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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to ________
Commission File Number: 000-25887
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE
(State or other jurisdiction of 36-3681151
incorporation or organization) (I.R.S. Employer Identification Number)
TEN NORTH DEARBORN STREET
CHICAGO, ILLINOIS 60602
(Address of principal executive offices) (Zip Code)
(312) 683-7100
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No /_/
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
================================================================================
CLASS OUTSTANDING AS OF NOVEMBER 6, 2001
- --------------------------------------------------------------------------------
Common, no par value 4,946,566
================================================================================
PRIVATEBANCORP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
Number
------
Selected Financial Data........................................................2
PART I
Item 1. Financial Statements..................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........39
Item 4. Controls and Procedures..............................................41
PART II
Item 1. Legal Proceedings....................................................42
Item 2. Changes in Securities and Use of Proceeds............................42
Item 3. Defaults upon Senior Securities......................................42
Item 4. Submission of Matters to a Vote of Security Holders..................43
Item 5. Other Information....................................................43
Item 6. Exhibits and Reports on Form 8-K.....................................43
Signatures....................................................................44
SELECTED FINANCIAL DATA
The following table summarizes certain selected unaudited consolidated
financial information of PrivateBancorp, Inc. at or for the periods indicated.
This information should be read in conjunction with the unaudited consolidated
financial statements and related notes included pursuant to Item 1 of this
report.
QUARTER ENDED
-------------------------------------------------------------
09/30/02 06/30/02 03/31/02 12/31/01 09/30/01
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
Interest income:
Loans, including fees...................... $13,704 $12,665 $12,148 $12,311 $12,785
Federal funds sold and interest-bearing
deposits................................ 38 8 17 13 23
Securities................................. 4,557 4,886 4,206 4,144 3,704
Total interest income................... 18,299 17,559 16,371 16,468 16,512
------ ------ ------ ------ ------
Interest expense:
Interest-bearing demand deposits........... 168 168 171 209 239
Savings and money market deposit accounts.. 1,923 1,763 1,719 2,224 2,844
Other time deposits........................ 3,976 3,810 4,323 4,028 4,273
Funds borrowed............................. 1,304 1,353 1,309 1,602 1,637
Trust preferred interest expense........... 485 485 485 485 485
------ ------ ------ ------ ------
Total interest expense.................. 7,856 7,579 8,007 8,548 9,478
------ ------ ------ ------ ------
Net interest income........................ 10,443 9,980 8,364 7,920 7,034
Provision for loan losses.................. 828 1,609 511 1,257 845
------ ------ ------ ------ ------
Net interest income after provision for
loan losses............................. 9,615 8,371 7,853 6,663 6,189
------ ------ ------ ------ ------
Non-interest income:
Banking, trust services and other income... 1,763 1,802 1,542 1,149 902
Securities gains (losses), net............. 280 274 (230) 1,191 365
Trading losses on interest rate swap....... (662) -- -- -- --
------ ------ ------ ------ ------
Total non-interest income............... 1,381 2,076 1,312 2,340 1,267
------ ------ ------ ------ ------
Non-interest expense:
Salaries and employee benefits............. 3,393 3,469 3,214 2,519 2,303
Occupancy expense, net..................... 1,227 1,206 1,139 1,325 985
Data processing............................ 433 374 308 420 303
Marketing.................................. 351 374 365 320 275
Amortization of goodwill................... -- -- -- 206 206
Professional fees.......................... 997 1,027 891 1,090 575
Insurance.................................. 118 106 93 85 88
Other Expense.............................. 569 557 462 661 606
------ ------ ------ ------ ------
Total non-interest expense................. 7,088 7,113 6,472 6,626 5,341
------ ------ ------ ------ ------
Income before income taxes................. 3,908 3,334 2,693 2,377 2,115
Income tax provision....................... 875 724 549 459 524
------ ------ ------ ------ ------
Net income.................................... $3,033 $2,610 $2,144 $1,918 $1,591
====== ====== ====== ====== ======
2
QUARTER ENDED
-------------------------------------------------------------
09/30/02 06/30/02 03/31/02 12/31/01 09/30/01
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PER SHARE DATA:
Basic earnings................................ $0.61 $0.53 $0.44 $0.40 $0.34
Diluted earnings.............................. 0.58 0.50 0.42 0.39 0.32
Dividends..................................... 0.040 0.030 0.030 0.030 0.030
Book value (at end of period)................. 16.06 14.57 13.20 12.97 13.07
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities.............................. $403,192 $392,090 $388,728 $332,933 $279,319
Total loans................................... 913,197 865,778 782,434 780,771 715,977
Total assets.................................. 1,404,326 1,332,008 1,231,208 1,176,768 1,041,975
Total deposits................................ 1,163,327 1,074,475 981,865 850,495 801,146
Funds borrowed................................ 125,422 154,499 155,523 231,488 137,956
Long-term debt-trust preferred securities..... 20,000 20,000 20,000 20,000 20,000
Total stockholders' equity.................... 79,281 71,697 64,926 62,304 62,087
Trust assets under administration............. $693,869 $733,939 $758,242 $722,713 $684,842
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(1)..................... 3.46% 3.53% 3.18% 3.28% 3.17%
Net interest spread(2)..................... 3.27 3.34 2.96 2.98 2.76
Non-interest income to average assets...... 0.41 0.65 0.36 0.86 0.49
Non-interest expense to average assets..... 2.08 2.24 2.07 2.43 2.16
Net overhead ratio(3)...................... 1.68 1.59 1.71 1.57 1.67
Efficiency ratio (4)....................... 56.3 55.4 61.1 60.9 60.6
Return on average assets (5)............... 0.89 0.82 0.73 0.70 0.64
Return on average equity (6)............... 15.86 15.07 13.35 12.18 10.46
Dividend payout ratio...................... 6.51 5.66 6.88 7.51 8.94
Asset Quality Ratios:
Non-performing loans to total loans........ 0.33% 0.37% 0.37% 0.41% 0.90%
Allowance for loan losses to:
total loans............................. 1.17 1.14 1.12 1.06 1.06
non-performing loans.................... 357 313 303 262 118
Net charge-offs to average total loans..... 0.04 0.24 0.01 0.27 0.11
Non-performing assets to total assets...... 0.21 0.24 0.24 0.27 0.62
Balance Sheet Ratios:
Loans to deposits.......................... 78.5% 80.6% 79.7% 91.8% 89.4%
Average interest-earning assets to
average interest-bearing liabilities.... 108.0 107.8 107.5 108.9 110.2
Capital Ratios:
Total equity to total assets............... 5.65% 5.38% 5.27% 5.29% 5.96%
Total risk-based capital ratio............. 9.10 9.37 9.93 9.71 10.55
Tier 1 risk-based capital ratio............ 7.61 7.84 8.37 8.18 8.88
Leverage ratio............................. 5.91 6.07 6.25 6.64 6.99
- ---------------------------
(1) Net interest income, on a tax equivalent basis, divided by average
interest-earning assets.
(2) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(3) Non-interest expense less non-interest income divided by average total
assets.
(4) Non-interest expense divided by the sum of net interest income, on a
tax equivalent, plus non-interest income.
(5) Net income divided by average total assets.
(6) Net income divided by average common equity.
