated financial position and results of operations. 55 MANAGEMENT Directors and Executive Officers Our directors and executive officers, their ages, and their principal position(s) with the company are shown in the table below. All of our directors are also directors of PrivateBank except Mr. Farrell and Mr. Gottlieb. Our officers are elected annually by our Board to serve for the terms provided in our By-laws.
Name Age Position(s) ---- --- ----------- Ralph B. Mandell(3)(4)........... 58 Chairman, President and CEO Caren L. Reed(5)................. 64 Vice Chairman Donald A. Roubitchek(5).......... 48 Chief Financial Officer and Director Donald L. Beal(2)(5)............. 53 Director Naomi T. Borwell(1)(4)........... 71 Director William A. Castellano(1)(3)(4)... 58 Director Robert F. Coleman(2)(3)(6)....... 54 Director W. James Farrell(4).............. 57 Director John E. Gorman(2)(3)(5).......... 54 Director Alvin J. Gottlieb(4)............. 72 Director James M. Guyette(1)(2)(3)(6)..... 54 Director Philip M. Kayman(6).............. 57 Director William R. Langley(2)(3)(4)...... 58 Director Thomas F. Meagher(1)(6).......... 68 Director Michael B. Susman(1)(5).......... 61 Director Gary S. Collins.................. 41 Managing Director of PrivateBank M. Gail Fitzgerald............... 56 Managing Director of PrivateBank Hugh H. McLean................... 40 Managing Director of PrivateBank
- -------- (1) Member of the Compensation Committee. (2) Member of the Audit Committee. (3) Member of the Planning Committee. (4) Serves as a Class I director with a term expiring in 2002. (5) Serves as a Class II director with a term expiring in 2000. (6) Serves as a Class III director with a term expiring in 2001. Ralph B. Mandell, a director since 1989, is a co-founder of PrivateBancorp and PrivateBank. A Managing Director of PrivateBank, he has served as Chairman and Chief Executive Officer of PrivateBancorp and PrivateBank since 1994 and assumed the additional title of President of both entities in March 1999. From inception until 1994, Mr. Mandell had the title of Co-Chairman and Co-Chief Executive Officer. Prior to starting PrivateBank and PrivateBancorp, Mr. Mandell was the Chief Operating Officer of First United Financial Services, Inc., from 1985 to 1989, and served as its President from 1988 to 1989. First United, a company that was traded on the Nasdaq National Market, was sold to First Chicago Corporation in 1987. He also served as President of Oak Park Trust & Savings Bank from 1985 until 1988. Prior thereto, Mr. Mandell had served as Executive Vice President of Oak Park Trust & Savings Bank since 1979. Caren L. Reed, a director since 1990, is one of PrivateBank's founding directors. A Managing Director of PrivateBank, he currently serves as Vice Chairman of PrivateBancorp and PrivateBank, and functions as Chief Credit Officer. From 1990 to March 1999, Mr. Reed also held the title of President of PrivateBancorp and PrivateBank. Prior to joining 56 PrivateBank, Mr. Reed was an Executive Vice President of Continental Bank, Chicago with a career spanning 34 years. His responsibilities included North American Banking, Multinational Banking-Europe, U.S. Capital Markets, and the London Merchant Bank. Donald A. Roubitchek has been a director since 1997. He has been the Secretary/Treasurer and Chief Financial Officer of PrivateBancorp, and Managing Director and Chief Operating Officer of PrivateBank, since inception. He has 27 years' experience in the banking industry and a concentrated background in finance. Prior to joining PrivateBank, Mr. Roubitchek served in various capacities with LaSalle Community Banks, and its predecessor, Lakeview Bank. Donald L. Beal, a director since 1991, has been the owner of Kar-Don, Inc. d/b/a Arrow Lumber Company, located in Chicago, Illinois, since 1980. Prior to that, Mr. Beal served as Vice President of Hyde Park Bank & Trust with responsibilities including commercial lending and personal banking. Mr. Beal is also the sole owner of Ashland Investment, Inc. In 1994, Ashland Investment filed for Chapter 11 relief under the federal bankruptcy laws and emerged from bankruptcy after reorganization in April 1995. Naomi T. Borwell has been a director since 1990. She is a private investor. Mrs. Borwell is a former director of First Chicago Bank of Oak Park and First United Trust Company. William A. Castellano has been a director since 1991. From 1996 to present he has been Chairman and founder of both Workspace, Inc. and Worknet, Inc., located in Oakbrook Terrace, Illinois. Workspace provides office furniture to businesses, and Worknet provides computer networking services to businesses. He was the founder of and served as the Chief Executive Officer to Chrysler Systems Leasing from 1977 to 1991. Robert F. Coleman, a director since 1990, is a principal of Robert F. Coleman & Associates, a law firm located in Chicago, Illinois. He concentrates his practice on business and professional litigation. W. James Farrell, a director since 1990, has been an executive with Illinois Tool Works, Inc. ("ITW"), a manufacturer of fasteners, components, assemblies and systems, since 1965, and became its Chairman and CEO in 1997. He currently serves as a director of ITW as well as The Quaker Oats Company, Morton International, Inc., Premark International, Inc. and Allstate Insurance Company, each of which is traded on the New York Stock Exchange. John E. Gorman has been a director since 1994. Since 1982, Mr. Gorman has been a General Partner of the Jorman Group, a privately-owned organization with diversified business holdings. Alvin J. Gottlieb, a director since 1990, is a private investor. Since 1961, Mr. Gottlieb has served in various capacities on the Board of Directors of Gottlieb Memorial Hospital, located in Melrose Park, Illinois, and he currently holds the position of Vice Chairman. James M. Guyette has been a director since 1990. Since 1997, he has been President and Chief Executive Officer of Rolls Royce North America, Inc. Mr. Guyette served as Executive Vice President of UAL Corporation from 1985 to 1995 when he retired after more than 25 years of employment with that company. He is currently a director of Rolls-Royce plc (London) and Pembroke Capital (Dublin), and formerly a director of First United Financial Services and United Airlines Employees Credit Union. Philip M. Kayman, a director since 1990, has been a senior partner with the law firm of Neal Gerber & Eisenberg in Chicago, Illinois since the firm's founding in 1986. William R. Langley, a director since 1989, is a co-founder of PrivateBancorp and PrivateBank. Mr. Langley held the title of Co-Chairman of PrivateBancorp, and was active in day-to-day management of the company until 1995 when he retired. Prior to the formation of PrivateBancorp, Mr. Langley had served as Chief Executive Officer of First United Financial Services, Inc. from 1985 to 1987 and as Chairman from 1987 to 1989. First United, a company that was traded on the Nasdaq National Market, was sold to First Chicago Corporation in 1987. Prior to that, he served as Chairman and President of Oak Park Trust and Savings Bank, where he had been employed since 1973. 57 Thomas F. Meagher has been a director since 1996. Mr. Meagher has been the Chairman of Howell Tractor and Equipment Co., a distributor of heavy equipment located in Elk Grove Village, Illinois, since 1980. He has had an extensive career in the transportation industry and currently serves on the Board of Directors of Trans World Airlines, Inc., a New York Stock Exchange company. Michael B. Susman has been a director since 1990. He has been a partner in the law firm of Spitzer, Addis, Susman & Krull, located in Chicago, Illinois, since 1974. Gary S. Collins has been a Managing Director of PrivateBank since 1991. As a specialist in real estate lending, Mr. Collins has spent more than 20 years managing diverse real estate transactions and the full range of mortgage financing. Before joining PrivateBank in 1991, he held senior positions at several Chicagoland financial institutions, including First Chicago Bank of Oak Park, First Colonial Bancshares and Avenue Bank of Oak Park. M. Gail Fitzgerald has been a Managing Director of PrivateBank since 1996. She serves as the bank's director of Trust and Investment Services. Ms. Fitzgerald has over 20 years' banking experience, most of which is in the trust area. She served as Trust Division President of Firstar Bank of Illinois from 1995 to 1996. She also served as Chairman, President, and Chief Executive Officer of First Colonial Trust Company in Illinois from 1993 to 1995 and Senior Vice President of First Chicago Trust Company of Illinois from 1988 to 1993. Hugh H. McLean has been a Managing Director of PrivateBank since 1996. He serves as head of credit marketing and manager of the Oak Brook office. Prior to joining the bank, he served as a regional manager with Firstar Bank Illinois and its predecessor from 1990 to 1996, and as head of a commercial banking division at American National Bank and Trust Company in Chicago, Illinois, from 1987 to 1990, where he was employed from 1980 to 1990. Board of Directors Our Board of Directors currently consists of 15 members divided into three classes of directors who are elected to hold office for staggered three-year terms as provided in our Restated Certificate of Incorporation and Amended and Restated By-laws. Although our charter documents have fixed the size of our Board at 16 members, there currently is one Class III director vacancy due to the recent resignation of a director. Those persons currently serving as Class I directors have been elected to hold office until the annual stockholders' meeting to be held in 2002; Class II directors have been elected to hold office until the annual stockholders' meeting to be held in 2000; and Class III directors have been elected to hold office until the annual stockholders' meeting to be held in 2001. Committees of the Board of Directors We have appointed certain members of our Board to serve on various committees of the Board of Directors. The Board of Directors has established three standing committees: (a) the Compensation Committee; (b) the Audit Committee; and (c) the Planning Committee. Compensation Committee. The Compensation Committee is responsible for reviewing the performance of our Chief Executive Officer; reviewing and recommending the compensation of the company's officers, including the Chief Executive Officer; recommending and approving stock option grants and restricted stock awards to management; reviewing and recommending non-cash compensation programs including stock option grants, 401(k) contributions and annual bonuses; reviewing and recommending director compensation; and advising the Chief Executive Officer on miscellaneous compensation issues. The members of the Compensation Committee are Messrs. Guyette (Chairman), Castellano, Meagher and Susman and Mrs. Borwell. Audit Committee. The Audit Committee reports to the Board of Directors in discharging its responsibilities relating to our accounting, reporting and financial control practices. The Audit Committee has general 58 responsibility for oversight of financial controls, as well as our accounting, regulatory, year 2000 and audit activities, and annually reviews the qualifications of the independent auditors. The Audit Committee is composed entirely of outside directors. The members of the Audit Committee are Messrs. Coleman (Chairman), Beal, Gorman, Guyette and Langley. Planning Committee. The Planning Committee is responsible for studying strategic issues prior to submission to the entire Board of Directors for approval. The Planning Committee consists of Messrs. Mandell (Chairman), Castellano, Coleman, Gorman, Guyette and Langley. We have not designated a nominating committee. The entire Board of Directors acts to nominate persons for election as directors. Director Compensation In 1992, we commenced a program of compensating those of our outside directors who are also outside directors of PrivateBank with stock option awards in lieu of cash retainers. Our philosophy has been to increase our directors' equity stake in the company and further enhance the alignment of their interests with those of our stockholders. The director options have been granted each year in amounts determined at the discretion of the Board. The options are fully vested at the end of the year of grant, subject to a full year of service. In each case, the options have been granted at an exercise price equal to or greater than the estimated fair market value of our common stock at the date of grant. Partial awards have been made for partial year service. As of March 31, 1999, there were outstanding options granted to non- employee directors pursuant to this program to purchase an aggregate of 179,920 shares of common stock at an average weighted per share exercise price of $11.13. In March 1999, the Board granted each non-employee director of PrivateBank an option to purchase 1,500 shares of common stock at the initial public offering price of shares sold in this offering. In addition to stock options, non-employee members of PrivateBancorp's Board of Directors receive fees of $200 for each board meeting attended. The directors also receive $100 per meeting for attendance at meetings of any committees of the Board on which they serve. Those directors who serve on the board of PrivateBank are also entitled to the same meeting fees. During 1998, the Boards of Directors of each of PrivateBancorp and PrivateBank met monthly. Total board and committee meeting fees paid in 1998 was $58,800. We intend to reevaluate the structure of our director compensation program following the offering and anticipate that we may seek stockholder approval of a stock-based director compensation plan at our next stockholders' meeting. Compensation Committee Interlocks and Insider Participation Messrs. Guyette and Castellano and Ms. Borwell each serve on the Compensation Committee of our Board of Directors. During our last fiscal year, each of these individuals has engaged in certain transactions as clients of PrivateBank, in the ordinary course of PrivateBank's business, including borrowings, all of which transactions are or were on substantially the same terms (including interest rates and collateral on loans) as those prevailing at the time for comparable transactions with unaffiliated persons. In the opinion of our management, none of these transactions involved more than the normal risk of collectibility or presented any other unfavorable features. See "Certain Transactions." 59 Executive Compensation The following table summarizes the compensation paid by PrivateBancorp and PrivateBank to the Chairman, President and Chief Executive Officer and the five other most highly paid executive officers (the "Named Executive Officers") during 1998. Summary Compensation Table
Long-Term Annual Compensation Compensation Awards ---------------------------- --------------------- Other Annual Securities All Other Compen- Restricted Underlying Compen- Name and Principal Salary Bonus sation(1) Stock(2) Options(3) sation Position Year ($) ($) ($) ($) (#) ($) ------------------ ---- ------- ------- ------------ ---------- ---------- --------- Ralph B. Mandell........ 1998 210,000 100,000 18,845 77,000(4) 6,400 34,723(5) Chairman, President and CEO Caren L. Reed........... 1998 146,000 45,000 14,795 -- 4,800 3,200(6) Vice Chairman Donald A. Roubitchek.... 1998 138,000 37,000 1,776 22,000(7) 6,400 3,200(6) Chief Financial Officer Hugh H. McLean.......... 1998 115,000 35,000 11,756 22,000(7) 5,600 3,005(6) Managing Director M. Gail Fitzgerald...... 1998 112,000 40,000 3,206 22,000(7) 5,600 3,067(6) Senior Trust Officer and Managing Director Gary S. Collins......... 1998 112,000 29,000 9,429 22,000(7) 5,600 2,749(6) Managing Director
- -------- (1) Represents automobile allowances, life insurance premiums and club membership dues and fees paid by the company. (2) Reflects restricted stock awards under our Stock Incentive Plan. PrivateBancorp has paid regular dividends on all shares of restricted stock outstanding. These shares of restricted stock are subject to forfeiture until the fifth anniversary of the grant date. (3) Options to purchase shares of common stock were granted in 1998 at an exercise price of $17.1875 (representing 125% of fair market value at the date of grant) and vest at the end of five years; however, these options may vest before the fifth anniversary subject to performance-based acceleration terms providing for complete vesting upon the third or fourth anniversary of their grant date if the cumulative annualized growth rate of the fair market value of the common stock (including dividends paid) equals at least 15% as of such anniversary date. (4) Represents award of 5,600 shares of restricted stock at a value of $13.75 per share. (5) Represents (a) matching contributions to the company's 401(k) plan, and (b) dollar value benefit of accrued imputed interest (assuming full forgiveness of cumulative accrued interest) relating to a loan from PrivateBancorp in connection with Mr. Mandell's 1998 stock purchase transaction. See "Certain Transactions." (6) Represents matching contributions to the company's 401(k) plan made by the company for the benefit of the executive officer. (7) Represents award of 1,600 shares of restricted stock at a value of $13.75 per share. 60 The table below summarizes certain information about the options which we granted in 1998 to each Named Executive Officer. All options were granted at per share exercise prices equal to 125% of the fair market value per share on the date of grant. Option Grants in Last Fiscal Year
Individual Grants ----------------------------------------- Potential Realizable Value at Assumed % of Total Annual Rates of Number of Options Stock Price Shares Granted to Exercise Appreciation for Underlying Employees or Base Option Term ($) Options in Fiscal Price Expiration ---------------- Name Granted Year ($/Sh) Date 5% 10% ---- ---------- ---------- -------- ---------- ------- -------- Ralph B. Mandell........ 6,400 11.19% 17.1875 6/24/08 $33,343 $118,249 Caren L. Reed........... 4,800 8.39% 17.1875 6/24/08 25,007 88,687 Donald A. Roubitchek.... 6,400 11.19% 17.1875 6/24/08 33,343 118,249 Gary S. Collins......... 5,600 9.79% 17.1875 6/24/08 29,175 103,468 M. Gail Fitzgerald...... 5,600 9.79% 17.1875 6/24/08 29,175 103,468 Hugh H. McLean.......... 5,600 9.79% 17.1875 6/24/08 29,175 103,468
The following table summarizes for each Named Executive Officer the number of shares of common stock subject to outstanding options and the value of such options that were unexercised at December 31, 1998. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Underlying Unexercised Value of Unexercised In-The- Shares Options at Money Options at Acquired on December 31, 1998 (#) Decemer 31, 1998 ($)(2) Exercise Value ---------------------------- ---------------------------- Name (#) Realized ($) Exercisable/Unexercisable(1) Exercisable/Unexercisable(1) ---- ----------- ------------ ---------------------------- ---------------------------- Ralph B. Mandell........ -- -- 71,840/10,400 656,190/32,750 Caren L. Reed........... 65,600 533,500 3,840/ 8,000 37,440/26,200 Donald A. Roubitchek.... -- -- 36,736/ 8,400 333,661/16,375 Gary S. Collins......... -- -- 30,016/ 7,200 272,956/13,100 M. Gail Fitzgerald...... -- -- 8,000/13,600 53,000/53,000 Hugh H. McLean.......... -- -- 8,000/13,600 53,000/53,000
