SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR TRANSITION PERIOD FROM ________ TO ________
Commission File Number: 000-25887
---------
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter.)
DELAWARE 36-3681151
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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 by checkmark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). 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 JULY 30, 2004
- -------------------------------------------------------------------------------
Common, no par value 20,311,600
===============================================================================
PRIVATEBANCORP, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
Page
Number
------
Selected Financial Data........................................................3
Part I ......................................................................5
Item 1. Financial Statements.........................................5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..........19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.........................................43
Item 4. Controls and Procedures.....................................46
Part II .....................................................................47
Item 1. Legal Proceedings...........................................47
Item 2. Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity Securities.................47
Item 3. Defaults upon Senior Securities.............................47
Item 4. Submission of Matters to a Vote of
Security Holders..........................................47
Item 5. Other Information...........................................48
Item 6. Exhibits and Reports on Form 8-K............................49
Signatures....................................................................50
2
SELECTED FINANCIAL DATA
The following table summarizes certain selected unaudited consolidated
financial information of PrivateBancorp, Inc. at or for the periods indicated.
This information should be read in conjunction with the unaudited consolidated
financial statements and related notes included pursuant to Item 1 of this
report.
QUARTER ENDED
-------------------------------------------------------------------
06/30/04 03/31/04 12/31/03 09/30/03 06/30/03
------------ ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
INTEREST INCOME:
Loans, including fees............... $ 18,702 $ 17,680 $ 16,588 $ 15,830 $ 15,208
Securities.......................... 7,820 7,929 7,773 6,333 5,148
Federal funds sold and
interest-bearing deposits....... 4 6 6 6 31
-------- -------- -------- --------- ---------
Total interest income............ 26,526 25,615 24,367 22,169 20,387
-------- -------- -------- --------- ---------
INTEREST EXPENSE:
Interest-bearing demand deposits.... 66 147 143 134 148
Savings and money market deposit
accounts......................... 2,541 1,874 1,697 1,375 1,644
Brokered deposits and other time
deposits......................... 4,548 4,072 4,300 4,346 4,348
Funds borrowed...................... 1,552 1,486 970 1,016 1,204
Long-term debt --trust preferred
securities....................... 485 485 485 485 485
-------- -------- -------- --------- ---------
Total interest expense........... 9,192 8,064 7,595 7,356 7,829
-------- -------- -------- --------- ---------
Net interest income (8).......... 17,334 17,551 16,772 14,813 12,558
Provision for loan losses........... 724 1,326 1,595 1,092 730
-------- -------- -------- --------- ---------
Net interest income after provision
for loan losses.................. 16,610 16,225 15,177 13,721 11,828
-------- -------- -------- --------- ---------
Wealth management, mortgage banking
and other income................. 3,472 2,980 2,889 3,657 3,181
Securities (losses) gains, net...... (1,166) 998 (163) (333) 2,310
Trading gains (losses) on interest
rate swap........................ 1,325 (1,066) 280 765 (1,054)
-------- -------- -------- --------- ---------
Total non-interest income........ 3,631 2,912 3,006 4,089 4,437
-------- -------- -------- --------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits...... 6,057 6,035 5,670 5,338 5,070
Occupancy expense................... 1,350 1,360 1,472 1,403 1,270
Professional fees................... 1,451 1,114 1,189 1,130 1,069
Marketing........................... 703 495 678 855 509
Data processing..................... 513 446 391 376 368
Insurance........................... 207 215 200 186 146
Amortization of intangibles......... 42 42 42 42 42
Other operating expenses............ 897 832 724 1,273 1,282
-------- -------- -------- --------- ---------
Total non-interest expense....... 11,220 10,539 10,366 10,603 9,756
-------- -------- -------- --------- ---------
Minority interest expense.............. 65 67 52 59 44
Income before income taxes.......... 8,956 8,531 7,765 7,148 6,465
-------- -------- -------- --------- ---------
Income tax expense..................... 2,500 2,581 2,042 2,018 1,852
-------- -------- -------- --------- ---------
Net income.......................... $ 6,456 $ 5,950 $ 5,723 $ 5,130 $ 4,613
======== ======== ======== ========= =========
PER SHARE DATA:
Basic earnings......................... $ 0.33 $ 0.31 $ 0.30 $ 0.28 $ 0.30
Diluted earnings....................... 0.31 0.29 0.28 0.27 0.28
Dividends.............................. 0.03 0.03 0.02 0.02 0.02
Book value (at end of period).......... 8.54 8.72 8.47 8.19 6.45
All previously reported share and per share data has
been restated to reflect the 2-for-1 stock split
which occurred on May 31, 2004
3
QUARTER ENDED
-------------------------------------------------------------------
06/30/04 03/31/04 12/31/03 09/30/03 06/30/03
------------ ------------ ------------ ------------ ------------
SELECTED FINANCIAL DATA (AT END OF PERIOD):
Total securities(1)......................... $ 722,582 $ 692,678 $ 699,262 $ 647,433 $ 581,743
Total loans................................. 1,407,586 1,344,707 1,224,657 1,131,706 1,066,919
Total assets................................ 2,199,170 2,139,095 1,984,923 1,857,103 1,759,676
Total deposits.............................. 1,673,404 1,622,899 1,547,359 1,476,047 1,445,590
Funds borrowed.............................. 306,447 297,537 219,563 164,491 170,433
Long-term debt--trust preferred securities.. 20,000 20,000 20,000 20,000 20,000
Total stockholders' equity.................. 173,669 174,041 166,956 161,105 100,340
Wealth management assets under management... 1,590,119 1,576,218 1,494,881 1,320,175 1,264,955
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin(2)(8)................ 3.51% 3.80% 3.82% 3.64% 3.33%
Net interest spread(3)................... 3.24 3.57 3.60 3.43 3.16
Non-interest income to
average assets........................ 0.67 0.57 0.63 0.92 1.06
Non-interest expense to
average assets........................ 2.08 2.08 2.16 2.38 2.33
Net overhead ratio(4).................... 1.41 1.51 1.53 1.46 1.27
Efficiency ratio(5),(8).................. 50.8 49.1 50.1 53.9 55.0
Return on average assets(6).............. 1.20 1.17 1.19 1.15 1.10
Return on average equity(7).............. 14.86 13.87 14.03 14.57 18.81
Fee income to total revenue(8),(9)....... 16.69 14.51 14.69 19.80 20.21
Dividend payout ratio.................... 9.42 10.03 6.89 7.67 6.75
Asset Quality Ratios:
Non-performing loans to total loans 0.06% 0.06% 0.09% 0.17% 0.26%
Allowance for loan losses to:
total loans........................... 1.23 1.23 1.23 1.23 1.22
non-performing loans.................. 2175 1954 1343 676 476
Net charge-offs (recoveries) to
average total loans................... (0.01) (0.03) 0.12 0.09 0.07
Non-performing assets to
total assets.......................... 0.04 0.04 0.06 0.10 0.16
Non-accrual loans to total loans......... 0.01 0.01 0.00 0.05 0.08
Balance Sheet Ratios:
Loans to deposits........................ 84.3% 82.9% 79.1% 76.7% 73.8%
Average interest-earning assets to
average interest-bearing
liabilities........................... 114.9 113.5 113.9 112.4 108.2
Capital Ratios:
Total equity to total assets............. 7.90% 8.14% 8.41% 8.68% 5.70%
Total risk-based capital ratio........... 12.14 12.14 12.71 12.88 8.37
Tier 1 risk-based capital ratio.......... 11.00 11.01 11.59 11.79 7.06
Leverage ratio........................... 7.82 8.03 8.25 8.52 5.23
- ------------------
(1) The entire securities portfolio was classified as "available-for-sale"
for the periods presented.
(2) Net interest income, on a tax-equivalent basis, 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 (tax
equivalent) plus non-interest income.
(6) Net income divided by average total assets.
(7) Net income divided by average common equity.
