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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the 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)
(312) 683-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
9.50% Cumulative Trust Preferred Securities
(and the Guarantee with respect thereto)
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 check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting common equity of the
Registrant held by non-affiliates of the Registrant was approximately
$48,234,690 based on the closing price of the common stock of $13.50 on March
15, 2001, as reported by the Nasdaq National Market.
As of March 15, 2001, the Registrant had outstanding 4,685,768
shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III.
FORM 10-K
Table of Contents
Page
Number
PART I .................................................................................................1
Item 1. Business................................................................................1
Item 2. Properties.............................................................................19
Item 3. Legal Proceedings .....................................................................20
Item 4. Submission of Matters to a Vote of Security Holders....................................20
PART II ................................................................................................20
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................20
Item 6. Selected Financial Data ...............................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ............................39
Item 8. Financial Statements and Supplementary Data ...........................................43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..43
PART III ................................................................................................43
Item 10. Directors and Executive Officers ......................................................43
Item 11. Executive Compensation ................................................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................43
Item 13. Certain Relationships and Related Transactions ........................................43
PART IV ................................................................................................43
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................43
Index to Consolidated Financial Statements..............................................................F-1
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PART I
ITEM 1. BUSINESS
Overview
We organized PrivateBancorp as a Delaware corporation in 1989 to
serve as the holding company for a Chicago-based de novo (or start-up) bank
designed to provide highly personalized financial services primarily to affluent
individuals, professionals, entrepreneurs and their business interests. We were
one of the first banks newly formed in the Chicago area at that time. The
organizers had significant senior level banking experience and many potential
client contacts from prior banking positions.
We believe that as the financial industry has consolidated, many
financial institutions have focused on a mass market approach using automated
customer service which de-emphasizes personal contact. We believe that the
centralization of decision-making power at these large institutions has resulted
in disruption of client relationships as frontline bank employees who have
limited decision-making authority fill little more than a processor role for
their customers. At many of these large institutions, services are provided by
employees in the "home office" who evaluate requests without the benefit of
personal contact with the customer or an overall view of the customer's
relationship with the institution.
We believe that this trend has been particularly frustrating to
affluent individuals, professionals, owners of closely-held businesses and
commercial real estate investors who traditionally were accustomed to dealing
directly with senior bank executives. These customers typically seek banking
relationships managed by a decision maker who can deliver a prompt response to
their requests and custom tailor a banking solution to meet their needs. As
smaller, independent banks have been acquired by national, multi-bank holding
companies, we believe that the personal relationships that these customers
maintained with the management of such banks have eroded, and their
individualized banking services have been lost.
We have two banking subsidiaries--The PrivateBank and Trust Company,
which we also refer to as The PrivateBank (Chicago), and The PrivateBank, which
we also refer to as The PrivateBank (St. Louis). We provide our clients with
traditional personal and commercial banking services, lending programs, and
trust and asset management services. Using the European tradition of "private
banking" as our model, we strive to develop a unique relationship with each of
our clients, utilizing a team of managing directors to serve our client's
individual and corporate banking needs, and tailoring our products and services
to meet their needs. Our managing directors are strategically located in seven
Midwestern United States locations. Currently, we have six offices in the
Chicago metropolitan area. These offices are strategically located in downtown
Chicago; in the affluent North Shore communities of Wilmette, Winnetka and Lake
Forest; in Oak Brook, centrally located in the fast growing west suburban DuPage
County; and in St. Charles, in the far western Fox Valley area. We currently
operate from one location in the St. Louis market where we established The
PrivateBank (St. Louis), a federally chartered savings bank, in June 2000. The
St. Louis-based bank also focuses on clients who are seeking a higher level of
service and a broad array of personalized banking and wealth management products
and services. The PrivateBank (St. Louis) clients consist of individuals, small
to medium-size businesses, commercial real estate investors and professionals.
Since year-end 1995 to December 31, 2000, we have grown our asset
base at a compound annual rate of 33.9% to $829.5 million. During the same
period, loans have grown at a compound annual rate of 36.9% to $599.4 million,
deposits at a compound annual rate of 30.8% to $670.2 million and trust assets
under administration at a compound annual rate of 30.7% to $777.8 million.
The PrivateBank Approach
We are a client-driven organization. We emphasize personalized
client relationships and custom-tailored financial services, complemented by the
convenience of technology. We target the affluent segment of the market because
we believe that there is significant unmet demand for personalized services
within this segment, and also because we believe it offers significant growth
potential. The key aspects of our private banking approach are:
o Personal Relationships. Our approach begins with the
development of strong, dedicated relationships with our
clients. Each client is matched with a team of individuals
headed by a managing director. This managing director
becomes our client's central point of contact with us. Our
16 managing directors, who are senior financial
professionals, act as the financial partners of our clients,
working with them to identify and service their banking
needs. By dedicating a team of executives to each client, we
are able to build ongoing relationships which allow our
managing directors to use their increasing knowledge of the
client's financial history and goals to quickly adapt our
services to the client's individual needs. Our clients
interact with the same persons for all types of banking
services, enabling them to gain a sense of security and
continuity of personal service in their banking
relationship. On the basis of this trust and confidence, we
seek to expand the scope of services provided to each
client, often including banking needs related to the
business affairs of our clients. Satisfied clients provide
our most fertile source of new business and new client
referrals as well.
o Affluent Target Client. We believe that the affluent segment
of the population, meaning that segment with annual incomes
over $150,000, is increasing and is diverse in terms of its
overall wealth and financial needs. We offer our services to
those members of this segment who are focused on building
and preserving wealth. Our clients include affluent
individuals, professionals, entrepreneurs and their business
interests. We target service industries such as the
accounting, legal and medical professions, as well as owners
of closely-held businesses, commercial real estate investors
and corporate executives. Although we generally target
individuals with high annual incomes and net worths, we also
recognize the growth potential of certain young
professionals and extend our services to those individuals
whose incomes or net worths do not initially meet our
criteria. We believe that this segment of the market is most
suited to our business and that these individuals are most
likely to develop long-term relationships with us.
o Customized Financial Services. In taking a long-term
relationship approach to our clients, we are able to
differentiate our services from the "one-size-fits-all"
mentality of other financial institutions. Our clients use a
wide variety of financial services beyond the traditional
banking products, and we work with them to identify their
particular needs and to develop and shape our services
tailored to meet those needs. While we offer a portfolio of
products, we believe that it is our personalized service
that distinguishes us from our competition. We encourage,
not discourage, our clients to contact us. We use regular
contact as a way to strengthen our relationships, increase
services to existing clients and earn referral business.
o Streamlined Decision-Making Process. Unlike most larger
banks, we do not have a lengthy chain of command. Our
clients generally deal directly with their dedicated
managing directors, who are given broad decision-making
authority. This allows our managing directors to respond
quickly and efficiently to our clients' needs. We are able
to use a streamlined approach because our organization has
many qualified, experienced credit officers. Officers with
credit approval authority make themselves available on short
notice to help consult on or approve credits when time is of
the essence. We use an "on call" approach, rather than
structured meetings, to approve credit. As the amount of the
credit and the complexity increases, we resort to a more
traditional approval process.
o Enhanced Personal Service through Technology. While we
encourage our clients to contact us directly, we also
utilize technology to complement and enhance client service.
We offer products such as PrivateBank Access, our Internet
banking service, Master Money debit cards and Private Line
Access, our voice-response communication system, to enhance,
not replace, personal contact. This technology allows us to
afford our clients the convenience of accessing our services
from remote locations at any time of day.
Our clients may connect to PrivateBank Access directly through our Internet
website, without the need for the diskettes or software downloads found in some
competing PC banking systems. Currently, our product:
o accesses deposit information and current deposit rate
schedules;
o allows transfers of funds among accounts;
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o includes a bill payment service with a variety of options;
o allows information to be exported to financial software
packages;
o includes a help desk which is staffed 92 hours per week; and
o sends e-mail messages from clients to bank personnel.
As technology changes, we intend to modify and enhance our electronic banking
products. We believe that in the future, a growing number of our clients will
desire both personal and electronic services. We intend to work to improve and
expand dual-delivery systems providing the quality of service to which our
clients are accustomed.
o Extensive Financial Network. In order to compete with other
financial service providers, we rely on a network of
professionals in the financial and investment communities
with whom we have developed strategic alliances over the
years. This enables us to offer our clients a broad array of
high quality services. For example, we work with selected
investment management firms in providing services to our
trust clients. Our clients can either maintain their
existing investment management relationships when they
become trust clients, or use our approved providers of
investment management services. We believe this choice
distinguishes our service from the rigid policies set by
some of our competitors. We, in turn, assist our clients in
selecting a complete package of services best suited to
their individual needs without incurring the overhead
associated with directly employing diversified portfolio
managers. We also have a contractual fee sharing agreement
with an independent insurance brokerage firm. Through this
affiliation, we offer a full range of personal and corporate
insurance products to our clients. To complement our
existing financial products and services, we have a
contractual arrangement with a registered securities
broker-dealer firm through which we offer our clients
on-site securities brokerage services.
Strategy for Growth
We seek to enhance long-term stockholder value through internal
growth, expanded product lines and selective geographic expansion. We expect to
continue to evaluate possible acquisition candidates and new office locations
and we intend to pursue opportunities that we perceive to be attractive to the
long-term value of our franchise. Our growth strategy entails four key
components:
o Developing Our Existing Relationships. An important part of
our future growth will be the continued development of our
existing client relationships. As the needs of our clients
change and grow, we seek to grow with them and continue to
provide them with our custom-tailored, flexible services.