3
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2002 2001 2001
---- ---- ----
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks................................. $44,561 $22,283 $26,343
Federal funds sold and other short-term investments..... 3,848 518 2,959
---------- ---------- ----------
Total cash and cash equivalents...................... 48,409 22,801 29,302
---------- ---------- ----------
Loans held for sale..................................... 9,062 11,335 140
Available-for-sale securities, at fair value............ 403,192 332,933 279,319
Loans, net of unearned discount......................... 913,197 780,771 715,977
Allowance for loan losses............................... (10,642) (8,306) (7,558)
---------- ---------- ----------
Net loans............................................... 902,555 772,465 708,419
---------- ---------- ----------
Goodwill................................................ 10,805 10,805 11,011
Bank premises and equipment, net........................ 6,378 3,814 4,198
Accrued interest receivable............................. 8,597 7,262 7,006
Other assets............................................ 15,328 15,353 2,580
---------- ---------- ----------
Total assets............................................ $1,404,326 $1,176,768 $1,041,975
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Noninterest-bearing.................................. $80,994 $73,146 $68,789
Interest-bearing..................................... 57,575 52,061 45,711
Savings and money market deposit accounts............... 431,455 362,987 361,563
Brokered deposits....................................... 324,977 138,911 93,215
Other time deposits..................................... 268,326 223,390 231,868
---------- ---------- ----------
Total deposits....................................... 1,163,327 850,495 801,146
Funds borrowed.......................................... 125,422 231,488 137,956
Long term debt - trust preferred securities............. 20,000 20,000 20,000
Accrued interest payable................................ 4,997 2,112 2,348
Other liabilities....................................... 11,299 10,369 18,438
---------- ---------- ----------
Total liabilities....................................... $1,325,045 $1,114,464 $979,888
========== ========== ==========
STOCKHOLDERS' EQUITY
Preferred Stock, 1,000,000 shares authorized............ -- -- --
Common stock, without par value, $1 stated value;
12,000,000 shares authorized; 4,936,156, 4,804,280,
and 4,750,124 shares issued and outstanding as of
September 30, 2002, December 31, 2001 and September
30, 2001, respectively............................... $4,936 $4,804 $4,750
Surplus................................................. 42,475 41,516 41,089
Retained earnings....................................... 24,760 17,468 15,294
Accumulated other comprehensive income.................. 8,721 323 2,781
Deferred compensation................................... (661) (857) (877)
Loans to officers....................................... (950) (950) (950)
---------- ---------- ----------
Total stockholders' equity.............................. 79,281 62,304 62,087
---------- ---------- ----------
Total liabilities and stockholders' equity.............. $1,404,326 $1,176,768 $1,041,975
========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
INTEREST INCOME
Loans, including fees................................. $13,704 $12,785 $38,517 $38,664
Securities............................................ 4,557 3,704 13,649 10,233
Federal funds sold and interest bearing deposits...... 38 23 63 231
------- ------- ------- -------
Total interest income.............................. 18,299 16,512 52,229 49,128
------- ------- ------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand............................ 168 239 507 714
Savings and money market deposit accounts.......... 1,923 2,844 5,405 9,251
Brokered deposits and other time deposits.......... 3,976 4,273 12,109 13,188
Funds borrowed........................................ 1,304 1,637 3,967 4,689
Long-term debt - trust preferred securities........... 485 485 1,454 1,245
------- ------- ------- -------
Total interest expense............................. 7,856 9,478 23,442 29,087
------- ------- ------- -------
Net interest income................................ 10,443 7,034 28,787 20,041
Provision for loan losses............................. 828 845 2,948 1,922
------- ------- ------- -------
Net interest income after provision
for loan losses.............................. 9,615 6,189 25,839 18,118
------- ------- ------- -------
NON-INTEREST INCOME
Banking, trust services and other income........... 1,763 902 5,107 2,879
Securities gains, net.............................. 280 365 324 904
Trading losses on interest rate swap............... (662) -- (662) --
------- ------- ------- -------
Total non-interest income....................... 1,381 1,267 4,769 3,783
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits........................ 3,393 2,303 10,076 6,592
Occupancy expense, net................................ 1,227 985 3,572 2,833
Professional fees..................................... 997 575 2,915 1,849
Goodwill amortization................................. -- 206 -- 618
Other non-interest expense............................ 1,471 1,272 4,110 4,136
------- ------- ------- -------
Total non-interest expense......................... 7,088 5,341 20,673 16,028
------- ------- ------- -------
Income before income taxes............................ 3,908 2,115 9,935 5,874
Income tax provision.................................. 875 524 2,148 1,592
------- ------- ------- -------
Net income......................................... $3,033 $1,591 $7,787 $4,282
======= ======= ======= =======
Basic earnings per share.............................. $0.61 $0.34 $1.59 $0.91
Diluted earnings per share............................ 0.58 0.32 1.51 0.88
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER LOANS TOTAL
COMMON RETAINED COMPREHENSIVE DEFERRED TO STOCKHOLDERS'
STOCK SURPLUS EARNINGS INCOME COMPENSATION OFFICERS EQUITY
----- ------- -------- ------ ------------ -------- ------
Balance, January 1,
2001................ $4,624 $40,107 $11,388 $(118) $(802) $(950) $54,249
Net income............. -- -- 4,282 -- -- -- 4,282
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and
reclassification
adjustments......... -- -- -- 2,899 -- -- 2,899
------ ------- ------- ------ ----- ----- -------
Total accumulated
comprehensive income -- -- 4,282 2,899 -- -- 7,181
------ ------- ------- ------ ----- ----- -------
Cash dividends
declared ($0.08 per
share).............. -- -- (376) -- -- -- (376)
Issuance of common
stock............... 126 982 -- -- -- -- 1,108
Awards granted......... -- -- -- -- (271) -- (271)
Amortization of
deferred
compensation........ -- -- -- -- 196 -- 196
------ ------- ------- ------ ----- ----- -------
Balance, September 30,
2001................ $4,750 $41,089 $15,294 $2,781 $(877) $(950) $62,087
====== ======= ======= ====== ===== ===== =======
BALANCE, JANUARY 1,
2002 $4,804 $41,516 $17,468 $323 $(857) $(950) $62,304
Net income............. -- -- 7,787 -- -- -- 7,787
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and
reclassification
adjustments......... -- -- -- 8,398 -- -- 8,398
------ ------- ------- ------ ----- ----- -------
Total comprehensive
income.............. -- -- 7,787 8,398 -- -- 16,185
------ ------- ------- ------ ----- ----- -------
Cash dividends
declared ($0.10 per
share).............. -- -- (495) -- -- -- (495)
Issuance of common
stock............... 132 959 -- -- -- -- 1,091
Awards granted......... -- -- -- -- (38) -- (38)
Amortization of
deferred
compensation........ -- -- -- -- 234 -- 234
------ ------- ------- ------ ----- ----- -------
BALANCE, SEPTEMBER 30,
2002................ $4,936 $42,475 $24,760 $8,721 $(661) $(950) $79,281
====== ======= ======= ====== ===== ===== =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 7,787 $ 4,282
-------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 999 1,059
Goodwill amortization....................................................... -- 618
Johnson Bank Illinois purchase accounting fair value accretion, net......... (45) (218)
Amortization of deferred compensation....................................... 234 196
Provision for loan losses................................................... 2,948 1,922
Net gain on sale of securities.............................................. (324) (904)
Trading losses on interest rate swap........................................ 662 --
Net proceeds from loans held for sale....................................... 2,273 565
Decrease in deferred loan fees.............................................. 553 170
Increase in deferred income taxes........................................... (3,335) (429)
Increase in accrued interest receivable..................................... (1,335) (1,483)
Increase (Decrease) in accrued interest payable............................. 2,885 (1,205)
Decrease (Increase) in other assets......................................... 689 (1,392)
Increase in other liabilities............................................... 929 13,853
------- -------
Total adjustments........................................................... 7,133 12,752
------- -------
Net cash provided by operating activities................................... 14,920 17,034
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, trading losses and sales of securities..... 102,890 94,550
Purchase of securities available-for-sale...................................... (160,763) (196,378)
Net loan principal advanced ................................................... (133,547) (117,813)
Bank premises and equipment expenditures....................................... (3,569) (1,052)
------- -------
Net cash used in investing activities....................................... (194,989) (220,693)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits................................................. 312,836 130,910
Issuance of common stock....................................................... 1,053 838
Issuance of trust preferred securities......................................... -- 20,000
Dividends paid................................................................. (492) (376)
Net (decrease) increase in funds borrowed...................................... (107,720) 41,076
------- -------
Net cash provided by financing activities................................... 205,677 192,448
------- -------
Net increase (decrease) in cash and cash equivalents........................... 25,608 (11,211)
Cash and cash equivalents at beginning of year................................. 22,801 40,513
------- -------
Cash and cash equivalents at end of period..................................... $ 48,409 $ 29,302
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
NOTE 1 -- BASIS OF PRESENTATION
The consolidated financial information of PRIVATEBANCORP, INC. (the
"Company") and its subsidiaries, The PrivateBank and Trust Company (the "Bank"
or "PrivateBank (Chicago)") and The PrivateBank (St. Louis), included herein is
unaudited; however, such information reflects all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation for the interim periods. The financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X.
The annualized results of operations for the nine months ended
September 30, 2002 are not necessarily indicative of the results expected for
the full year ending December 31, 2002. The accompanying consolidated financial
statements are unaudited and do not include information or footnotes necessary
for a complete presentation of financial condition, results of operations, or
cash flows in accordance with generally accepted accounting principles. The
September 30, 2002 consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes for the year
ended December 31, 2001 included in the Company's Annual Report on Form 10-K
(File No. 000-25887).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expense during the reported
period. Actual results could differ from these estimates.
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.