(8) The company adjusts GAAP reported net interest income by the tax
equivalent adjustment amount to account for the tax attributes on
federally tax exempt municipal securities. For GAAP purposes, tax
benefits associated with federally tax-exempt municipal securities are
reflected in income tax expense. The following table reconciles
reported net interest income to net interest income on a tax equivalent
basis for the periods presented:
RECONCILIATION OF NET INTEREST INCOME TO NET INTEREST INCOME ON A TAX EQUIVALENT BASIS
2Q04 1Q04 4Q03 3Q03 2Q03
------ ------ ------ ------ ------
Net interest income........................ $17,334 $17,551 $16,772 $14,813 $12,558
Tax equivalent adjustment to net
interest income......................... 1,100 1,017 925 772 742
------- ------- ------- ------- -------
Net interest income, tax equivalent basis.. $18,434 $18,568 $17,697 $15,585 $13,300
======= ======= ======= ======= =======
(9) Wealth management, mortgage banking & other income as a percentage of
the sum of net interest income and wealth management, mortgage banking
& other income.
4
PART I
ITEM 1. FINANCIAL STATEMENTS
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
JUNE 30, 2004 2003 JUNE 30, 2003
------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Cash and due from banks.......................... $ 22,414 $ 49,115 $ 51,771
Federal funds sold and other
short-term investments ........................ 1,779 985 9,145
---------- ---------- -----------
Total cash and cash equivalents............... 24,193 50,100 60,916
---------- ---------- -----------
Loans held for sale.............................. 6,419 4,420 12,570
Available-for-sale securities, at fair value..... 722,582 669,262 581,743
Loans, net of unearned discount.................. 1,407,586 1,224,657 1,066,919
Allowance for loan losses........................ (17,304) (15,100) (13,019)
---------- ---------- -----------
Net loans..................................... 1,390,282 1,209,557 1,053,900
---------- ---------- -----------
Goodwill......................................... 20,547 19,242 19,242
Premises and equipment, net...................... 5,711 6,233 6,284
Accrued interest receivable...................... 8,892 7,868 7,159
Other assets..................................... 20,544 18,241 17,862
---------- ---------- -----------
Total assets.................................. $2,199,170 $1,984,923 $ 1,759,676
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits:
Non-interest-bearing.......................... $ 163,543 $ 135,110 $ 110,244
Interest-bearing.............................. 89,810 85,083 79,397
Savings and money market deposit accounts........ 683,205 562,234 497,437
Brokered deposits................................ 413,813 447,948 438,652
Other time deposits.............................. 323,033 316,984 319,860
---------- ---------- ----------
Total deposits................................ 1,673,404 1,547,359 1,445,590
Funds borrowed................................... 306,447 219,563 170,433
Long-term debt --trust preferred securities...... 20,000 20,000 20,000
Accrued interest payable......................... 3,797 5,053 4,892
Other liabilities................................ 21,853 25,992 18,421
---------- ---------- ----------
Total liabilities............................. 2,025,501 1,817,967 1,659,336
========== ========== ==========
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized..... -- -- --
Common stock, without par value, $1 stated value;
39,000,000 shares authorized; 20,344,073,
19,945,849, and 15,574,028 shares
issued and outstanding as of June 30, 2004,
December 31, 2003 and June 30, 2003,
respectively.................................. 20,344 19,707 15,574
Treasury stock................................... (1,662) -- --
Additional paid-in-capital....................... 99,155 93,943 37,930
Retained earnings................................ 57,682 46,193 35,377
Accumulated other comprehensive income........... 3,052 9,909 11,861
Deferred compensation............................ (4,902) (2,796) (402)
---------- ---------- ----------
Total stockholders' equity.................... 173,669 166,956 100,340
---------- ---------- ----------
Total liabilities and stockholders' equity.... $2,199,170 $1,984,923 $1,759,676
========== ========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements. All previously reported
share and per share data has been restated to reflect
the 2-for-1 stock split which occurred on May 31, 2004.
5
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
INTEREST INCOME
Loans, including fees............................. $18,702 $15,208 $36,382 $30,375
Federal funds sold and interest bearing deposits.. 4 31 10 56
------- ------- ------- -------
Securities:
Taxable ..................................... 5,288 3,451 10,879 7,243
Exempt from federal income taxes............. 2,532 1,697 4,870 3,284
Total interest income......................... 26,526 20,387 52,141 40,958
------- ------- ------- -------
INTEREST EXPENSE
Deposits:
Interest-bearing demand........................ 66 148 213 276
Savings and money market deposit accounts...... 2,541 1,644 4,415 3,353
Brokered deposits and other time deposits...... 4,548 4,348 8,620 8,288
Funds borrowed.................................... 1,552 1,204 3,038 2,516
Long-term debt -- trust preferred securities...... 485 485 970 970
------- ------- ------- -------
Total interest expense......................... 9,192 7,829 17,256 15,403
------- ------- ------- -------
Net interest income............................ 17,334 12,558 34,885 25,555
------- ------- ------- -------
Provision for loan losses......................... 724 730 2,050 1,686
------- ------- ------- -------
Net interest income after provision
for loan losses................................ 16,610 11,828 32,835 23,869
------- ------- ------- -------
NON-INTEREST INCOME
Wealth management, mortgage banking
and other income............................... 3,472 3,181 6,452 5,882
Securities (losses) gains, net................... (1,166) 2,310 (168) 2,255
Trading gains (losses) on interest rate swap..... 1,325 (1,054) 259 (1,284)
------- ------- ------- -------
Total non-interest income...................... 3,631 4,437 6,543 6,853
------- ------- ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits.................... 6,057 5,070 12,092 9,848
Occupancy expense, net............................ 1,350 1,270 2,710 2,689
Professional fees................................. 1,451 1,069 2,565 2,353
Marketing......................................... 703 509 1,198 995
Data processing................................... 513 368 960 761
Postage, telephone & delivery..................... 227 212 456 424
Insurance......................................... 207 146 422 314
Amortization of intangibles....................... 42 42 84 84
Other non-interest expense........................ 670 1,070 1,272 1,707
------- ------- ------- -------
Total non-interest expense..................... 11,220 9,756 21,759 19,175
------- ------- ------- -------
Minority interest expense......................... 65 44 132 82
------- ------- ------- -------
Income before income taxes..................... 8,956 6,465 17,487 11,465
------- ------- ------- -------
Income tax provision.............................. 2,500 1,852 5,081 3,249
------- ------- ------- -------
Net income..................................... $ 6,456 $ 4,613 $12,406 $ 8,216
======= ======= ======= =======
Basic earnings per share.......................... $ 0.33 $ 0.30 $ 0.63 $ 0.54
Diluted earnings per share........................ $ 0.31 $ 0.28 $ 0.60 $ 0.50
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 2-for-1 stock split which occurred
on May 31, 2004.
6
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
ADDITIONAL COMPRE- DEFERRED TOTAL
COMMON TREASURY PAID-IN- RETAINED HENSIVE COMPEN- STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS INCOME SATION EQUITY
-------- -------- ---------- ---------- ------------ --------- -------------
BALANCE, JANUARY 1, 2003..... $15,408 $ -- $37,663 $27,784 $ 8,826 $ (589) $ 89,092
Net income................... -- -- 8,216 -- -- 8,216
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............... -- -- -- -- 3,035 -- 3,035
------- ------- ------- ------- ------- ------- --------
Total comprehensive income... -- -- -- 8,216 3,035 -- 11,251
------- ------- ------- ------- ------- ------- --------
Cash dividends declared
($0.04 per share)......... -- -- -- (623) -- -- (623)
Issuance of common stock..... 166 -- 267 -- -- -- 433
Awards granted, net of
forfeitures............... -- -- -- -- -- 120 120
Amortization of deferred
compensation.............. -- -- -- -- -- 67 67
------- ------- ------- ------- ------- ------- --------
BALANCE, JUNE 30, 2003....... $15,574 $ -- $37,930 $35,377 $11,861 $ (402) $100,340
======= ======= ======= ======= ======= ======= ========
BALANCE, JANUARY 1, 2004..... $19,707 $ -- $93,943 $46,193 $ 9,909 $(2,796) $166,956
Net income................... -- -- -- 12,406 -- -- 12,406
Net increase in fair
value of securities
classified as
available-for-sale,
net of income taxes
and reclassification
adjustments............... -- -- -- -- (6,857) -- (6,857)
------- ------- ------- ------- ------- ------- --------
Total comprehensive income... -- -- -- 12,406 (6,857) -- 5,549
------- ------- ------- ------- ======= ------- --------
Cash dividends declared
($0.06 per share)......... -- -- -- (1,205) -- -- (1,205)
Issuance of common stock..... 668 -- 4,466 -- -- -- 5,134
Acquisition of treasury
stock..................... (31) (1,662) 746 -- -- -- (947)
Awards granted, net of (2,599)
forfeitures............... -- -- -- -- -- (2,599)
Amortization of deferred
compensation.............. -- -- -- 288 -- 493 781
------- ------- ------- ------- ------- ------- --------
BALANCE, JUNE 30, 2004....... $20,344 $(1,662) $99,155 $57,682 $ 3,052 $(4,902) $173,669
======= ======= ======= ======= ======= ======= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 2-for-1 stock split which occurred
on May 31, 2004.