For example, we strive to follow our clients from the
purchase of their homes, through the financing of their own
business, to the development and planning of their estate
and continuing the relationship tradition with their
children and grandchildren. We believe we have a significant
opportunity to further develop our existing client
relationships in each of our offices.
o Increasing the Reach of Our Existing Offices. In addition to
increasing the services provided to our existing clients, we
seek to expand the market presence of our existing offices,
particularly in our newer offices. We believe that the
growing need for private banking services in these markets
is still largely unmet and we believe there is a significant
opportunity to increase our client base in these offices. We
hope to capitalize on our reputation and the reputations of
our managing directors in increasing our market presence.
Our managing directors, with their personal and professional
contacts in the financial and corporate arenas, have been
instrumental in developing our business. We encourage our
senior executives to attend and host business receptions,
charitable activities and promotional gatherings so that we
may interact with our clients in a unique and personal
manner. We also hope to grow our business through referrals
from our existing clients. Referrals have been a significant
source of new business for us. We value this system of
networking because it allows us to further develop and
strengthen our personal and professional relationships with
both new and existing clients.
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o Expanding into New Product Lines. Our goal is to be the
primary source of financial products and services for our
clients. We believe that by broadening our product line and
adding additional financial services not currently offered
by us, we should be able to achieve an increase in our
franchise value through diversification of our fee income
and strengthening of our client relationships. To reach this
goal, we intend to consider acquisitions, joint ventures or
strategic alliances with other financial service companies
that emphasize quality service and the value of
relationships. Our targets are businesses that complement
our services and enable us to broaden our product line to
better serve our clients and help us develop new client
relationships.
o Expanding into New Markets. We believe the trend toward bank
consolidation and centralized decision-making that has
created a demand for our private banking services is not
unique to Chicago or St. Louis. As we identify other markets
that present opportunities for growth and development
similar to those in the Chicago and St. Louis markets, we
will consider selective geographic expansion through
possible acquisitions of existing institutions or by
establishing new banking offices.
The PrivateBank (Chicago) and The PrivateBank (St. Louis)
We offer banking services to our clients at a personal level. We
believe this is not the same as personal banking service. We define private
banking as offering banking products and services to our clients when they want
it, how they want it and where they want it. We tailor our products and services
to fit our clients instead of making our clients fit our products and services.
Our services fall into four general categories:
o Commercial Services. We offer a full range of lending
products to businesses owned by or affiliated with our
clients. We offer lines of credit for working capital, term
loans for equipment and other investment purposes, and
letters of credit to support the commitments our clients
make. We tailor these products to meet the varied needs of
our clients. Non-credit products we offer include lockbox,
cash concentration accounts, merchant credit card
processing, electronic funds transfer, other cash management
products and insurance. We strive to offer banking packages
that are competitive and allow us to provide service to our
clients beyond what is expected in our industry.
o Real Estate Services. We provide real estate loan products
to businesses and individuals. Our commercial real estate
lending products are designed for real estate investors. We
provide a full range of fixed and floating rate permanent
and mini-permanent mortgages for our clients to finance a
variety of properties such as apartment buildings, office
buildings, strip shopping centers, and other income
properties. We also provide some construction lending for
residential and commercial developments. We believe that our
lending products are competitively priced with terms that
are tailored to our clients' individual needs.
Our residential mortgage products range from 30-year fixed rate products to
personal construction lending. The home mortgage market is very competitive and
we believe that our service is what separates us from our competition. Many
mortgage lenders cannot work with borrowers who have non-traditional income
sources or non-traditional properties, such as co-ops. Our mortgage lending
staff is trained to work with successful individuals who have complex personal
financial profiles. We have developed a proficiency for mortgages in excess of
$1.0 million per loan and will work with our clients and our market sources to
place these loans into the secondary market. Our experience has been that
residential lending is an excellent vehicle to attract new clients.
o Trust and Asset Management. Our trust services include
investment management, personal trust and estate services,
custodial services, retirement accounts and brokerage and
investment services. Our trust personnel work with our
clients to define objectives, goals and strategies for their
investment portfolios. We assist the client with the
selection of an outside investment manager and work to
tailor the investment program accordingly. During 1999, we
introduced PrivateBank Counselor, an asset allocation
program that combines outside professional portfolio
management with an investment plan that our trust personnel
tailor to the individual client's personal financial goals.
Our trust and estate account administrators work with our
clients and their attorneys to establish their estate plans.
We work closely with our clients and their beneficiaries to
ensure that their needs are met and to advise them on
financial matters. When serving as management agent, trustee
or executor, we often structure
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and periodically monitor the performance of the investment
management of our clients' investment portfolios. We also
provide our clients with custodial services for safekeeping
of their assets. Consistent with our private banking
approach, we emphasize a high level of personal service in
our trust area, including prompt collection and reinvestment
of interest and dividend income, weekly valuation, tracking
of tax information, customized reporting and ease of
security settlement. We also offer retirement products such
as individual retirement accounts, 401(k)s, IRA rollovers,
and administrative services for retirement vehicles such as
profit sharing plans and employee stock option plans, as
well as a full line of brokerage and investment products.
Trust services are currently offered at The PrivateBank (St.
Louis) through the trust department of The PrivateBank
(Chicago).
o Individual Banking Services. Our typical private banking
client has several of the following products: interest
bearing checking with credit line, money market deposit
accounts, certificates of deposit, ATM/debit cards, and
brokerage accounts. Some of our clients are using the
PrivateBank Access Internet PC banking product. In addition
to residential mortgages, we provide clients a variety of
secured and unsecured personal loans and lines of credit.
Through our affiliations and contractual arrangements with
an independent insurance brokerage firm and a registered
securities broker-dealer firm, we offer insurance products
and securities brokerage services. We strive to accommodate
the individual needs of each of our clients by offering the
convenience of highly personalized services, including
domestic and international wire transfers and foreign
currency exchange.
Lending Activities
We work with our clients to provide a full range of commercial, real
estate and personal lending products and services. Our loans are concentrated in
six major areas: (1) commercial real estate; (2) commercial; (3) residential
real estate; (4) personal; (5) home equity; and (6) construction. We have
adopted a loan policy that contains general lending guidelines and is subject to
review and revision by our board of directors. We extend credit consistent with
this comprehensive loan policy.
The goal of our lending program is to meet the credit needs of our
diverse client base while using sound credit principles to protect the quality
of our assets. Our business and credit strategy is relationship-driven and we
strive to provide a reliable source of credit, a variety of lending
alternatives, and sound financial advice. When extending credit, our decisions
are based upon our client's ability to repay the loan from non-speculative
sources. The quality and integrity of the borrower is crucial in the loan
approval process. We monitor the performance of our loan portfolio through
regular contacts with our clients, continual portfolio review, careful
monitoring of delinquency reports and reliance on our loan review function.
We have retained an independent, outside resource to perform our
loan review function. Using an outside resource ensures that our loan review
process remains independent of the loan production and administration processes.
Our loan reviewer examines individual credits to critique individual problems
and the entire portfolio to comment on systemic weaknesses. The reviewer reports
directly to the audit committee of our board of directors on a quarterly basis.
In addition to loan review, the loan/investment committee of our board reviews
the adequacy of the allowance for loan losses on a quarterly basis. The
committee assesses management's loan loss provisions based on loan review's
findings, delinquency trends, historical loan loss experience and current
economic trends.
Our legal lending limits, based on our banks' statements of
financial condition, are calculated to not exceed 20% of capital plus
unencumbered reserves. At December 31, 2000, The PrivateBank (Chicago)'s legal
lending limit was $12.8 million and The PrivateBank (St. Louis)'s legal lending
limit was $1.0 million. A bank's legal lending limit is the maximum amount of
credit that the bank may commit to any one individual or business entity after
aggregating all related credit.
In addition to our chief credit officer, certain individuals have
been designated acting chief credit officers, credit officers, officers with
lending authority, and residential real estate lending officers. No single
individual has sole authority to approve a loan. As the size of aggregate credit
exposure increases, additional officers are required to approve the loan
requests. This serves several purposes: (a) larger credits get more scrutiny,
(b) most senior credit officers become involved in the decision-making process
for the vast majority of dollars loaned without
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approving a proportionate number of loan requests, and (c) we become more
consistent in administration of credit as credit officers experience the
dynamics of our overall portfolio and credit culture.
Our chief credit officer, or his designate, is involved in all
credit decisions when the aggregate credit exposure is in excess of $250,000.
The loan/investment committee of The PrivateBank (Chicago) reviews all credit
decisions over $2.5 million and that of The PrivateBank (St. Louis) reviews all
credit decisions over $250,000. Prior approval is required for credit exposure
in excess of $5.0 million and for all credits related to our board members or
our managing directors. Loans are approved at the bank level by a management
loan committee or by obtaining the approval of individual credit officers. We
believe that this process allows us to be more responsive to our clients' needs
by being able to approve credit without waiting for scheduled committee
meetings. We also use management committee meetings to discuss complex credits
or when we feel that a particular credit may be informative to everyone in the
loan approval process. The PrivateBank (St. Louis) is required to maintain a
specific percentage of its loan portfolio in qualified residential real estate
loans. To address this regulatory requirement, from time to time, The
PrivateBank (St. Louis) intends to purchase qualifying loans from The
PrivateBank (Chicago) in exchange for loans generated in the St. Louis market
that do not meet the criteria for qualified-thrift-loans. We expect to price
sales of loans between the banks so as to allow each bank to achieve equal risk
rewards from a yield perspective. Prior to purchasing any loans, the chief
credit officer of The PrivateBank (Chicago) will apply the same credit policies
and procedures as are followed for any other loan approval. Likewise, The
PrivateBank (St. Louis) will apply the same lending discipline to loans
purchased from The PrivateBank (Chicago) as it does for externally generated
loans.