NOTE 2 -- EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings
per share (in thousands except per share data):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
Net Income......................................... $7,787 $4,282
Average common shares outstanding.................. 4,902 4,682
Average common shares equivalent(1)................ 257 160
------ ------
Weighted average common shares and common share
equivalents..................................... 5,159 4,842
====== ======
Net income per average common share - basic........ $ 1.59 $ 0.91
Net income per average common share - diluted...... $ 1.51 $ 0.88
- ---------------------------
(1) Common shares equivalent result from stock options being treated as if
they had been exercised and are computed by application of the treasury
stock method.
8
NOTE 3 - NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 applies to all business combinations completed after June
30, 2001. All future business combinations must be recorded using the purchase
method of accounting. As the Company contemplates further acquisitions as part
of its growth strategy, this Statement will likely have an impact on the
Company's future financial statements.
SFAS No. 142 supercedes APB Opinion No. 17 "Intangible Assets" and
addresses the accounting of intangible assets and goodwill. Adoption of this
Statement was required beginning January 1, 2002 in relation to all of the
Company's goodwill and intangible assets. The Statement discontinues the regular
amortization of goodwill and a transitional impairment test of goodwill is
required as of January 1, 2002. An annual impairment test of goodwill is
required every year thereafter. Impairment losses from goodwill recognized in
the initial application of this Statement are to be reported as resulting from a
change in accounting principle. Impairment losses in subsequent years will be
recorded as operating expenses. Goodwill at September 30, 2002 totaled $10.8
million. The Company's impairment evaluation has been completed as of January 1,
2002, and no goodwill impairment has been recorded as of September 30, 2002. Any
future acquisitions completed by the Company will also be subject to this
Statement.
The following table shows the effect of adopting SFAS No. 142 (in
thousands, except per share data):
NINE MONTHS ENDED
-----------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
---- ----
(IN THOUSANDS)
Reported net income................ $7,787 $4,282
Add: Goodwill amortization (net of
tax) ........................... -- 432
------ ------
Adjusted net income................ $7,787 $4,714
====== ======
Basic earnings per share:
Reported basic earnings per share.. $ 1.59 $ 0.91
Add: Goodwill amortization (net of
tax) ............................. -- .09
------ ------
Adjusted basic earnings per share.... $ 1.59 $ 1.00
====== ======
Diluted earnings per share:
Reported diluted earnings per share.. $ 1.51 $ 0.88
Add: Goodwill amortization (net of
tax) ............................. -- .09
------ ------
Adjusted diluted earnings per share.. $ 1.51 $ 0.97
====== ======
9
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 supersedes SFAS No.
121 and the accounting and reporting provisions of APB Opinion No. 30. The
Statement addresses the accounting for a segment of a business accounted for as
a discontinued operation and the accounting for the disposition of long-lived
assets. The provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001. The Company adopted
the Statement in the first quarter of 2002 with no material effect on the
Company's results of operations.
NOTE 4 - OPERATING SEGMENTS
For purposes of making operating decisions and assessing performance,
management regards The PrivateBank (Chicago), The PrivateBank (St. Louis),
Wealth Management and the Holding Company as four operating segments. The
Company's investment portfolios are included in total assets and reported in the
results of The PrivateBank (Chicago) and The PrivateBank (St. Louis),
respectively. The business segments summarized below and in the following tables
are primarily managed with a focus on various performance objectives including
total assets, total deposits, borrowings, gross loans, total capital and net
income.
THE PRIVATEBANK (CHICAGO)
The PrivateBank (Chicago), through its main office located in downtown
Chicago as well as six full-service Chicago suburban locations, provides
personal and commercial banking services primarily to affluent individuals,
professionals, entrepreneurs and their business interests.
The PrivateBank (Chicago)'s commercial lending products include lines
of credit for working capital, term loans for equipment and letters of credit to
support the commitments made by its clients. Non-credit products include
lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, other cash management products and insurance. The
PrivateBank (Chicago) offers a full range of real estate lending products
including fixed and floating rate permanent and mini-permanent mortgages,
construction and commercial real estate loans. Personal loans include
installment loans and lines of credit, home equity loans and a wide variety of
home mortgage loans.
Individual banking services include interest bearing checking, money
market accounts, certificates of deposit, ATM/debit cards and investment
brokerage accounts. Additionally, The PrivateBank (Chicago) offers secured and
unsecured personal loans and lines of credit. Through The PrivateBank
(Chicago)'s affiliations with Mesirow Financial, Inc. and Sterling Investment
Services, Inc., clients have access to insurance products and securities
brokerage services. The PrivateBank (Chicago) also offers domestic and
international wire transfers and foreign currency exchange. During the second
quarter of 2002, the PrivateBank (Chicago) introduced an Index Powered
Certificate of Deposit product ("IPCD") with a five-year term. This non-fee
based, FDIC-insured product is a five-year certificate of deposit with a yield
based on the performance of the S&P 500.
10
THE PRIVATEBANK (CHICAGO)
-------------------------
SEPTEMBER 30,
2002 2001
---- ----
(IN THOUSANDS)
Total gross loans.................. $ 815,230 $659,043
Total assets....................... 1,265,061 975,724
Total deposits..................... 1,055,224 758,641
Total borrowings................... 91,672 115,706
Total capital...................... 105,540 78,781
Year-to-date net income............ 9,697 6,321
THE PRIVATEBANK (ST. LOUIS)
The PrivateBank (St. Louis), through its main office located in St.
Louis, Missouri, provides personal and commercial banking services primarily to
affluent individuals, professionals, entrepreneurs and their business interests.
The PrivateBank (St. Louis) offers a full range of real estate lending
products including fixed and floating rate permanent and mini-permanent
mortgages and construction loans. Personal loans include installment loans and
lines of credit, home equity loans and a wide variety of home mortgage loans.
Commercial lending products provided by The PrivateBank (St. Louis) include
lines of credit for working capital, term loans for equipment and letters of
credit to support the commitments made by its clients. Non-credit products
include lock-box, cash concentration accounts, merchant credit card processing,
electronic funds transfer, other cash management products and insurance.
Individual banking services include interest bearing checking, money market
deposit accounts, certificates of deposit, ATM/debit cards and investment
brokerage accounts. The PrivateBank (St. Louis) also offers domestic and
international wire transfers and foreign currency exchange.
THE PRIVATEBANK (ST. LOUIS)
---------------------------
SEPTEMBER 30,
2002 2001
---- ----
(IN THOUSANDS)
Total gross loans................... $ 99,538 $58,011
Total assets........................ 132,986 66,557
Total deposits...................... 108,103 42,609
Total borrowings.................... 11,500 17,000
Total capital....................... 12,068 6,682
Year-to-date net income (loss)...... 527 (509)
WEALTH MANAGEMENT
Wealth Management includes investment management, personal trust and
estate services, custodial services, retirement accounts and brokerage,
financial planning, and investment services. Investment management professionals
work with wealth management clients to define objectives, goals and strategies
of the clients' investment portfolios. Wealth Management personnel assist trust
clients with the selection of an outside portfolio manager to direct account
investments. Trust and estate account administrators work with clients and their
attorneys to establish estate plans. Consistent with the Company's philosophy,
11
Wealth Management emphasizes a high level of personal service, including prompt
collection and reinvestment of interest and dividend income, weekly valuation,
tracking of tax information, customized reporting and ease of security
settlement.
WEALTH MANAGEMENT
-----------------
SEPTEMBER 30,
-------------
2002 2001
---- ----
(IN THOUSANDS)
Trust assets under administration... $693,869 $684,842
Trust fee revenue................... 2,187 2,028
Year-to-date net income............. 240 389
The following table indicates the breakdown of our trust assets under
administration at September 30, 2002 by account classification and related gross
revenue for the nine months ended September 30, 2002:
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2002
------------------------
ACCOUNT TYPE MARKET VALUE REVENUE
------------ ------------ -------
(IN THOUSANDS)
Personal trust--managed.............. $231,715 $1,016
Agency--managed...................... 139,763 667
Custody............................. 270,498 441
Employee benefits--managed........... 51,893 63
-------- ------
Total............................ $693,869 $2,187
======== ======
HOLDING COMPANY ACTIVITIES
Holding Company Activities consist of parent company only matters. The
Holding Company's most significant assets are its net investments in its two
banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis).
During the first quarter 2001, in connection with the issuance of $20.0 million
of 9.50% trust preferred securities, the Holding Company issued $20.0 million of
9.50% subordinated debentures which are accounted for as long-term debt and also
qualify as Tier 1 and Tier 2 capital (see note 9). The Tier 1 qualifying amount
is limited to 25% of Tier 1 capital under Federal Reserve regulations. The
excess amount qualifies as Tier 2 capital. Holding Company Activities are
reflected primarily by interest expense on borrowings and operating expenses.