7
PRIVATEBANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------------
2004 2003
---------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 12,406 $ 8,216
--------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................................... 816 738
Amortization of deferred compensation, net of forfeitures............. 493 67
Provision for loan losses............................................. 2,050 1,686
Net loss (gain) on sale of securities................................. 168 (2,255)
Trading (gains) losses on interest rate swap.......................... (259) 1,284
Net (increase) decrease in loans held for sale........................ (1,999) 1,750
Decrease in deferred loan fees........................................ (190) (378)
(Increase) decrease in accrued interest receivable.................... (1,025) 2,268
Decrease in accrued interest payable.................................. (1,256) (94)
Increase in other assets.............................................. (2,403) (150)
(Decrease) increase in other liabilities.............................. (448) 2,747
--------- --------
Total adjustments..................................................... (4,053) 7,663
--------- --------
Net cash provided by operating activities............................. 8,353 15,879
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, paydowns, and sales
of available-for-sale securities..................................... 125,451 40,390
Purchase of securities available-for-sale................................ (189,071) (129,544)
Net loan principal advanced.............................................. (182,490) (101,063)
Minority Interest in Lodestar Investment Counsel, LLC.................... 132 --
Acquisition of Corley Financial Corporation.............................. (475) --
Premises and equipment expenditures...................................... (249) (272)
--------- --------
Net cash used in investing activities................................. (246,702) (190,489)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in total deposits........................................... 126,050 240,330
Proceeds from exercise of stock options.................................. 2,376 553
Acquisition of treasury stock............................................ (1,662) --
Dividends paid........................................................... (1,205) (623)
Issuance of borrowings................................................... 176,447 101,433
Repayment of borrowings.................................................. (89,564) (140,954)
--------- --------
Net cash provided by financing activities............................. 212,442 200,739
--------- --------
Net (decrease) increase in cash and cash equivalents..................... (25,907) 26,129
Cash and cash equivalents at beginning of year........................... 50,100 34,787
--------- --------
Cash and cash equivalents at end of period............................... $ 24,193 $ 60,916
========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements. All previously reported share and per share data has
been restated to reflect the 2-for-1 stock split which occurred
on May 31, 2004.
8
PRIVATEBANCORP, INC. AND SUBSIDIARIES
NOTE 1--BASIS OF PRESENTATION
The consolidated financial information of PRIVATEBANCORP, Inc. (the
"Company") and its subsidiaries, The PrivateBank and Trust Company (the "Bank"
or "The PrivateBank (Chicago)"), The PrivateBank (St. Louis) and The PrivateBank
Mortgage Company (the "Mortgage Company") 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 six months ended June 30,
2004 are not necessarily indicative of the results expected for the full year
ending December 31, 2004. 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 June 30, 2004
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes for the year ended December 31, 2003
included in the Company's Annual Report on Form 10-K.
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--ACCOUNTING FOR STOCK-BASED COMPENSATION
Pursuant to SFAS No. 148, Accounting for Stock-Based Compensation (SFAS
No. 148), pro forma net income and pro forma earnings per share are presented in
the following table as if the fair value method of accounting for stock-based
compensation plans had been utilized.
THREE MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income
As reported................... $6,456 $4,613
Pro forma..................... $6,147 4,586
Basic earnings per share
As reported................... $ 0.33 $ 0.30
Pro forma..................... 0.31 0.30
Diluted earnings per share
As reported................... $ 0.31 $ 0.28
Pro forma..................... 0.30 0.28
9
SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
Net income
As reported.................. $12,406 $8,216
Pro forma.................... $11,788 8,162
Basic earnings per share
As reported.................. $ 0.63 $ 0.54
Pro forma.................... 0.60 0.54
Diluted earnings per share
As reported.................. $ 0.60 $ 0.51
Pro forma.................... 0.57 0.50
During the second quarter of 2004, the Company adopted the binomial
method of valuing options for options granted in the second quarter and going
forward. Previously the Black-Scholes method was used, however regulatory and
accounting guidance have recommended the binomial method as it takes into
account more assumptions about a grant's features, and better estimates
employees' likely behavior regarding investments. The binomial model tends to
produce a lower estimate of option value than Black-Scholes.
In determining the fair value of each option grant for purposes of the
above pro forma disclosures, the Company used the following assumptions for
grants made in 2004: dividend yield of 0.40%; risk-free interest rate of 3.60%;
expected lives of 7 years for the stock options; and expected volatility of
approximately 30%, computed from an index of strategic peer company composite
volatility over a one year basis. The following assumptions for grants made in
2003 were used: dividend yield of 0.40%; risk-free interest rate of 4.55%;
expected lives of 10 years for the stock options; and expected volatility of
approximately 46%. During the second quarter 2004, the Company granted 185,200
stock options with an exercise price of $26.89 to certain members of management
that vest over 4 years. Additionally, the Company granted 1,200 stock options
with an exercise price of $28.40 to a member of management that vest over 4
years.
NOTE 3--EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings
per share (in thousands except per share data) for the six months ended June 30,
2004 and 2003:
SIX MONTHS ENDED
JUNE 30,
--------------------------
2004 2003
------------ ------------
Net income....................................... $12,406 $ 8,216
Weighted average common shares outstanding....... 19,541 15,250
Weighted average common shares equivalent(1)..... 965 1,040
------- -------
Weighted average common shares and
common share equivalents...................... 20,506 16,290
======= =======
Net income per average common share - basic...... $ 0.63 $ 0.54
Net income per average common share - diluted.... $ 0.60 $ 0.50
(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.
10
NOTE 4--NEW ACCOUNTING STANDARDS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling interest
and results of operations of a VIE need to be included in a company's
consolidated financial statements. The adoption of FIN 46 did not have a
material impact on its results of operations, financial position or liquidity.
On March 9, 2004, the SEC staff issued Staff Accounting Bulletin No.
105, Application of Accounting Principles to Loan Commitments, which provides
guidance regarding mortgage loan interest rate lock commitments related to loans
held for sale as written options, effective for commitments entered into after
March 31, 2004. The Company accounts for loan commitments on single-family
mortgages that it intends to sell as derivatives in accordance with FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
Loan commitments are recorded at zero on the date of issuance and are adjusted
through earnings thereafter for changes in interest rates. In accordance with
SAB 105, the Company does not include in the fair value of loan commitments any
value for future servicing rights or other intangible assets. The adoption of
SAB 105 did not have a material impact on the second quarter 2004.
NOTE 5--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 securities portfolio is comprised of the two banks'
portfolios and, accordingly, each portfolio is included in total assets and
reported in the results of The PrivateBank (Chicago) and The PrivateBank (St.
Louis). Compensation expense related to the management of the investment
portfolios is allocated solely to The PrivateBank (Chicago). Insurance expense
for the Company is allocated to The PrivateBank (Chicago), the Holding Company
and the Wealth Management segments. The results for each business segment are
summarized in the paragraphs below and included in the following segment tables.
We apply the accrual basis of accounting for each reportable segment
and for transactions between reportable segments. During the first six months of
2004, there were no changes in the measurement methods used to determine
reported segment profit or loss as compared to the same period in 2003. For the
periods presented, there are no asymmetrical allocations to segments requiring
disclosure.