- -------- (1) The numbers and amounts in the above table represent shares of common stock subject to options granted that were unexercised as of December 31, 1998. (2) The estimated fair market value of our common stock at December 31, 1998 was $16.00. Employment Agreements We have entered into employment agreements, to be effective as of July 1, 1999, with two of our executive officers: Ralph B. Mandell, our Chairman, President and Chief Executive Officer, and Donald A. Roubitchek, our Chief Financial Officer. Under the provisions of his agreement, which has a term of two years, Mr. Mandell is entitled to an annual base salary of $230,000. Mr. Roubitchek's agreement has a term of one year and provides for an annual base salary of $145,000. Both Mr. Mandell and Mr. Roubitchek may receive discretionary bonuses to the extent determined by the Board of Directors and are entitled to participate in benefit plans and other fringe benefits available to our managing directors. Under each agreement, the executive officer's employment may be terminated by the company at any time for "cause," as defined in the agreements, in which case, or if the executive resigns from the company without "good reason," the agreement immediately terminates, and the officer would be entitled only to unpaid 61 benefits accrued during the term of his employment. If the executive chooses to resign with good reason, or the company chooses to terminate his employment without cause, the officer is also entitled to receive severance in the amount equal to 18 months of his then current base annual salary for Mr. Mandell and 12 months for Mr. Roubitchek, plus a pro rata bonus for the year of termination based on the prior year's bonus amount, if any. The agreements also provide for death benefits equal to six months of then current annual base salary. In the event that Mr. Mandell is terminated after a change in control of the company, he will be entitled to a lump sum payment equal to three times the sum of (1) his annual base salary; (2) the greater of (a) his bonus amount, if any, for the prior year or (b) his average bonus, if any, for the three preceding years; and (3) the sum of the contributions that would have been made by the company under any benefit plan and the annual value of any other executive perquisites. Mr. Roubitchek will be entitled to a lump sum payment equal to twice the sum of these amounts for him. The agreements entitle the executives to receive gross up payments to cover any federal excise taxes payable by them in the event the change in control benefits are deemed to constitute "excess parachute payments" under Section 280G of the Internal Revenue Code. A change in control is defined under the agreements as an occurrence of any one of the following events as determined by our Board: . if any person, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act, becomes the beneficial owner of 10% or more of the total voting power of our then outstanding voting capital stock; provided, however, that if that person becomes a beneficial owner of 10% or more of our voting capital stock as a result of an acquisition of stock directly from the company, or a decrease in the number of outstanding shares due to a repurchase of shares by the company, it shall not be considered a change in control; . if during any period of two consecutive years, those individuals who at the beginning of the period constitute our Board of Directors cease to make up a majority of the Board; . the consummation of a reorganization, merger or consolidation of the company, or the sale of all or substantially all of our assets; provided, that so long as more than 50% of the voting stock of the successor entity is held by stockholders who had been beneficial owners of our stock immediately before the transaction, and at least a majority of the board of the successor entity is made up of members of our Board, the merger or sale shall not be considered a change in control; and . the approval by our stockholders of a plan of complete liquidation or dissolution. The agreements also contain non-compete provisions, which prohibit the executive from soliciting, either for his own account or for the benefit of any entity located within a twenty-five mile radius of the company or any of our subsidiaries, any of our clients or employees. These non-compete provisions remain in effect for a period of one year after the termination of employment. The non-compete provisions do not apply in the event of a change in control. Stock Incentive Plan We maintain a Stock Incentive Plan pursuant to which we may grant our executive officers and key employees stock options and restricted stock awards. We also have a director compensation program for our non-employee directors. See "Management--Director Compensation." The purpose of the Stock Incentive Plan is to enhance our ability to attract and retain officers, executives and key employees and to align the interests of such individuals with those of our stockholders. The Stock Incentive Plan is administered, construed and interpreted by the Compensation Committee of the Board of Directors. The Compensation Committee may at any time alter, amend or terminate the Stock Incentive Plan provided that no action of the Board may adversely affect a participant's rights under any previously-granted stock option or restricted stock award without the consent of the participant. Any amendment to the Stock Incentive Plan which increases the number of shares of Common Stock which may be awarded or changes the class of persons eligible to receive awards must be approved by the company's stockholders within twelve months prior to or after the effective 62 date of such amendment. Deductions by the company for compensation amounts under the Stock Incentive Plan are not expected to be limited by Section 162(m) of the Internal Revenue Code. There are currently 476,607 shares of common stock remaining available for issuance under the Stock Incentive Plan. Of such shares, 426,488 are subject to options that are currently outstanding and 50,119 remain available for future grant as options or restricted stock awards. In the event of any change to the outstanding shares of stock of the company by reason of stock dividend or distribution, recapitalization, merger or consolidation, the Compensation Committee will adjust the number of shares of stock which may be issued under the Stock Incentive Plan and will provide for an equitable adjustment of any outstanding options or restricted stock grants. No individual participant in the Stock Incentive Plan may receive options to purchase more than 100,000 shares of common stock during any calendar year. As of March 31, 1999, there were outstanding options to purchase an aggregate of 426,488 shares of common stock under the Stock Incentive Plan, at exercise prices ranging from $6.25 to $18.00. In March 1999, we granted a total of 60,600 stock options, effective upon completion of this offering, at the initial public offering price. These options vest 50% after two years, 75% after three years, and are fully vested after four years. A total of 20,400 shares of restricted stock were also granted in March 1999 which will be fully vested after five years, at which time these shares will no longer be subject to forfeiture. In connection with the pending acquisition of Towne Square, we have agreed to grant Mr. Castronovo options to purchase 7,000 shares of our stock at the initial public offering price and to award him 3,000 shares of restricted stock. See "Pending Acquisition." All stock options granted pursuant to the Stock Incentive Plan are evidenced by agreements stating the number of shares covered thereby, the exercise price, the period or periods of time within which each option will become fully or partially exercisable, and whether an option is an "incentive stock option" as such term is defined in Section 422 of the Internal Revenue Code or a non- qualified stock option. The Compensation Committee has the authority to determine exercisability of an option and may in its discretion accelerate the time or times for exercise. No stock option may be exercisable after the expiration of 10 years from the date it is granted, and, in the case of an incentive stock option granted to a 10% stockholder, the option must be exercised within five years from the date it is granted. The price to be paid for the shares upon the exercise of each option may not be less than the fair market value of such shares on the date on which the option is granted, as determined by the Compensation Committee. An incentive stock option granted to a 10% stockholder must have an exercise price of at least 110% of the fair market value of the stock subject to the option as of the date of grant. The aggregate fair market value (determined as of the time the option is granted) of stock with respect to which incentive stock options are exercisable for the first time by an optionee during any calendar year (under all option plans of the company) may not exceed $100,000, provided that, to the extent that such limitation is exceeded, any excess options shall be deemed not to be incentive stock options. All restricted stock awards granted pursuant to the Stock Incentive Plan are evidenced by a written grant document in a form approved by the Compensation Committee. The grant document specifies the period or periods of time within which each grant of restricted stock will no longer be subject to restrictions on sale, transfer or alienation of the stock. The grant document shall also specify the treatment of the stock upon termination of employment before the restrictions are lifted. Certain Federal Income Tax Consequences The following summary discusses certain of the federal income tax consequences associated with (a) the grant of a stock option under our Stock Incentive Plan, and (b) the exercise of such option. This summary is limited and does not describe state or local income or other tax consequences. 63 Non-Qualified Stock Options. The grant of a non-qualified stock option (including any option exceeding the limitations on incentive stock options described above) will not be a taxable event to the optionee. Upon the exercise of a non-qualified stock option, the optionee generally must recognize ordinary compensation income equal to the difference between the exercise price and the fair market value of the common stock on the date of exercise. This compensation income will be subject to applicable withholding. At the time of exercise, the company will generally be entitled to a tax deduction in the amount of such compensation income. The optionee's tax basis for the stock received pursuant to the exercise will equal the sum of the recognized compensation income and the exercise price. Incentive Stock Options. The grant of an incentive stock option will not be a taxable event to the optionee. In addition, in contrast to the exercise of a non-qualified stock option, the timely exercise of an incentive stock option will not cause the optionee to recognize taxable income for regular income tax purposes (although the employee could be subject to an alternative minimum tax liability as described below). Also, the company shall not be entitled to a tax deduction for either the grant or the exercise. Upon exercise of an incentive stock option by an optionee, the alternative minimum taxable income of such optionee must be determined as if such incentive stock option were a non-qualified stock option (see "Non-Qualified Stock Options," above). Accordingly, such optionee will be required to include as alternative minimum taxable income the excess (if any) of the value of shares received upon exercise as of the date such shares are vested over the amount paid for such shares. Such employee would then be required to pay the greater of such optionee's regular or alternative minimum tax liability computed with respect of such year. If optionee engages in the disqualifying disposition of the stock subject to an incentive stock option, however, the exercise of the incentive stock option may give rise to taxable compensation income to the optionee and a tax deduction to the company. The optionee's sale or exchange of shares required upon the exercise of an incentive stock option more than one year after the transfer of the shares to such optionee and more than two years after the date of grant of the incentive stock option will result in any difference between the net sale proceeds and the exercise price being treated as long-term capital gain or loss to the optionee. If such sale or exchange takes place within two years after the date of the grant of the incentive stock option or within one year from the date of transfer of the shares to the optionee, the sale or exchange will generally be a "disqualifying disposition" and will have the following results: any excess of (x) the lesser of (1) the fair market value of the shares at the time of exercise and (2) the amount realized on the disqualifying disposition of the shares over (y) the option exercise price of such shares, will be ordinary income to the optionee, subject to applicable withholding taxes, and the company will be entitled to a tax deduction in the amount of such income. Any further gain or loss after the date of exercise will generally qualify as capital gain or loss and will not result in any deduction by the company. Withholding Taxes. To the extent that any amount recognized by an optionee upon exercise of an option is subject to withholding taxes, the company may require the optionee to pay, in addition to the amount required to exercise the option, the appropriate amount of withholding. To the extent compensation income is recognized by an optionee in connection with the exercise of a non-qualified stock option, the company generally would be entitled to a matching compensation deduction (assuming the requisite withholding requirements are satisfied). Restricted Stock Awards. Ordinarily, the award of restricted stock under the Stock Incentive Plan will not be a taxable event to the grantee. The grantee will incur ordinary compensation income, however, when the restrictions on the stock are 64 lifted, in an amount equal to the fair market value of the stock at the time the restrictions are lifted. Similarly, while the company will not be entitled to a tax deduction for the restricted stock at the time of grant, at the time the restrictions are lifted, the company will generally be entitled to a tax deduction in the amount of the then-current fair market value of the stock. Any dividends paid on restricted stock will be taxable income to the grantee at the time issued. As an exception to the above paragraph, under Internal Revenue Code (S)83(b) a grantee may elect to include in current gross income restricted stock at the time it is granted. If the grantee makes such an election, the fair market value of the restricted stock at the time of grant, without regard to any restrictions, shall be includable in the grantee's gross income. If the restricted stock is subsequently forfeited by the grantee, either by termination of employment before restrictions are lifted or otherwise, no deduction to the grantee's income may be made. If the granted makes an election under (S)83(b), the company will generally be entitled to a tax deduction at the time of the grant for the then-current fair market value of the restricted stock, without regard to restrictions. CERTAIN TRANSACTIONS Some of our executive officers and directors are, and have been during the preceding three years, clients of PrivateBank, and some of our executive officers and directors are direct or indirect owners of 10% or more of the stock of corporations which are, or have been in the past, clients of PrivateBank. As such clients, they have had transactions in the ordinary course of business of PrivateBank, including borrowings, all of which transactions are or were on substantially the same terms (including interest rates and collateral on loans) as those prevailing at the time for comparable transactions with nonaffiliated persons. In the opinion of our management, none of the transactions involved more than the normal risk of collectibility or presented any other unfavorable features. At March 31, 1999, PrivateBank had $12,148,755 in loans outstanding to certain directors and executive officers and their business interests of the company and certain executive officers of PrivateBank. In May 1998, Ralph B. Mandell, our Chairman, President and Chief Executive Officer, purchased 72,720 shares of newly issued common stock at $13.75 per share from PrivateBancorp. The purpose of the transaction was to enhance Mr. Mandell's interest in the long-term performance of the company and further align his interests with those of our stockholders. At the request of the Board of Directors of the company, one of the underwriters, EVEREN Securities, Inc., provided a fairness opinion to the company relating to the sale price established by our Board in connection with the transaction. As part of the transaction, we loaned Mr. Mandell approximately 95% of the purchase price on a full recourse basis. The loan matures in five years but becomes payable prior to the fifth year in the event Mr. Mandell sells any of the 72,720 shares or Mr. Mandell's employment is terminated. Interest accrues at 5.69% per annum, compounded annually (the applicable Federal rate), on the principal amount of the loan; however, provided Mr. Mandell does not sell any of the shares purchased and remains in our employ, 25% of the accumulated interest on the loan will be forgiven on the loan's second anniversary, 50% of the accumulated interest on the loan will be forgiven on its third anniversary, 75% of the accumulated interest on the loan will be forgiven on its fourth anniversary, and 100% of the accumulated interest on the loan will be forgiven on the loan's fifth anniversary. Mr. Mandell pledged all of the shares of common stock purchased in the transaction as collateral for the loan he received from us, but he is entitled to vote, and receive dividends on, the shares. During 1998, we incurred professional fees for services provided by the law firm Spitzer, Addis, Susman & Krull. Michael B. Susman, who is one of our directors, is a partner of that firm. 65 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of the common stock as of March 31, 1999, and as adjusted to give effect to the offering assuming 900,000 shares are sold in the offering (assuming no exercise of the over- allotment option and no additional purchases of shares in the offering by the persons shown), with respect to (a) each of our directors and Named Executive Officers; and (b) all of our directors and Named Executive Officers as a group.