The following table sets forth the loan portfolio by category as of
December 31, 2000 and 1999:
December 31, Percentage of December 31, Percentage of
2000 total loans 1999 total loans
------------- ------------- ------------ -------------
(dollars in thousands)
Commercial real estate.......... $206,464 34.4% $146,368 36.8%
Commercial...................... 137,343 22.9% 67,026 16.9%
Residential real estate......... 86,052 14.4% 72,972 18.4%
Personal........................ 62,414 10.4% 57,497 14.5%
Home equity..................... 46,013 7.7% 24,396 6.1%
Construction.................... 61,143 10.2% 29,018 7.3%
---------- ----- ---------- -----
Total loans................ $599,429 100.0% $397,277 100.0%
========== ===== ========== =====
Commercial Real Estate Loans. Our commercial real estate portfolio
is comprised primarily of loans secured by multi-family housing units located in
the Chicago metropolitan area. Other types of commercial real estate collateral
include: commercial properties owned by clients housing their manufacturing,
warehousing or service businesses, investments in small retail centers, and
investments in other business properties.
Risks inherent in real estate lending are related to the market
value of the property taken as collateral, the underlying cash flows and
documentation. It is important to accurately assess property values through
careful review of appraisals. Some examples of risky commercial real estate
lending include loans secured by properties with widely fluctuating market
values or income properties occupied by renters with unstable sources of income,
and not perfecting liens on property taken as collateral. We mitigate these
risks by understanding real estate values in areas in which we lend,
investigating the sources of cash flow servicing the debt on the property and
adhering to loan documentation policy.
Commercial real estate loan products include mini-permanent and
permanent financing, transaction loans to purchase properties prior to permanent
financing, and lines of credit secured by commercial real estate portfolios. We
typically structure mini-permanent and permanent financing as adjustable rate
mortgages. ARM structure allows our clients to lock in an interest rate for a
fixed period of time in order to avoid interest rate risk during the lock-in
period. The vast majority of our ARM loans have initial fixed pricing for
between one to five years. Each ARM loan has language defining repricing beyond
the initial fixed pricing term. Transaction loans to purchase commercial
property typically have maturities of one year or less. Lines of credit secured
by commercial real estate portfolios are typically granted for one year with
annual extensions after a successful underwriting review. Interest rates for our
lines of credit typically are based on a floating rate formula.
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In our credit analysis process for commercial real estate loans, we
typically review the appraised value of the property, the ability of the
property as collateral to service debt, the significance of any outside income
of the borrower or income from other properties owned by the borrowers, and the
strength of guarantors, if any. Our real estate appraisal policy has been
approved by our board loan/investment committee. It addresses selection of
appraisers, appraisal standards, environmental issues and specific requirements
for different types of properties.
Commercial Loans. Our commercial loan portfolio is comprised of
lines of credit for working capital, term loans for equipment and expansion, and
letters of credit. These loans are made to businesses affiliated with our
clients, or to clients directly for business purposes. The vast majority of our
commercial loans are personally guaranteed. Unsecured loans are made to
businesses when a guarantor, as a secondary source of repayment, has a
significant ability to repay and a significant interest in the business entity.
Commercial loans can contain risk factors unique to the business of each
borrower. In order to mitigate these risks, we seek to gain an understanding of
the business of each borrower, place appropriate value on collateral taken and
structure the loan properly to make sure that collateral values are maintained
while loans are committed. Appropriate documentation of commercial loans is also
important to protect our interests.
Our lines of credit typically are limited to a percentage of the
value of the assets securing the line, and priced by a floating rate formula.
Lines of credit typically are reviewed annually and are supported by accounts
receivable, inventory and equipment. Depending on the risk profile of the
borrower, we may require periodic aging of receivables, and inventory and
equipment listings to verify the quality of the borrowing base prior to
advancing funds. Our term loans are typically also secured by the assets of our
clients' businesses. Term loans typically have maturities between one to five
years, with either floating or fixed rates of interest. Commercial borrowers are
required to provide updated personal and corporate financial statements at least
annually. Letters of credit are an important product to many of our clients. We
issue standby or performance letters of credit, and can service the
international needs of our clients through correspondent banks. We use the same
underwriting standards for letters of credit as we do for funded loans.
Our credit approval process for commercial loans is comprehensive.
We typically review the current and future cash needs of the borrower, the
business strategy, management's ability, the strength of the collateral, and the
strength of the guarantors. While our loan policy has guidelines for advances on
different types of collateral, we establish eligible asset values on a
case-by-case basis for each borrower. Our officer on the account must be able to
validate his or her position during the approval process.
Residential Real Estate Loans. Our residential real estate portfolio
consists primarily of first and second mortgage loans for 1-4 unit residential
properties. We do not originate long-term fixed rate loans for our own portfolio
due to interest rate risk considerations. However, we do originate these loans
for sale into the secondary market. This is a significant business activity in
our residential real estate lending unit. For our own portfolio, we originate
ARM loans typically structured with 30-year maturities and initial rates fixed
for between one to five years with annual repricing beyond the initial term.
Our credit review process mirrors the standards set by traditional
secondary market sources. We review appraised value and debt service ratios, and
we gather data during the underwriting process in accordance with the various
laws and regulations governing residential real estate lending. Our real estate
appraisal policy sets specific standards for valuing residential property.
We require pre-approval from secondary market sources before we
approve loans to be sold into the secondary market. Our internal approval
process is less stringent for loans pre-approved by our secondary market
sources. This allows us to be responsive to the tight time commitments dictated
for locking in rates in the secondary market.
We believe that we have a competitive advantage in our ability to
offer financing for our clients who have non-traditional income sources or
require large mortgage loans. We have developed secondary market sources for
mortgages, including several able to provide financing in amounts in excess of
$1.0 million per loan which is occasionally required by our clients. By offering
our own ARM loans, we can offer credit to individuals who are self-employed or
have significant income from partnerships or investments. The secondary market
often will not take the time or will be unable to make exceptions for otherwise
qualified borrowers. We also have experience in
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making loans to qualified borrowers secured by co-ops. We believe that we are
one of a limited number of financial institutions in the Chicago area making
these loans.
Personal Loans. Our personal loan portfolio consists of loans to
secure funds for personal investment, loans to acquire personal assets such as
automobiles and boats, and personal lines of credit. Frequently, our borrowers
prefer not to liquidate assets to secure funds for investment or personal
acquisitions. They will use these assets as collateral for personal loans, or if
their financial statements and personal reputations are sufficient, we will
grant unsecured credit. A key factor in originating personal loans is knowing
our borrowers. When personal loans are unsecured, we believe that the character
and integrity of the borrower becomes as important as the borrower's financial
statement.
Our clients request a combination of lines of credit, floating-rate
term loans and fixed-rate term loan products. Many of our clients use their
personal investment portfolios as collateral for personal loans. Personal lines
of credit are used for a variety of purposes such as the comfort of having funds
available for future uses or establishing a line of credit as overdraft
protection. We respond quickly to the needs of our clients within the limits set
by our loan policy.
Personal loans are subject to the same approval process as all other
types of loans. Each client is underwritten to ensure that they have adequate
collateral coverage and/or cash flow. Annual financial statements are required
of each personal borrower.
Home Equity Loans. Our home equity loan portfolio consists of
traditional home equity lines of credit prevalent in the market today. In
general, we advance up to 80% on the value of a home, less the amount of prior
liens. However, we may vary from that percentage depending on the value of the
home, type of dwelling, and the personal financial situation of the borrower.
Home equity loans are funded either through draws requested by our clients or by
special home equity credit drafts that function as bank checks. Home equity
loans are approved using the same standards as residential mortgage loans. Our
borrower's personal cash flow is compared to debt service requirements to
determine our borrower's ability to repay. Home equity loans are competitively
priced and are based on a floating rate formula.
Construction Loans. Our construction loan portfolio consists of
single residential properties, multi-family properties, and commercial projects.
As construction lending has greater inherent risk, we closely monitor the status
of each construction loan throughout its term. Typically, we require full
investment of the borrower's equity in construction projects prior to injecting
our funds. Generally, we do not allow borrowers to recoup their equity from the
sale proceeds of finished units (if applicable) until we have recovered our
funds on the overall project. We use a title company to disburse periodic draws
from the construction line to ensure that there will be no title problems at the
end of the project.
Our construction loans are often the highest yielding loans in our
portfolio due to the inherent risks and the monitoring requirements. These loans
typically have floating rates, commitment fees and release fees. During our
credit approval process, factors unique to construction loans are considered.