The accounting policies of the segments are generally the same as those
described in Note 1 -- Basis of Presentation to the consolidated financial
statements included in this report.
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.
11
Individual banking services include interest-bearing checking, money
market accounts, certificates of deposit, ATM/debit cards and investment
brokerage accounts. Additionally, The PrivateBank (Chicago) offers secured and
unsecured personal loans and lines of credit. Through The PrivateBank
(Chicago)'s affiliations with Mesirow Financial, Inc. and Sterling Investment
Services, Inc., clients have access to insurance products and securities
brokerage services. The PrivateBank (Chicago) also offers domestic and
international wire transfers and foreign currency exchange. The PrivateBank
(Chicago) balance sheet reflects goodwill of $19.2 million and intangibles of
$2.3 million at June 30, 2004, which remained relatively unchanged compared to
December 31, 2003 balances.
THE PRIVATEBANK (CHICAGO)
-----------------------------------
JUNE 30,
-----------------------------------
2004 2003
---------------- ----------------
(IN THOUSANDS)
Total gross loans......... $1,239,269 $ 942,704
Total assets.............. 1,954,978 1,577,124
Total deposits............ 1,524,379 1,303,753
Total borrowings.......... 254,352 119,910
Total capital............. 153,958 136,157
Net interest income....... 29,846 22,613
Non-interest income....... 2,819 4,063
Non-interest expense...... 13,311 12,059
Net income................ 12,384 9,096
THE PRIVATEBANK (ST. LOUIS)
The PrivateBank (St. Louis), a federal savings bank, was established as
a new bank subsidiary of the Company on June 23, 2000, and through its main
office located in St. Louis, Missouri, 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, and other cash management products. 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.
12
THE PRIVATEBANK (ST. LOUIS)
-----------------------------------
JUNE 30,
-----------------------------------
2004 2003
---------------- ----------------
(IN THOUSANDS)
Total gross loans.............. $171,246 $125,926
Total assets................... 239,921 177,068
Total deposits................. 170,131 143,767
Total borrowings............... 52,094 15,522
Total capital.................. 16,303 14,965
Net interest income............ 3,426 2,506
Non-interest income............ 1,225 1,816
Non-interest expense........... 2,721 2,686
Net income..................... 1,149 826
WEALTH MANAGEMENT
Wealth Management includes investment management, personal trust and
estate services, custodial services, retirement accounts and brokerage and
investment services. Investment management professionals work with wealth
management clients to define objectives, goals and strategies of the clients'
investment portfolios. Wealth Management personnel assist some trust clients
with the selection of an outside portfolio manager to direct account
investments. Trust and estate account administrators work with clients and their
attorneys to establish estate plans. Consistent with the Company's philosophy,
Wealth Management emphasizes a high level of personal service, including prompt
collection and reinvestment of interest and dividend income, weekly valuation,
tracking of tax information, customized reporting and ease of security
settlement. The minority interest expense related to Lodestar is included in
non-interest expense for this segment.
WEALTH MANAGEMENT
-----------------------------
JUNE 30,
-----------------------------
2004 2003
---------- -----------
(IN THOUSANDS)
Wealth Management assets under
management...................... $1,590,119 $1,264,955
Wealth Management fee revenue...... 4,087 3,065
Net interest income................ 818 618
Non-interest expense............... 3,678 3,222
Net income......................... 729 242
The following tables indicates the breakdown of our wealth management
assets under management at June 30, 2004 by account classification and related
gross revenue for the six months ended June 30, 2004 and June 30, 2003:
13
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, 2004
----------------------------
MARKET
VALUE REVENUE
------------ ------------
ACCOUNT TYPE (IN THOUSANDS)
- -------------------------------------
Lodestar............................. $ 609,185 $1,807
Personal trust--managed.............. 330,616 1,053
Agency--managed...................... 241,800 720
Custody.............................. 409,084 445
Employee benefits--managed........... 63,031 62
---------- ------
Less trust assets managed by
Lodestar(1)....................... (63,597)
----------
Total............................. $1,590,119 $4,087
========== ======
(1) These assets are included in personal trust - managed balances, agency
- managed balances as well as Lodestar balances. The revenues related
to these assets are allocated between personal trust- managed, agency -
managed and Lodestar based on the services provided.
AT OR FOR THE SIX MONTHS
ENDED JUNE 30, 2004
----------------------------
MARKET
VALUE REVENUE
------------ ------------
ACCOUNT TYPE (IN THOUSANDS)
- -------------------------------
Lodestar....................... $ 538,370 $1,482
Personal trust--managed........ 55,012 266
Agency--managed................ 218,930 671
Custody........................ 377,115 539
Employee benefits--managed..... 75,528 107
---------- ------
Total....................... $1,264,955 $3,065
========== ======
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),
and a mortgage company subsidiary, The PrivateBank Mortgage Company, formerly
Corley Financial Corporation, acquired on June 15, 2004. 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 subordinated
debentures which are accounted for as long-term debt and also qualify as Tier 1
and Tier 2 capital (see note 8). 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. For the
second quarter 2004, The PrivateBank Mortgage Company results are included in
Holding Company Activities, since June 15, 2004, the date of acquisition.
14
HOLDING COMPANY ACTIVITIES
----------------------------
JUNE 30,
----------------------------
2004 2003
---------- ----------
(IN THOUSANDS)
Total assets................... $199,675 $156,196
Total borrowings............... 2,645 35,000
Long-term debt - trust
preferred securities........ 20,000 20,000
Total capital.................. 174,992 100,339
Interest expense............... 974 1,539
Non-interest income............ 100 101
Non-interest expense........... 2,151 1,429
Net loss....................... (1,858) (1,949)
The following is a summary of certain operating information for
reportable segments at or for the periods presented and the reported
consolidated balances (in millions):
AT OR FOR THE SIX THE THE HOLDING
MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
JUNE 30, 2004 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
- --------------------- ----------- ----------- ---------- ---------- --------------- ------------
Total assets......... $1,955.0 $239.9 $ - $199.7 $(195.4) $2,199.2
Total deposits....... 1,524.4 170.1 - - (21.1) 1,673.4
Total borrowings(1).. 254.3 52.1 - 22.6 (2.6) 326.4
Total loans.......... 1,239.3 171.2 - - (2.9) 1,407.6
Total capital........ 154.0 16.3 - 175.0 (171.6) 173.7
Net interest income.. 29.8 3.4 0.8 (0.8) 1.7 34.9
Non-interest income.. 2.8 1.2 4.1 0.1 (1.7) 6.5
Non-interest expense. 13.3 2.7 3.7 2.2 (0.1) 21.8
Minority interest
expense........... - - 0.1 - - 0.1
Net income........... 12.4 1.2 0.7 (1.9) - 12.4
Wealth Management
assets under
management........ - - 1,653.7 - (63.6) 1,590.1
AT OR FOR THE SIX THE THE HOLDING
MONTHS ENDED PRIVATEBANK PRIVATEBANK WEALTH COMPANY INTERSEGMENT
JUNE 30, 2003 (CHICAGO) (ST. LOUIS) MANAGEMENT ACTIVITIES ELIMINATIONS(2) CONSOLIDATED
- --------------------- ----------- ----------- ---------- ---------- --------------- ------------
Total assets......... $1,577.1 $177.1 $ - $156.2 $(150.7) $1,759.7
Total deposits....... 1,303.8 143.8 - - (2.0) 1,445.6
Total borrowings(1).. 119.9 15.5 - 55.0 - 190.4
Total loans.......... 942.7 125.9 - - (1.7) 1,066.9
Total capital........ 136.2 15.0 - 100.3 (151.2) 100.3
Net interest income.. 22.6 2.5 0.6 (1.5) 1.4 25.6
Non-interest income.. 4.1 1.8 3.1 0.1 (2.2) 6.9
Non-interest expense. 12.1 2.7 3.2 1.4 (0.2) 19.2
Minority interest
expense........... - - 0.1 - - 0.1
Net income........... 9.1 0.8 0.2 (1.9) - 8.2
Wealth Management
assets under
management........ - - 1,265.0 - - 1,265.0
- ------------------
(1) Includes long-term debt-trust preferred securities for the Holding
Company Activities segment.