Shares Subject to Exercisable Options to Percentage Percentage Shares of Purchase Total Ownership Ownership Common Common Beneficial Before After Stock(1) Stock(2) Ownership Offering(3) Offering(3) --------- ----------- ---------- ----------- ----------- Directors Ralph B. Mandell** (4).. 221,320 75,840 297,160 8.42% 6.71% Caren L. Reed** (5)..... 9,600 7,040 16,640 * * Donald A. Roubitchek** (6).................... 31,920 38,736 70,656 2.02% 1.61% Donald L. Beal (7)...... 17,464 12,720 30,184 * * Naomi T. Borwell (8).... 164,800 12,720 177,520 5.12% 4.07% William A. Castellano (9).................... 132,400 12,720 145,120 4.19% 3.32% Robert F. Coleman (10).. 26,400 12,720 39,120 1.13% * W. James Farrell........ 10,400 6,240 16,640 * * John E. Gorman.......... 49,000 8,400 57,400 1.66% 1.32% Alvin J. Gottlieb....... 105,600 6,240 111,840 3.23% 2.57% James M. Guyette........ 12,000 12,720 24,720 * * Philip M. Kayman........ 12,800 12,720 25,520 * * William R. Langley...... 89,600 68,240 157,840 4.48% 3.57% Thomas F. Meagher....... 12,500 6,480 18,980 * * Michael B. Susman....... 22,400 12,720 35,120 1.01% * Other Named Executive Officers Gary S. Collins (11).... 28,180 31,616 59,796 1.72% 1.36% M. Gail Fitzgerald (12). 13,200 8,000 21,200 * * Hugh H. McLean (13)..... 45,528 12,000 57,528 1.66% 1.32% Directors and executive officers as a group (18 persons)............... 1,005,112 357,872 1,362,984 35.78% 28.94%
- -------- *Less than 1% **Denotes person who serves as director and as an executive officer. (1) Unless otherwise noted, represents all shares held individually, held in individual retirement accounts or revocable trusts for the benefit of the director or executive officer, and held jointly with spouse. (2) Includes options which are currently exercisable or exercisable within 60 days of the date of this prospectus. (3) Beneficial ownership percentages are calculated in accordance with SEC Rule 13d-3 promulgated under the Securities Exchange Act of 1934. Does not give effect to the planned issuance of shares in the pending acquisition. See "Pending Acquisition." (4) Includes 26,600 shares of restricted stock granted to Mr. Mandell under our Stock Incentive Plan. These shares vest at various dates between 2001 and 2004, and are subject to forfeiture until such time as they vest. Also included are 72,720 shares which have been pledged as collateral to secure a loan from the company to Mr. Mandell. See "Certain Transactions." Also includes 23,600 shares held by Mr. Mandell's spouse. Mr. Mandell's business address is c/o The PrivateBank & Trust Company, Ten North Dearborn Street, Chicago, Illinois 60602. 66 (5) Includes 9,600 shares of restricted stock granted to Mr. Reed under our Stock Incentive Plan. These shares vest at various dates between 2001 and 2002, and are subject to forfeiture until such time as they vest. (6) Includes 13,200 shares of restricted stock granted to Mr. Roubitchek under our Stock Incentive Plan. These shares vest at various dates between 2001 and 2004, and are subject to forfeiture until such time as they vest. Also includes 400 shares held by Mr. Roubitchek's children. (7) Includes 10,364 shares held by Mr. Beal's spouse and children. (8) Ms. Borwell's address is 1040 N. Lake Shore Drive, Chicago, Illinois 60611. (9) Includes 14,000 shares held by Mr. Castellano's children. (10) Includes 800 shares held by Mr. Coleman's spouse and 3,200 shares held by the Robert F. Coleman & Associates Retirement Savings Plan of which Mr. Coleman is a participant. (11) Includes 10,400 shares of restricted stock granted to Mr. Collins under our Stock Incentive Plan. These shares vest at various dates between 2001 and 2004, and are subject to forfeiture until such time as they vest. Also includes 4,170 shares owned by Mr. Collins' spouse and children. (12) Includes 6,800 shares of restricted stock granted to Ms. Fitzgerald under our Stock Incentive Plan. These shares vest at various dates between 2002 and 2004, and are subject to forfeiture until such time as they vest. (13) Includes 7,800 shares of restricted stock granted to Mr. McLean under our Stock Incentive Plan. These shares vest at various dates between 2002 and 2004, and are subject to forfeiture until such time as they vest. SUPERVISION AND REGULATION General Banking is a highly regulated industry. We have attempted to summarize several applicable statutes and regulations, but you should understand that these summaries are not complete, and you should refer to the statutes and regulations for more information. Also, these statutes and regulations are likely to change in the future, and we cannot predict what effect these changes, if made, will have on our operations. Finally, please remember that supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors rather than stockholders of banks and bank holding companies. Bank Holding Company Regulation PrivateBancorp is registered as a "bank holding company" with the Board of Governors of the Federal Reserve System (the "Federal Reserve") pursuant to the Bank Holding Company Act of 1956 (the Bank Holding Company Act of 1956 and the regulations issued thereunder are collectively referred to as the "BHC Act"), and we are subject to regulation, supervision and examination by, and we are required to file reports and additional information with the Federal Reserve. Minimum Capital Requirements. The Federal Reserve has adopted risk-based capital requirements for assessing bank holding company capital adequacy. These standards revise the normal definition of capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. At December 31, 1998, our consolidated assets were approximately $416 million. Under the Federal Reserve's risk-based guidelines applicable to the company, capital is classified into two categories. For bank holding companies, Tier 1, or "core", capital consists of: . common stockholders' equity; . perpetual preferred stock (subject to some limitations); and 67 . minority interests in the common equity accounts of consolidated subsidiaries less: . goodwill; . specified intangible assets; and . specified investments in other corporations. Tier 2 capital consists of: . the allowance for loan and lease losses; . perpetual preferred stock and related surplus; . hybrid capital instruments; . perpetual debt securities; . mandatory convertible debt securities; . term subordinated debt and related surplus; and . intermediate-term preferred stock, including related securities. Under the Federal Reserve's capital guidelines, bank holding companies are required to maintain a minimum ratio of qualifying total capital to risk- weighted assets of 8%, of which at least 4% must be in the form of Tier 1 capital. The Federal Reserve also requires a minimum leverage ratio of Tier 1 capital to total assets of 3%. Bank holding companies not rated in the highest category under the regulatory rating system are required to maintain a leverage ratio of one percent to two percent above the stated minimum. The 3% Tier 1 capital to total assets ratio is the minimum leverage standard for bank holding companies, and the Federal Reserve uses this minimum standard in conjunction with the risk-based ratio in determining the overall capital adequacy of banking organizations. In addition, the Federal Reserve continues to consider the Tier 1 leverage ratio in evaluating proposals for expansion or new activities. In its capital adequacy guidelines, the Federal Reserve emphasizes that the foregoing standards are supervisory minimums and that banking organizations generally are expected to operate well above the minimum ratios. These guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum levels. As of March 31, 1999, we had regulatory capital in excess of the Federal Reserve's minimum requirements. Our total risk-based capital ratio at March 31, 1999 was 11.21% and our leverage ratio was 7.53%. Acquisitions. The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank or bank holding company, or for a merger or consolidation of a bank holding company with another bank holding company. With limited exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the Federal Reserve has determined, by regulation or order, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto, such as owning and operating a savings association, trust company, or investment or financial advisory business. Under the BHC Act and Federal Reserve regulations, we are prohibited from engaging in tie-in arrangements in connection with an extension of credit, lease, sale of property, or furnishing of services. That means that, in most circumstances, we may not condition a client's purchase of one of our services on the purchase of another service. 68 Interstate Banking and Branching Legislation. Under the Interstate Banking and Efficiency Act, adequately capitalized and adequately managed bank holding companies are allowed to acquire banks across state lines subject to various limitations. In addition, under the Interstate Banking Act, banks are permitted, under some circumstances, to merge with one another across state lines and thereby create a main bank with branches in separate states. After establishing branches in a state through an interstate merger transaction, a bank may establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law. Ownership Limitations. Any person, including that person's associates, affiliates and groups acting in concert with him or her, who purchases or subscribes for 5% or more of our common stock may be required to obtain prior approval of the Commissioner and the Federal Reserve. Under the Illinois Banking Act, any person who thereafter acquires more than 10% of our stock may be required to obtain the prior approval of the Commissioner. Under the Change in Bank Control Act, a person may be required to obtain the prior regulatory approval of the Federal Deposit Insurance Corporation ("FDIC") and the Federal Reserve before acquiring the power to directly or indirectly control the management, operations or policies of PrivateBancorp or PrivateBank or before acquiring control of 25% or more of any class of PrivateBancorp's or PrivateBank's outstanding voting stock. In addition, any corporation, partnership, trust or organized group that acquires a controlling interest in PrivateBancorp or PrivateBank may have to obtain approval of the Federal Reserve to become a bank holding company and thereafter be subject to regulation as a bank holding company. Dividends. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies. In the policy statement, the Federal Reserve expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or which could only be funded in ways that weakened the bank holding company's financial health, such as by borrowing. Additionally, the Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to prohibit or limit the payment of dividends by banks and bank holding companies. Under a longstanding policy of the Federal Reserve, PrivateBancorp is expected to act as a source of financial strength to PrivateBank and to commit resources to support PrivateBank. The Federal Reserve takes the position that in implementing this policy, it may require PrivateBancorp to provide financial support when the company otherwise would not consider itself able to do so. In addition to the restrictions on dividends imposed by the Federal Reserve, Delaware law also places limitations on our ability to pay dividends. For example, we may not pay dividends to our stockholders if, after giving effect to the dividend, we would not be able to pay our debts as they become due. Because a major source of our revenue is dividends which we receive and expect to receive from PrivateBank, our ability to pay dividends will depend on the amount of dividends paid by PrivateBank. We cannot be sure that PrivateBank will, in any circumstances, pay such dividends to us. Bank Regulation Under Illinois law, PrivateBank is subject to supervision and examination by the commissioner of the Illinois Office of Banks and Real Estate (the "Commissioner"). As an affiliate of PrivateBank, PrivateBancorp is also subject to examination by the Commissioner. PrivateBank is a member of the Federal Home Loan Bank ("FHLB") of Chicago and may be subject to examination by the FHLB of Chicago. In addition, the deposits of PrivateBank are insured by the Bank Insurance Fund ("BIF") thereby rendering PrivateBank subject to the provisions of the Federal Deposit Insurance Act ("FDIA") and, as a state nonmember bank, to supervision and examination by the FDIC. The FDIA requires the FDIC approval of any merger and/or consolidation by or with an insured bank, as well as the establishment or relocation of any bank or branch office. The FDIC also supervises compliance with the provisions of federal law and regulations which place restrictions on loans by FDIC-insured banks to their directors, executive officers and other controlling persons. 69 Furthermore, all banks are affected by the credit policies of other monetary authorities, including the Federal Reserve, which regulate the national supply of bank credit. Such regulation influences overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans and paid on deposits. The Federal Reserve's monetary policies have had a significant effect on the operating results of commercial banks in the past and we expect this trend to continue in the future. Dividends. The Illinois Banking Act provides that an Illinois bank may not pay dividends of an amount greater than its current net profits after deducting losses and bad debts while such bank continues to operate a banking business. For the purpose of determining the amount of dividends that an Illinois bank may pay, bad debts are defined as debts upon which interest is past due and unpaid for a period of six months or more unless such debts are well-secured and in the process of collection. In addition to the foregoing, the ability of the company and PrivateBank to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under the Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"), as described below. Federal Reserve System. PrivateBank is subject to Federal Reserve regulations requiring depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve regulations generally require 3% reserves on the first $47.8 million of transaction accounts plus 10% on the remainder. The first $4.7 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) are exempted from the reserve requirements. PrivateBank is in compliance with that requirement. Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994, requires the Federal Reserve, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The FDIC and the other federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to FDICIA. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the FDIC adopted regulations that authorize, but do not require, the FDIC to order an institution that has been given notice by the FDIC that it is not satisfying any of the safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the FDIC must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. If an institution fails to comply with such an order, the FDIC may seek to enforce its order in judicial proceedings and to impose civil money penalties. The FDIC and the other federal bank regulatory agencies also proposed guidelines for asset quality and earning standards. Prompt Corrective Action. FDICIA requires the federal banking regulators, including the Federal Reserve and the FDIC, to take prompt corrective action with respect to depository institutions that fall below minimum capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions, including restrictions on growth, investment activities, capital distributions and affiliate transactions, and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (for example, the company or a 70 stockholder controlling the company). In other respects, FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for under-capitalized institutions. The capital- based prompt corrective action provisions of FDICIA and their implementing regulations apply to FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to the prompt corrective action provisions of FDICIA. As of March 31, 1999, PrivateBank had capital in excess of the requirements for a "well-capitalized" institution. Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured institution, PrivateBank is required to pay deposit insurance premiums based on the risk it poses to the insurance fund. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve designated reserve ratios in the insurance funds and to impose special additional assessments. The FDICIA assessment rate schedule for BIF-insured deposits provides for an assessment range of zero to 0.27% (subject to a $2,000 minimum) of deposits depending on capital and supervisory factors. Each depository institution is assigned to one of three capital groups: "well capitalized," "adequately capitalized" or "less than adequately capitalized." Within each capital group, institutions are assigned to one of three supervisory subgroups: "healthy," "supervisory concern" or "substantial supervisory concern." Accordingly, there are nine combinations of capital groups and supervisory subgroups to which varying assessment rates would be applicable. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. During 1998, PrivateBank paid deposit insurance premiums in the aggregate amount of $33,572. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practice, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know any practice, condition or violation that might lead to termination of our deposit insurance. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 provides that beginning with semi-annual periods after December 31, 1996, BIF deposits will also be assessed to pay interest on the bonds issued in the late 1980s by the Financing Corporation (the "FICO Bonds") to recapitalize the now defunct Federal Savings & Loan Insurance Corporation. For purposes of the assessments to pay interest on the FICO Bonds, BIF deposits will be assessed at a rate of 20% of the assessment rate applicable to SAIF deposits until December 31, 1999. After the earlier of December 31, 1999 or the date on which the last savings association ceases to exist, full pro rata sharing of FICO assessments will begin. It has been estimated that the rates of assessment for the payment of interest on the FICO Bonds will be approximately 1.3 basis points for BIF- assessable deposits and approximately 6.4 basis points for SAIF-assessable deposits. The payment of the assessment to pay interest on the FICO Bonds should not materially affect the Bank. Community Reinvestment. Under the CRA, a financial institution has a continuing and affirmative obligation to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. However, institutions are rated on their performance in meeting the needs of their communities. Performance is judged in three areas: (a) a lending test, to evaluate the institution's record of making loans in its assessment areas; (b) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and business; and (c) a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain 71 applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings. PrivateBank was assigned a "satisfactory" rating in January 1999 as a result of its last CRA examination. This is the second highest rating a bank may receive. Compliance with Consumer Protection Laws. PrivateBank is subject to many federal consumer protection statutes and regulations including the CRA, the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement Procedures Act and the Home Disclosure Act. Among other things, these acts: . require banks to meet the credit needs of their communities; . require banks to disclose credit terms in meaningful and consistent ways; . prohibit discrimination against an applicant in any consumer or business credit transaction; . prohibit discrimination in housing-related lending activities; . require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement projects; . require lenders to provide borrowers with information regarding the nature and cost of real estate settlements; . prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and . prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations. From time to time we have been made aware of certain deficiencies in our consumer compliance program. Management believes that any deficiencies have already been or are in the process of being corrected. In the event that consumer compliance deficiencies were to continue over time, enforcement or administrative actions by the appropriate federal banking regulators may affect the implementation of our growth strategies. Enforcement Actions. Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake an enforcement action against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. Other. PrivateBank is also subject to state and federal restrictions upon: . extensions of credit to the company and any non-banking affiliates, . the purchase of assets from affiliates, . the issuance of guarantees, acceptances or letters of credit on behalf of affiliates, and . investments in stock or other securities issued by affiliates or acceptance thereof as collateral for an extension of credit. PrivateBancorp and PrivateBank are subject to restrictions with respect to engaging in the issuance, underwriting, public sale or distribution of certain types of securities. In addition, PrivateBank must maintain reserves against deposits and is subject to restrictions upon: . the nature and amount of loans which it may make to a single borrower (and, in some instances, a group of affiliated borrowers), 72 . the nature and amount of securities in which it may invest, . the amount of investment in PrivateBank premises, and . the manner in and extent to which it may borrow money. Pending Legislation. Because of the concerns relating to competitiveness and the safety and soundness of the banking industry, Congress is considering a number of wide-ranging proposals for altering the structure, regulation and competitive relationships of the nation's financial institutions. We cannot predict whether or in what form any of these proposals will be adopted or the extent to which the proposals will affect our operations, if at all. Monetary Policy and Economic Conditions The earnings of banks and bank holding companies are sensitive to changes in prevailing interest rates and are affected by general economic conditions and the fiscal and monetary policies of federal regulatory agencies, including the Federal Reserve. Through changes in the discount rate, availability of borrowing at the "discount window," open market transactions, and imposition of changes in the reserve requirements, the Federal Reserve exerts considerable influence over the cost and availability of funds obtainable for lending or investing. Monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and such use may affect interest rates charged on loans or paid on deposits. Monetary and fiscal policies have affected the operating results of commercial banks in the past and are expected to do so in the future. We cannot fully predict the nature or the extent of any effects which fiscal or monetary policies may have on our business and earnings. 73 DESCRIPTION OF CAPITAL STOCK The information in this prospectus gives effect to a 2-for-1 stock split effective as of June 28, 1999, and to an amendment to PrivateBancorp's Restated Certificate of Incorporation to increase the authorized shares approved by stockholders on April 22, 1999. The amendment was filed on June 25, 1999, with the Secretary of State of the State of Delaware. Common Stock We are authorized to issue 12,000,000 shares of common stock, without par value, of which 3,451,824 shares were outstanding prior to the offering. As of March 31, 1999, 632,808 shares of common stock were reserved for issuance upon the exercise of currently outstanding options. The outstanding shares of common stock currently are, and the shares of common stock to be issued in the offering will be (when issued and delivered in accordance with the terms and conditions of the offering), fully paid and nonassessable. Each share of common stock has the same relative rights as, and is identical in all respects with, each other share of common stock. Each holder of record of common stock is entitled to one vote per share on all matters voted upon by our stockholders. Upon completion of the public offering, holders of shares of common stock will have no preemptive, redemption or cumulative voting rights. In the event of liquidation, the holders of shares of common stock are entitled to share ratably in any of our assets retained after payment in full of creditors and, if any preferred stock is then authorized, issued and outstanding, after payment to holders of such preferred stock but only to the extent of any liquidation preference. Dividends. The holders of our common stock are entitled to receive and share equally in such dividends, if any, declared by the Board of Directors out of funds legally available therefor. We may pay dividends if, as and when declared by our Board of Directors. The payment of dividends by the company is subject to limitations imposed by the Delaware General Corporation Law ("DGCL"). See "Dividends." If we issue preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends. Voting Rights. The holders of our common stock possess voting rights in the company. Stockholders elect our Board of Directors and act on such other matters as are required to be presented to them under the DGCL or our Amended and Restated Certificate of Incorporation, or as are otherwise presented to them by the Board of Directors. Each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Accordingly, holders of more than fifty percent of the outstanding shares of common stock will be able to elect all of the Directors to be elected each year. Although there are no present plans to do so, if we issue preferred stock, holders of the preferred stock may also possess voting rights. Certain matters require a two-thirds stockholder vote. See "Certain Anti-Takeover Effects of the Company's Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and Delaware Law." Liquidation. In the event of any liquidation, dissolution or winding up of the company, the holders of our common stock would be entitled to receive, after payment or provision for payment of all of our debts and liabilities, all of our assets available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of any liquidation or dissolution. Preemptive Rights and Redemption. Holders of our common stock will not be entitled to preemptive rights with respect to any shares which we may issue in the future. The common stock is not subject to mandatory redemption by us. Preferred Stock Our Board of Directors is authorized, pursuant to the Amended and Restated Certificate of Incorporation, to issue 1,000,000 shares of preferred stock, without par value, in one or more series with respect to which the Board, without stockholder approval, may determine voting, conversion and other rights which could adversely affect the rights of the holders of our common stock. Currently, no shares of our authorized preferred stock are issued or outstanding. Stockholders will not have preemptive rights to subscribe for shares of preferred stock. 