Recurring holding company operating expenses consist of compensation
(amortization of restricted stock awards, other salary expense) and
miscellaneous professional fees. In May of 2002, PrivateBancorp, Inc. acquired
an office building located in St. Charles, Illinois, for $1.8 million from Towne
Square Realty. The St. Charles location of The PrivateBank (Chicago) continues
to lease space in the building and pays rent to the Holding Company at the same
terms and conditions as was paid to the prior owner.
12
HOLDING COMPANY ACTIVITIES
--------------------------
SEPTEMBER 30,
-------------
2002 2001
---- ----
(IN THOUSANDS)
Total assets....................... $121,619 $87,037
Total borrowings................... 22,250 5,250
Long-term debt - trust preferred
securities...................... 20,000 20,000
Interest expense................... 1,857 1,568
Total capital...................... 79,281 62,087
Year-to-date net loss.............. (2,677) (1,919)
The following table reconciles the differences between the sum of the
reportable segments and the reported consolidated balance of total assets:
TOTAL ASSETS
------------
SEPTEMBER 30,
-------------
2002 2001
---- ----
(IN THOUSANDS)
Sum of reportable segments.......... $1,519,666 $1,129,318
Adjustments......................... (115,340) (87,343)
---------- ----------
Consolidated PrivateBancorp, Inc.... $1,404,326 $1,041,975
========== ==========
The adjustments to total assets presented in the table above represent
the elimination of the net investment in banking subsidiaries in consolidation,
the elimination of the Company's cash that is maintained in a subsidiary bank
account, the reclassification of the unearned discount of loans and the
reclassification related to current and deferred taxes.
NOTE 5 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments
as of September 30, 2002 have not materially changed on a relative basis from
the carrying values and estimated fair values of financial instruments disclosed
as of December 31, 2001, except for the fair value of the interest rate swap
executed by the Company, which is recorded at a fair value of $3.0 million as of
September 30, 2002, an increase of $1.3 million since December 31, 2001. In 2001
we entered into an interest rate swap transaction in which we agreed to receive
a fixed rate in exchange for payment of a floating rate based on an agreed-upon
notional amount. The fair value of the swap was $1.7 million on December 31,
2001. The interest rate swap has been designated as a fair value hedge of a
fixed-rate $25.0 million advance with the Federal Home Loan Bank of Chicago
(FHLB).
The Company entered into a $25 million swap during the third quarter
of 2002, swapping the 10-year rate for 3-month LIBOR to act as an economic hedge
of a portion of the Company's available-for-sale municipal securities portfolio.
The September 30, 2002 fair market value adjustment on this swap resulted in the
trading loss of $662,000 with a corresponding derivative liability of the same
amount. This swap does not qualify for hedge accounting treatment, therefore,
the mark-to-market adjustment flows through earnings.
13
NOTE 6 -- OTHER COMPREHENSIVE INCOME
Change in the fair value of securities available-for-sale is presented
on a net basis on the Consolidated Statement of Changes in Stockholders' Equity.
The following table discloses the changes in other accumulated comprehensive
income for the nine months ended September 30, 2002 and 2001, on a gross basis
(in thousands):
SEPTEMBER 30, 2002
------------------
BEFORE NET OF
TAX TAX TAX
AMOUNT EXPENSE AMOUNT
------ ------- ------
Unrealized gains on securities available-for-sale--
Unrealized holding gains, net..................... $ 11,035 $ 2,383 $ 8,652
Less: reclassification adjustment for net gains
included in net income......................... 324 70 254
-------- -------- -------
Unrealized gains, net............................. $ 10,711 $ 2,313 $ 8,398
======== ======== =======
SEPTEMBER 30, 2001
------------------
BEFORE NET OF
TAX TAX TAX
AMOUNT EXPENSE AMOUNT
------ ------- ------
Unrealized gains on securities available-for-sale--
Unrealized holding gains, net..................... $ 4,881 $ 1,323 $ 3,558
Less: reclassification adjustment for net gains
included in net income......................... 904 245 659
------- ------- -------
Unrealized gains, net............................. $ 3,977 $ 1,078 $ 2,899
======= ======= =======
14
NOTE 7 -- CAPITAL TRANSACTIONS
During the third quarter of 2002, the Company contributed capital of
$1.0 million to The PrivateBank (St. Louis) to support growth at this
subsidiary.
NOTE 8 -- FUNDS BORROWED
A summary of all funds borrowed and outstanding at September 30, 2002,
December 31, 2001 and September 30, 2001 is presented in the table below:
CURRENT
FUNDS BORROWED: RATE MATURITY 09/30/02 12/31/01 09/30/01
--------------- ---- -------- -------- -------- --------
Subordinated note 3.75% 02/11/07 5,000 5,000 5,000
FHLB fixed advance (2) 6.50% 10/23/05 26,540 24,886 25,000
FHLB fixed advance 6.21% 12/05/03 30,000 30,000 30,000
FHLB fixed advance 2.21% 07/22/03 1,000 1,000 1,000
FHLB fixed advance 2.74% 07/17/03 1,000 - -
FHLB fixed advance 2.46% 06/16/03 500 - -
FHLB fixed advance 2.70% 05/08/03 1,000 - -
Borrowing under revolving line of credit
facility 3.50% 04/11/03 17,250 5,000 250
FHLB fixed advance 2.98% 03/10/03 1,000 - -
FHLB fixed advance 2.38% 01/13/03 1,000 - -
FHLB fixed advance 5.89% 12/20/02 - - 1,000
FHLB fixed advance 5.89% 12/20/02 1,000 1,000 -
FHLB fixed advance 2.39% 11/12/02 5,000 5,000 -
FHLB fixed advance 5.91% 06/21/02 - 500 500
FHLB fixed advance 4.21% 05/13/02 - 1,000 1,000
FHLB fixed advance 5.02% 03/06/02 - 1,000 1,000
FHLB fixed advance 4.30% 02/01/02 - 25,000 25,000
FHLB fixed advance 5.21% 01/22/02 - 1,000 1,000
FHLB fixed advance 6.49% 11/13/01 - - 2,000
FHLB open line advance 1.74% daily - 25,000 -
Fed funds purchased 2.11% daily 29,000 103,000 40,000
Demand repurchase agreements (1) 1.60% daily 6,132 3,102 5,206
-------- -------- --------
Total funds borrowed........................ $125,422 $231,488 $137,956
======== ======== ========
________________
(1) Demand repurchase agreements are a form of retail repurchase agreements
offered to certain clients of The PrivateBank (Chicago). Funds are
swept each business day from the client's demand deposit account. These
amounts are not deposits and are not insured, but are secured by a pool
of securities pledged specifically for this purpose.
(2) This FHLB advance is subject to a fair value hedge utilizing an
interest rate swap with a fair value of $3.0 million. The contractual
par amount on the advance is $25.0 million.
15
On February 11, 2002, the Company renewed the term on an $18.0 million
revolving credit facility with a commercial bank originally entered into on
February 11, 2000. On April 11, 2002, the loan agreement was amended and the
revolving line was increased to $25.0 million. The interest rate on borrowings
under this revolving line resets quarterly, and is based on, at our option,
either the lender's prime rate or three-month LIBOR plus 120 basis points with a
floor of 3.50%. The Company has elected to pay interest based on the three-month
LIBOR rate plus 120 basis points. The initial rate of interest on the revolver
was 7.20%, and most recently reset to 3.50% on September 30, 2002. The
collateral for this borrowing consists of the common stock of The PrivateBank
(Chicago) and The PrivateBank (St. Louis), which is held in custody by the
lender. As of September 30, 2002, the outstanding balance was $17.25 million.
On February 11, 2000, the Company entered into a subordinated note
issued to Johnson International, Inc. and subsequently sold to a third party, in
the principal amount of $5.0 million. The interest on the subordinated note is
reset each quarter based on the three-month LIBOR rate. The note is payable in
full on or before February 11, 2007, and provides for certain rate escalation
beginning after February 11, 2002. On February 11, 2002, the interest rate
increased from LIBOR +50 basis points to LIBOR +200 basis points. This pricing
is in effect until February 11, 2004, at which point the pricing increases to
LIBOR +350 until maturity on February 11, 2007. The average rate of interest on
the subordinated note was 3.84% during the third quarter of 2002 compared to
4.37% during the third quarter of 2001 and most recently reset to 3.75% on
August 11, 2002. The Company has the right to repay the subordinated note at any
time after giving at least 30 days, but not more than 60 days advance notice.