(2) The intersegment elimination for total loans reflects the exclusion of
unearned income for management reporting purposes. The intersegment
elimination for total capital reflects the elimination of the net
investment in The PrivateBank (Chicago), The PrivateBank (St. Louis)
and The PrivateBank Mortgage Company in consolidation. The intersegment
eliminations include adjustments necessary for each category to agree
with the related consolidated financial statements.
15
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 elimination of fed funds purchased and sold between Chicago and St.
Louis, the reclassification of the unearned discount on loans, the
reclassification related to current and deferred taxes, the elimination of The
PrivateBank (Chicago) commercial loan and offsetting the warehouse line of
credit borrowing on The PrivateBank Mortgage Company's books and the
reclassification of loan fee income which is included in non-interest income for
segment reporting purposes as compared to interest income for consolidated
reporting purposes.
NOTE 6--ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments
as of June 30, 2004 have not materially changed on a relative basis from the
carrying values and estimated fair values of financial instruments disclosed as
of December 31, 2003.
NOTE 7--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 the components of other accumulated
comprehensive income for the six months ended June 30, 2004 and 2003 (in
thousands):
JUNE 30, 2004
---------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX EFFECT AMOUNT
---------- ------------ ----------
Change in unrealized gains on securities
available-for-sale........................ $11,245 $4,284 $6,961
Less: reclassification adjustment for gain
included in net income.................... 168 64 104
------- ------ ------
Change in net unrealized gains............... $11,077 $4,220 $6,857
======= ====== ======
JUNE 30, 2003
---------------------------------------------
BEFORE TAX NET OF TAX
AMOUNT TAX EFFECT AMOUNT
---------- ------------ ----------
Change in unrealized gains on securities
available-for-sale............................. $6,853 $2,330 $4,523
Less: reclassification adjustment for gain
included in net income......................... 2,255 767 1,488
------- ------ ------
Change in net unrealized gains.................... $4,598 $1,563 $3,035
======= ====== ======
NOTE 8--LONG TERM DEBT -- TRUST PREFERRED SECURITIES
On February 8, 2001, PrivateBancorp Capital Trust I, a Delaware
statutory 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.
16
Subject to certain limitations, the Company has the right to defer
payment of interest on the debentures at any time, or from time to time, for a
period not to exceed 20 consecutive quarters. The trust preferred securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
debentures at maturity or their earlier redemption. At the option of the
Company, the debentures may be redeemed in whole or in part prior to maturity on
or after December 31, 2005, if certain conditions are met, and only after the
Company has obtained Federal Reserve approval, if then required under applicable
guidelines or regulations.
The Company has guaranteed the payment of distributions and payments
upon liquidation or redemption of the trust preferred securities, in each case
to the extent of funds held by the trust. The Company and the trust believe
that, taken together, the obligations of the Company under the guarantee, the
debentures and other related agreements provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of all of the
obligations of the trust under the trust preferred securities.
The aggregate principal amount of the trust preferred securities
outstanding is $20.0 million. As of June 30, 2004, the entire amount of the
preferred securities is eligible for treatment as Tier I capital as allowed by
the Federal Reserve. At June 30, 2004, the unamortized balance of the
underwriting commissions paid and offering expenses was $1.0 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 9--CAPITAL TRANSACTIONS
During the second quarter 2004, the Company declared and paid a $0.03
per share dividend, even with first quarter 2004 levels, and a 50% increase from
the fourth quarter 2003 dividend rate of $0.02 per share.
During the second quarter 2004, the Company repurchased 24,515 shares
of its common stock in connection with the satisfaction of a stock option
exercise and federal withholding tax requirements on the exercise of stock
options by a board member and the Chief Executive Officer of the Company.
On April 23, 2004, the Company announced a two-for-one split of its
common stock, which was effected in the form of a stock dividend. Stockholders
received one share for every one share of PrivateBancorp, Inc. common stock held
on the record date. The stock dividend was paid on May 31, 2004 to stockholders
of record as of the close of business on May 17, 2004.
NOTE 10--ACQUISITIONS
On June 15, 2004, the Company acquired Corley Financial Corporation, a
Chicago-based, mortgage-banking boutique that originated approximately $180.0
million in single-family residential loans in 2003. The PrivateBank (Chicago)
previously outsourced its processing of residential mortgage loans to Corley
Financial Corporation in a business relationship that was established over three
years ago. The Company acquired Corley in an effort to better serve clients and
lower mortgage origination costs, while adding highly experienced mortgage
lenders to client service teams. After the acquisition, the mortgage bank
operates as The PrivateBank Mortgage Company and is maintained as a separate
subsidiary of PrivateBancorp, Inc.
The consideration paid by the Company included cash of $475,000 and
32,000 shares of common stock valued at $872,640, for an aggregate purchase
price of $1.3 million before transaction costs. The value of the common stock
issued was determined based on the closing stock price of PrivateBancorp,
17
Inc.'s common stock on the date of acquisition. All assets and liabilities were
adjusted to fair value as of the effective date of the acquisition.
THE PRIVATEBANK MORTGAGE COMPANY
JUNE 15, 2004
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition:
AT JUNE 15, 2004 (IN 000'S)
---------------------------
Cash........................................ $ 187
Fixed assets................................ 8
Loans held for sale......................... 4,773
Other assets................................ 143
------
Total assets acquired ................. $5,111
Current liabilities ........................ $5,068
------
Total liabilities assumed ............. 5,068
Net assets acquired ........................ $ 43
======
The acquisition resulted in goodwill of $1.3 million. The goodwill will
not be amortized pursuant to the application of SFAS 142, but will be evaluated
annually for impairment. The entire amount of goodwill is expected to be
deductible for tax purposes.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
PrivateBancorp was organized as a Delaware corporation in 1989 to serve
as the holding company for a Chicago-based de novo (start-up) bank. Our flagship
downtown Chicago location opened in 1991. We expanded to Wilmette in north
suburban Cook County in 1994 and the Oak Brook facility in west suburban DuPage
County was established in 1997. We established the St. Charles office in January
2000, in connection with our purchase of Towne Square Financial Corporation (a
company which was in the process of forming a de novo bank) on August 3, 1999.
On February 11, 2000, we consummated our acquisition of Johnson Bank Illinois
adding two additional locations in Lake Forest and Winnetka, Illinois. During
the second quarter 2000, we received regulatory approval to create a new banking
subsidiary and on June 23, 2000, PrivateBancorp capitalized The PrivateBank (St.
Louis). In May 2001, The PrivateBank (Chicago) opened a second branch in the Fox
Valley area in Geneva, Illinois. On July 22, 2004, the Company signed a
definitive lease agreement for the site of a new Chicago banking office in the
historic Palmolive Building at the corner of North Michigan Avenue and Walton
Place in Chicago's affluent Gold Coast neighborhood to open in the fall of 2004.
On April 21, 2004, the Company announced its intent to expand to the
southeastern Wisconsin market. The Company plans to open a new banking office to
operate as The PrivateBank (Wisconsin), which is expected to open for business
at an as of yet undisclosed downtown Milwaukee location by the first of the year
2005.
In December 2002, The PrivateBank (Chicago) acquired an 80% controlling
interest in Lodestar Investment Counsel, a Chicago-based investment adviser with
$609.2 million of assets under management at June 30, 2004. On June 15, 2004,
the Company acquired Corley Financial Corporation, a Chicago-based,
mortgage-banking boutique. After the acquisition, the mortgage bank operates as
The PrivateBank Mortgage Company and is maintained as a separate subsidiary of
PrivateBancorp, Inc.
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 "Operating Segments Results"
beginning on page 29 and "Note 5 -- Operating Segments" to the unaudited
consolidated financial statements of the Company included on page 11.
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 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 and 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
high service charge income typical of many retail banks.
Non-interest expenses are heavily influenced by the growth of operations.
Our growth directly affects the majority of our expense categories.