74 The rights of the holders of the common stock would generally be subject to the prior rights of the preferred stock with respect to dividends, liquidation preferences and other matters. The dividend rights, dividend rates, conversion rights, conversion prices, voting rights, redemption rights and terms (including sinking fund provisions, if any), the redemption price or prices and the liquidation preferences of any series of the authorized preferred stock and the numbers of such shares of preferred stock in each series will be established by the Board of Directors as such shares are to be issued. It is not possible to state the actual effect of the preferred stock on the rights of holders of common stock until the Board of Directors determines the rights of the holders of a series of the preferred stock. However, such effects might include: . restrictions on dividends; . dilution of the voting power to the extent that the preferred stock were given voting rights; . dilution of the equity interest and voting power if the preferred stock were convertible into common stock; and . restrictions upon any distribution of assets to the holders of common stock upon liquidation or dissolution until the satisfaction of any liquidation preference granted to holders of the preferred stock. Furthermore, although we have no present intention to do so, the Board of Directors could direct us to issue, in one or more transactions, shares of preferred stock or additional shares of common stock or rights to purchase such shares (subject to the limits imposed by applicable laws and the rules of any stock exchange or automated dealer quotation system to the extent that such rules may become applicable to, or may be observed by, us) in amounts which could make more difficult and, therefore, less likely, a takeover, proxy contest, change in our management or any other extraordinary corporate transaction which might be opposed by the incumbent Board of Directors. Any issuance of preferred stock or of common stock could have the effect of diluting the earnings per share, book value per share and voting power of common stock held by our stockholders. Certain Anti-Takeover Effects of the Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and Delaware Law General. Certain provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-laws and the DGCL may have the effect of impeding the acquisition of control of the company by means of a tender offer, a proxy fight, open-market purchases or otherwise in a transaction not approved by our Board of Directors. These provisions may have the effect of discouraging a future takeover attempt which is not approved by our Board of Directors but which individual stockholders may deem to be in their best interests or in which stockholders may receive a substantial premium for their shares over then current market prices. As a result, stockholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of our current Board of Directors or management more difficult. The provisions of the Amended and Restated Certificate of Incorporation and Amended and Restated By-laws described below are designed to reduce, or have the effect of reducing, our vulnerability to an unsolicited proposal for the restructuring or sale of all or substantially all of our assets or an unsolicited takeover attempt which is unfair to our stockholders. The following description of certain of the provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws is general, and you should read it with our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws. Authorized Shares. Our Amended and Restated Certificate of Incorporation authorizes the issuance of 12,000,000 shares of common stock and 1,000,000 shares of preferred stock. We have authorized these amounts to provide our Board of Directors with flexibility to effect, among other things, transactions, financings, acquisitions, stock dividends, stock splits and employee stock options. However, these authorized shares may also be used by the Board of Directors consistent with its fiduciary duty to deter future attempts to gain control of the company. 75 The Board of Directors also has sole authority to determine the terms of any one or more series of preferred stock, including voting rights, conversion rates, and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the Board of Directors has the power to the extent consistent with its fiduciary duty to issue a series of preferred stock to persons friendly to management in order to attempt to block a merger or other transaction by which a third party seeks control, and thereby assist the incumbent Board of Directors and management to retain their respective positions. Classified Board of Directors; Filling of Board Vacancies and Qualifying Shares. Our Board of Directors is divided into three classes, each of which contains approximately one-third of the whole number of the members of the Board of Directors. Each class serves a staggered three-year term, with approximately one-third of the total number of Directors being elected each year. Under the DGCL, members of a staggered board may only be removed for cause unless the Certificate of Incorporation provides otherwise. Our Amended and Restated Certificate of Incorporation does not provide for removal of directors without cause. The staggered board is intended to provide for continuity of the Board of Directors and to make it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of the Board of Directors without the consent of the incumbent Board of Directors. Our Amended and Restated By-laws provide that there shall be sixteen Directors. Our Amended and Restated By-laws also provide that any vacancy occurring on the Board of Directors, including a vacancy created by an increase in the number of directors, will be filled by a majority vote of the directors then in office. Directors so chosen shall hold office until their successors are elected and qualified or until their earlier resignation or removal. No Cumulative Voting; Limitation on Action by Written Consent and Stockholder Meetings. Our Amended and Restated Certificate of Incorporation does not provide for cumulative voting. Our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws also provide that any action required or permitted to be taken by the stockholders must be effected at an annual or special meeting and may not be effected by written consent in lieu of a meeting. Our Amended and Restated By-laws provide that special meetings of the stockholders may only be called by the Chairman of the Board, the President or the Secretary at the written request of a majority of the Board of Directors. Delaware Business Combination Statute. Section 203 of the DGCL provides that, subject to certain exceptions specified therein, an "interested stockholder" of a Delaware corporation shall not engage in any business combination, including mergers or consolidations or acquisitions of additional shares of the corporation, with the corporation for a three-year period following the time that such stockholder becomes an interested stockholder unless (a) prior to such time, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, (b) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding certain shares), or (c) at or subsequent to such time the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Except as otherwise specified in Section 203, an interested stockholder is defined to include any person that is (x) the owner of 15% or more of the outstanding voting stock of the corporation, or (y) is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date of determination, and the affiliates and associates of any such person. Under certain circumstances, Section 203 makes it more difficult for a person who would be an interested stockholder to effect various business combinations with a corporation for a three-year period. We have not elected to be exempt from the restrictions imposed under Section 203. The provisions of Section 203 may encourage persons interested in acquiring us to negotiate in advance with our Board of Directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approves either the business combination or the transaction which results in any such person becoming an interested 76 stockholder. Such provisions also may have the effect of preventing changes in our management. It is possible that such provisions could make it more difficult to accomplish transactions which our stockholders may otherwise deem to be in their best interests. Amendment of the Restated Certificate of Incorporation and By-laws. Our Amended and Restated Certificate of Incorporation provides that the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock, voting together as a single class, is required to amend, repeal, or adopt any provision inconsistent with, the provisions of our Amended and Restated Certificate of Incorporation classifying directors, eliminating cumulative voting, prohibiting stockholder action without a meeting or specifying the vote required to amend such provisions. Our By-laws may be amended by the stockholders or the Board of Directors; however, the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock, voting together as a single class, is required to amend, repeal, or adopt any provision inconsistent with, the provisions of the Amended and Restated By-laws describing how special meetings of the stockholders must be called, prohibiting stockholder action without a meeting, regarding properly bringing business before a stockholder meeting, stating the number of and classifying directors, relating to filling director vacancies, and specifying the vote required to amend such provisions. Certain By-Law Provisions. Our Amended and Restated By-laws also require a stockholder who intends to nominate a candidate for election to the Board of Directors, or to raise new business at an annual stockholder meeting, to provide us advance notice of at least 120 days. The notice provision requires a stockholder who desires to raise new business at an annual stockholder meeting to provide us certain information concerning the nature of the new business, the stockholder and such stockholder's interest in the business matter. Similarly, a stockholder wishing to nominate any person for election as a director must provide us with certain information concerning the nominee and such proposing stockholder. The provisions described above are intended to reduce our vulnerability to takeover attempts and certain other transactions which have not been negotiated with and approved by our Board of Directors. Attempts to take over corporations have become increasingly common. An unsolicited, nonnegotiated proposal can seriously disrupt the business and management of a corporation and cause it great expense. Accordingly, the Board of Directors believes it is in the best interests of the company and our stockholders to encourage potential acquirors to negotiate directly with management and that these provisions will encourage such negotiations and discourage nonnegotiated takeover attempts. It is also the view of the Board of Directors that these provisions should not discourage persons from proposing a merger or other transaction at a price that reflects our true value and that otherwise is in the best interest of all stockholders. Limitation of Director Liability and Indemnification Our Amended and Restated Certificate of Incorporation provides that no director will be personally liable to the company or our stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that directors will have liability (a) for any breach of a director's duty of loyalty to the company or our stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the DGCL, or (d) for any transaction from which the director derived an improper personal benefit. Our Amended and Restated By-laws provide that we will indemnify any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director, officer, employee or agent of the company, or is or was serving at our request as a director, trustee, officer, employee or agent of another corporation or other enterprise against expenses actually and reasonably incurred by such person in connection with such action, suit or proceeding. To the extent that a person seeking indemnification has been successful on the merits or otherwise in defense of any action, suit, or proceeding, such person will be indemnified for his or her expenses which were actually and reasonably incurred. Any indemnification payment must be authorized upon a determination that the individual seeking indemnification met the necessary standard of conduct for such indemnification. Such determination will be made by a majority vote of a quorum 77 consisting of directors not involved with the action, suit or proceeding; a written opinion of independent legal counsel, if the described quorum cannot be obtained or if the majority vote of the described quorum directs; a vote of the stockholders; or a decision of the court in which the action was brought. To qualify for indemnification, such person must have acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was lawful. Expenses may be paid by us as they are incurred, in advance of a final disposition, as authorized by the Board of Directors and upon receipt of an undertaking by the person seeking indemnification to repay the advanced amount if it is later determined that he or she was not entitled to indemnification. The indemnification and advancement of expenses provided by the Amended and Restated By-laws are not to be deemed exclusive of any other rights to which any person seeking indemnification may be entitled as a matter of law or under our Amended and Restated Certificate of Incorporation, the Amended and Restated By-laws, any agreement, vote of stockholders, any insurance purchased by us, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and will continue as to a person who has ceased to be such director, trustee, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. We have entered into indemnification agreements with our directors and executive officers to indemnify them against certain liabilities. Consistent with the provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated By-laws, under the terms of the agreements, we will indemnify our directors and executive officers to the fullest extent permitted under applicable law against all expenses, liabilities and losses incurred in connection with any legal proceeding brought against any of them by reason of their status as directors, officers, employees, agents or fiduciaries of the company. The expenses, liabilities and losses which we are obligated to pay may include judgments, fines and amounts paid in settlement of such legal proceedings by our directors and executive officers so long as they acted in good faith and in a manner which they reasonably believed was in the best interests of the company. Transfer Agent and Registrar The transfer agent and registrar for our common stock is Illinois Stock Transfer Company, Chicago, Illinois. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have 4,351,824 of common stock issued and outstanding (4,486,824 shares if the underwriters exercise their over-allotment option in full), assuming no exercise of any options. Of these shares, 2,770,550 shares, including the 900,000 shares to be sold in this offering (assuming no exercise of the over-allotment option), will be freely tradeable in the public market without restriction or registration under the Securities Act, unless held by our "affiliates" as that term is defined under the Securities Act. The remaining 1,581,274 shares are subject to certain restrictions on trading, as described below. All shares sold in the Towne Square transaction will be subject to contractual holding periods of one to three years. See "Pending Acquisition." Restricted stock awards granted to our employees. Pursuant to the terms of our Stock Incentive Plan, we have awarded 21,600 shares of restricted stock to certain of our employees who are not executive officers. Although our employees have full voting rights with regard to these shares and may receive any dividends we declare, they may not transfer the shares until they are fully vested. Each restricted stock award will vest in its entirety on the fifth anniversary of the date of grant. Unless earlier forfeited, the awards will vest according to the following schedule:
Year Shares Vested ---- ------------- 2001....................... 4,800 2002....................... 9,600 2003....................... 1,600 2004....................... 5,600
78 Shares held by our executive officers and directors. Our executive officers and directors currently hold 1,005,112 shares of our common stock, representing 23.1% of the shares that will be outstanding upon completion of this offering. Of these shares, 74,400 shares were granted to our officers pursuant to restricted stock awards and are subject to forfeiture until the fifth anniversary of the date of grant. These restricted stock awards will vest between the years 2001 and 2004. The remaining shares held by our officers and directors may be sold in the public market under the provisions of Rule 144 of the Securities Act, upon the expiration of certain holding periods specified in Rule 144. Lock-up Agreements. Our directors and officers and certain of our stockholders have entered into lock-up agreements with the underwriters pursuant to which they have agreed not to offer, sell or contract to sell any of their shares of common stock for a period of 180 days from the date of this prospectus without the underwriters' prior written consent. An aggregate of 1,477,774 shares of our common stock are subject to these agreements. Upon the expiration of this 180-day period, our directors and officers and stockholders may resell their shares, if vested, subject to the restrictions discussed below. Shares Subject to Rule 144. In general, under Rule 144 as currently in effect, a person who has beneficially owned shares for at least one year, including an affiliate, is entitled to sell, within a three-month period, that number of shares which does not exceed the greater of: . one percent of the outstanding shares of our common stock (approximately 43,518 shares immediately following the offering); or . the average weekly reported trading volume of our common stock during the four calendar weeks preceding the sale. Sales made under Rule 144 are also subject to certain requirements pertaining to: . the manner of such sales; . notices of such sales; and . the availability of current public information about us. Under Rule 144(k), a person other than an affiliate may sell shares freely, without regard to the above restrictions, if that person has held the shares for a period of two years or more. Affiliates, such as our directors and officers, are always subject to these manner of sale and volume restrictions, regardless of the length of time that they have held their shares. Currently there are 101,900 shares of our common stock held by non- affiliates which are subject to the provisions of Rule 144. Of such shares, 20,000 are subject to the lock-up agreements discussed above. Non-affiliates may sell the remaining shares pursuant to the Rule 144 restrictions beginning in September 1999, except for 20,000 of these shares that are subject to a lock-up agreement. All of these shares will be freely tradable by non- affiliates by December 2000. Registration Rights of Certain of Our Stockholders. Pursuant to the terms of our private placement offering materials, we have granted certain "piggyback" registration rights to holders of 2,769,872 shares of our common stock. These stockholders, including some of our affiliates, are entitled to have their shares registered for sale under the Securities Act in the event that we determine to register shares of our common stock in connection with an underwritten public offering or otherwise. These rights are subject to certain limitations and conditions, including: . our ability to preclude or limit the number of shares which these stockholders may include in the underwritten offering or registration; 79 . the right of the managing underwriter, in its sole discretion, to limit the number of shares to be underwritten; and . the requirement that each participating stockholder bear a pro rata portion of the underwriting discounts and commissions. Of the shares entitled to these registration rights, all shares held by non- affiliates are currently tradable pursuant to the terms of Rule 144(k), as described above. Those shares held by our affiliates are subject to the manner of sale and volume restrictions of Rule 144, as set forth above. None of the registration rights with respect to these shares have been exercised in connection with this offering. Shares Reserved For Issuance Pursuant to Options. Effective upon completion of this offering, we will have an aggregate of 632,808 shares reserved for issuance pursuant to outstanding stock options granted to certain key employees, officers and directors. Options to purchase 453,408 shares are currently exercisable. In addition, there are 50,119 shares remaining available for future awards under our Stock Incentive Plan, out of which the option grant and restricted stock award are expected to be made to Tom Castronovo in connection with the Towne Square Financial Corporation transaction. We intend to register under the Securities Act the shares of common stock reserved for issuance under our stock plans, whereupon all of these shares will be freely tradeable, subject to compliance by affiliates with the Rule 144 volume and manner of sale limitations. Our Nasdaq Symbol. Our common stock has been approved for quotation and trading on The Nasdaq National Market/SM/ under the symbol "PVTB." 80 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below, for whom EVEREN Securities, Inc. and Stifel, Nicolaus & Company, Incorporated are acting as representatives (the "Representatives"), have severally agreed to purchase from us, and we have agreed to sell to them, the respective number of shares of common stock set forth opposite each underwriter's name below:
Number of Underwriters Shares ------------ ------- EVEREN Securities, Inc........................................... 298,500 Stifel, Nicolaus & Company, Incorporated......................... 298,500 ABN AMRO Chicago Corporation..................................... 45,000 William Blair & Company, L.L.C................................... 45,000 McDonald Investments Inc., a KeyCorp Company..................... 45,000 Fox-Pitt, Kelton Inc............................................. 28,000 Hoefer & Arnett, Inc............................................. 28,000 Howe Barnes Investments, Inc..................................... 28,000 Loop Capital Markets............................................. 28,000 Ryan, Beck & Co., Inc............................................ 28,000 Wheat First Securities........................................... 28,000 ------- Total........................................................ 900,000 =======
The Underwriting Agreement provides that the obligations of the several underwriters thereunder are subject to approval of certain legal matters by their counsel and to various other conditions. The nature of the underwriters' obligation is such that they are committed to purchase and pay for all shares of common stock (other than those covered by the over-allotment options discussed below) if any are purchased. The underwriters propose to offer the shares of our common stock directly to the public at the initial public offering price set forth on the cover page of this prospectus, and to certain securities dealers (who may include the underwriters) at such price, less a concession not in excess of $0.72 per share of common stock. The underwriters may allow, and such selected dealers may reallow, a concession not in excess of $0.10 per share of common stock to certain brokers and dealers. After this offering, the price to the public, concession, allowance and reallowance may be changed by the Representatives. The Representatives have informed us that they do not intend to confirm sales to any account over which they exercise discretionary authority. We have granted the underwriters an option to purchase up to 135,000 additional shares of common stock at the same price per share as we will receive for the 900,000 shares that the underwriters have agreed to purchase. This option is exercisable during the 30-day period after the date of this prospectus, solely to cover over-allotments, if any. To the extent that the underwriters exercise this option, each of the underwriters will be committed, subject to certain conditions, to purchase such additional shares of common stock in approximately the same proportions as set forth in the above table. If purchased, the underwriters will sell the additional shares on the same terms as the 900,000 shares are being sold. If the underwriters exercise the over- allotment in full, the total public offering price will be $18,630,000, total underwriting discounts and commissions will be $1,304,100, and total proceeds to us will be $17,325,900. The offering of the common stock is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject any order for the purchase of common stock. Subject to certain exceptions, we have agreed not to issue, and each of our officers and directors (and certain stockholders of the company) has agreed not to offer, sell or otherwise dispose of any of our shares of common stock or our other equity securities for a period of 180 days after the date of this prospectus (other than shares sold pursuant to this prospectus and shares issuable in the transaction with Towne Square Financial Corporation) without the prior written consent of EVEREN Securities. 81 Subject to certain exceptions for registration statements on Form S-8, we have agreed not to file a registration statement relating to any of our shares of common stock or other equity securities for a period of 180 days after the date of this prospectus (other than the shares to be issued in this offering and the shares issuable in the transaction with Towne Square Financial Corporation) without the prior written consent of EVEREN Securities. We have agreed to indemnify the underwriters against certain liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect thereof. Prior to this offering, there has been no public market for our common stock. Consequently, we negotiated the initial public offering price with the underwriters. Among the factors considered in such negotiations were: . prevailing market conditions; . an assessment of our management; . our results of operations in recent periods; . the present stage of our development; . the market capitalizations and stages of development of other companies which we and the Representatives believe to be comparable to us; and . estimates of our business potential. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to this offering at or above the initial public offering price. The initial public offering price should not be considered an indication of the actual value of our common stock. Such price is subject to change as a result of market conditions and other factors. We cannot assure you that our common stock can be resold at or above the initial public offering price. In order to facilitate this offering, certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock during and after the offering, such as the following: . the underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than we have been sold to them; . the underwriters may elect to cover any such short position by purchasing shares of common stock in the open market or by exercising the over-allotment option; . the underwriters may stabilize or maintain the price of our common stock by bidding for or purchasing shares of common stock in the open market; . the underwriters may engage in passive market making transactions; and . the underwriters may impose penalty bids, under which selling concessions allowed to syndicate members of other broker-dealers participating in this offering are reclaimed if shares of common stock previously distributed in the offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of our common stock to the extent that it discourages resales thereof. No representation is made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. EVEREN Securities has provided in the past, and both Representatives may provide in the future, investment banking services to PrivateBancorp for which they have received and would expect to receive customary fees and commissions. 82 LEGAL MATTERS Certain legal matters in connection with this offering, including the validity of the common stock, are being passed upon for the company by Vedder, Price, Kaufman & Kammholz, Chicago, Illinois. Certain legal matters are being passed upon for the underwriters by Jenner & Block, Chicago, Illinois. EXPERTS The consolidated financial statements for each of the three years in the three-year period ended December 31, 1998, included in this prospectus, have been audited by Arthur Andersen LLP, independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. WHERE YOU CAN GET MORE INFORMATION We have filed a registration statement on Form S-1 under the Securities Act with the SEC in connection with the common stock offered by this prospectus. This prospectus omits certain information, exhibits and undertakings set forth in the registration statement which we have filed with the SEC. You may inspect and copy those materials upon payment of prescribed rates, at the Public Reference Room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional office of the SEC at the following locations: Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. This information is also available on the Internet at the SEC's website. The address for the web site is: http://www.sec.gov. For further information about the company, reference is hereby made to the registration statement and the exhibits thereto. Statements contained in this prospectus concerning the provisions of any contract, agreement or other document are not necessarily complete, and in each instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the registration statement for a full statement of the provisions thereof. Each such statement in this prospectus is qualified in all respects by such reference. 83 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PRIVATEBANCORP, INC.