NOTE 9 -- LONG TERM DEBT -- TRUST PREFERRED SECURITIES
Effective February 8, 2001, PrivateBancorp Capital Trust I, a newly
created Delaware business trust and wholly-owned finance subsidiary of the
Company, issued 2,000,000 shares (including the underwriters' over-allotment) of
9.50% trust preferred securities, which represent preferred undivided interests
in the assets of the trust. The sole assets of the trust are 9.50% junior
subordinated debentures issued by the Company with a maturity date of December
31, 2030.
Subject to certain limitations, the Company has the right to defer
payment of interest on the debentures at any time, or from time to time, for a
period not to exceed 20 consecutive quarters. The trust preferred securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
debentures at maturity or their earlier redemption. At the option of the
Company, the debentures may be redeemed in whole or in part prior to maturity on
or after December 31, 2005, if certain conditions are met, and only after the
Company has obtained Federal Reserve approval, if then required under applicable
guidelines or regulations.
The Company has guaranteed the payment of distributions on and payments
upon liquidation or redemption of the trust preferred securities, in each case
to the extent of funds held by the trust. The Company and the trust believe
that, taken together, the obligations of the Company under the guarantee, the
debentures and other related agreements provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of all of the
obligations of the trust under the trust preferred securities.
16
The trust preferred securities are recorded as long-term debt of the
Company. The aggregate principal amount of the trust preferred securities
outstanding is $20 million. As of September 30, 2002, the entire amount of the
preferred securities is eligible for treatment as Tier I capital as allowed by
the Federal Reserve. At September 30, 2002, the unamortized balance of the
underwriting commissions paid and offering expenses was $1.1 million and is
classified as part of other assets on the balance sheet. This amount is being
amortized on a straight-line basis until maturity at $9,764 per quarter. The
amortization is recognized as interest expense on the income statement. In the
event the Company exercises its right to redeem the securities prior to
maturity, any unamortized commissions would be expensed upon redemption.
NOTE 10 -- ACQUISITION
On September 5, 2002, the Company announced that it signed a definitive
agreement to acquire a controlling interest in Lodestar Investment Counsel,
which is anticipated to be completed in the fourth quarter 2002. Lodestar is a
Chicago-based investment advisor with $464.0 million of assets under management
at August 31, 2002. Lodestar manages equity, balanced, and fixed
income accounts primarily for high net-worth individuals, retirement plans, and
charitable organizations with investable assets in excess of $1.0 million, and
shares a similar focus on highly personalized client service. Lodestar will
operate as a subsidiary of PrivateBancorp, Inc. and will continue to be managed
independently.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
PrivateBancorp, Inc. ("the Company") was organized as a Delaware
corporation in 1989 to serve as the holding company for a Chicago-based de novo
bank designed to provide highly personalized financial services primarily to
affluent individuals, professionals, entrepreneurs and their business interests.
Through the Company's banking subsidiaries, The PrivateBank and Trust Company
(The PrivateBank (Chicago)) and The PrivateBank (St. Louis), the Company
provides its clients with traditional personal and commercial banking services,
lending programs, and wealth management services. Using the European tradition
of "private banking" as the model, the Company strives to develop a unique
relationship with clients, utilizing a team of managing directors to serve the
clients' individual and corporate banking needs, and tailoring products and
services to meet such needs. Currently, the Company has seven Chicago-area
offices: downtown Chicago, Wilmette, Oak Brook, St. Charles, Lake Forest,
Winnetka, and Geneva, Illinois. During 2000, the Company expanded to the St.
Louis market where it opened a new federal savings bank, The PrivateBank (St.
Louis). Currently, the Company operates one location in the St. Louis market.
Managing directors are strategically located at all of these locations.
For financial information regarding the Company's four separate lines
of business, The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth
Management and Holding Company Activities, see "Note 4 -- Operating Segments" to
the unaudited consolidated financial statements of the Company included in this
report.
The profitability of our operations depends on our net interest income,
provision for loan losses, non-interest income, and non-interest expense. Net
interest income is dependent on the amounts and yields of interest-earning
assets as compared to the amounts and rates on interest-bearing liabilities. Net
interest income is sensitive to changes in market rates of interest as well as
to the execution of our asset/liability management strategy. The provision for
loan losses reflects the cost of credit risk in the loan portfolio and is
affected by changes in the loan portfolio, management's assessment of the
collectability of the loan portfolio, loss experience, as well as economic and
market factors.
Non-interest income consists primarily of net security gains (losses),
trading losses on interest rate swap, wealth management fee income, and to a
lesser extent, fees for ancillary banking services. 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 the same level of service charge income
typical of many retail banks.
Non-interest expense includes salaries and employee benefits as well as
occupancy, data processing, marketing, professional fees, insurance and other
expenses. Non-interest expenses are influenced by the growth of operations. Our
growth directly affects the majority of our expense categories. Profitability
and expense ratios were negatively impacted during the second quarter of 2001
due to the start-up nature of operations in St. Louis. The PrivateBank (St.
Louis) began to operate profitably during the fourth quarter of 2001 and has had
a positive impact on our profitability in 2002. For the nine months ended
September 30, 2002, The PrivateBank (St. Louis) had earnings of $527,000 versus
a loss of $509,000 in the prior year period. During the remainder of 2002, we
expect profitability and expense ratios to continue to improve relative to 2001.
18
On September 5, 2002, the Company announced that it signed a definitive
agreement to acquire a controlling interest in Lodestar Investment Counsel,
which is anticipated to be completed in the fourth quarter 2002. Lodestar is a
Chicago-based investment advisor with $464.0 million of assets under management
at August 31, 2002. Lodestar manages equity, balanced, and fixed income accounts
primarily for high net-worth individuals, retirement plans, and charitable
organizations with investable assets in excess of $1.0 million, and shares the
Company's focus on highly personalized client service. Lodestar will operate as
a subsidiary of PrivateBancorp, Inc. and will continue to be managed
independently.
The Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our unaudited
consolidated financial statements included herein. Reference should also be made
to our accounting policies set out in the notes to the consolidated financial
statements. Certain critical policies involve estimates and assumptions by
management. By their nature, changes in these assumptions and estimates could
significantly affect our financial position or results of operations. Actual
results could differ from those estimates. Estimates and judgments regarding the
determination of the adequacy of the reserve for loan losses, as described in
both Management's Discussion and Analysis and in the financial statement notes
included in the Company's Form 10-K for the year ended December 31, 2001, is of
particular significance to us. In addition, effective January 1, 2002, we
adopted SFAS No. 142, which requires an annual impairment test of goodwill.
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001
NET INCOME
Net income for the third quarter ended September 30, 2002 was $3.0
million, an increase of 91% over third quarter 2001 net income of $1.6 million.
Earnings per share increased 81% to $0.58 per diluted share for the third
quarter 2002 compared to third quarter 2001 earnings per diluted share of $0.32.
Net income for the nine months ended September 30, 2002 increased 82% to $7.8
million compared to $4.3 million for the same period last year. Earnings per
share grew from $0.88 per diluted share for the nine months ended September 30,
2001 to $1.51 per diluted share for the nine months ended September 30, 2002.
The table in Note 3 to the unaudited financial statements included in this
report presents the impact on diluted earnings per share for September 30, 2002
excluding goodwill amortization net of tax. The increase in net income during
the third quarter 2002 reflects the positive impact on net interest income and
net interest margin that resulted from growth in average earning assets,
continued high credit quality and improved operating efficiencies as compared to
the prior year quarter.
For the remainder of 2002, we expect to experience continued growth in
our balance sheet and in earnings. Based on our strong earnings performance and
absent unanticipated circumstances, we expect our earnings will meet or exceed
the recently revised high end of current analysts' estimates for 2002 of $2.10
per share. For 2003, we are targeting a minimum 15% return on average equity and
a minimum 15% growth in earnings per share. Additionally, we have a goal of
growing fee-based income to 30% of total revenues by the end of 2005.