19
CRITICAL ACCOUNTING POLICIES
Generally accepted accounting principles are complex and require
management to apply significant judgment to various accounting, reporting and
disclosure matters. Management must use assumptions and estimates to apply these
principles where actual measurements are not possible or practical. 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. For a complete discussion of our significant accounting
policies, see the footnotes to our Consolidated Financial Statements included on
pages F-8 through F-14 in our Form 10-K for the fiscal year ended December 31,
2003. Below is a discussion of our critical accounting policies. These policies
are critical because they are highly dependent upon subjective or complex
judgments, assumptions and estimates. Changes in such estimates may have a
significant impact on the financial statements. Actual results could differ from
those estimates. Management has reviewed the application of these policies with
the Audit Committee of the Company's Board of Directors.
For PrivateBancorp, Inc., accounting policies that are viewed as
critical to us are those relating to estimates and judgments regarding the
determination of the adequacy of the allowance for loan losses and the
estimation of the valuation of goodwill and the useful lives applied to
intangible assets.
Allowance for Loan Losses
We maintain an allowance for loan losses at a level management believes is
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 based on a review of available 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. Our allowance for loan losses is reassessed monthly to
determine the appropriate level of the allowance. The amount of the allowance
for loan losses is determined based on a variety of factors, including
assessment of the credit risk of the loans in the portfolio, volume of loans in
the portfolio, delinquent loans, impaired loans, evaluation of current economic
conditions in the market area, actual charge-offs and recoveries during the
period and historical loss experience. 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.
Management adjusts the allowance for loan losses by recording a provision
for loan losses in an amount sufficient to maintain the allowance at the level
determined appropriate. Loans are charged-off when deemed to be uncollectible by
management. We believe that the allowance for loan losses is adequate to provide
for estimated probable credit losses inherent in our loan portfolio. The
allowance for loan losses as a percentage of total loans was 1.23% as of June
30, 2004 compared to 1.22% as of June 30, 2003.
Goodwill and Intangible Assets
During 2001, The PrivateBank (Chicago) recorded approximately $12.2
million in goodwill in connection with the Johnson Bank Illinois acquisition.
During 2002, the Company recorded $8.4 million of goodwill and $2.5 million in
customer intangibles in connection with the acquisition of Lodestar. During the
second quarter 2004, the Company recorded $1.3 million of goodwill in connection
with the acquisition of Corley Financial. Intangible assets are amortized over
an estimated useful life of 15 years. Effective January 1, 2002, the Company
adopted FAS No. 142, which requires that goodwill and intangible assets that
have indefinite lives no longer be amortized but be reviewed for impairment
annually, or more frequently if certain indicators arise. Prior to the adoption
of FAS No. 142, goodwill was
20
being amortized using the straight-line method over a period of 15 years. The
Company did not incur any goodwill impairment in 2003 in adopting FAS 142. The
Company performs an impairment test of goodwill each year. Impairment losses on
recorded goodwill, if any, will be recorded as operating expenses.
Goodwill at June 30, 2004 was $20.5 million compared to $19.2 million
at June 30, 2003, an increase of $1.3 million, resulting from the acquisition of
Corley Financial. Amortization expense related to the Lodestar customer
intangible assets is recognized at approximately $168,000 each year until 2017.
RESULTS OF OPERATIONS -THREE AND SIX MONTHS
ENDED JUNE 30, 2004 AND 2003
NET INCOME
Net income for the second quarter ended June 30, 2004, was $6.5
million, up 40% compared to second quarter 2003 net income of $4.6 million.
Earnings per diluted share increased 11% to $0.31 in the second quarter 2004
compared to $0.28 per diluted share in the second quarter 2003. Net income for
the six months ended June 30, 2004, increased to $12.4 million, or $.60 per
diluted share, compared to $8.2 million, or $0.50 per diluted share, for the
same period last year, reflecting diluted earnings per share improvement of 20%.
The improvement in earnings per diluted share for the three and six
months ended June 30, 2004 as compared to the prior year period reflects a year
over year increase in net interest margin augmented by strong loan demand and
increases in wealth management, mortgage banking and other income. Non-interest
income was $3.6 million in the second quarter 2004, reflecting a decrease of
approximately $806,000 or 18% from the second quarter 2003. The decrease in fee
income was attributable to $1.2 million in securities losses compared to $2.3
million in securities gains in the prior year quarter. Securities losses were
more than offset by $1.3 million in trading gains from the fair market value
adjustment on a $25.0 million, 10-year treasury rate for 3-month LIBOR interest
rate swap and increases in wealth management fee revenue during the quarter.
During the six months ended June 30, 2004, the Company recognized securities
losses of $168,000, compared to gains of $2.3 million for the same period in
2003. Non-interest income for the six months ended June 30, 2004 reflects the
fair market value adjustment on the interest rate swap, which resulted in gains
of $259,000 during the six months ended June 30, 2004, versus losses of $1.3
million in the prior year period.
NET INTEREST INCOME
Net interest income is the difference between interest income and fees
on earning assets and interest expense on deposits and borrowings. Interest
income includes amortization of loan origination fees recorded from loans.
Interest expense includes amortization of prepaid fees on brokered deposits and
issuance costs of trust preferred securities. Net interest margin represents net
interest income on a tax equivalent basis as a percentage of average earning
assets during the period. Net interest margin reflects the spread between
average yields earned on interest earning assets and the average rates paid on
interest-bearing deposits and borrowings. The volume of non-interest-bearing
funds, largely comprised of demand deposits and capital, also affects the net
interest margin.
Net interest income was $17.3 million during the three months ended
June 30, 2004 compared to $12.6 million for the second quarter of 2003, an
increase of 38%, and a decrease of 1% compared to the first quarter 2004.
Average earning assets during the second quarter of 2004 were $2.1 billion,
compared to $1.6 billion in the prior year quarter, an increase of 32%, and an
increase of 7% since the first quarter 2004. Net interest margin (on a tax
equivalent basis) was 3.51% in the second quarter of 2004, up from 3.33% in the
prior year second quarter and down from 3.80% in the first quarter of 2004.
Compared to the first quarter 2004, the margin compression during the second
quarter of 2004 reflects a 19 basis point decrease in yields on average earning
assets and a 14 basis point increase in the costs of average interest-bearing
liabilities. The decrease in earning asset yields was primarily due to the
combined impact of lower yields on recently originated loans, a decrease in the
dividend paid on Federal
21
Home Loan Bank (Chicago) stock from 6.5% in the first quarter 2004 to 6.0% in
the second quarter 2004, and high levels of residential mortgage prepayments,
which depressed the yield on the Company's mortgage-backed securities portfolio.
The increase in cost of funds was primarily due to the combined impact of adding
approximately $36.0 million of long-term brokered deposits in the first quarter
2004 and early in the second quarter 2004 as well as the one-time cost of
approximately $170,000 associated with calling and refunding $25.0 million of
brokered deposits. For the third quarter 2004, the Company expects net interest
margin to stabilize given a likely increase in earning asset yields.
Net interest income on a tax equivalent basis was $37.0 million during
the six months ended June 30, 2004 compared to $27.0 million for the same period
in 2003, an increase of 37%. Net interest margin (on a tax equivalent basis) was
3.65% for the six months ended June 30, 2004, up from 3.49% in the prior year
period. The improvement in net interest margin during the six months ended June
30, 2004 as compared to the same period in 2003 was primarily attributable to a
reduction of 21 basis points in the rates paid on our interest bearing
liabilities, which more than offset the 14 basis point decline in the rates
earned on interest yielding assets. During 2004, increases in market rates of
interest have positively impacted yields on investment securities.
A changing interest rate environment has an effect on our net interest
margin. A large portion of our loan portfolio is based on the prime interest
rate and may reprice faster than our deposits and floating rate borrowings.
Longer-term liabilities are generally more expensive than shorter-term
liabilities given the upward slope of the yield curve. Alternatively, if market
interest rates decrease, we expect our net interest margin to experience
pressure. As discussed in the previous quarter, changing our focus to lengthen
borrowing terms given historically lower rates during 2003 and the first quarter
of 2004 has compressed net interest margin this quarter, but should have a
positive impact in future quarters if market interest rates continue to rise.