These include assessment of the market for the finished product, reasonableness
of the construction budget, ability of the borrower to fund cost overruns, and
the borrower's ability to liquidate and repay the loan at the point when the
loan-to-value ratio is the greatest. We seek to manage these risks by, among
other things, ensuring that the collateral value of the property throughout the
construction process does not fall below acceptable levels, ensuring that funds
disbursed are within parameters set by the original construction budget, and
properly documenting each construction draw. Due to our more stringent standards
for underwriting and monitoring construction loans and the credit profile of our
borrowers, we are comfortable with the risk associated with this portfolio and
are committed to construction lending as an integral part of our lending
program.
Investment Activities
The objective of our investment policy is to maximize income
consistent with liquidity, asset quality, regulatory constraints and
asset/liability objectives. The policy is to be reviewed at least annually by
our board of directors. Our board is provided quarterly information recapping
purchases and sales with the resulting gains or
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losses, average maturity, federal taxable equivalent yields and appreciation or
depreciation by investment categories.
We invest primarily in direct obligations of the United States,
obligations guaranteed as to principal and interest by the United States,
obligations of agencies of the United States, bank-qualified tax-exempt
obligations of state and local political subdivisions and collateralized
mortgage obligations. We also may invest from time to time in corporate debt or
other securities as permitted by our investment policy. In addition, we enter
into federal funds transactions with our principal correspondent banks, and
primarily act as a net seller of such funds. The sale of federal funds are
effectively short-term loans from us to other banks.
Our investment portfolio also includes equity investments in the
Federal Home Loan Bank of Chicago and the Federal Home Loan Bank of Des Moines.
We invest in the Federal Home Loan Bank in order to be a member, which qualifies
us to use their services including Federal Home Loan Bank borrowings. In
addition, we have purchased participations in pools of loans from Neighborhood
Housing Services ("NHS"). NHS is a not-for-profit organization which helps
provide affordable housing to low and moderate income residents in the Chicago
area. The size of our investment is proportionate to the volume of loans in
certain credit programs offered by NHS. NHS is an important vehicle in our
Community Reinvestment Act ("CRA") lending program.
Our chief financial officer is responsible for the management of our
investment portfolio as well as the implementation of our investment strategy.
Trust and Asset Management
We offer our clients a wide variety of trust and asset management
services designed to meet their individual needs and investment goals. Many of
our trust clients have long-standing relationships with our managing directors.
In administering a trust, we work closely with our client, the beneficiaries and
the trustees' attorneys and accountants on personal and tax matters to assist
the client in accomplishing the stated objectives. As fiduciaries of a trust or
estate, our responsibilities may include:
o administering the account pursuant to the applicable
document;
o collecting, holding and valuing assets;
o monitoring investment portfolios;
o paying debts, expenses and taxes;
o distributing property;
o advising beneficiaries; and
o preparation of tax returns.
In addition to trust and estate administration, we offer:
o institutional accounts;
o guardianship administration;
o investment agency accounts;
o Section 1031 exchanges; and
o custodial accounts.
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Since January 1, 1997, the average account value of new trusts
administered by us was approximately $3.0 million. We seek to continue to grow
our trust business as we expand our client base and our clients increasingly
reach retirement age and focus on their estate plans. The following table
indicates the break-down of our trust assets under administration at December
31, 2000 by account classification and related gross revenue for the nine months
ended December 31, 2000:
At or for the twelve months
ended December 31, 2000
-----------------------
Account Type Market Value Revenue
------------ ------------ -------
(in thousands)
Personal trust--managed.................. $274,483 $1,282
Agency--managed.......................... 117,898 411
Custody.................................. 350,175 530
Employee benefits--managed............... 35,209 68
---------- ---------
Total................................ $777,765 $2,291
========== ---======
We have chosen to outsource the investment management aspect of our
trust business so that we may offer our clients diversity and flexibility of
investment representation and to allow us to impartially evaluate investment
performance. This structure also allows our clients to independently designate
one or more specific advisors enabling them to maintain existing relationships
they may have within the financial community. If the client does not have such a
relationship in place, we help them select an investment management firm to best
service their needs. Based on the client's investment strategy and objectives
and the account attributes, one or more investment managers will be selected
from a selected group of approved advisors.
Our trust policy has established controls over our trust activities
to safeguard the assets of our clients against operational and administrative
risk. We have a system of internal controls that is designed to keep our
operating risk at appropriate levels. Our system of internal controls includes
policies and procedures relating to authorization, approval, documentation and
monitoring of transactions. Administrative risk is the risk of loss that may
occur as a result of breaching a fiduciary duty to a client. To manage this
risk, our trust policy has established corporate policies and procedures to
ensure that obligations to clients are discharged faithfully and in compliance
with applicable legal and regulatory requirements. These policies and procedures
provide guidance and establish standards related to the creation, sale, and
management of investment products, trade execution, and counterparty selection.
Asset/Liability Management Committee
We have an asset/liability committee ("ALCO") comprised of selected
senior executives who are charged with the dual goals of optimization and
stabilization of net interest income over time while adhering to prudent banking
practices. ALCO oversees asset growth, liquidity and capital, and directs our
overall acquisition and allocation of funds. At its meetings, ALCO reviews
issues including:
o data on economic conditions;
o current interest rate outlook;
o current forecast on loans and deposits;
o mix of interest rate sensitive assets and liabilities;
o bank liquidity position;
o investment portfolio purchases and sales; and
o other matters as presented.
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ALCO is also responsible for monitoring compliance with our
investment policy. On a quarterly basis, ALCO reports to the loan/investment
committee who reviews the portfolio of reports we prepare for our board of
directors and all the decisions made by ALCO affecting net interest income.
Competition
We do business in the highly competitive financial services
industry. Our geographic market is primarily the greater Chicago and St. Louis
metropolitan areas. The financial services industry is comprised of commercial
banks, thrifts, credit unions, investment banks, brokerage houses, money
managers, and other providers of financial products and services. These firms
compete with us for one or more of the following: loans, deposits, trust
services, or investment products. Some of these firms have business units that
promote themselves as "private banks." The typical private banking competitor is
a unit of a large commercial bank catering to the upper echelon of that bank's
customer base.
We view ourselves as the only private bank in the Chicago and St.
Louis markets focused solely on offering an extended range of traditional
banking and trust products to affluent professionals, entrepreneurial
individuals and their business interests. While our products may be similar to
those of our competitors, we attempt to distinguish ourselves by emphasizing
consistent, superior levels of personal service. For commercial and commercial
real estate lending, we compete with a number of major Chicago-area financial
institutions and suburban banks and, in the St. Louis market, with St.
Louis-based financial institutions and banking offices. For trust services, we
compete with the largest Chicago-area banks and some investment managers. For
private banking services, we compete with the private banking departments of
major Chicago and St. Louis-area financial institutions, some suburban banks,
and brokerage houses. For residential mortgage lending, we compete with banks,
savings and loans, mortgage brokers and numerous other financial services firms
offering mortgage loans in our market areas. Several of our competitors are
national or international in scope.
Some of our competitors are not subject to the same degree of
regulation as that imposed on bank holding companies, state banking
organizations and federal savings banks. In addition, the larger banking
organizations, investment banks and brokerage houses have significantly greater
resources than we do. As a result, some of our competitors have advantages over
us in name recognition and market penetration.
Employees
As of December 31, 2000, we had approximately 137 full-time
equivalent employees. The salaries of all of our employees are paid by either
The PrivateBank (Chicago) or The PrivateBank (St. Louis), with the exception of
Messrs. Mandell and Svec and Lisa M. O'Neill, our controller, a portion of whose
salaries are paid by PrivateBancorp.
We provide our employees with a comprehensive program of benefits,
some of which are on a contributory basis, including comprehensive medical and
dental plans, life insurance plans, and 401(k) plans. We consider our
relationship with our employees to be good.
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SUPERVISION AND REGULATION
General
Banking is a highly regulated industry. The following is a summary
of several applicable statutes and regulations. However, these summaries are not
complete, and you should refer to the statutes and regulations for more
information. Also, these statutes and regulations are likely to change in the
future, and we cannot predict what effect these changes, if made, will have on
our operations. Finally, please remember that the supervision, regulation and
examination of banks and bank holding companies by bank regulatory agencies are
intended primarily for the protection of depositors rather than stockholders of
banks and bank holding companies.
Bank Holding Company Regulation
PrivateBancorp is registered as a "bank holding company" with the
Board of Governors of the Federal Reserve System (the "Federal Reserve")
pursuant to the Bank Holding Company Act of 1956, as amended (the Bank Holding
Company Act of 1956 and the regulations issued thereunder are collectively
referred to as the "BHC Act"), and we are subject to regulation, supervision and
examination by the Federal Reserve.
Minimum Capital Requirements. The Federal Reserve has adopted
risk-based capital requirements for assessing bank holding company capital
adequacy. These standards define capital and establish minimum capital ratios in
relation to assets, both on an aggregate basis, and as adjusted for credit risks
and off-balance sheet exposures. Under the Federal Reserve's risk-based
guidelines applicable to PrivateBancorp, capital is classified into two
categories.
For bank holding companies, Tier 1, or "core," capital consists
of:
o common stockholders' equity;
o qualifying noncumulative perpetual preferred stock;
o qualifying cumulative perpetual preferred stock (subject to
some limitations); and
o minority interests in the common equity accounts of
consolidated subsidiaries.
less:
o goodwill; and
o specified intangible assets.
Tier 2, or "supplementary," capital consists of:
o the allowance for loan and lease losses;
o perpetual preferred stock and related surplus;
o hybrid capital instruments;
o unrealized holding gains on equity securities;
o perpetual debt and mandatory convertible debt securities;
o term subordinated debt, including related surplus; and
o intermediate-term preferred stock, including related
securities.