Page ---- Report of Arthur Andersen LLP, Independent Public Accountants............. F-2 Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 and 1997........................................................ F-3 Consolidated Statements of Income for the three months ended March 31, 1999 and 1998 (unaudited) and for the years ended December 31, 1998, 1997 and 1996................................................................. F-4 Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1999 (unaudited) and for the years ended December 31, 1998, 1997 and 1996.................................................. F-5 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 (unaudited) and for the years ended December 31, 1998, 1997 and 1996................................................................. F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of PrivateBancorp, Inc.: We have audited the accompanying consolidated balance sheets of PRIVATEBANCORP, INC. (a Delaware corporation) AND SUBSIDIARY as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PrivateBancorp, Inc. and Subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Arthur Andersen LLP Chicago, Illinois January 29, 1999 (except with respect to the matter discussed in Note 19, as to which the date is June 25, 1999) F-2 PRIVATEBANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS As of March 31, 1999 and December 31, 1998 and 1997
March 31, December 31, December 31, 1999 1998 1997 ------------ ------------ ------------ (unaudited) ASSETS Cash and due from banks-noninterest bearing............................. $ 8,220,209 $ 11,894,781 $ 9,229,704 Federal funds sold................... 7,759,124 3,619,437 16,976,417 ------------ ------------ ------------ Total cash and cash equivalents.. 15,979,333 15,514,218 26,206,121 ------------ ------------ ------------ Available-for-sale securities, at fair value.......................... 105,135,775 116,890,739 65,383,252 ------------ ------------ ------------ Loans................................ 307,766,039 281,964,896 218,494,547 Less: Allowance for loan losses.... (3,695,000) (3,410,000) (3,050,000) ------------ ------------ ------------ Net loans.......................... 304,071,039 278,554,896 215,444,547 ------------ ------------ ------------ Bank premises and equipment, net..... 1,528,416 1,587,720 1,904,338 ------------ ------------ ------------ Accrued interest receivable.......... 2,685,131 2,264,195 1,581,728 ------------ ------------ ------------ Other assets......................... 1,654,854 1,496,071 1,352,145 ------------ ------------ ------------ Total assets..................... $431,054,548 $416,307,839 $311,872,131 ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits: Noninterest-bearing................ $ 28,178,279 $ 39,490,083 $ 34,233,722 Interest-bearing................... 31,793,923 26,508,202 26,083,741 Savings and money market deposit accounts............................ 180,871,333 170,713,032 135,624,494 Other time deposits.................. 143,610,570 128,282,346 89,831,506 ------------ ------------ ------------ Total deposits................... 384,454,105 364,993,663 285,773,463 Accrued interest payable............. 994,331 720,874 453,056 Funds borrowed....................... 10,000,000 20,000,000 -- Other liabilities.................... 5,552,114 1,319,654 957,857 ------------ ------------ ------------ Total liabilities................ 401,000,550 387,034,191 287,184,376 ------------ ------------ ------------ Stockholders' equity: Preferred stock, 1,000,000 shares authorized........................ Common stock, without par value; 12,000,000 shares authorized; 3,451,824, 3,431,424 and 3,217,184 shares issued and outstanding in 1999, 1998 and 1997, respectively. 3,451,824 3,431,424 3,217,184 Surplus............................ 22,600,302 22,273,902 19,782,477 Retained earnings.................. 5,853,156 4,912,359 2,165,310 Accumulated other comprehensive income, net of tax effect......... (58,045) 149,471 29,117 Deferred compensation.............. (843,498) (543,767) (506,333) Loan to executive officer.......... (949,741) (949,741) -- ------------ ------------ ------------ Total stockholders' equity....... 30,053,998 29,273,648 24,687,755 ------------ ------------ ------------ Total liabilities and stockholders' equity............ $431,054,548 $416,307,839 $311,872,131 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-3 PRIVATEBANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Three Months Ended March 31, 1999 and 1998, and for the Years Ended December 31, 1998, 1997 and 1996
Three Months Ended March 31, Year Ended December 31, --------------------- ----------------------------------- 1999 1998 1998 1997 1996 ---------- ---------- ----------- ----------- ----------- (unaudited) Interest income: Loans, including fees. $5,635,595 $4,624,309 $19,619,603 $16,729,277 $12,151,454 Federal funds sold and interest-bearing deposits............. 48,268 498,263 2,181,013 874,981 1,392,465 Securities............ 1,570,161 726,566 3,491,622 2,518,675 2,396,461 ---------- ---------- ----------- ----------- ----------- Total interest income............. 7,254,024 5,849,138 25,292,238 20,122,933 15,940,380 ---------- ---------- ----------- ----------- ----------- Interest expense: Deposits: Interest-bearing demand............. 142,080 121,077 487,073 376,833 304,807 Savings and money market deposit accounts........... 1,800,196 1,628,727 6,651,280 5,879,689 4,613,396 Other time.......... 1,751,289 1,346,153 6,154,468 3,821,473 2,972,891 Funds borrowed........ 144,420 -- 19,136 2,903 143,026 ---------- ---------- ----------- ----------- ----------- Interest expense.... 3,837,985 3,095,957 13,311,957 10,080,898 8,034,120 ---------- ---------- ----------- ----------- ----------- Net interest income. 3,416,039 2,753,181 11,980,281 10,042,035 7,906,260 Provision for loan losses................. 285,000 91,370 361,986 602,991 523,679 ---------- ---------- ----------- ----------- ----------- Net interest income after provision for loan losses.......... 3,131,039 2,661,811 11,618,295 9,439,044 7,382,581 ---------- ---------- ----------- ----------- ----------- Non-interest Income: Banking and trust services............. 441,456 273,243 1,280,585 1,210,273 910,786 Securities gains...... -- -- 39,894 -- -- ---------- ---------- ----------- ----------- ----------- Total non-interest income............. 441,456 273,243 1,320,479 1,210,273 910,786 ---------- ---------- ----------- ----------- ----------- Non-interest Expense: Salaries and employee benefits............. 1,115,449 1,101,860 4,076,523 3,901,662 3,410,676 Occupancy............. 352,051 333,527 1,379,059 1,274,058 990,098 Data processing....... 131,039 120,490 508,181 395,665 334,211 Marketing............. 152,990 138,793 566,960 500,482 424,235 Amortization of organizational costs. -- -- -- -- 23,295 Professional fees..... 177,796 93,843 560,715 448,441 325,663 Insurance............. 41,415 30,015 134,365 114,955 82,001 Other................. 284,040 181,668 863,539 626,412 508,292 ---------- ---------- ----------- ----------- ----------- Total non-interest expense............ 2,254,780 2,000,196 8,089,342 7,261,675 6,098,471 ---------- ---------- ----------- ----------- ----------- Income before income taxes.............. 1,317,715 934,858 4,849,432 3,387,642 2,194,896 Income tax provision.... 291,132 364,594 1,839,294 1,242,347 761,873 ---------- ---------- ----------- ----------- ----------- Net income............ $1,026,583 $ 570,264 $ 3,010,138 $ 2,145,295 $ 1,433,023 ---------- ---------- ----------- ----------- ----------- Basic earnings per share.................. $ .30 $ .18 $ .91 $ .69 $ .49 ========== ========== =========== =========== =========== Diluted earnings per share.................. $ .28 $ .17 $ .86 $ .65 $ .47 ========== ========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-4 PRIVATEBANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Three Months Ended March 31, 1999 and for the Years Ended December 31, 1998, 1997 and 1996
Year Ended December 31, Three Months Ended ----------------------------------------------------------------------- March 31, 1999 1998 1997 1996 ----------------------- ----------------------- ----------------------- ----------------------- Compre- Compre- Compre- Compre- hensive hensive hensive hensive Total Income Total Income Total Income Total Income ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------- (unaudited) Common stock: Balance at beginning of year.............. $ 3,431,424 $ 3,217,184 $ 2,958,272 $ 2,850,672 Issuance of stock..... 20,400 214,240 258,912 107,600 ----------- ----------- ----------- ----------- Balance at end of year................. 3,451,824 3,431,424 3,217,184 2,958,272 ----------- ----------- ----------- ----------- Surplus: Balance at beginning of year.............. 22,273,902 19,782,477 17,301,302 16,652,652 Issuance of common stock................ 326,400 2,283,360 2,476,534 648,650 Other................. -- 208,065 4,641 -- ----------- ----------- ----------- ----------- Balance at end of year................. 22,600,302 22,273,902 19,782,477 17,301,302 ----------- ----------- ----------- ----------- Retained Earnings (Deficit): Balance at beginning of year.............. 4,912,359 2,165,310 237,373 (1,011,042) Net income............ 1,026,583 $1,026,583 3,010,138 $3,010,138 2,145,295 $2,145,295 1,433,023 $1,433,023 ---------- ---------- ---------- ---------- Dividends paid-- $0.03, $0.08, $0.07 and $0.07 per share in 1999, 1998, 1997 and 1996, respectively......... (85,786) (263,089) (217,358) (184,608) ----------- ----------- ----------- ----------- Balance at end of year................. 5,853,156 4,912,359 2,165,310 237,373 ----------- ----------- ----------- ----------- Accumulated Other Comprehensive Income-- Unrealized Gains (Losses) on Securities Available for Sale: Balance at beginning of year.............. 149,471 29,117 (56,847) (47,750) Other comprehensive income--unrealized gains (losses) on securities available for sale, net of tax provision (benefit) of $(132,674), $76,523, $47,698 and $(4,685) for the three months ended March 31, 1999, and in 1998, 1997, and 1996, respectively... (207,516) (207,516) 120,354 120,354 85,964 85,964 (9,097) (9,097) ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------- Comprehensive income.. $ 819,067 $3,130,492 $2,231,259 $1,423,926 ========== ========== ========== ========== Balance at end of year................. (58,045) 149,471 29,117 (56,847) ----------- ----------- ----------- ----------- Deferred Compensation: Balance at beginning of year.............. (543,767) (506,333) (217,750) -- Awards granted........ (346,800) (187,000) (402,500) (277,500) Amortization of deferred compensation......... 47,068 149,566 98,917 33,500 Other................. -- -- 15,000 26,250 ----------- ----------- ----------- ----------- Balance at end of year................. (843,498) (543,767) (506,333) (217,750) ----------- ----------- ----------- ----------- 31,003,739 30,223,389 24,687,755 20,222,350 Loan to Executive Officer: Loan to stockholder/chief executive officer.... (949,741) (949,741) -- -- ----------- ----------- ----------- ----------- Total stockholders' equity at end of year............... $30,053,998 $29,273,648 $24,687,755 $20,222,350 =========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 PRIVATEBANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 1999 and 1998 and For the Years Ended December 31, 1998, 1997 and 1996
Year Ended December 31, March 31, March 31, ----------------------------------------- 1999 1998 1998 1997 1996 ------------ ------------ ------------- ------------ ------------ (unaudited) Cash Flows From Operating Activities: Net income............. $ 1,026,583 $ 570,264 $ 3,010,138 $ 2,145,295 $ 1,433,023 ------------ ------------ ------------- ------------ ------------ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........ 135,526 122,731 507,853 472,669 329,013 Amortization of organization costs.. -- -- -- -- 23,295 Amortization of deferred compensation........ 47,068 31,938 149,566 98,917 33,500 Provision for loan losses.............. 285,000 91,370 361,986 602,991 523,679 Gain on sales of securities.......... (45,564) -- (39,894) -- -- Increase in deferred loan fees........... -- -- 347,766 85,684 48,883 (Increase) in deferred income taxes............... -- -- (290,700) (440,387) (201,729) (Increase) in accrued interest receivable. (420,805) (167,272) (682,467) (145,916) (291,010) Increase in accrued interest payable.... 273,457 84,944 267,818 60,881 35,506 Decrease in other assets.............. (28,012) (366,903) 70,251 77,449 105,579 Increase in other liabilities......... 4,232,460 368,143 569,862 414,712 691 ------------ ------------ ------------- ------------ ------------ Total adjustments.. 4,479,130 164,951 1,262,041 1,227,000 607,407 ------------ ------------ ------------- ------------ ------------ Net cash provided by operating activities........ 5,505,713 735,215 4,272,179 3,372,295 2,040,430 ------------ ------------ ------------- ------------ ------------ Cash Flows From Investing Activities: Proceeds from maturities, pay downs, and sales of securities............ 14,917,259 32,628,772 85,390,763 11,255,315 25,658,276 Purchase of securities available for sale.... (3,456,295) (15,400,000) (136,661,479) (31,888,325) (31,992,943) Net loan principal advanced.............. (25,801,143) (5,252,823) (63,820,101) (47,240,005) (45,352,131) Bank premises and equipment expenditures.......... (75,075) (47,393) (191,235) (659,401) (901,638) ------------ ------------ ------------- ------------ ------------ Net cash provided by (used in) investing activities........ (14,415,254) 11,928,556 (115,282,052) (68,532,416) (52,588,436) ------------ ------------ ------------- ------------ ------------ Cash Flows From Financing Activities: Net increase in total deposits.............. 19,460,442 18,886,537 79,220,200 63,202,205 45,702,759 Proceeds from funds borrowed.............. -- -- 20,000,000 -- 3,000,000 Principal reductions of funds borrowed..... (10,000,000) -- -- (3,000,000) (700,000) Issuance of common stock................. -- 124,200 1,360,859 2,347,946 505,000 Dividends paid......... (85,786) (60,629) (263,089) (217,358) (184,608) ------------ ------------ ------------- ------------ ------------ Net cash provided by financing activities........ 9,374,656 18,950,108 100,317,970 62,332,793 48,323,151 ------------ ------------ ------------- ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents............ 465,115 31,613,879 (10,691,903) (2,827,328) (2,224,855) Cash and Cash Equivalents at Beginning of Year...... 15,514,218 26,206,121 26,206,121 29,033,449 31,258,304 ------------ ------------ ------------- ------------ ------------ Cash and Cash Equivalents at End of Year................... $ 15,979,333 $ 57,820,000 $ 15,514,218 $ 26,206,121 $ 29,033,449 ============ ============ ============= ============ ============ Cash Paid During Year For: Interest............... $ 3,564,874 $ 3,011,013 $ 13,044,139 $ 10,004,288 $ 7,998,614 Income taxes........... 233,880 $ 88,676 1,826,826 1,562,726 977,432 ============ ============ ============= ============ ============ Non-Cash Transactions: Loan to executive officer for purchase of common stock....... $ -- $ -- $ 949,741 $ -- $ -- ============ ============ ============= ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997 1. Accounting Policies: The consolidated financial statements of PrivateBancorp, Inc. (the "Company") and Subsidiary have been prepared in conformity with generally accepted accounting principles and reporting practices prescribed for the banking industry. A description of the significant accounting policies follows: a. Consolidation The consolidated financial statements of the Company and Subsidiary include the accounts of the Company and its wholly owned subsidiary, The PrivateBank and Trust Company (the "Bank"). Significant intercompany accounts and transactions have been eliminated in the preparation of these statements. b. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods, but not longer than thirty days. c. Securities Securities for which management has the intent and ability to hold to maturity are reported at cost, adjusted for amortization of premium and accretion of discount. Securities available for sale are reported at fair value, with unrealized gains and losses and applicable income taxes reported as other comprehensive income in a separate component of stockholders' equity. At December 31, 1998 and 1997, all securities held were classified as available for sale. Premium and discount on securities are included in interest income on securities over the period from acquisition to maturity or earlier call date using the straight-line method, the results of which are not materially different from those obtained using the level-yield method. The specific identification method is used to record gains and losses on security transactions. d. Loans Loans are generally reported at the principal amount outstanding, net of unearned income. Loans originated and intended for sale in the secondary market are classified as held for sale and reported at the lower of cost or market value. Loan origination and commitment fees, offset by certain direct loan origination costs, are being deferred and the net amount amortized as an adjustment of the related loan's yield. The Company is generally amortizing these amounts over the contractual life of the related loans. Loans are placed on nonaccrual status when, in the opinion of management, there are doubts as to the collectibility of interest or principal, or when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. All loans classified as nonaccrual are considered to be impaired. Any shortfall in the estimated value of an impaired loan compared with the recorded investment of the loan is identified as an allocated portion of the allowance for loan losses and is one of the factors F-7 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 considered by management in their overall assessment of the adequacy of the allowance for loan losses. Interest previously accrued but not collected is reversed and charged against interest income at the time the related loan is placed on nonaccrual status. Interest payments received on impaired loans are recorded as reductions of principal if principal payment is doubtful. e. Allowance for Loan Losses The allowance for loan losses is determined by management based on factors such as past loan loss experience, known and inherent risks in the loan portfolio, the estimated value of any underlying collateral, prevailing economic conditions and other factors and estimates which are subject to change over time. Management adjusts the allowance for loan losses by recording a provision for loan losses in an amount sufficient to maintain the allowance at a level commensurate with the risks in the loan portfolio. Loans are charged off when deemed to be uncollectible by management. f. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the assets. g. Organization Costs Organization costs incurred by the Company in performing activities necessary to organize the Bank were amortized on a straight-line basis over a five-year period beginning February 6, 1991, when the Bank commenced operations. h. Income Taxes The Company accounts for income taxes under an asset and liability approach with the objective of recognizing the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences that have been recognized in the Company's financial statements or tax returns. The measurement of tax assets and liabilities is based on tax rates in enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based on available evidence. i. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities In June, 1996, the Financial Accounting Standards Board (FASB) issued SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Under SFAS No. 125, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. In December, 1996, the FASB issued SFAS No. 127 "Deferral of Effective Date of Certain Provisions of FASB Statement No. 125" which delayed the effectiveness of selected provisions of SFAS No. 125 from January 1, 1997 to January 1, 1998. Management adopted SFAS No. 125 upon its effectiveness on January 1, 1997 and January 1, 1998 as appropriate. The adoption of these statements had no effect on the Company's reported consolidated financial position and the results of operations. F-8 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 j. Earnings per Share The Company accounts for and reports earnings per share using a dual presentation of basic and diluted earnings per share. Basic earnings per common share are determined by dividing earnings by the weighted average number of common shares. Dilutive stock options are included as share equivalents using the treasury stock method in determining diluted earnings per share. k. Comprehensive Income In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components. The statement requires that components of comprehensive income, as defined, be reported in a financial statement that is displayed with the same prominence as other financial statements. Management adopted SFAS No. 130 in 1998 upon its effectiveness, using the statement of changes in stockholders' equity approach. The adoption of this statement had no effect on the Company's reported consolidated financial position and the results of operations. The 1997 and 1996 consolidated financial statements have been restated to conform to the SFAS No. 130 principles. l. Derivatives In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives Instruments and for Hedging Activities." It requires that all derivatives be recognized as assets or liabilities on the balance sheet and be measured at fair value. If certain conditions are met, a derivative may be specifically designated as a hedging instrument. The statement is effective for fiscal quarters beginning after June 15, 1999. As the Company and Bank do not own any derivative instruments, this statement is expected to have no effect on the Company's reported consolidated financial position and the results of operations. m. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from these estimates. n. Reclassifications Certain reclassifications have been made to prior periods' consolidated financial statements to place them on a basis comparable with the current period's consolidated financial statements. o. Interim Financial Information The accompanying financial statements as of March 31, 1999 and for the three months ended March 31, 1999 and 1998 are unaudited and in the opinion of management, reflect all adjustments that are necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods then ended. All such adjustments are of a normal and recurring nature. F-9 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 2. Operations: The Company was incorporated under the laws of the State of Delaware on November 7, 1989. The Bank commenced operations on February 6, 1991, after having received the approval of various banking regulatory authorities. The Bank, through its downtown Chicago main office as well as two suburban branches, provides personal and commercial banking services primarily to affluent individuals, professionals and their business interests in the Chicago metropolitan area. In addition to loans and deposits, the Company's services include trust, investment and insurance products. 3. Earnings Per Share and Stock Split: The following table contains a reconciliation of the numerators and denominators used in the computation of basic and diluted earnings per share for the years ended December 31, 1998, 1997 and 1996:
Weighted Income Average Shares Per Share (Numerator) (Denominator) Amount ----------- -------------- --------- Year Ended December 31, 1998 Basic Earnings Per Share--Income available to common stockholders. $3,010,138 3,313,092 $.91 ==== Effect of Dilutive Stock Options.. -- 201,436 ---------- --------- Diluted Earnings Per Share--Income available to common stockholders. $3,010,138 3,514,528 $.86 ========== ========= ==== Year Ended December 31, 1997 Basic Earnings Per Share--Income available to common stockholders. $2,145,295 3,124,464 $.69 ==== Effect of Dilutive Stock Options.. -- 161,408 ---------- --------- Diluted Earnings Per Share--Income available to common stockholders. $2,145,295 3,285,872 $.65 ========== ========= ==== Year Ended December 31, 1996 Basic Earnings Per Share--Income available to common stockholders. $1,433,023 2,939,040 $.49 ==== Effect of Dilutive Stock Options.. -- 113,984 ---------- --------- Diluted Earnings Per Share--Income available to common stockholders. $1,433,023 3,053,024 $.47 ========== ========= ====
On June 25, 1998, the Company's stockholders approved an eight-for-one common stock split to be distributed in the form of a stock dividend. As a result of this action, 1,446,473 shares were issued to stockholders of record on June 25, 1998. Additionally, stated value was changed from $20 to $2.50 per share, leaving the Company's common stock account unchanged. All references to number of shares, per share amounts and stock option data in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. F-10 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 4. Securities: The amortized cost and the estimated fair value of securities as of December 31, 1998 and 1997, were as follows:
Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------ ---------- ---------- ------------ December 31, 1998-- Available for Sale-- U.S. Treasuries......... $ 6,020,730 $ 73,333 $ -- $ 6,094,063 States and political subdivisions........... 37,709,337 227,188 (132,097) 37,804,428 Collateralized mortgage obligations............ 61,357,858 117,435 (61,016) 61,414,277 Corporate securities.... 10,242,935 19,565 -- 10,262,500 ------------ -------- --------- ------------ Total debt securities... 115,330,860 437,521 (193,113) 115,575,268 Equity securities....... 1,315,471 -- -- 1,315,471 ------------ -------- --------- ------------ $116,646,331 $437,521 $(193,113) $116,890,739 ============ ======== ========= ============ December 31, 1997-- Available for Sale-- U.S. Treasury and U.S. Government agencies.... $ 35,948,802 $ 22,365 $ (9,917) $ 35,961,250 Collateralized mortgage obligations............ 10,501,933 4,256 (93,456) 10,412,733 Corporate securities.... 18,145,287 125,650 (1,368) 18,269,569 ------------ -------- --------- ------------ Total debt securities... 64,596,022 152,271 (104,741) 64,643,552 Equity securities....... 739,700 -- -- 739,700 ------------ -------- --------- ------------ $ 65,335,722 $152,271 $(104,741) $ 65,383,252 ============ ======== ========= ============
The amortized cost and estimated fair value of securities at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because obligors may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated Cost Fair Value ------------ ------------ Due within one year............................ $ 6,196,706 $ 6,235,547 Due after one year through five years.......... 2,624,825 2,659,654 Due after five years through ten years......... 8,781,479 8,817,549 Due after ten years............................ 97,727,850 97,862,518 Equity securities.............................. 1,315,471 1,315,471 ------------ ------------ $116,646,331 $116,890,739 ============ ============
During 1998, securities were sold for total proceeds of $13,886,279, resulting in a net gain of $39,894. No securities were sold in 1997 or 1996. The other comprehensive income--unrealized gain on securities available for sale is presented on a net basis on the Consolidated Statements of Changes in Stockholders' Equity. The following table discloses F-11 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 changes in other comprehensive income for 1998 on a gross basis. As there were no sales of securities in 1997 or 1996, the gross and net presentations for these years are the same.
1998 ----------------------------- Before tax Tax Net of Tax amount Expense Amount ---------- ------- ---------- Unrealized Gains on Securities Available for Sale-- Unrealized holding gains................. $236,771 $92,032 $144,739 Less: reclassification adjustment for gain included in net income............. 39,894 15,509 24,385 -------- ------- -------- Net unrealized gains....................... $196,877 $76,523 $120,354 ======== ======= ========
At December 31, 1998, securities carried at $35,319,869 were pledged to secure public and trust deposits and for other purposes as required or permitted by law. Equity securities consist of Federal Home Loan Bank of Chicago capital stock and Neighborhood Housing Services certificates. These securities do not have a readily determinable fair value for purposes of SFAS No. 115 since their ownership is restricted and they lack a market. Accordingly, such securities are carried at an amount equal to cost. In the opinion of management, there were no investments in securities at December 31, 1998, which constituted an unusual credit risk for the Company. 5. Loans: Amounts outstanding by selected loan categories at December 31, 1998 and 1997, were as follows:
1998 1997 ------------ ------------ Real estate-- Residential................................... $ 47,746,331 $ 54,129,790 Commercial.................................... 94,392,491 55,429,205 Construction.................................. 22,407,610 10,140,104 Commercial...................................... 46,799,787 33,862,056 Personal........................................ 64,194,340 62,756,792 Held for sale................................... 6,424,337 2,176,600 ------------ ------------ $281,964,896 $218,494,547 ============ ============
Loans held for sale are residential real estate loans intended to be sold in the secondary market. Under the Bank's sales program, such loans are sold at face value. No lower-of-cost-or-market adjustments were required at December 31, 1998 or 1997. There were no loans on which the accrual of interest has been discontinued (impaired loans) at December 31, 1998 and 1997, respectively, as well as at any time during 1998. The average balance of impaired loans and the related amount of interest income recognized while such loans were impaired amounted to $2,272 and $0 in 1997. F-12 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 6. Allowance for Loan Losses: The changes in the allowance for loan losses for the three years ended December 31, 1998 were as follows:
1998 1997 1996 ---------- ---------- ---------- Beginning balance..................... $3,050,000 $2,450,000 $1,955,000 Loans charged off..................... (1,986) (2,991) (28,679) Provision for loan losses............. 361,986 602,991 523,679 ---------- ---------- ---------- Ending balance........................ $3,410,000 $3,050,000 $2,450,000 ========== ========== ==========
There were no impaired loans at December 31, 1998 and 1997. 7. Bank Premises and Equipment: Bank premises and equipment at December 31, 1998 and 1997, consisted of the following:
1998 1997 ---------- ---------- Furniture, fixtures and equipment.................. $2,408,164 $2,230,145 Leasehold improvements............................. 1,344,354 1,331,138 ---------- ---------- 3,752,518 3,561,283 Accumulated depreciation and amortization.......... 2,164,798 1,656,945 ---------- ---------- $1,587,720 $1,904,338 ========== ==========
Included in occupancy expense in the consolidated statements of income is depreciation and amortization expense of $507,853, $472,669 and $329,013 for 1998, 1997 and 1996, respectively. The Bank leases its main banking facility and branch facilities under noncancellable operating lease agreements. The minimum annual rental commitments under these leases, at December 31, 1998, are as follows: 1999.......................... $ 338,527 2000.......................... 319,907 2001.......................... 330,456 2002.......................... 244,404 2003.......................... 254,952 2004 and thereafter........... 689,022 ---------- $2,177,268 ==========
Total rent expense included in the consolidated statements of income was $635,761, $601,461, and $494,757 for 1998, 1997, and 1996, respectively. F-13 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 8. Income Taxes: The components of total income tax provision in the consolidated statements of income for the years ended December 31, 1998, 1997, and 1996 are as follows:
1998 1997 1996 ---------- ---------- -------- Income tax provision-- Current-- Federal............................. $1,758,748 $1,609,697 $963,602 State............................... 371,246 73,037 -- ---------- ---------- -------- 2,129,994 1,682,734 963,602 ---------- ---------- -------- Deferred-- Federal............................. (255,235) (298,018) (201,729) State............................... (35,465) (142,369) -- ---------- ---------- -------- (290,700) (440,387) (201,729) ---------- ---------- -------- Total............................. $1,839,294 $1,242,347 $761,873 ========== ========== ========
The tax effect of fair value adjustments on securities available for sale is recorded directly to other comprehensive income in a separate component of stockholders' equity. The net tax provision (benefit) recorded directly to other comprehensive income amounted to $76,523, $47,698, and $(4,685) in 1998, 1997 and 1996, respectively. A summary reconciliation of the differences between the total income tax provision (benefit) and the amounts computed at the statutory federal tax rate of 34% for the years ended December 31, 1998, 1997, and 1996 is as follows:
1998 1997 1996 ---------- ---------- -------- Income tax provision at statutory federal income tax rate................ $1,648,806 $1,151,798 $746,265 Increase (decrease) in taxes resulting from: Tax exempt income..................... (67,264) -- -- State income taxes.................... 221,615 6,525 -- Other................................. 36,137 84,024 15,608 ---------- ---------- -------- Total............................... $1,839,294 $1,242,347 $761,873 ========== ========== ========
F-14 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 A net deferred tax asset is included in other assets in the consolidated balance sheet as a result of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their related tax bases. The components of the net deferred tax asset as of December 31, 1998 and 1997 are as follows:
1998 1997 ---------- ---------- Gross deferred tax assets-- Allowance for loan losses....................... $1,182,193 $1,041,960 Leasehold improvements.......................... 231,316 159,524 Amortization of restricted stock................ 109,240 51,298 Other........................................... 51,829 36,434 ---------- ---------- 1,574,578 1,289,216 Valuation allowance............................... -- -- ---------- ---------- Gross deferred tax assets......................... 1,574,578 1,289,216 Gross deferred tax liabilities.................... (215,233) (144,048) ---------- ---------- Net deferred tax asset............................ $1,359,345 $1,145,168 ========== ==========
9. Funds Borrowed: As of December 31, 1998, funds borrowed consisted of a $20 million FHLB term note, with an interest rate of 5.20%. The term note matured on January 7, 1999. There were no funds borrowed as of December 31, 1997. 10. Employee Benefit and Incentive Plans: a. Savings and Profit Sharing Plan The Bank maintains The PrivateBank and Trust Company Savings and Profit Sharing Plan (the "Plan") pursuant to Section 401(k) of the Internal Revenue Code, whereby eligible employees may contribute a percentage of compensation, but not in excess of the maximum amount allowed under the Code. The Bank can make discretionary contributions to the Plan as determined and approved by the Bank's Board of Directors. Total discretionary contributions to the Plan amounted to $61,462, $47,001, and $43,130 in 1998, 1997 and 1996, respectively. b. Stock Options Pursuant to initial stockholder stock option agreements as amended, the Company granted to each initial stockholder an option to purchase up to the number of shares equal to that number of shares purchased by the investor in the initial offering at an exercise price of $6.25 per share. All 80,800 shares reserved for issuance to these initial stockholders were issued by the Company in January and February, 1996, upon the exercise of these option agreements. The Company has stock options outstanding under its Stock Incentive Plan, a director stock option program and certain compensation replacement options. As in effect as of December 31, 1998, the Stock Incentive Plan allows up to 15% of the then number of common shares issued and outstanding, plus an additional 136,000 shares, to be issued under the Plan either pursuant to the exercise of stock options granted thereunder or as restricted stock awards. The option price may not be less than the fair market value on the date of grant. All options have a term of 10 years. Options granted F-15 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 in 1998 are first exercisable five years from the date of grant or up to two years earlier if certain conditions for total stockholder return are met. Options granted in 1997 and prior are first exercisable beginning at least two years following the date of grant. Since 1992 the Company has compensated non-employee directors with annual option grants. The option price of the director options is fair market value on the date of grant, and the exercise period is 10 years from the date of grant. In 1992, the Company granted compensation replacement options to certain officers of the Company who agreed to reduced cash compensation. The option price is the fair market value on the date of grant. The compensation replacement options are exercisable during a 10-year period from the date of grant. The following table summarizes the status of the Company's stock option agreements and stock option program as of December 31, 1998 and 1997, and changes during the years then ended:
1998 1997 ----------------------- ----------------------- Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price ------- -------------- ------- -------------- Outstanding at beginning of year................ 543,168 $ 7.57 523,264 $ 7.38 Granted............... 80,960 17.19 35,360 11.00 Exercised............. (81,920) 7.02 (15,456) 6.25 Forfeited............. -- -- ------- ------ ------- ------ Outstanding at end of year................... 542,208 $ 9.09 543,168 $ 7.57 ======= ====== ======= ====== Options exercisable at year-end............... 433,808 425,168 ======= ======= Weighted average fair value of options granted during the year................... $17.19 $11.00
The range of exercise prices and weighted average remaining contractual life for stock options outstanding as of December 31, 1998, was $6.25-$17.19 and 7 years, respectively. The Company applies APB Opinion 25 in accounting for stock-based compensation. Accordingly, no compensation expense has been recognized for its stock option program. Had compensation expense for stock options been determined based on the fair value at the grant dates for awards under the stock option program consistent with the method of FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ---------- ---------- ---------- Net income-- As reported........................... $3,010,138 $2,145,295 $1,433,023 Pro forma............................. 2,869,569 1,996,145 1,282,268 ========== ========== ========== Basic earnings per share-- As reported........................... $ .91 $ .69 $ .49 Pro forma............................. .87 .64 .44 Diluted earnings per share-- As reported........................... $ .86 $ .65 $ .47 Pro forma............................. .82 .61 .42 ========== ========== ==========