22
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 JUNE 30,
-------------------------------------------------------------------------
2004 2003
--------------------------------- ----------------------------------
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ------ ---------- -------- ------
Fed funds sold and other
short-term investments......... $ 1,944 $ 4 0.78% $ 9,765 $ 31 1.04%
Investment securities (taxable)... 489,759 5,289 4.29% 387,942 3,451 3.53%
Investment securities
(non-taxable) ................. 215,469 3,631 6.74% 140,002 2,439 6.97%
Loans, net of unearned
discount(2).................... 1,377,610 18,702 5.40% 1,047,043 15,208 5.78%
---------- ------- ---------- -------
Total earning assets.............. $2,084,782 $27,626 5.27% $1,584,752 $21,129 5.30%
========== ======= ========== =======
Interest-bearing deposits......... $1,474,100 $ 7,155 1.95% $1,287,331 $ 6,140 1.91%
Funds borrowed.................... 320,766 1,552 1.91% 157,485 1,204 3.02%
Trust preferred securities........ 20,000 485 9.70% 20,000 485 9.70%
---------- ------- ---------- -------
Total interest-bearing
liabilities.................... $1,814,865 9,192 2.03% $1,464,816 7,829 2.14%
========== ------- ========== -------
Tax equivalent net interest
income(3)...................... $18,434 $13,300
======= =======
Net interest spread(4)............ 3.24% 3.16%
Net interest margin(3)(5)......... 3.51% 3.33%
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------
2004 2003
--------------------------------- ----------------------------------
AVERAGE AVERAGE
BALANCE(1) INTEREST RATE BALANCE(1) INTEREST RATE
---------- -------- ------ ---------- -------- ------
Fed funds sold and other
short-term investments......... $ 1,797 $ 10 1.12% $ 10,794 $ 56 1.03%
Investment securities (taxable)... 482,704 10,879 4.48% 369,815 7,243 3.90%
Investment securities(non-taxable) 207,059 6,987 6.75% 134,502 4,721 7.02%
Loans, net of unearned
discount(2).................... 1,320,804 36,382 5.48% 1,023,807 30,375 5.93%
---------- ------- ---------- -------
Total earning assets.............. $2,012,364 $54,258 5.37% $1,538,918 $42,395 5.51%
========== ======= ========== =======
Interest-bearing deposits......... $1,428,509 $13,248 1.86% $1,234,814 $11,917 1.95%
Funds borrowed.................... 313,348 3,038 1.92% 174,780 2,516 2.86%
Trust preferred securities........ 20,000 970 9.70% 20,000 970 9.70%
---------- ------- ---------- -------
Total interest-bearing liabilities $1,761,857 $17,256 1.96% $1,429,594 $15,403 2.17%
========== ------- ========== -------
Tax equivalent net interest
income(3)...................... $37,002 $26,992
======= =======
Net interest spread(4)............ 3.41% 3.34%
Net interest margin(5)(3)......... 3.65% 3.49%
- ------------------
(1) Average balances were generally computed using daily balances.
(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) We adjust GAAP reported net interest income by the tax equivalent
adjustment amount to account for the tax attributes on federally tax
exempt municipal securities. The total tax equivalent adjustment
reflected in the above table is $1.1 million and $742,000 in the second
quarters of 2004 and 2003, respectively. The total tax equivalent
adjustment reflected in the above table is $2.1 million and $1.4
million for the six months ended June 30, 2004 and June 30, 2003,
respectively. For GAAP purposes, tax benefits associated with federally
tax-exempt municipal securities are reflected in income tax expense.
The following table reconciles reported net interest income to net
interest income on a tax equivalent basis for the periods presented:
23
RECONCILIATION OF QUARTER NET INTEREST INCOME TO QUARTER NET INTEREST
INCOME ON A TAX EQUIVALENT BASIS
2Q04 2Q03
------- -------
Net interest income............................. $17,334 $12,558
Tax equivalent adjustment to net
interest income.............................. 1,100 742
------- -------
Net interest income, tax equivalent basis....... $18,434 $13,300
======= =======
RECONCILIATION OF YEAR-TO-DATE NET INTEREST INCOME TO YEAR-TO-DATE NET INTEREST
INCOME ON A TAX EQUIVALENT BASIS
6/30/04 6/30/03
------- -------
Net interest income............................. $34,885 $25,555
Tax equivalent adjustment to net
interest income.............................. 2,117 1,437
------- -------
Net interest income, tax equivalent basis....... $37,002 $26,992
======= =======
(4) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(5) Net interest income, on a tax-equivalent basis, divided by average
interest-earning assets.
The following tables show 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.
24
THREE MONTHS ENDED JUNE 30, 2004
COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
CHANGE CHANGE
CHANGE DUE DUE TO DUE TO TOTAL
TO RATE VOLUME MIX CHANGE
---------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Interest income/expense from:
Fed funds sold and other short-term investments... $ (12) $ (25) $ 10 $ (27)
Investment securities (taxable)................... 736 896 206 1,838
Investment securities (non-taxable)(1)............ (79) 1,311 (40) 1,192
Loans, net of unearned discount................... (987) 4,763 (282) 3,494
----- ------- ------ -------
Total tax equivalent interest income(1)........ $(342) $ 6,945 $ (106) $ 6,497
===== ======= ====== =======
Interest-bearing deposits......................... $ 110 $ 891 $ 14 $ 1,015
Funds borrowed.................................... (436) 1,231 (447) 348
Trust preferred securities........................ -- -- -- --
----- ------- ------ -------
Total interest expense......................... $(326) $ 2,122 $ (433) $ 1,363
----- ------- ------ -------
Net tax equivalent interest income(1)............. $ (16) $ 4,823 327 $ 5,134
===== ======= ====== =======
SIX MONTHS ENDED JUNE 30, 2004
COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
CHANGE CHANGE
CHANGE DUE DUE TO DUE TO TOTAL
TO RATE VOLUME MIX CHANGE
---------- ------ ------- ------
(DOLLARS IN THOUSANDS)
Interest income/expense from:
Fed funds sold and other short-term
investments............................. $ 5 $ (46) $ (5) $ (46)
Investment securities (taxable)............. 1,052 2,186 398 3,636
Investment securities (non-taxable)(1)...... (182) 2,526 (78) 2,266
Loans, net of unearned discount............. (2,312) 8,739 (420) 6,007
------- ------- ------ -------
Total tax equivalent interest income(1).. $(1,437) $13,405 $ (104) $11,863
------- ------- ------ -------
Interest-bearing deposits................... $ (527) $ 1,869 $ (11) $ 1,331
Funds borrowed.............................. (819) 1,967 (626) 522
Trust preferred securities.................. -- -- -- --
------- ------- ------ -------
Total interest expense................... $(1,346) $ 3,836 $ (637) $ 1,853
------- ------- ------ -------
Net tax equivalent interest income(1)....... $ (91) $ 9,569 $ 532 $10,010
======= ======= ====== =======
- ------------------
(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
$1.1 million and $742,000 in the second quarters of 2004 and 2003,
respectively. The total tax equivalent adjustment reflected in the above
table is $2.1 million and $1.4 million for the six months ended June 30,
2004 and June 30, 2003, respectively.
PROVISION FOR LOAN LOSSES
We made a provision for loan losses of $724,000 for the quarter ended
June 30, 2004 compared to $730,000 for the comparable period in 2003. Net
recoveries totaled $51,000 for the quarter ended June 30, 2004 versus net
charge-offs of $182,000 for the second quarter of 2003 and net recoveries of
$103,000 for the quarter ended March 31, 2004. For the six months ended June 30,
2004, the provision for loan losses was $2.1 million compared to $1.7 million in
the prior year period.
25
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 on which provisions are based begins
on page 31.
NON-INTEREST INCOME
Non-interest income was $3.6 million in the second quarter of 2004,
reflecting a decrease of approximately $806,000 or 18% from the second quarter
of 2003. The decrease in fee income was primarily attributable to $1.2 million
in securities losses compared to $2.3 million in securities gains in the prior
year quarter. Securities losses were more than offset by $1.3 million in trading
gains from the fair market value adjustment on a $25.0 million 10-year treasury
rate for 3-month LIBOR interest rate swap and increases in wealth management fee
revenue during the quarter. During the six months ended June 30, 2004, the
Company recognized securities losses of $168,000, compared to gains of $2.3
million for the same period in 2003. Non-interest income for the six months
ended June 30, 2004 reflects the fair market value adjustment on the interest
rate swap, which resulted in gains of $259,000 during the six months ended June
30, 2004, versus losses of $1.3 million in the prior year period.