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Under the Federal Reserve's capital guidelines, bank holding
companies are required to maintain a minimum ratio of qualifying total capital
to risk-weighted assets of 8%, of which at least 4% must be in the form of Tier
1 capital. The Federal Reserve has established a minimum ratio of Tier 1 capital
to total assets of 3% for strong bank holding companies (those rated a composite
"1" under the Federal Reserve's rating system). For all other bank holding
companies, the minimum ratio of Tier 1 capital to total assets is 4%. In
addition, the Federal Reserve continues to consider the Tier 1 leverage ratio
(after deducting all intangibles) in evaluating proposals for expansion or new
activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes
that the foregoing standards are supervisory minimums and that banking
organizations generally are expected to operate well above the minimum ratios.
These guidelines also state that banking organizations experiencing growth,
whether internally or by making acquisitions, are expected to maintain strong
capital positions substantially above the minimum levels.
As of December 31, 2000, we had regulatory capital in excess of the
Federal Reserve's minimum requirements. Our total risk-based capital ratio at
December 31, 2000 was 8.15% and our leverage ratio was 5.54%.
Acquisitions. The BHC Act requires prior Federal Reserve approval
for, among other things, the acquisition by a bank holding company of direct or
indirect ownership or control of more than 5% of the voting shares or
substantially all the assets of any bank, or for a merger or consolidation of a
bank holding company with another bank holding company. With limited exceptions,
the BHC Act prohibits a bank holding company from acquiring direct or indirect
ownership or control of voting shares of any company which is not a bank or bank
holding company and from engaging directly or indirectly in any activity other
than banking or managing or controlling banks or performing services for its
authorized subsidiaries. A bank holding company may, however, engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined, by regulation or order, to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto,
such as owning and operating a savings association, performing functions or
activities that may be performed by a trust company, or acting as an investment
or financial advisor. Under the BHC Act and Federal Reserve regulations, we are
prohibited from engaging in tie-in arrangements in connection with an extension
of credit, lease, sale of property, or furnishing of services. That means that,
except with respect to traditional banking products, we may not condition a
client's purchase of one of our services on the purchase of another service. The
passage of the Gramm-Leach-Bliley Act, however, allows bank holding companies to
become financial holding companies. Financial holding companies do not face the
same prohibitions to entering into certain business transactions that bank
holding companies currently face. See the discussion of the Gramm-Leach-Bliley
Act below.
Interstate Banking and Branching Legislation. Under the Interstate
Banking and Efficiency Act, adequately capitalized and adequately managed bank
holding companies are allowed to acquire banks across state lines subject to
various limitations. In addition, under the Interstate Banking Act, banks are
permitted, under some circumstances, to merge with one another across state
lines and thereby create a main bank with branches in separate states. After
establishing branches in a state through an interstate merger transaction, a
bank may establish and acquire additional branches at any location in the state
where any bank involved in the interstate merger could have established or
acquired branches under applicable federal and state law.
Ownership Limitations. Under the Illinois Banking Act, any person
who acquires more than 10% of our stock may be required to obtain the prior
approval of the commissioner of the Illinois Office of Banks and Real Estate
(the "Commissioner"). Under the Change in Bank Control Act, a person may be
required to obtain the prior regulatory approval of the Federal Reserve before
acquiring the power to directly or indirectly control the management, operations
or policies of PrivateBancorp or before acquiring control of 10% or more of any
class of our outstanding voting stock.
Dividends. The Federal Reserve has issued a policy statement on the
payment of cash dividends by bank holding companies. In the policy statement,
the Federal Reserve expressed its view that a bank holding company experiencing
earnings weaknesses should not pay cash dividends exceeding its net income or
which could only be funded in ways that weakened the bank holding company's
financial health, such as by borrowing. Additionally, the Federal Reserve
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and
13
regulations. Among these powers is the ability to prohibit or limit the payment
of dividends by banks and bank holding companies.
Under a longstanding policy of the Federal Reserve, we are expected
to act as a source of financial strength to our banking subsidiaries and to
commit resources to support them. The Federal Reserve takes the position that in
implementing this policy, it may require us to provide financial support when we
otherwise would not consider ourselves able to do so.
In addition to the restrictions on dividends imposed by the Federal
Reserve, Delaware law also places limitations on our ability to pay dividends.
For example, we may not pay dividends to our stockholders if, after giving
effect to the dividend, we would not be able to pay our debts as they become
due. Because a major source of our revenue could be dividends which we expect to
receive from our banking subsidiaries, our ability to pay dividends will depend
on the amount of dividends paid by our banking subsidiaries. We cannot be sure
that our banking subsidiaries will pay such dividends to us.
Bank Regulation
The PrivateBank (Chicago) is subject to supervision and examination
by the commissioner of the Illinois Office of Banks and Real Estate (the
"Commissioner") and, as a non-member, FDIC-insured bank, to supervision and
examination by the Federal Deposit Insurance Corporation ("FDIC"). As an
affiliate of The PrivateBank (Chicago), we are also subject to examination by
the Commissioner. The PrivateBank (Chicago) is a member of the Federal Home Loan
Bank ("FHLB") of Chicago and may be subject to examination by the FHLB of
Chicago. The Federal Deposit Insurance Act ("FDIA") requires prior FDIC approval
for any merger and/or consolidation by or with another depository institution,
as well as for the establishment or relocation of any bank or branch office. The
FDIA also gives the power to the FDIC to issue cease and desist orders. A cease
and desist order could either prohibit a bank from engaging in certain unsafe
and unsound bank activity or could require a bank to take certain affirmative
action. The FDIC also supervises compliance with the federal law and regulations
which place restrictions on loans by FDIC-insured banks to an executive officer,
director or principal shareholder of the bank, the bank holding company which
owns the bank, and any subsidiary of such bank holding company. The FDIC also
examines The PrivateBank (Chicago) for its compliance with statutes which
restrict and, in some cases, prohibit certain transactions between a bank and
its affiliates. Among other provisions, these laws place restrictions upon:
o extensions of credit to the bank holding company and any
non-banking affiliates,
o the purchase of assets from affiliates,
o the issuance of guarantees, acceptances or letters of credit
on behalf of affiliates, and
o investments in stock or other securities issued by
affiliates or acceptance thereof as collateral for an
extension of credit.
Also, The PrivateBank (Chicago) is subject to restrictions with
respect to engaging in the issuance, underwriting, public sale or distribution
of certain types of securities and to restrictions upon:
o the nature and amount of loans which it may make to a single
borrower (and, in some instances, a group of affiliated
borrowers),
o the nature and amount of securities in which it may invest,
o the amount of investment in The PrivateBank (Chicago)
premises, and
o the manner in and extent to which it may borrow money.
Furthermore, all banks are affected by the credit policies of other
monetary authorities, including the Federal Reserve, which regulate the national
supply of bank credit. Such regulation influences overall growth of bank loans,
investments, and deposits and may also affect interest rates charged on loans
and paid on deposits. The
14
Federal Reserve's monetary policies have had a significant effect on the
operating results of commercial banks in the past and we expect this trend to
continue in the future.
Dividends. The Illinois Banking Act provides that an Illinois bank
may not pay dividends of an amount greater than its current net profits after
deducting losses and bad debts while such bank continues to operate a banking
business. For the purpose of determining the amount of dividends that an
Illinois bank may pay, bad debts are defined as debts upon which interest is
past due and unpaid for a period of six months or more unless such debts are
well-secured and in the process of collection.
In addition to the foregoing, the ability of PrivateBancorp and The
PrivateBank (Chicago) to pay dividends may be affected by the various minimum
capital requirements and the capital and non-capital standards established under
the Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"),
as described below.
Federal Reserve System. The PrivateBank (Chicago) is subject to
Federal Reserve regulations requiring depository institutions to maintain
noninterest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations generally
require 3% reserves on the first $44.3 million of transaction accounts plus 10%
on the remainder. The first $5.0 million of otherwise reservable balances
(subject to adjustments by the Federal Reserve) are exempted from the reserve
requirements. The PrivateBank (Chicago) is in compliance with that requirement.
Standards for Safety and Soundness. The FDIA, as amended by FDICIA
and the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the FDIC, together with the other federal bank regulatory agencies, to
prescribe standards of safety and soundness, by regulations or guidelines,
relating generally to operations and management, asset growth, asset quality,
earnings, stock valuation, and compensation. The FDIC and the other federal bank
regulatory agencies have adopted a set of guidelines prescribing safety and
soundness standards pursuant to FDICIA. The guidelines establish general
standards relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. In addition, the FDIC adopted regulations
that authorize, but do not require, the FDIC to order an institution that has
been given notice by the FDIC that it is not satisfying the safety and soundness
guidelines to submit a compliance plan. If, after being so notified, an
institution fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the FDIC must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized association is
subject under the "prompt corrective action" provisions of FDICIA. If an
institution fails to comply with such an order, the FDIC may seek to enforce its
order in judicial proceedings and to impose civil money penalties. The FDIC and
the other federal bank regulatory agencies have also proposed guidelines for
asset quality and earning standards.
Prompt Corrective Action. FDICIA requires the federal banking
regulators, including the Federal Reserve and the FDIC, to take prompt
corrective action with respect to depository institutions that fall below
minimum capital standards and prohibits any depository institution from making
any capital distribution that would cause it to be undercapitalized.