F-16 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 In determining the fair value of each option grant for purposes of the above pro forma disclosures, the Company used an option pricing model with the following assumptions for grants in 1998 and 1997, respectively: dividend yield of 0.6% and 0.7% for 1998 and 1997 respectively; risk-free interest rate of 6.0% for both years; and expected lives for both years of 10 years for the Stock Incentive Plan options, 10 years for the compensation replacement options and 10 years for the various director options. c. Restricted Stock In 1998 and 1997, the Company issued 13,600 and 36,800 shares, respectively, of restricted stock under the Stock Incentive Plan. These shares had a fair value of $13.75 and $10.94 per share, respectively, as of the grant date. During 1997, 1,600 restricted shares were forfeited. These shares carry voting and dividend rights. Sale of the shares is restricted prior to vesting. Subject to continued employment, vesting occurs five years from the date of grant. Shares issued under the plan are recorded at their fair market value on the date of grant with a corresponding charge to deferred compensation. The deferred compensation, a component of stockholders' equity, is being amortized as compensation expense on a straight-line basis over the vesting period. Included in salaries and employee benefits in the consolidated statements of income is compensation expense for restricted shares of $149,566, $98,917, and $33,500 for 1998, 1997, and 1996 respectively. 11. Related-Party Transactions: An analysis of loans made to directors and executive officers of the Company and the Bank follows: Balance, December 31, 1997................................... $11,308,339 Additions.................................................. 3,226,741 Collections................................................ (3,791,197) ----------- Balance, December 31, 1998................................... $10,743,883 ===========
Directors and executive officers of the Company and Bank were clients of and had transactions with the Bank in the ordinary course of business during the period presented above and additional transactions may be expected in the future. In management's opinion, all outstanding loans, commitments and deposit relationships included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others, and did not involve more than a normal risk of collectibility or other unfavorable features. In addition to the loans reflected above, in June, 1998, the Company made a $949,741 loan to the chief executive officer of the Company and the Bank, the proceeds of which were put towards the purchase of $1 million of common stock of the Company. The loan has a five year term but is payable sooner under certain conditions. The loan bears interest at the rate of 5.69% per annum. Provided that the officer remains employed by the Bank, the loan agreement calls for forgiveness of 0% up to 100% of the interest based on how many years the loan remains outstanding. The loan is reflected in the consolidated financial statements as a reduction in stockholders' equity. The Company is the general partner in a partnership for investment purposes. Through a contractual arrangement, the Bank's trust department maintains the partnership's records and earns an administrative fee from the partnership. During 1998, the Bank began offering insurance products to its clients through a strategic alliance with a Chicago based financial services firm which is a stockholder of the Company. In addition, this financial F-17 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 services firm serves as an insurance agency in coordinating certain insurance coverage for the Company and Bank. During 1998, the Bank earned commission revenue of $5,761 for referred business and paid $131,690 in fees to this financial services firm for insurance and related services. During 1998 and 1997, the Bank acquired selected furniture with a total cost of $2,655 and $71,875, respectively, through related parties. The Bank incurred professional fees in 1998, 1997 and 1996 for services provided by one law firm, whose partner is a director of the Company and the Bank. 12. Credit-Related Instruments: The Company has, through its subsidiary Bank, credit-related instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated financial statements. Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed to completely perform as contracted. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments, assuming that the amounts are fully advanced and that collateral or other security is of no value. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At December 31, 1998 and 1997, the Bank had the following categories of credit-related financial instruments (at contract amount):
1998 1997 ----------- ----------- Commitments to extend credit..................... $97,487,444 $67,184,442 Standby letters of credit........................ 10,147,140 2,971,656
Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each client's creditworthiness on a cash-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a client to a third party. Those guarantees are primarily issued to support commercial business activities of Bank clients. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The Bank holds collateral supporting those commitments for which collateral is deemed necessary. 13. Concentrations of Credit Risk: Loan concentrations are defined as amounts loaned to a multiple number of borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. The Bank grants F-18 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 loans to clients located primarily in the metropolitan Chicago area. There are no other significant concentrations of loans and commitments to make loans other than the categories of loans disclosed in Note 5. 14. Estimated Fair Value of Financial Instruments: The following presents the carrying value and estimated fair value of the various classes of financial instruments, all nontrading, held by the Company, through its subsidiary Bank, at December 31, 1998 and 1997. This information is presented solely for compliance with SFAS No. 107 and is subject to change over time based on a variety of factors. Because no active market exists for a significant portion of the financial instruments presented below and the inherent imprecision involved in the estimation process, management does not believe the information presented reflects the amounts that would be received if the Company's assets and liabilities were sold nor does it represent the fair value of the Company as an entity. Where possible, the Company has utilized quoted market prices to estimate fair value. Since quoted market prices were not available for a significant portion of the financial instruments, the fair values were approximated using discounted cash flow techniques. Fair value estimates are made at a specific point in time, based on judgments regarding future expected loss experience, current economic conditions, risk conditions, risk characteristics of various financial instruments and other factors. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
December 31, 1998 December 31, 1997 ------------------------- ------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value ------------ ------------ ------------ ------------ Assets-- Cash and cash equivalents.......... $ 15,514,218 $ 15,514,218 $ 26,206,121 $ 26,206,121 Securities............ 116,890,739 116,890,739 65,383,252 65,383,252 Net loans............. 278,554,896 281,547,896 215,444,547 216,343,547 Accrued interest receivable........... 2,264,195 2,264,195 1,581,728 1,581,728 Liabilities-- Deposits with no stated maturity...... 236,711,317 236,711,317 195,941,957 195,941,957 Time deposits......... 128,282,346 128,506,346 89,831,506 89,905,506 ------------ ------------ ------------ ------------ Total deposits...... 364,993,663 365,217,663 285,773,463 285,847,463 ------------ ------------ ------------ ------------ Accrued interest payable................ 720,874 720,874 453,056 453,056 Funds borrowed.......... 20,000,000 20,000,000 -- -- ============ ============ ============ ============
The following methods and assumptions were used to estimate the fair value of each class of financial instruments. These assumptions were based on subjective estimates of market conditions and perceived risks of the financial instruments at a certain point in time. a. Cash and Cash Equivalents, Accrued Interest Receivable and Interest Payable For these short-term instruments, the carrying value approximates fair value because these instruments are short-term in nature and do not present unanticipated credit concerns. F-19 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 b. Securities For securities held to maturity or available for sale, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. c. Net Loans The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company's and the industry's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Fair value for significant nonaccrual (impaired) loans is based on estimated cash flows which are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. d. Deposit Liabilities The fair value of deposits with no stated maturity, such as non-interest- bearing deposits, interest-bearing deposits, savings and money market deposit accounts, is equal to the amount payable on demand as of year-end. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. e. Funds Borrowed Rates currently available to the Company and Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. f. Unrecognized Financial Instruments The fair value of unrecognized financial instruments, including commitments to extend credit, standby letters of credit and financial guarantees, is insignificant and, therefore, not presented. 15. Regulatory Requirements: The Bank is subject to federal and state laws, which restrict the payment of dividends to the Company. Based on these restrictions, at January 1, 1999, the Bank could have declared approximately $6,954,418 in dividends without requesting approval of the applicable federal or state regulatory agency. The Bank is required to maintain noninterest-bearing cash balances with the Federal Reserve based on the types and amounts of deposits held. During 1998 and 1997, the average balances maintained to meet the requirement were $829,000 and $649,000, respectively. The Company and Bank are subject to various regulatory capital requirements as established by the applicable federal or state banking regulatory authorities. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that F-20 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items. The quantitative measures for capital adequacy require the Company and Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk weighted assets and of Tier 1 capital to average assets (leverage). The Company's and Bank's capital components, classification, risk weightings and other factors are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate certain actions by regulators that, if undertaken, could have a material effect on the Company's financial statements. Management believes that as of December 31, 1998, the Company and Bank meet all minimum capital adequacy requirements to which they are subject. The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action and management believes that no events or changes in conditions have occurred subsequent to such notification to change the Bank's category. The following table presents selected capital information for the Company (Consolidated) and Bank as of December 31, 1998 and 1997:
To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions ------------- -------------- --------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ------ (000's) (000's) (000's) As of December 31, 1998-- Total risk-based capital-- Consolidated............ $34,978 11.53% $24,274 8.00% Bank.................... 31,473 10.41 24,188 8.00 $30,235 10.00% Tier 1 risk-based capital-- Consolidated............ 31,568 10.40% 12,137 4.00% Bank.................... 28,063 9.29 12,094 4.00 18,141 6.00% Tier 1 (leverage) capital-- Consolidated............ 31,568 7.88% 16,018 4.00% Bank.................... 28,063 7.27 15,456 4.00 19,320 5.00% As of December 31, 1997-- Total risk-based capital-- Consolidated............ $28,159 11.75% $19,165 8.00% Bank.................... 25,837 10.79 19,164 8.00 23,955 10.00% Tier 1 risk-based capital-- Consolidated............ 25,164 10.50% 9,582 4.00% Bank.................... 22,843 9.54 9,582 4.00 14,373 6.00% Tier 1 (leverage) capital-- Consolidated............ 25,164 8.70% 11,563 4.00% Bank.................... 22,843 8.16 11,208 4.00 14,011 5.00%
16. Operating Segments: As noted in Note 2, the Bank provides personal and commercial banking services to affluent individuals, professionals and their business interests in the Chicago metropolitan area. Such services include loans, deposit instruments, investments, and trust services. For purposes of making operating decisions and assessing performance, management treats the Company and Bank as one operating segment. F-21 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 The financial information contained in the Company's consolidated financial statements, such as net interest income, other income, net income and total assets, is used by management as a key input in evaluating the performance of the Company and Bank on an aggregate basis. 17. Contingent Liabilities Because of the nature of its activities, the Company is from time to time involved in legal actions that arise in the normal course of business. In the judgment of management, after consultation of legal counsel, none of the litigation to which the Company or its subsidiary is a party will have a material effect, either individually or in the aggregate, on the consolidated financial position or results of operations. 18. Privatebancorp, Inc. (Parent Company Only)--Condensed Financial Statements: PRIVATEBANCORP, INC. (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS As of December 31, 1998 and 1997
ASSETS 1998 1997 ------ ----------- ----------- Cash and due from banks--bank subsidiary............... $ 668,753 $ 1,766,193 Investment in bank subsidiary.......................... 28,269,290 22,871,969 Other assets........................................... 353,350 67,149 ----------- ----------- Total assets....................................... $29,291,393 $24,705,311 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Other liabilities...................................... $ 17,745 $ 17,556 ----------- ----------- Total liabilities...................................... 17,745 17,556 Stockholders' equity................................... 29,273,648 24,687,755 ----------- ----------- Total liabilities and stockholders' equity......... $29,291,393 $24,705,311 =========== ===========
F-22 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 PRIVATEBANCORP, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ---------- ---------- ---------- Operating income: Interest income--other................... $ 31,523 $ -- $ -- Total.................................. 31,523 -- -- ---------- ---------- ---------- Operating expense: Amortization of deferred compensation.... 149,566 98,917 33,500 Amortization of organization costs....... -- -- 23,295 Other.................................... 225,853 67,974 23,788 ---------- ---------- ---------- Total.................................. 375,419 166,891 80,583 ---------- ---------- ---------- (Loss) before income taxes and equity in undistributed net income of bank subsidiary............................ (343,896) (166,891) (80,583) Income tax (benefit)....................... (134,119) (56,743) (34,546) ---------- ---------- ---------- (Loss) before equity in undistributed net income of bank subsidiary......... (209,777) (110,148) (46,037) ---------- ---------- ---------- Equity in undistributed net income of bank subsidiary................................ 3,219,915 2,255,443 1,479,060 ---------- ---------- ---------- Net income............................. $3,010,138 $2,145,295 $1,433,023 ========== ========== ==========
The Parent Company Only Statements of Changes in Stockholders' Equity are the same as the Consolidated Statements of Changes in Stockholders' Equity. F-23 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1998 and 1997 PRIVATEBANCORP, INC. (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Net income............................ $ 3,010,138 $ 2,145,295 $ 1,433,023 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities-- Equity in net income of bank subsidiary......................... (3,219,915) (2,255,443) (1,479,060) Amortization of organization costs.. -- -- 23,295 Amortization of deferred compensation....................... 149,566 98,917 33,500 (Increase) decrease in other assets. (135,187) (57,731) 2,474 Increase (decrease) in other liabilities........................ 189 49,593 (27,398) ----------- ----------- ----------- Total adjustments................. (3,205,347) (2,164,664) (1,447,189) ----------- ----------- ----------- Net cash (used in) operating activities....................... (195,209) (19,369) (14,166) ----------- ----------- ----------- Cash flows from investing activities: Net (increase) in capital investments in bank subsidiary................... (2,000,000) (2,000,000) -- ----------- ----------- ----------- Net cash (used in) investing activities........................... (2,000,000) (2,000,000) -- ----------- ----------- ----------- Cash flows from financing activities: Issuance of common stock.............. 1,360,859 2,347,946 505,000 Dividends paid........................ (263,090) (217,358) (184,608) ----------- ----------- ----------- Net cash provided by financing activities....................... 1,097,769 2,130,588 320,392 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............................ (1,097,440) 111,219 306,226 Cash and cash equivalents at beginning of year................................ 1,766,193 1,654,974 1,348,748 ----------- ----------- ----------- Cash and cash equivalents at end of year................................... $ 668,753 $ 1,766,193 $ 1,654,974 =========== =========== =========== Other cash flow disclosures: Income tax payment (receipt).......... $ 1,826,826 $ 1,562,726 $ 977,432 =========== =========== =========== Non-cash transactions: Loan to executive officer for purchase of common stock...................... $ 949,741 $ -- $ -- =========== =========== ===========