The following table presents the breakdown of wealth management,
mortgage banking and other income for the periods presented:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
JUNE 30, JUNE 30,
-------------------- ---------------------
2004 2003 2004 2003
------ ------ ------ ------
Wealth management fee revenue.......... $2,129 $1,580 $4,087 $3,065
Residential real estate secondary
market fees......................... 782 1,037 1,246 1,818
Banking and other services............. 436 415 870 723
Bank owned life insurance.............. 125 149 249 276
------ ------ ------ ------
Total wealth management, mortgage
banking and other income......... $3,472 $3,181 $6,452 $5,882
====== ====== ====== ======
Total wealth management assets under management were $1.6 billion at
June 30, 2004 compared to $1.3 billion at June 30, 2003, and up $95.2 million
from $1.5 billion at December 31, 2003. Of these amounts, trust services assets
under management were $980.9 million and Lodestar assets under management were
$609.2 million at June 30, 2004. Excluded from the total wealth management
assets under management are $63.6 million of trust services assets that are
managed by Lodestar. At March 31, 2004, trust services managed $974.4 million of
assets, Lodestar managed $601.8 million of assets, and $56.6 million of assets
managed by Lodestar were excluded from the total wealth management assets under
management. Growth in assets under management during the quarter reflects the
impact of net new business generated.
Growth in wealth management fee income contributed to the expansion in
non-interest income during the quarter. Wealth management fee income totaled
$2.1 million for the second quarter of 2004, an increase of approximately
$550,000 from the second quarter of 2003 and an increase of $172,000 from the
first quarter of 2004. Of the $2.1 million, approximately $534,000 was revenue
generated from wealth management services provided to those clients where a
third-party investment manager is utilized. For the three months ended June 30,
2003, $1.6 million of wealth management fee revenue was generated; of this
amount approximately $477,000 was third-party investment manager revenue. A
26
portion of revenue is used to pay these third-party investment managers and the
remaining amount of fees collected are utilized to cover costs associated with
administering other aspects of the wealth management services that we provide to
clients. The fees paid to third-party investment managers are included in the
professional fees category of non-interest expense. For the six months ended
June 30, 2004, wealth management fee income totaled $4.1, compared to $3.1
million in the prior year period.
The increase in wealth management fee revenue over the prior year
period reflects a favorable shift in the mix of accounts towards higher fee
structures, the addition of new business and equity market improvements
experienced during 2003.
Sales of residential real estate loans generated $782,000 of income
during the second quarter of 2004 compared to $1.0 million during the prior year
quarter primarily due to a lower volume of loans sold as a result of relatively
decreased demand for residential real estate loans. Late in the first quarter
2004, when market interest rates declined, we experienced a slight increase in
the demand for residential real estate loans. The majority of these loans closed
in the second quarter with a resulting benefit to residential loan fees. For the
six months ended June 30, 2004, sales of newly originated residential real
estate loans generated $1.2 million of income as compared to $1.8 million in the
year earlier period, a decrease of 32%.
During the second quarter of 2004, we recognized income of $125,000
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 as compared to
relatively similar levels of income in the second quarter of 2003. This policy
covers certain higher-level employees who are deemed to be significant
contributors to the Company. All employees included in this policy are aware and
have consented to the coverage. The cash surrender value of BOLI at June 30,
2004 was $11.5 million and is included in other assets on the balance sheet.
Early in the third quarter 2004, the Company purchased an additional $22.0
million in BOLI, which should result in higher BOLI revenue in the third quarter
of 2004.
Included in non-interest income for the 2004 period are trading losses
recorded to reflect the fair market value adjustment on an interest rate swap
used to economically hedge a portion of the Company's investment in long-term
municipal bonds. The change in the fair market value of the swap is recognized
in earnings and resulted in a gain for the three months ended June 30, 2004
because of the overall increase in market rates of interest during the period.
For the three months ended June 30, 2004, the trading gain totaled $1.3 million
compared to a trading loss of $1.1 million during the second quarter of 2003.
Securities losses for the three months ended June 30, 2004 were $1.2 million
compared to gains of $2.3 million in the prior year quarter. For the six months
ended June 30, 2004, trading gains were $259,000 compared to losses of $1.3
million in the prior year period. Securities losses were $168,000 for the first
six months of 2004, compared to gains of $2.3 million in the prior year period.
27
NON-INTEREST EXPENSE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
JUNE 30, JUNE 30,
------------------------ -------------------------
2004 2003 2004 2003
----------- ------------ ------------ ------------
(IN THOUSANDS) (IN THOUSANDS)
Salaries and employee benefits.......... $6,057 $5,070 $12,092 $ 9,848
Occupancy............................... 1,350 1,270 2,710 2,689
Professional fees....................... 1,451 1,069 2,565 2,353
Marketing............................... 703 509 1,198 995
Data processing......................... 513 368 960 761
Postage, telephone and delivery......... 227 212 456 424
Office supplies and printing............ 127 137 262 297
Insurance............................... 207 146 422 314
Amortization of intangibles............. 42 42 84 84
Other expense........................... 543 933 1,010 1,410
------- ------ ------- -------
Total non-interest expense.............. $11,220 $9,756 $21,759 $19,175
======= ====== ======= =======
Non-interest expense increased to $11.2 million in the second quarter
of 2004 from $9.8 million in the second quarter of 2003, an increase of 15%. For
the six months ended June 30, 2003, non-interest expense increased 13% to $21.8
million from $19.2 million in the prior period.
The increase in non-interest expense between the periods is
attributable primarily to increases in personnel costs associated with our
growing client service team, including the addition of several managing
directors during 2004 and the addition of Corley Financial Corporation
employees. Our efficiency ratio (non-interest expense divided by the sum of net
interest income on a tax equivalent basis plus non-interest income) improved to
50.8% for the second quarter 2004 as compared to 55.0% for the second quarter
2003. On a tax-equivalent basis, this ratio indicates that in the second quarter
of 2004, we spent 50.9 cents to generate each dollar of revenue, compared to
55.0 cents in the second quarter of 2003. Our efficiency ratio improved to 50.0%
for the six months ended June 30, 2004 as compared to 56.7% for the same period
in 2003. Please refer to footnote 3 on page 24 for a reconciliation of net
interest income to net interest income on a tax equivalent basis.
Salaries and benefits increased to $6.1 million, or 19% during the
second quarter 2004 as compared to the year ago quarter, reflecting the
increased level of full-time equivalent employees to 252 people at June 30, 2004
from 194 people at June 30, 2003. Salaries and benefits increased to $12.1
million, or 23% during the six months ended June 30, 2004 as compared to the
year ago period. The increase is due primarily to overall growth in the
organization and the addition of two Managing Directors and 11 employees as a
result of the acquisition of Corley Financial in June of 2004.
Occupancy expense increased to $1.4 million during the second quarter
2004, reflecting an increase of 6% over the prior year quarter. Occupancy
expense was $2.7 million during the six months ended June 30, 2004, even with
the prior year period. We expect occupancy expense to increase in future
quarters with the additional floor space that is being leased in our downtown
Chicago location as well as the additional space being leased for the Gold Coast
office to be opened in the fall of 2004.
Professional fees, which include legal, accounting, consulting,
information systems consulting services and investment management fees,
increased to $1.5 million during the second quarter of 2004, reflecting an
increase of 36% over the prior year quarter, primarily due to expenses
associated with the documentation and testing of internal controls which has
resulted as a result of the requirements of the Sarbanes-Oxley Act. During 2004,
we expect to spend approximately $250,000 in professional fees and expenses
associated with the implementation of these requirements. Professional fees
increased to $2.6 million, or 9%, during the six months ended June 30, 2004,
compared to the prior year period.
28
Marketing expense increased 38% to $703,000 during the second quarter 2004 over
the prior year quarter and 20% to $1