Institutions that are not adequately capitalized may be subject to a variety of
supervisory actions, including restrictions on growth, investment activities,
capital distributions and affiliate transactions, and will be required to submit
a capital restoration plan which, to be accepted by the regulators, must be
guaranteed in part by any company having control of the institution (for
example, the company or a stockholder controlling the company). In other
respects, FDICIA provides for enhanced supervisory authority, including greater
authority for the appointment of a conservator or receiver for critically
under-capitalized institutions. The capital-based prompt corrective action
provisions of FDICIA and its implementing regulations apply to FDIC-insured
depository institutions. However, federal banking agencies have indicated that,
in regulating bank holding companies, the agencies may take appropriate action
at the holding company level based on their assessment of the effectiveness of
supervisory actions imposed upon subsidiary insured depository institutions
pursuant to the prompt corrective action provisions of FDICIA. Also, under
FDICIA, insured depository institutions with assets of $500 million or more at
the beginning of a fiscal year, must submit an annual report for that year,
including financial statements and a
15
management report, to each of the FDIC, any appropriate federal banking agency,
and any appropriate bank supervisor. The PrivateBank (Chicago) had assets of
$500 million or more at the beginning of fiscal year 2000, and must therefore
provide an annual report as required by FDICIA.
As of December 31, 2000, The PrivateBank (Chicago) had capital in
excess of the requirements for a "well-capitalized" institution.
Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured
institution, The PrivateBank (Chicago) is required to pay deposit insurance
premiums based on the risk it poses to the Bank Insurance Fund ("BIF"). The FDIC
has authority to raise or lower assessment rates on insured deposits in order to
achieve statutorily required reserve ratios in the insurance funds and to impose
special additional assessments. Each depository institution is assigned to one
of three capital groups: "well capitalized," "adequately capitalized" or
"undercapitalized." Within each capital group, institutions are assigned to one
of three supervisory subgroups: "A" (institutions with few minor weaknesses),
"B" (institutions which demonstrate weaknesses which, if not corrected, could
result in significant deterioration of the institution and increased risk of
loss to BIF), and "C" (institutions that pose a substantial probability of loss
to BIF unless effective corrective action is taken). Accordingly, there are nine
combinations of capital groups and supervisory subgroups to which varying
assessment rates would be applicable. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. During
2000, The PrivateBank (Chicago) paid deposit insurance premiums in the aggregate
amount of $103,470. During 2000, The PrivateBank (St. Louis) paid deposit
insurance premiums in the aggregate amount of $2,214.
Deposit insurance may be terminated by the FDIC upon a finding that
an institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC. Such terminations can
only occur, if contested, following judicial review through the federal courts.
We do not know any practice, condition or violation that might lead to
termination of our deposit insurance.
Community Reinvestment. Under the CRA, a financial institution has a
continuing and affirmative obligation to help meet the credit needs of its
entire community, including low- and moderate-income neighborhoods. The CRA does
not establish specific lending requirements or programs for financial
institutions, nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community. However, institutions are rated on their performance in meeting the
needs of their communities. Performance is judged in three areas: (a) a lending
test, to evaluate the institution's record of making loans in its assessment
areas; (b) an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs benefitting
low or moderate income individuals and business; and (c) a service test, to
evaluate the institution's delivery of services through its branches, ATMs and
other offices. The CRA requires each federal banking agency, in connection with
its examination of a financial institution, to assess and assign one of four
ratings to the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by the institution, including applications for charters, branches and other
deposit facilities, relocations, mergers, consolidations, acquisitions of assets
or assumptions of liabilities, and savings and loan holding company
acquisitions. The CRA also requires that all institutions make public disclosure
of their CRA ratings.
The PrivateBank (Chicago) was assigned a "satisfactory" rating in
January 1999 as a result of its last CRA examination.
Compliance with Consumer Protection Laws. The PrivateBank (Chicago)
is subject to many federal consumer protection statutes and regulations
including the CRA, the Truth in Lending Act, the Truth in Savings Act, the Equal
Credit Opportunity Act, the Fair Housing Act, the Real Estate Settlement
Procedures Act and the Home Disclosure Act. Among other things, these acts:
o require banks to meet the credit needs of their communities;
o require banks to disclose credit terms in meaningful and
consistent ways;
o prohibit discrimination against an applicant in any consumer
or business credit transaction;
16
o prohibit discrimination in housing-related lending
activities;
o require banks to collect and report applicant and borrower
data regarding loans for home purchases or improvement
projects;
o require lenders to provide borrowers with information
regarding the nature and cost of real estate settlements;
o prohibit certain lending practices and limit escrow account
amounts with respect to real estate transactions; and
o prescribe possible penalties for violations of the
requirements of consumer protection statutes and
regulations.
From time to time we have been made aware of certain deficiencies in
our consumer compliance program. Management believes that any deficiencies have
already been or are in the process of being corrected. In the event that
consumer compliance deficiencies were to continue over time, enforcement or
administrative actions by the appropriate federal banking regulators could
result. Such action could in turn affect the implementation of our growth
strategies.
Enforcement Actions. Federal and state statutes and regulations
provide financial institution regulatory agencies with great flexibility to
undertake an enforcement action against an institution that fails to comply with
regulatory requirements, particularly capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
civil money penalties, cease and desist orders, receivership, conservatorship or
the termination of deposit insurance.
Impact of the Gramm-Leach-Bliley Act. On November 12, 1999,
President Clinton signed the Gramm-Leach-Bliley Act (the "GLB Act"), which among
other things, establishes a comprehensive framework to permit affiliations among
commercial banks, insurance companies and securities firms. Also, a bank holding
company which meets certain criteria may certify that it satisfies such criteria
and become a financial holding company, and thereby engage in a broader range of
activity than permitted a bank holding company.
The GLB Act imposes new requirements on financial institutions with
respect to customer privacy by generally prohibiting disclosure of customer
information to non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy policies to
customers annually. The GLB Act directs the federal regulators to promulgate
implementing regulations within six months of enactment. The privacy provisions
will become effective six months thereafter.
We do not believe that the GLB Act will have a material adverse
effect upon our operations in the near term. However, to the extent the GLB Act
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This
consolidation could result in a growing number of larger financial institutions
that offer a wider variety of financial services than we currently offer and
that can aggressively compete in the markets we currently serve.
The PrivateBank (St. Louis). The PrivateBank (St. Louis) is a
federally chartered savings bank. Accordingly, it is governed by and subject to
extensive regulation, examination and supervision by the Office of Thrift
Supervision ("OTS"), and is required to comply with the rules and regulations of
the OTS under the Home Owners' Loan Act ("HOLA"). As a federally chartered
savings bank, The PrivateBank (St. Louis) has greater flexibility in pursuing
interstate branching than an Illinois state bank. The activities of The
PrivateBank (St. Louis) are also governed by the Federal Deposit Insurance Act.
The FDIC has back-up regulatory authority over The PrivateBank (St. Louis).
Although The PrivateBank (St. Louis) has a different primary federal regulator
from The PrivateBank (Chicago), most, if not all, of the federal statutes and
regulations applicable to The PrivateBank (Chicago) are also applicable to The
PrivateBank (St. Louis).
17
Under such regulation and supervision, The PrivateBank (St. Louis)
is required to file reports with the OTS and the FDIC concerning its activities
and financial condition in addition to obtaining regulatory approvals prior to
establishing branches or entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. The OTS conducts
periodic examinations to test The PrivateBank's (St. Louis) compliance with
various regulatory and safety and soundness requirements. This regulation and
supervision establishes a comprehensive framework of supervision and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including discretion with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulatory requirements and policies, whether by the OTS, the
FDIC or the Congress, could have a material adverse impact on us, The
PrivateBank (St. Louis) and our operations.
The PrivateBank (St. Louis) is also required to be a qualified
thrift lender ("QTL"). The HOLA requires savings institutions to meet a QTL
test, under which the institution is required to either qualify as a "domestic
building and loan association" under the Internal Revenue Code or maintain at
least 65% of its "portfolio assets" (total assets less (1) specified liquid
assets up to 20% of total assets; (2) intangibles, including goodwill; and (3)
the value of property used to conduct business) in certain "qualified thrift
investments," (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least nine months out of
each twelve month period. As part of its application process, The PrivateBank
(St. Louis) submitted a three-year business plan to the FDIC and the OTS which
commits to compliance with the QTL test among other objectives, including the
maintenance of sufficient capital. A savings institution that fails the QTL test
is subject to certain operating restrictions and may be required to convert to a
bank charter. In meeting the QTL test, The PrivateBank (St. Louis) may be
assisted by The PrivateBank (Chicago) through the purchase by The PrivateBank
(Chicago) of certain loans and/or assets from The PrivateBank (St. Louis).