As of September 30, 2002, the Company had outstanding stock options to
purchase a total of 560,515 common shares, all of which are considered "in the
money" based on the average stock price for the period and therefore are taken
into account for purposes of calculating diluted earnings per share. The
dilution calculation is based on the number of
19
new shares the Company would have had to issue to satisfy option exercises
assuming all "in the money" options were exercised and that the exercise
proceeds payable to the Company were used to purchase shares in the market at
the average stock price for the earnings period. The remaining number of shares
issuable upon the option exercises are assumed to have been issued and to be
outstanding for purposes of computing diluted earnings per share. The following
table illustrates what the impact on diluted earnings per share for the nine
months ended September 30, 2002 would have been assuming parallel changes in the
period-end market value and average market value of the Company's stock over the
price range shown. The table illustrates that diluted earnings per share would
have been somewhat negatively impacted if the Company's closing stock price had
been higher, since under the treasury stock method, it is assumed the Company
would have had to issue more shares for purposes of computing diluted earnings
per share. Conversely, at lower stock prices, the resulting diluted earnings per
share would be somewhat higher since the Company would have had to issue fewer
shares for purposes of the calculation. The impact of stock price changes on the
dilutive effect of options would be more significant if all of the options were
not in the money within the illustrated stock price range.
ILLUSTRATIVE TABLE REGARDING CALCULATION OF DILUTED EPS UNDER VARYING MARKET
VALUE SCENARIOS
PROFORMA
PRO FORMA DILUTED EPS
ASSUMED ASSUMED DILUTIVE FOR THE
CLOSING AVERAGE SHARES NINE MONTHS
ASSUMED SCENARIOS MARKET VALUE MARKET VALUE (IN 000'S) ENDED 9/30/02
----------------- ------------ ------------ ---------- -------------
ACTUAL AS REPORTED (9/30/02) $30.57 $26.80(1) 259 $1.51
------ --------- --- -----
Decrease $10...................... $20.57 $16.80 120 $1.55
Decrease $5....................... 25.57 21.80 199 1.53
Increase $5...................... 35.57 31.80 298 1.50
Increase $10..................... 40.57 36.80 327 1.49
Increase $15..................... 45.57 41.80 350 1.48
Increase $20..................... 50.57 46.80 367 1.48
Increase $25..................... 55.57 51.80 381 1.47
- ------------------
(1) Average market value is calculated by averaging each trading day's high
and low sale price on the NASDAQ National Market.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees
earned on earning assets and interest expense paid on deposits and borrowings.
Net interest margin represents net interest income on a tax equivalent basis as
a percentage of average earning assets during the period. Net interest margin
reflects the spread between average yields earned on interest earning assets and
the average rates paid on interest bearing deposits and borrowings. The volume
of non-interest bearing funds, largely comprised of demand deposits and capital,
also affects the net interest margin.
Net interest income on a tax equivalent basis totaled $11.2 million for
the three months ended September 30, 2002, an increase of 48% over third quarter
2001 net interest income of $7.6 million, due to growth in average earning
assets between periods as well as improvements in net interest margin. Average
earning assets during the period were $1.3
20
billion, compared to $940.4 million in the prior year quarter, an increase of
36%. Net interest margin (on a tax equivalent basis) for the three months ended
September 30, 2002 was 3.46%, up from 3.17% in the prior year third quarter and
down from 3.53% in the second quarter of 2002. The margin compression during the
third quarter of 2002 reflects a 13 basis point decrease in yields on average
earning assets offset by a 6 basis point decrease in the costs of average
interest-bearing liabilities. The decrease in asset yields is primarily due to
lower mortgage rates which impacted new loan yields, loan refinancings and
yields on our mortgage-backed securities. During the fourth quarter of 2002, we
expect to experience continued compression in net interest margin, as compared
to third quarter 2002, as market rates of interest have recently begun to
decrease from interest rate levels at September 30, 2002.
Net interest income on a tax equivalent basis was $31.0 million during
the nine months ended September 30, 2002 compared to $21.2 million for the same
period in 2001, an increase of 46%. Net interest margin (on a tax equivalent
basis) was 3.40% for the nine months ended September 30, 2002, up from 3.09% in
the prior year period and 3.36% in the second quarter of 2002. The improvement
in net interest margin compared to the second quarter of 2002 was primarily
attributable to decreases in our cost of funds resulting from maturing funding
sources that have been replaced at lower rates.
21
The following tables present a summary of our net interest income and
related net interest margin, calculated on a tax equivalent basis (dollars in
thousands):
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2002 2001
-------------------------------- --------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
Short-term investments........... $2,585 $38 5.68% $2,429 $23 3.70%
Investment securities(1)......... 385,217 5,313 5.50% 248,407 4,221 6.80%
Loans, net of unearned
discount(2)...................... 887,720 13,704 6.07% 689,558 12,785 7.30%
---------- ------- -------- -------
Total earning assets............. $1,275,522 $19,055 5.90% $940,395 $17,029 7.16%
========== ======= ======== =======
Interest-bearing deposits........ $1,041,397 $6,067 2.31% $707,780 $7,356 4.12%
Funds borrowed................... 119,714 1,304 4.27% 125,623 1,637 5.10%
Long-term debt - Trust Preferred
Securities.................... 20,000 485 9.70% 20,000 485 9.70%
---------- ------- -------- -------
Total interest-bearing
liabilities................... $1,181,111 7,856 2.63% $853,403 $9,478 4.40%
========== ======= ======== =======
Tax equivalent net interest
income........................ $11,199 $7,551
======= ======
Net interest spread.............. 3.27% 2.76%
Net interest margin.............. 3.46% 3.17%
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
-------------------------------- ---------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
Short-term investments........... $2,758 $63 3.01% $4,862 $231 6.26%
Investment securities(1)......... 377,698 15,882 5.61% 233,508 11,399 6.51%
Loans, net of unearned
discount(2)...................... 829,107 38,517 6.16% 670,235 38,664 7.66%
---------- ------- -------- -------
Total earning assets............. $1,209,563 $54,462 5.98% $908,605 $50,294 7.35%
========== ======= ======== =======
Interest-bearing deposits........ $968,820 $18,021 2.49% $688,945 $23,153 4.49%
Funds borrowed................... 133,364 3,967 3.92% 120,585 4,689 5.13%
Long-term debt - Trust Preferred
Securities(3)................. 20,000 1,454 9.70% 17,918 1,245 9.17%
---------- ------- -------- -------
Total interest-bearing
liabilities................... $1,122,184 $23,442 2.79% $827,448 $29,087 4.69%
========== ======= ======== =======
Tax equivalent net interest
income........................ $31,020 $21,207
======= =======
Net interest spread.............. 3.19% 2.66%
Net interest margin.............. 3.40% 3.09%
__________________
(1) Interest income on tax-advantaged investment securities reflects a tax
equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table
is approximately $756,000 and $517,000 in the third quarters of 2002
and 2001, respectively, and $2.2 million and $1.2 million for the nine
months ended 2002 and 2001, respectively.
(2) Nonaccrual loans are included in the average balances and do not have a
material effect on the average yield. Interest due on non-accruing
loans was not material for the periods presented.
(3) The trust preferred securities pay a 9.50% fixed rate of interest. The
yield for 2001 is based on the interest period from February 8, 2001 to
September 30, 2001 and includes the amortization of underwriting
commissions paid.
22
The following table shows the dollar amount of changes in interest
income (tax-equivalent) and interest expense by major categories of
interest-earning assets and interest-bearing liabilities attributable to changes
in volume or rate, or a mix of both, for the periods indicated. Volume variances
are computed using the change in volume multiplied by the previous period's
rate. Rate variances are computed using the changes in rate multiplied by the
previous period's volume.
THREE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001
CHANGE CHANGE
DUE TO DUE TO CHANGE TOTAL
RATE VOLUME DUE TO MIX CHANGE
---- ------ ---------- ------
(DOLLARS IN THOUSANDS)
Short-term investments................ $ 12 $ 1 $ 2 $ 15
Investment securities................. (814) 2,345 (440) 1,091
Loans, net of unearned discount....... (2,138) 3,646 (589) 919
------- ------ -------- ------
Total interest income.............. (2,940) 5,992 (1,027) 2,025
------- ------ -------- ------
Interest-bearing deposits............. (3,229) 3,465 (1,525) (1,289)
Funds borrowed........................ (263) (76) 6 (333)
Long-term debt - Trust Preferred
Securities......................... -- -- -- --
------- ------ -------- ------
Total interest expense............. (3,492) 3,389 (1,519) (1,622)
------- ------ -------- ------
Net interest income................... $ 552 $2,603 $ 492 $3,647
======= ====== ======== ======
NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001
CHANGE CHANGE
DUE TO DUE TO CHANGE TOTAL
RATE VOLUME DUE TO MIX CHANGE
---- ------ ---------- ------
(DOLLARS IN THOUSANDS)
Short-term investments................ $ (118) $ (99) $ 49 $ (168)
Investment securities................. (1,572) 7,021 (968) 4,481
Loans, net of unearned discount....... (7,519) 9,102 (1,730) (147)
-------- -------- -------- -------
Total interest income.............. (9,209) 16,024 (2,649) 4,166
-------- -------- -------- -------
Interest-bearing deposits............. (10,306) 9,399 (4,226) (5,133)
Funds borrowed........................ (1,091) 490 (121) (722)
Long-term debt - Trust Preferred
Securities......................... 71 143 (6) 208
-------- -------- -------- -------
Total interest expense............. (11,326) 10,032 (4,353) (5,647)
-------- -------- -------- -------
Net interest income................... $ 2,117 $ 5,992 $ 1,704 $ 9,813
======== ======== ======== =======
PROVISION FOR LOAN LOSSES
We maintain an allowance for loan losses that we deem adequate to
absorb credit losses inherent in our loan portfolio. The allowance for loan
losses reflects management's latest assessment of the losses that are probable
and reasonably estimable in the loan portfolio. Our allowance for probable loan
losses is reassessed monthly to determine the appropriate level of the reserve.