F-24 PRIVATEBANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded) December 31, 1998 and 1997 19. Subsequent Event: During March and April, 1999, the Company's Board of Directors and stockholders approved an increase in the number of authorized shares to 12,000,000 shares of common stock and 1,000,000 shares of preferred stock. The Board also approved a change in the per share stated value of the common stock from $2.50 to $1.00 per share, and declared a two-for-one common stock split to be effected in the form of a stock dividend. Such change in authorized shares and change in stated value became effective prior to the effectiveness of the registration statement covering the Company's initial public offering. On June 24, 1999 to effect a two-for-one stock split, the Company's Board of Directors declared a one-for-one stock dividend on its common stock payable on June 28, 1999 to stockholders of record as of the close of business on June 25, 1999. All references to number of shares, per share amounts and stock option data in the consolidated financial statements have been adjusted to reflect the stock split on a retroactive basis. F-25 [Logo of PrivateBancorp, Inc.] APPENDIX B DISSENTERS' RIGHTS UNDER DELAWARE LAW Delaware Code Title 8. Corporations Chapter 1. General Corporation Law Subchapter IX Merger or Consolidation ((S)) 262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to ((S)) 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to ((S)) 251 (other than a merger effected pursuant to ((S)) 251(g) of this title), ((S)) 252, ((S)) 254, ((S)) 257, ((S)) 258, ((S)) 263 or ((S)) 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of ((S)) 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to ((S))((S)) 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. B-1 (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under ((S)) 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such a merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to ((S)) 228 or ((S)) 253 of this title, each constituent corporation, either before the effective date of the merger or consolidation or within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section; provided that, if the notice is given on or after the effective date of the merger or consolidation, such notice shall be given by the surviving or resulting corporation to all such holders of any class or series of stock of a constituent corporation that are entitled to appraisal rights. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such B-2 effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. B-3 (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. B-4 PART II INFORMATION REQUIRED IN THE REGISTRATION STATEMENT Item 20. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law grants each corporation organized thereunder the powers to indemnify any individual made party or threatened to be made party to any threatened, pending or completed action, suit or proceeding because the individual is or was a director, officer, employee or agent of the corporation, against actual and reasonable expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred with respect to an action, suit or proceeding if the individual acted in good faith, and the individual reasonably believed: (a) that the individual's conduct was in the corporation's best interests; (b) that the individual's conduct was at least not opposed to the corporation's best interests; and (c) in the case of any criminal proceeding, that the individual had no reasonable cause to believe the individual's conduct was unlawful. However, there will be limited or no indemnification for directors, officers, employees or agents adjudged to be liable to the corporation where such individuals are parties to any action by or in the right of the corporation. Article Ninth of the Company's Amended and Restated Certificate of Incorporation provides as follows: NINTH: The Corporation shall indemnify, to the full extent that it shall have power under applicable law to do so and in a manner permitted by such law, any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Corporation against liabilities and expenses reasonably incurred or paid by such person in connection with such action, suit or proceeding. The Corporation may indemnify, to the full extent that it shall have power under applicable law to do so and in a manner permitted by such law, any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigate, by reason of the fact that he is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against liabilities and expenses reasonably incurred or paid by such person in connection with such action, suit or proceeding. The words "liabilities" and "expenses" shall include, without limitation: liabilities, losses, damages, judgments, fines, penalties, amounts paid in settlement, expenses, attorneys' fees and costs. The indemnification provided by this Article NINTH shall not be deemed exclusive of any other rights to which any person indemnified may be entitled under any statute, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be such director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. The Corporation may purchase and maintain insurance on behalf of any person referred to in the preceding paragraph against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article NINTH or otherwise. For purposes of this Article NINTH, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. II-1 The provisions of this Article NINTH shall be deemed to be a contract between the Corporation and each director or officer who serves in any such capacity at any time while this Article and the relevant provisions of the General Corporation Law of the State of Delaware or other applicable law, if any, are in effect, and any repeal or modification of any such law or of this Article shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Corporation. Article XI of the Amended and Restated By-laws of the Company provides as follows: Section 11.1 Third-Party Actions. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including all appeals (other than an action by or in the right of the Corporation) by reason of the fact that the person is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgment, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit, or proceeding; if the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or on a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Section 11.2 Derivative Actions. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit, including all appeals, by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, actually and reasonably incurred by the person in connection with the defense or settlement of the action or suit, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation. However, no indemnification shall be made in respect of any claim, issue, or matter as to which the person is adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Corporation unless and only to the extent that the court of common pleas or the court in which the action or suit was brought determines on application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for expenses that the court of common pleas or other court shall deem proper. Section 11.3 Rights After Successful Defense. To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 11.1 or 11.2, above, or in defense of any claim, issue, or matter in that action, suit, or proceeding, he or she shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him or her in connection with the action, suit, or proceeding. II-2 Section 11.4 Other Determination of Rights. Unless ordered by a court, any indemnification made under Section 11.1 or 11.2, above, shall be made by the Corporation only as authorized in the specific case on a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 11.1 or 11.2, above. The determination shall be made (a) by a majority vote of a quorum consisting of directors who were not and are not parties to or threatened with the action, suit, or proceeding; (b) if the described quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; (c) by the stockholders; or (d) by the court in which the action, suit, or proceeding was brought. Section 11.5 Advances of Expenses. Expenses of each person seeking indemnification under Section 11.1 or 11.2, above, may be paid by the Corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding, as authorized by the Board of Directors in the specific case, on receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay the amount if it is ultimately determined that he or she is not entitled to be indemnified by the Corporation. Section 11.6 Nonexclusiveness; Heirs. The indemnification provided by this Article shall not be deemed exclusive of, and shall be in addition to, any other rights to which those seeking indemnification may be entitled as a matter of law or under the Certificate of Incorporation, these By- Laws, any agreement, vote of stockholders, any insurance purchased by the Corporation, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of that person. The effect of the foregoing provisions of the Delaware General Corporation Law, the Company's Amended and Restated Certificate of Incorporation and Amended and Restated By-laws would be to permit such indemnification of officers and directors by the Company for liabilities arising under the Securities Act of 1933. The Company has purchased $10 million of insurance policies which insure the Company's directors and officers against liability which they may incur as a result of actions taken in such capacities. In addition, the Company maintains trust errors and omissions coverage up to a limit of $10 million. Item 21. Exhibits 2.1 Agreement and Plan of Reorganization dated as of June 24, 1999, by and between PrivateBancorp, Inc. and Towne Square Financial Corporation.+ 2.2 Form of Building Lease by and between Towne Square Realty, L.L.C. and The PrivateBank and Trust Company. 2.3 Form of Advisory Board and Support Agreement by and between PrivateBancorp, Inc. and the stockholders of Towne Square Financial Corporation. 2.4 Form of Stock Restriction Agreement by and between PrivateBancorp, Inc. and the stockholders of Towne Square Financial Corporation. 2.5 Form of Employment Agreement by and between PrivateBancorp, Inc. and Thomas N. Castronovo. 2.6 Form of Non-Competition and Support Agreement by and between PrivateBancorp, Inc. and Thomas N. Castronovo. 3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp, Inc.*** 3.2 [Intentionally left blank] II-3 3.3 Amended and Restated By-laws of PrivateBancorp, Inc.* 4.1 Specimen Common Stock Certificate.** 5 Opinion of Vedder, Price, Kaufman & Kammholz regarding legality. 8 Opinion of Vedder, Price, Kaufman & Kammholz regarding certain federal income tax matters. 10.1 Lease Agreement for banking facility located at Ten North Dearborn, Chicago, Illinois dated January 1, 1992, as amended, by and between General American Life Insurance Company as successor-in-interest to LaSalle National Trust, N.A., as successor trustee to LaSalle National Bank, not personally but as Trustee under Trust Agreement dated November 6, 1985 and known as Trust No. 110519 and The PrivateBank and Trust Company.* 10.2 Lease Agreement for banking facility located at 1603 West Sixteenth Street, Oak Brook, Illinois dated October ____, 1996, by and between Columbia Lisle Limited Partnership and The PrivateBank and Trust Company.* 10.3 Lease Agreement for banking facility located at 517 Green Bay Road, Wilmette, Illinois dated as of May 2, 1994 by and between Gunnar H. Hedlund, Doris S. Hedlund, Robert P. Hedlund and Gerald A. Hedlund, LaSalle National Trust, N.A., as successor trustee to LaSalle National Bank, not personally but solely as Trustee under Trust Agreement dated December 28, 1972 and known as Trust No. 45197 and The PrivateBank and Trust Company.* 10.4 Stock Purchase Agreement dated as of May 28, 1998 by and among PrivateBancorp, Inc., Delaware Charter Guarantee and Trust Co., Trustee FBO Ralph B. Mandell, IRA and The Ralph B. Mandell Revocable Trust UTA dated June 5, 1997.* 10.5 Pledge Agreement dated as of May 28, 1998 by and between the Ralph B. Mandell Revocable Trust UTA dated June 5, 1997 and PrivateBancorp, Inc. (included as Exhibit B to Stock Purchase Agreement dated as of May 28, 1998 by and among PrivateBancorp, Inc., Delaware Charter Guarantee and Trust Co., Trustee FBO Ralph B. Mandell, IRA and The Ralph B. Mandell Revocable Trust UTA dated June 5, 1997 filed as Exhibit 10.4 herewith).* 10.6 PrivateBancorp, Inc. Amended and Restated Stock Incentive Plan, as to be amended.*** 10.7 Employment Agreement by and between Ralph B. Mandell and PrivateBancorp, Inc. effective as of July 1, 1999.** 10.8 Employment Agreement by and between Donald A. Roubitchek and PrivateBancorp, Inc. effective as of July 1, 1999.** 10.9 Outsourcing Agreement by and between The PrivateBank and Trust Company and Marshall & Ilsley Corporation, acting through its division M&I Data Services, dated as of April 9, 1999.** 10.10 Form of Indemnification Agreement by and between PrivateBancorp, Inc. and its directors and executive officers.** 21 Subsidiary of the Registrant.* 23.1 Consent of Arthur Andersen LLP.++ 23.2 Consent of Vedder, Price, Kaufman & Kammholz (included in their opinions filed as Exhibits 5 and 8). II-4 24 Power of Attorney (set forth on signature page to Registration Statement). 99.1 Consent of National Decision Systems.* - -------------- * Filed under corresponding exhibit number to the Company's registration statement on Form S-1 (File No. 333-77147) and incorporated herein by reference. ** Filed under corresponding exhibit number to Amendment No. 1 to the Company's registration statement on Form S-1 (File No. 333-77147) and incorporated herein by reference. *** Filed under corresponding exhibit number to Amendment No. 2 to the Company's registration statement on Form S-1 (File No. 333-77147) and incorporated herein by reference. + Filed as Exhibit No. 10.11 to Amendment No. 2 to the Company's registration statement on Form S-1 (File No. 333-77147) and incorporated herein by reference. ++ Filed herewith Item 22. Undertakings (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, offering or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 (c) The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Amendment No. 1 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the State of Illinois, on this 2nd day of August, 1999. PrivateBancorp, Inc. By: /s/ Ralph B. Mandell ---------------------------------- Ralph B. Mandell Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to this Registration Statement has been signed by the following persons in the capacities and on the date indicated.
Name Title Date ---- ----- ---- /s/ Ralph B. Mandell Chairman, President, CEO and Director August 2, 1999 - --------------------------- (principal executive officer) Ralph B. Mandell /s/ Caren L. Reed* Vice Chairman and Director August 2, 1999 - --------------------------- Caren L. Reed /s/ Donald A. Roubitchek Chief Financial Officer and Director August 2, 1999 - --------------------------- (principal financial officer) Donald A. Roubitchek /s/ Jeanene V. Meisser Controller August 2, 1999 - --------------------------- (principal accounting officer) Jeanene V. Meisser /s/ Donald L. Beal* Director August 2, 1999 - --------------------------- Donald L. Beal /s/ Naomi T. Borwell* Director August 2, 1999 - --------------------------- Naomi T. Borwell /s/ William A. Castellano* Director August 2, 1999 - --------------------------- William A. Castellano
II-7
Name Title Date ---- ----- ---- /s/ Robert F. Coleman* Director August 2, 1999 - --------------------------- Robert F. Coleman Director August 2, 1999 - --------------------------- W. James Farrell /s/ John E. Gorman* Director August 2, 1999 - --------------------------- John E. Gorman Director August 2, 1999 - --------------------------- Alvin J. Gottlieb Director August 2, 1999 - --------------------------- James M. Guyette /s/ Philip M. Kayman* Director August 2, 1999 - --------------------------- Philip M. Kayman /s/ William R. Langley* Director August 2, 1999 - --------------------------- William R. Langley /s/ Thomas F. Meagher* Director August 2, 1999 - --------------------------- Thomas F. Meagher /s/ Michael B. Susman* Director August 2, 1999 - --------------------------- Michael B. Susman
* Signed pursuant to power of attorney. By: /s/ Ralph B. Mandell -------------------- Ralph B. Mandell Attorney-in-Fact II-8 EXHIBIT INDEX Item 21. Exhibits 2.1 Agreement and Plan of Reorganization dated as of June 24, 1999, by and between PrivateBancorp, Inc. and Towne Square Financial Corporation.+ 2.2 Form of Building Lease by and between Towne Square Realty, L.L.C. and The PrivateBank and Trust Company. 2.3 Form of Advisory Board and Support Agreement by and between PrivateBancorp, Inc. and the stockholders of Towne Square Financial Corporation. 2.4 Form of Stock Restriction Agreement by and between PrivateBancorp, Inc. and the stockholders of Towne Square Financial Corporation. 2.5 Form of Employment Agreement by and between PrivateBancorp, Inc. and Thomas N. Castronovo. 2.6 Form of Non-Competition and Support Agreement by and between PrivateBancorp, Inc. and Thomas N. Castronovo. 3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp, Inc.*** 3.2 [Intentionally left blank] 3.3 Amended and Restated By-laws of PrivateBancorp, Inc.* 4.1 Specimen Common Stock Certificate.** 5 Opinion of Vedder, Price, Kaufman & Kammholz regarding legality. 8 Opinion of Vedder, Price, Kaufman & Kammholz regarding certain federal income tax matters. 10.1 Lease Agreement for banking facility located at Ten North Dearborn, Chicago, Illinois dated January 1, 1992, as amended, by and between General American Life Insurance Company as successor-in-interest to LaSalle National Trust, N.A., as successor trustee to LaSalle National Bank, not personally but as Trustee under Trust Agreement dated November 6, 1985 and known as Trust No. 110519 and The PrivateBank and Trust Company.* 10.2 Lease Agreement for banking facility located at 1603 West Sixteenth Street, Oak Brook, Illinois dated October ____, 1996, by and between Columbia Lisle Limited Partnership and The PrivateBank and Trust Company.* 10.3 Lease Agreement for banking facility located at 517 Green Bay Road, Wilmette, Illinois dated as of May 2, 1994 by and between Gunnar H. Hedlund, Doris S. Hedlund, Robert P. Hedlund and Gerald A. Hedlund, LaSalle National Trust, N.A., as successor trustee to LaSalle National Bank, not personally but solely as Trustee under Trust Agreement dated December 28, 1972 and known as Trust No. 45197 and The PrivateBank and Trust Company.* 10.4 Stock Purchase Agreement dated as of May 28, 1998 by and among PrivateBancorp, Inc., Delaware Charter Guarantee and Trust Co., Trustee FBO Ralph B. Mandell, IRA and The Ralph B. Mandell Revocable Trust UTA dated June 5, 1997.* II-9 10.5 Pledge Agreement dated as of May 28, 1998 by and between the Ralph B. Mandell Revocable Trust UTA dated June 5, 1997 and PrivateBancorp, Inc. (included as Exhibit B to Stock Purchase Agreement dated as of May 28, 1998 by and among PrivateBancorp, Inc., Delaware Charter Guarantee and Trust Co., Trustee FBO Ralph B. Mandell, IRA and The Ralph B. Mandell Revocable Trust UTA dated June 5, 1997 filed as Exhibit 10.4 herewith).* 10.6 PrivateBancorp, Inc. Amended and Restated Stock Incentive Plan, as to be amended.*** 10.7 Employment Agreement by and between Ralph B. Mandell and PrivateBancorp, Inc. effective as of July 1, 1999.** 10.8 Employment Agreement by and between Donald A. Roubitchek and PrivateBancorp, Inc. effective as of July 1, 1999.** 10.9 Outsourcing Agreement by and between The PrivateBank and Trust Company and Marshall & Ilsley Corporation, acting through its division M&I Data Services, dated as of April 9, 1999.** 10.10 Form of Indemnification Agreement by and between PrivateBancorp, Inc. and its directors and executive officers.** 21 Subsidiary of the Registrant.* 23.1 Consent of Arthur Andersen LLP.++ 23.2 Consent of Vedder, Price, Kaufman & Kammholz (included in their opinions filed as Exhibits 5 and 8). 24 Power of Attorney (set forth on signature page to Registration Statement). 99.1 Consent of National Decision Systems.* - ----------------- + Filed as Exhibit No. 10.11 to Amendment No. 2 to the Company's registration statement on Form S-1 (File No. 333-77147) and incorporated herein by reference. ++ Filed herewith * Filed under corresponding exhibit number to the Company's registration statement on Form S-1 (File No. 333-77147) and incorporated herein by reference. ** Filed under corresponding exhibit number to Amendment No. 1 to the Company's registration statement on Form S-1 (File No. 333-77147) and incorporated herein by reference. ***Filed under corresponding exhibit number to Amendment No. 2 to the Company's registration statement on Form S-1 (File No. 333-77147) and incorporated herein by reference. II-10 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated January 29, 1999 (except with respect to the matter discussed in Note 19, as to which the date is June 25, 1999) (and to all references to our Firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP Chicago, Illinois July 30, 1999 -----END PRIVACY-ENHANCED MESSAGE-----