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We
intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and we are including this statement for purposes
of these safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe our future plans, strategies and expectations,
can generally be identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Our ability to
predict results or the actual effect of future plans or strategies is inherently
uncertain and actual results may differ materially from the results discussed in
forward-looking statements. Factors which might cause such a difference include,
but are not limited to, fluctuations in market rates of interest and loan and
deposit pricing; a deterioration of general economic conditions in our market
areas; legislative or regulatory changes; adverse developments in our loan or
investment portfolios; significant increases in competition; difficulties in
identifying attractive acquisition opportunities or strategic partners to
complement our private banking approach; and the possible dilutive effect of
potential acquisitions or expansion. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
EXECUTIVE OFFICERS
The following persons serve as executive officers of PrivateBancorp:
Ralph B. Mandell (60), a director since 1989, is a co-founder of
PrivateBancorp and The PrivateBank (Chicago). A Managing Director of The
PrivateBank (Chicago) and a director of The PrivateBank (St. Louis), he has
served as Chairman and Chief Executive Officer of PrivateBancorp and The
PrivateBank (Chicago) since 1994 and assumed the additional title of President
of both entities in March 1999. From inception until 1994, Mr. Mandell had the
title of Co-Chairman. Prior to starting The PrivateBank (Chicago) and
PrivateBancorp, Mr. Mandell was the Chief Operating Officer of First United
Financial Services, Inc., from 1985 to 1989, and served as its President from
1988 to 1989. First United, a company that was traded on the Nasdaq National
Market, was sold to First Chicago Corporation in 1987. He also served as
President of Oak Park Trust & Savings Bank from
18
1985 until 1988. Prior thereto, Mr. Mandell had served as Executive Vice
President of Oak Park Trust & Savings Bank since 1979.
Gary S. Collins (42) has been a Managing Director of The PrivateBank
(Chicago) since 1991. As a specialist in real estate lending, Mr. Collins has
spent more than 20 years managing diverse real estate transactions and the full
range of mortgage financing. Before joining the bank in 1991, he held senior
positions at several Chicago metropolitan area financial institutions, including
First Chicago Bank of Oak Park, First Colonial Bancshares and Avenue Bank of Oak
Park.
Hugh H. McLean (41) has been a Managing Director of The PrivateBank
(Chicago) since 1996. He serves as head of credit marketing and manager of the
Oak Brook office. Prior to joining the bank, he served as a regional manager
with Firstar Bank Illinois and its predecessor from 1990 to 1996, and as head of
a commercial banking division at American National Bank and Trust Company in
Chicago, Illinois, from 1987 to 1990, where he was employed from 1980 to 1990.
Thomas S. Palmer (53) has been a Managing Director of The
PrivateBank (Chicago) since July 2000. He serves as director of trust and asset
management services. Mr. Palmer has spent almost 30 years serving the investment
and banking needs of clients. Prior to joining the bank, he was with First
Chicago, now known as Bank One, in Chicago, Illinois, where he had been employed
since 1979.
Gary L. Svec (34), has been the Secretary/Treasurer and Chief
Financial Officer of PrivateBancorp since August 2000. Prior to joining the
company, Mr. Svec served as Vice President and as Investment and Asset/Liability
Specialist for Betzold, Berg, Nussbaum & Heitman, Inc., working with the firm's
financial institutions clients, from August 1995 to August 2000. He also served
as Chief Financial Officer of Betzold Berg Investment Management from August
1995 to August 1998. From 1988 until July 1995, Mr. Svec was employed by Crowe,
Chizek & Company as an auditor, tax advisor and consultant to their financial
institutions group. Mr. Svec is a certified public accountant.
ITEM 2. PROPERTIES
We currently have seven physical banking locations. We have a
variety of renewal options in each of our properties and certain rights to
secure additional space. The main offices of PrivateBancorp and The PrivateBank
(Chicago) are located in the central business and financial district of Chicago.
We lease 20,923 square feet comprising the entire eighth, ninth and tenth floors
and part of the eleventh floor of a building located at Ten North Dearborn
Street. This lease expires on or about August 31, 2006.
We established a north suburban office in the affluent North Shore
area located at 517 Green Bay Road, Wilmette, Illinois, in October 1994. We
lease approximately 5,300 square feet on the first floor of a commercial
building. This lease expires on June 30, 2004.
In January 1997, we opened a third office of The PrivateBank
(Chicago) in rapidly growing, west suburban DuPage County at 1603 West Sixteenth
Street, Oak Brook, Illinois. We lease approximately 4,200 square feet on the
first floor of a two-story office building. This lease expires on December 14,
2001.
In January 2000, we opened our Fox Valley office at 24 South Second
Street, St. Charles, Illinois. We lease approximately 6,700 square feet of a
commercial building. This lease expires October 31, 2009.
Our St. Louis office is located at 1401 South Brentwood Boulevard,
St. Louis, Missouri. We lease approximately 12,400 square feet on the first and
second floors of a commercial building. This lease expires on February 4, 2009.
Our offices in Lake Forest and Winnetka, Illinois, were both
acquired as part of the purchase of Johnson Bank Illinois. Our Lake Forest
office is on the first floor of a two-story office building located at 920 South
Waukegan Road, Lake Forest, Illinois. The lease is for approximately 9,400
square feet and expires on July 31, 2005. Our Winnetka office leases
approximately 5,100 square feet and is located at 1000 Green Bay Road, Winnetka,
Illinois. This lease expires on June 30, 2003.
19
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be party to various legal proceedings
arising in the normal course of our business. Since we act as a depository of
funds, we may be named from time to time as a defendant in various lawsuits
(such as garnishment proceedings) involving claims to the ownership of funds in
particular accounts. Neither PrivateBancorp nor any of our subsidiaries is a
party to any pending material legal proceedings that we believe will have a
material adverse effect on our business, results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is quoted on the Nasdaq National Market under the
symbol "PVTB." As of March 15, 2001, we had approximately 352 record holders of
our common stock. The table below sets forth the high and low sales prices of
our common stock as reported by Nasdaq for the periods indicated.
High Low
---- ---
2000
First Quarter................. $16.3750 $10.0000
Second Quarter................ 14.7500 10.2500
Third Quarter................. 14.9375 13.6250
Fourth Quarter................ 14.1250 8.8750
1999 High Low
---- ---
Second Quarter(1)............. $35.7500 $18.0000
Third Quarter................. 21.4375 15.2500
Fourth Quarter................ 17.8750 12.4375
(1) Reflects the high and low sales prices on June 30, 1999, the first day of
trading of our common stock on Nasdaq.
Holders of our common stock are entitled to receive dividends that
the board of directors may declare from time to time. We may only pay dividends
out of funds which are legally available for that purpose. Because consolidated
net income consists largely of the net income of our subsidiaries, dividend
payments to stockholders are dependent upon our receipt of dividends from our
subsidiaries. See "Supervision and Regulation" for a discussion of regulatory
restrictions on dividend declarations. Our dividend declaration is discretionary
and will depend on our earnings and financial condition, regulatory limitations,
tax considerations and other factors.
We have paid quarterly dividends on our common stock since the third
quarter of 1995. While the board of directors expects to continue to declare
dividends quarterly, there can be no assurance that we will continue to pay
dividends at these levels or at all. The following table shows the history of
per share cash dividends declared and paid on our common stock for the last two
years.
2000
First Quarter..................... $0.025
Second Quarter.................... 0.025
Third Quarter..................... 0.025
Fourth Quarter.................... 0.025
1999
First Quarter..................... $0.025
Second Quarter.................... 0.025
Third Quarter..................... 0.025
Fourth Quarter.................... 0.025
20
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated
financial and other data of PrivateBancorp at or for the periods indicated. The
balance sheet and statement of income data are derived from our December 31,
2000 consolidated financial statements which have been audited by Arthur
Andersen, LLP. This information should be read in conjunction with our audited
consolidated financial statements and related notes included pursuant to Item 8
of this report. See "Index to Consolidated Financial Statements" on page F-1.
Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Selected Statement of Income Data:
Interest income:
Loans, including fees ............................... $ 48,633 $ 26,597 $ 19,619 $ 16,729 $ 12,152
Federal funds sold and interest-bearing deposits .... 1,058 330 2,181 875 1,392
Securities .......................................... 7,455 5,141 3,492 2,519 2,396
-------- -------- -------- -------- --------
Total interest income ............................. 57,146 32,068 25,292 20,123 15,940
-------- -------- -------- -------- --------
Interest expense:
Interest-bearing demand deposits .................... 869 604 487 377 305
Savings and money market deposit accounts ........... 13,711 7,671 6,651 5,880 4,613
Other time deposits ................................. 14,635 7,399 6,155 3,821 2,973
Funds borrowed ...................................... 4,116 931 19 3 143
-------- -------- -------- -------- --------
Total interest expense ............................ 33,331 16,605 13,312 10,081 8,034
-------- -------- -------- -------- --------
Net interest income ............................... 23,815 15,463 11,980 10,042 7,906
Provision for loan losses ........................... 1,690 1,208 362 603 524
-------- -------- -------- -------- --------
Net interest income after provision for loan losses 22,125 14,255 11,618 9,439 7,382
-------- -------- -------- -------- --------
Non-interest income:
Banking, trust services and other income ............ 3,077 1,947 1,280 1,210 911
Securities gains .................................... 92 57 40 -- --
-------- -------- -------- -------- --------
Total non-interest income ......................... 3,169 2,004 1,320 1,210 911
-------- -------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits ...................... 8,174 5,156 4,077 3,902 3,411
Severance charge .................................... 562 -- -- -- --
Occupancy expense, net .............................. 2,987 1,563 1,379 1,274 990
Data processing ..................................... 820 478 508 396 334
Marketing ........................................... 1,202 692 567 500 424
Amortization of organization costs .................. -- -- -- -- 23
Professional fees ................................... 2,135 1,295 561 448 326
Goodwill amortization ............................... 731 -- -- -- --
Insurance ........................................... 303 214 134 115 82
Towne Square Financial Corporation acquisition ...... -- 1,300 -- -- --
Other expense ....................................... 1,692 1,389 863 627 508
-------- -------- -------- -------- --------
Total non-interest expense ........................ 18,606 12,087 8,089 7,262 6,098
-------- -------- -------- -------- --------
Income before income taxes ........................ 6,688 4,172 4,849 3,387 2,195
Income tax provision ................................ 2,263 1,257 1,839 1,242 762
-------- -------- -------- -------- --------
Net income ........................................ $ 4,425 $ 2,915 $ 3,010 $ 2,145 $ 1,433
======== ======== ======== ======== ========
Per Share Data:
Basic earnings ...................................... $ 0.96 $ 0.73 $ 0.91 $ 0.69 $ 0.49
Diluted earnings .................................... 0.92 0.69 0.86 0.65 0.47
Dividends ........................................... 0.10 0.10 0.08 0.07 0.07
Book value (at end of period) ....................... 11.73 10.26 8.53 7.67 6.84
Selected Financial Condition Data (at end of period):
Total securities(1) ................................. $172,194 $ 71,134 $116,891 $ 65,383 $ 44,617
Total loans ......................................... 599,429 397,277 281,965 218,495 171,343
Total assets ........................................ 829,509 518,697 416,308 311,872 246,734
Total deposits ...................................... 670,246 453,092 364,994 285,773 222,571
Funds borrowed ...................................... 96,879 15,000 20,000 -- 3,000
Total stockholders' equity .......................... 54,249 47,080 29,274 24,688 20,222
Trust assets under administration ................... 777,800 729,904 611,650 469,646 328,662
21
Year Ended December 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Selected Financial Ratios and Other Data:(1)
Performance Ratios:
Net interest margin(2) ............................. 3.63% 3.79% 3.64% 4.01% 3.73%
Net interest spread(3) ............................. 3.02 3.15 2.98 3.31 3.03
Non-interest income to average assets .............. 0.45 0.45 0.37 0.45 0.42
Non-interest expense to average assets(8) .......... 2.64 2.71 2.29 2.71 2.79
Net overhead ratio(4)(8) ........................... 2.19 2.26 1.91 2.26 2.38
Efficiency ratio(5)(8) ............................. 66.76 65.76 60.82 64.53 69.17
Return on average assets(6)(8) ..................... 0.63 0.65 0.85 0.80 0.66
Return on average equity(7)(8) ..................... 8.81 7.66 11.27 9.49 7.38
Dividend payout ratio .............................. 10.43 13.78 8.74 10.13 12.88
Asset Quality Ratios:
Non-performing loans to total loans ................ 0.24% 0.21% 0.36% 0.24% 0.65%
Allowance for probable loan losses to:
Total loans ...................................... 1.02 1.14 1.21 1.40 1.43
Non-performing loans ............................. 423 548 336 578 220
Net charge-offs to average total loans ............. 0.18 0.03 -- -- 0.02
Non-performing assets to total assets .............. 0.17 0.16 0.24 0.17 0.45
Balance Sheet Ratios:
Loans to deposits .................................. 89.4% 87.7% 77.3% 76.5% 77.0%
Average interest-earning assets to average interest-
bearing liabilities .............................. 111.5 116.3 116.4 117.7 118.6
Capital Ratios:
Total equity to total assets ....................... 6.53% 9.08% 7.03% 7.92% 8.20%
Total risk-based capital ratio ..................... 8.15 13.96 11.53 11.75 12.21
Tier 1 risk-based capital ratio .................... 6.47 12.84 10.40 10.50 10.96
Leverage ratio ..................................... 5.54 10.77 7.88 8.70 8.71
Ratio of Earnings to Fixed Charges(9):
Including deposit interest ......................... 1.20 x 1.25 x 1.36 x 1.34 x 1.27 x
Excluding deposit interest ......................... 2.62 5.48 256.21 1,130.00 16.35
- --------------
(1) For all periods, the entire securities portfolio was classified "Available
for Sale."
(2) Net interest income divided by average interest-earning assets.
(3) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(4) Non-interest expense less non-interest income divided by average total
assets.
(5) Non-interest expense divided by the sum of net interest income, on a tax
equivalent basis, plus non-interest income.
(6) Net income divided by average total assets.
(7) Net income divided by average common equity.
(8) 2000 performance ratios presented in the table above include a third
quarter one-time severance and recruitment of new executive officers
charge, and 1999 performance ratios include one-time charges related to the
Towne Square Financial Corporation acquisition and St. Louis start-up costs
incurred in the third and fourth quarter, respectively, in the following
amounts (in thousands):
Pre-Tax After-Tax
------- ---------
Severance charges.......................... $ 562 $ 377
Towne Square Corporation acquisition....... 1,433 1,382
St. Louis start-up costs................... 324 214
(footnotes continued)
22
2000 and 1999 performance ratios excluding the special charges described
above are as follows:
Year Ended December 31,
-----------------------
2000 1999
------ ------
Non-interest expense to average assets...... 2.56% 2.32%
Net overhead ratio.......................... 2.11 1.87
Efficiency ratio............................ 64.75 57.52
Return on average assets.................... 0.68 1.01
Return on average equity.................... 9.56 11.86
(9) In computing the ratio of earnings to fixed charges: (a) earnings have
been based on income before income taxes and fixed charges, and (b)
fixed charges consist of interest and amortization of debt discount and
expense including amounts capitalized and the estimated interest portion
of rents.
ITEM 7. 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, or
start-up bank) on August 3, 1999. On February 11, 2000, we consummated our
acquisition of Johnson Bank Illinois adding two additional locations of The
PrivateBank (Chicago) 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).
Since year-end 1995 to December 31, 2000, we have grown our asset
base at a compound annual rate of 33.9% to $829.5 million. During the same
period, loans have grown at a compound annual rate of 36.9% to $599.4 million,
deposits at a compound annual rate of 30.8% to $670.2 million and trust assets
under administration at a compound annual rate of 30.7% to $777.8 million.
For financial information regarding our four separate lines of
business, The PrivateBank (Chicago), The PrivateBank (St. Louis), Trust Services
and Holding Company Activities, see "Note 2 -- Operating Segments" to our
consolidated financial statements as of and for the year ended December 31,
2000, included on page F-9.
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 trust fee income, and to a
lesser extent, net securities gains and 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.
Profitability and expense ratios were negatively impacted in 2000 due to the
start-up operation of the St. Charles office, the acquisition of Johnson Bank
Illinois, and the opening of The PrivateBank (St. Louis). During 2001, we expect
to continue to incur operating expenses in excess of revenues for The
PrivateBank (St. Louis).
23
On June 30, 1999, we sold 900,000 shares of common stock in our
initial public offering at $18 per share. The closing date of the offering was
July 6, 1999, when we received net proceeds of approximately $14.4 million
(after deduction of offering expenses). On July 26, 1999, an additional 135,000
shares were sold pursuant to the underwriters' exercise of their over allotment
option for additional net proceeds of $2.3 million. The year to date earnings
per share calculation as of December 31, 1999 does not equal the sum of the
individual quarter earnings per share amounts. Based upon the application of
FASB Statement No. 128, "Earnings per Share," a difference arises that is
attributable to the impact of our initial public offering which closed in July
1999, and the acquisition of Town Square Financial Corporation during the third
quarter 1999.
CONSOLIDATED RESULTS OF OPERATIONS
Net Income
Our net income for the year ended December 31, 2000 was $4.4
million, or $0.92 per diluted share, compared to $2.9 million, or $0.69 per
diluted share, for the year ended December 31, 1999. Excluding one-time charges,
our earnings were $4.8 million, or $1.00 per diluted share, in 2000 and $4.5
million, or $1.07 per diluted share, in 1999.
Net income for the year ended December 31, 2000 included a
previously announced one-time charge of $377,000 after-tax, or $0.08 per diluted
share, comprised of severance packages for two departing executives as well as
amounts incurred to secure their replacements. Net income for the year ended
December 31, 1999, included an acquisition charge of $1.4 million after-tax, or
$0.29 per diluted share, related to the acquisition of Towne Square Financial
Corporation in St. Charles, Illinois and the start-up expenses of The
PrivateBank (St. Louis). The earnings growth of 6.5% between 2000 and 1999 is
due to growth in net interest income and non-interest income offset by higher
operating expenses. Net income in 2000 includes the financial results of the
former Johnson Bank Illinois locations subsequent to their acquisition on
February 11, 2000. Excluding the effects of goodwill amortization and
acquisition interest expense associated with the transaction, the two offices
located in Winnetka and Lake Forest have contributed $1.0 million to our net
income in 2000.
Net income for the year ended December 31, 1999 was $2.9 million, or
$0.69 per diluted share, compared to $3.0 million, or $0.86 per diluted share,
for the year ended December 31, 1998. Excluding the Towne Square Financial
Corporation acquisition-related charge and St. Louis start-up costs, 1999
earnings were $4.5 million, an increase of 50% over 1998 net income. Before
these one-time charges, 1999 earnings per diluted share were $1.07, a 24%
increase over 1998 earnings per diluted share of $0.86.
The increase in earnings from operations before one-time charges is
primarily attributable to growth in the balance sheet, particularly in loans,
and improvement in our net interest margin. Increased fee income, mainly from
trust services, also contributed to the improvement in income before one-time
charges.