Our analysis is influenced by the following factors: the volume and quality of
loans and commitments in the portfolio, loss experience, and economic
conditions. A discussion of the allowance for loan losses and the factors
management considers in assessing the adequacy of the allowance begins on page
29.
23
The provision for loan losses was $828,000 in the third quarter of
2002, versus $1.6 million in the second quarter 2002 and $845,000 in the third
quarter of 2001. The allowance as a percentage of loans was 1.17% as of
September 30, 2002 compared to 1.14% at June 30, 2002 and 1.06% as of September
30, 2001. The increased level of the allowance reflects management's ongoing
assessment of the losses that are probable and reasonably estimable in the loan
portfolio and the effect the current weakened state of the overall economy on
some of our clients.
NON-INTEREST INCOME
Non-interest income increased to $1.4 million in the third quarter of
2002, reflecting an increase of approximately $114,000 or 9% compared to the
third quarter of 2001. The increase in non-interest income is attributable
primarily to an $861,000 increase in banking, trust services and other income
offset by $662,000 in trading losses and an $85,000 decrease in net gains on the
sale of investment securities. The Company recognized $280,000 of net securities
gains during the third quarter 2002, compared to net securities gains of
$365,000 during the third quarter of 2001.
As market interest rates continued to decline to historic lows late in
the third quarter, the value of the Company's long-term tax-exempt
bank-qualified municipal bond portfolio increased from an unrealized gain of
$3.3 million as of June 30, 2002 to $10.4 million as of September 30, 2002. In
order to protect a portion of the portfolio appreciation should rates rise, the
Company entered into a $25 million swap during the third quarter of 2002. The
Company swapped the 10-year rate for 3-month LIBOR to act as an economic hedge
to a portion of the available-for-sale municipal securities in the portfolio.
The September 30, 2002 fair market value adjustment on this swap resulted in the
trading loss of $662,000. Net securities gains of $280,000 during the third
quarter of 2002 included a charge of $520,000 related to a 20% permanent
impairment write-down on the Company's interest-only collateralized mortgage
obligation (CMO) portfolio. At September 30, 2002, the remaining book value of
the interest-only CMO portfolio was $2.6 million.
The following table presents the breakdown of banking, trust services
and other income for the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Trust services........................ $ 685,825 $629,901 $2,187,330 $2,028,319
Residential real estate secondary
market fees........................ 522,226 47,347 1,427,586 191,730
Banking and other services............ 393,115 224,252 1,039,799 658,642
162,000 -- 452,000 --
---------- -------- ---------- ----------
BOLI..................................
Total banking, trust services & other
income............................. $1,763,166 $901,500 $5,106,715 $2,878,691
========== ======== ========== ==========
24
Trust assets under administration increased to $693.9 million at
September 30, 2002 compared to $684.8 million at September 30, 2001, and down
from $733.9 million at June 30, 2002. The 5% decrease in trust assets under
administration since June 30, 2002 is attributable primarily to continued
weakness in the domestic equity markets, offset by new wealth management
business generated during the quarter. Trust fee revenue increased by 9%, or
$56,000, from the prior year quarter to $686,000 for the quarter ended September
30, 2002, but decreased by 12% from $777,000 at June 30, 2002.
For the remainder of 2002, we expect to experience continued pressure
in trust services income due to weakness in the equity markets. Completion of
the acquisition of Lodestar Investment Control, expected to occur in the fourth
quarter of 2002, will provide additional sources of revenue in our wealth
management segment.
Fees from sales of residential loans in the secondary market increased
to $522,000 during the third quarter of 2002 from $47,000 in the prior year
quarter. The increase in fees from sales of residential loans results from new
business and refinancings generated in both our St. Louis and Chicago offices.
During 2002, we have been experiencing increased demand for residential loans as
a result of the historically low level of market interest rates.
For the remainder of 2002, we expect to continue to experience demand
for residential loans as clients refinance current mortgages to take advantage
of current interest rates. We plan to sell these loans in the secondary market,
which will result in continued loan fees upon such sale.
Banking and other income increased by $169,000 to $393,000 for the
third quarter 2002 as compared to the prior year quarter, reflecting growth in
deposit accounts and the implementation of a new fee structure applied on
deposit relationships during 2002. We expect to experience continued growth in
banking and other services fee-based income for the remainder of 2002 as
compared to the same period of 2001.
During the third quarter of 2002, we recognized income of $162,000
related to the increased cash surrender value of a bank owned life insurance
(BOLI) policy that was entered into in the fourth quarter of 2001. On a tax
equivalent basis, the income was $245,455. This policy covers certain high-level
employees who are deemed to be significant contributors to the company. All
employees included in this policy are aware of and have consented to the
coverage. The cash surrender value of BOLI at September 30, 2002 was $10.6
million and is included in other assets on the balance sheet.
25
NON-INTEREST EXPENSE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(IN THOUSANDS) (IN THOUSANDS)
Salaries and employee benefits........ $3,393 $2,303 $10,076 $6,592
Occupancy............................. 1,227 985 3,572 2,833
Professional fees..................... 997 575 2,915 1,849
Marketing............................. 351 275 1,090 889
Data processing....................... 433 303 1,115 875
Postage, telephone and delivery....... 185 200 546 581
Office supplies and printing.......... 106 167 251 359
Insurance............................. 118 88 317 269
Goodwill.............................. - 206 - 618
Other expense......................... 278 239 791 1,163
------ ------ ------- -------
Total non-interest expense............ $7,088 $5,341 $20,673 $16,028
====== ====== ======= =======
Non-interest expense increased to $7.1 million in the third quarter of
2002 from $5.3 million in the third quarter of 2001. The 33% increase in
non-interest expense between periods reflects the continued growth of the
organization during the twelve-month period ended September 30, 2002, is
primarily attributable to increases in salaries and employee benefits resulting
from the growth in the number of employees and compares favorably to the larger
increases in net interest income and non-interest income for the same period.
The elimination of goodwill amortization in 2002 resulted in a favorable impact
of $618,000 to non-interest expense for the nine months ended September 30,
2002. The efficiency ratio improved significantly to 56.3% in the third quarter
of 2002 from 60.6% in the prior year quarter, as growth in revenue contribution
at all locations has outpaced increases in recurring operational costs. On a
tax-equivalent basis, this ratio indicates that in the third quarter of 2002, we
spent 56.3 cents to generate each dollar of revenue, compared to 60.6 cents in
the third quarter of 2001. During the remainder of 2002, we expect to maintain a
range of 55% to 60% for our level of operating efficiency which would compare
favorably to our operating efficiency ratio reported for the comparable periods
of 2001, as revenue generated at the new offices outpaces the increases in
related operating expenses.
Salaries and benefits increased to $3.4 million, or 47% during the
third quarter 2002 as compared to the year ago quarter, reflecting the increased
level of full-time equivalent employees to 176 people at September 30, 2002 as
compared to 145 people at September 30, 2001. Salaries and benefits increased
53% during the first nine months of 2002 to $10.1 million as compared to $6.6
million for the first nine months of 2001. The increase in
26
salaries and employee benefits is a result of the increased scope of operations
and overall growth in the organization as well as the accrual of an increased
performance bonus for management during 2002. Additionally, mortgage banking
commissions for personnel involved in the sale of residential real estate loans,
which amounts have increased during 2002 due to the higher level of mortgage
refinancing activity, are also included in salaries and benefits.
Occupancy expense increased to $1.2 million during the third quarter
2002, reflecting an increase of 25% over the prior year quarter. Occupancy
expense increased to $3.6 million for the first nine months of 2002, from $2.8
million for the first nine months of 2001, reflecting an increase of 26%. The
rental of additional floor space in the downtown Chicago office during 2002 and
the depreciation of fixed assets, software and equipment comprise this increase.
In May of 2002, the Company acquired the office building currently occupied by
the St. Charles location of The PrivateBank (Chicago). The $1.8 million cash
purchase was made based on a fair market value appraisal and was paid to Towne
Square Realty L.L.C., an entity 25% owned by a managing director of The
PrivateBank (Chicago). The St. Charles office of The PrivateBank (Chicago)
currently leases the space from the Company.
Professional fees increased to $1.1 million during the third quarter of
2002, reflecting an increase of 73% over the prior year quarter. During the nine
months ended September 30, 2002, professional fees increased by $1.0 million
over the prior year's first nine months, a 58% increase over prior year. The
increase in professional fees is primarily attributable to information systems
consultation to assist us in the implementation of system upgrades as well as in
the augmentation of our current disaster recovery network. During 2002, the
continued focus on the improvement and upgrade of information technology has
resulted in the investment in more personnel, software and hardware. During
2002, the Company paid cash compensation to the members of the Company's board
of directors in lieu of granting stock options. Professional fees for the third
quarter 2002 include consulting fees paid to a third party for management of the
renovation and improvements made to the floors occupied at the downtown Chicago
location. Additionally, mortgage banking expenses related to the sale of
residential real estate loans, which amounts have increased during 2002 due to
the higher level of mortgage refinancing activity, are included in professional
fees.
During the third quarter 2002, insurance expense increased 34% compared
to the prior year quarter to $118,000 as a result of continued growth in the
number of employees requiring additional insurance coverage. In addition, during
the third quarter 2002, the Company renegotiated all of its insurance coverage
pursuant to maturing policies. Insurance expense for the fourth quarter 2002
will reflect a full quarter expense of the renegotiated policies and will be
approximately 20% higher than the third quarter expense amounts.
Postage, telephone and delivery expenses decreased to $185,000 during
the third quarter 2002, a decrease of 8% over the prior year quarter. Office
supplies and printing costs decreased to $106,000 during the third quarter 2002,
a 37% decrease as compared to the prior year quarter. Office supplies and
printing expenses decreased 30% for the first nine months of 2002 from the
year-ago period's level of $359,000 to $251,000. Office supplies and printing
costs were higher in the prior year quarter primarily due to accumulated check
printing charges that were not passed on to customers.
Data processing fees increased 43% from $303,000 in the third quarter
2001 to $433,000 for the third quarter 2002. Data processing fees increased from
$875,000 for the first nine months of 2001 to $1.1 million for the first nine
months of 2002, an increase of 27%. The increase in data processing expense
during 2002 reflects increased costs associated with the reconfiguration of our
data lines to support our new data line
27
infrastructure that provides complete redundancy of our main operating facility
at one of our bank locations.
Other non-interest expense increased 16% from $239,000 in the prior
year quarter 2001 to $278,000 in the current quarter 2002. For the nine months
ended September 30, 2002, other non-interest expense decreased from $1.2 million
the prior year to $791,000 in the current period, a decrease of 32%. During the
second quarter 2001, the Company recognized charges of $561,000 related to the
resolution of certain items associated with prior system conversions that were
not recurring in 2002.
INCOME TAXES
The following table shows our income before income taxes, applicable
income taxes and effective tax rate for the nine months ended September 30, 2002
and 2001, respectively (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2002 2001
---- ----
Income before taxes.......... $9,935 $5,874
Income tax provision......... 2,148 1,592
Effective tax rate........... 21.6% 27.1%
The lower effective tax rate for the nine months ended September 30,
2002 as compared to the prior year period is primarily attributable to an
increase in the amount of federally tax-exempt municipal investment securities
held in our securities portfolio. Tax-exempt municipal securities increased from
$95.1 million at September 30, 2001 to $131.5 million at September 30, 2002, an
increase of 38%. The effective income tax rate varies from statutory rates
principally due to certain interest income, which is tax-exempt for federal or
state purposes, and certain expenses, which are disallowed for tax purposes.
The Company currently is taxed at a stated federal rate of 34% on its
taxable income. This rate will increase to 35% when the Company's annual taxable
income exceeds $10.0 million. The Company's stated federal tax rate may increase
in 2002 or 2003, and as a result, the tax equivalent adjustment for income on
federally tax-exempt municipal securities will be higher, resulting in a
positive impact on our reported net interest margin.
FINANCIAL CONDITION
TOTAL ASSETS
Total assets increased to $1.4 billion at September 30, 2002, an
increase of $227.6 million, or 19% over total assets of $1.2 billion at December
31, 2001, and an increase of $362.4 million, or 35% over total assets of $1.0
billion at September 30, 2001. The balance sheet growth during the nine months
ended September 30, 2002 was accomplished mainly through loan growth throughout
the Company and growth in the investment securities portfolio. The growth in
assets was funded through excess liquidity that resulted from the growth in core
deposits and our continued reliance on brokered deposits.
28
LOANS
Total loans increased to $913.2 million, an increase of $132.4 million,
or 17%, from $780.8 million at December 31, 2001, and an increase of $197.1
million, or 28%, from $716.1 million at September 30, 2001.
The PrivateBank (St. Louis) had loans outstanding of $99.5 million as
of September 30, 2002, growth of $26.0 million since December 31, 2001. The
PrivateBank (Chicago) generated the remaining loan growth of $106.4 million
experienced by the Company since December 31, 2001. All of The PrivateBank
(Chicago) offices posted strong gains in loan volume on a quarter over quarter
basis.
The following table sets forth our loan portfolio net of unearned
discount by category (in thousands) at the following dates:
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
2002 2001 2001
---- ---- ----
LOANS
Commercial real estate........... $427,303 $310,869 $273,970
Residential real estate.......... 79,269 89,889 91,844
Commercial....................... 162,341 163,279 141,066
Personal(1)...................... 134,801 124,206 116,775
Construction..................... 109,483 92,528 92,462
-------- -------- --------
Total loans................... $913,197 $780,771 $716,117
======== ======== ========
- -------------------
(1) Includes home equity loans and overdraft lines.
ALLOWANCE FOR LOAN LOSSES
Loan quality is continually monitored by management and reviewed by the
loan/investment committees of the boards of directors of the banks on a monthly
basis. In determining the adequacy of the allowance for loan losses, management
considers a variety of factors, including assessment of the credit risk of the
portfolio, delinquent loans, evaluation of current economic conditions in the
market area, actual charge-offs during the year and historical loss experience.
We maintain an allowance for loan losses that we deem adequate 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
based on review of available and relevant information, including probable losses
that have been identified relating to specific borrowing relationships, as well
as probable losses inherent in the loan portfolio and credit undertakings that
are not specifically identified. The unallocated portion of the reserve involves
the exercise of judgment by management and reflects various considerations,
including management's view that the reserve should have a margin that
recognizes the imprecision inherent in the process of estimating credit losses.
The allowance for loan losses as a percentage of total loans was 1.17%
at September 30, 2002, 1.06% at December 31, 2001 and 1.06% at September 30,
2001. Management believes that the allowance for loan losses is adequate to
provide for estimated probable credit losses inherent in the loan portfolio. For
the remainder of 2002, as the Company continues to monitor current economic
conditions and the resulting impact on specific borrower situations, the
allowance for loan losses will be adjusted accordingly.
Net charge-offs, primarily related to one commercial real estate
credit, totaled $95,000 for the quarter ended September 30, 2002 versus net
charge-offs of $183,000 in
29
the year earlier period and $490,000 in the second quarter 2002. The provision
for loan losses was $828,000 in the third quarter of 2002, versus $845,000 in
the third quarter of 2001 and $1.6 million in the second quarter of 2002.
Management judges the adequacy of the allowance by formally reviewing and
analyzing potential problem credits, which entails assessing current and
historical loss experience, loan portfolio quality, volume and trends,
prevailing economic and business conditions, specific loan review and other
relevant factors.
Following is a summary of changes in the allowance for loan losses for
the nine months ended September 30, 2002 and 2001 (in thousands):
2002 2001
---- ----
Balance, January 1................................ $ 8,306 $6,108
Provisions charged to earnings.................... 2,948 1,922
Loans charged-off, net of recoveries.............. (612) (472)
------- ------
Balance, September 30............................. $10,642 $7,558
======= ======
NONPERFORMING LOANS
The following table classifies our non-performing loans as of the dates shown:
9/30/02 6/30/02 3/31/02 12/31/01 9/30/01
------- ------- ------- -------- -------