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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, 2001
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 ExchangeAct 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 $80,921,338 based on the
closing price of the common stock of $22.65 on March 1, 2002, as reported by the
NASDAQ National Market.
As of March 1, 2002, the Registrant had outstanding 4,907,940 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III.
FORM 10-K
Table of Contents
Page
Number
PART I
Item 1. Business...................................................................................1
Item 2. Properties................................................................................18
Item 3. Legal Proceedings.........................................................................18
Item 4. Submission of Matters to a Vote of Security Holders.......................................18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.....................19
Item 6. Selected Financial Data...................................................................20
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...............................................41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......41
PART III
Item 10. Directors and Executive Officers..........................................................42
Item 11. Executive Compensation....................................................................42
Item 12. Security Ownership of Certain Beneficial Owners and Management............................42
Item 13. Certain Relationships and Related Transactions............................................42
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................42
Index to Consolidated Financial Statements................................................................F-1
ii
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 that 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 also refer to The PrivateBank
(Chicago) and The PrivateBank (St. Louis) individually as The PrivateBank or
collectively as The PrivateBanks. We provide our clients with traditional
personal and commercial banking services, lending programs, and wealth
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 eight Midwestern
United States locations. Currently, we have seven 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 and Geneva, 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-sized businesses, commercial real estate investors and professionals.
Since year-end 1995 to December 31, 2001, we have grown our asset base at a
compound annual rate of 35% to $1.2 billion. During the same period, loans have
grown at a compound annual rate of 36% to $780.8 million, deposits at a compound
annual rate of 30% to $850.5 million and trust assets under administration at a
compound annual rate of 24% to $722.7 million. Diluted earnings per share (EPS)
have grown at a compound annual rate of 25% to $1.28 since year-end 1995.
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:
. 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 18 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 that 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
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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.
. 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 worth, we also recognize the
growth potential of certain young professionals and extend our services to
those individuals whose incomes or net worth do not initially meet our
criteria. We believe that this segment of the market is most suited to our
business and that these individuals are most likely to develop long-term
relationships with us.
. Customized Financial Services. 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.
. 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.
. 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, Trust Plus Online Access and
Business NetBanking directly through the Internet. Business NetBanking became
available during 2001. Through Trust Plus Online Access, which became available
late in 2000, wealth management clients may access account balance and history
information in a read-only format through the Internet. Business NetBanking
allows customers to access loan information, initiate stop payments, establish
repetitive wire transfers and authorize transactions that clear through the
Automated Clearing House (ACH). Business NetBanking is supported by a help desk
that is staffed 60 hours per week. Currently, clients may:
. access information regarding their wealth management account balances and
recent transactions;
. access deposit information;
. transfer funds among deposit accounts;
. utilize a bill payment service with a variety of options;
. export information to financial software packages;
. access the PrivateBank Access help desk which is staffed 24 hours a day,
seven days a week; and
. send e-mail messages 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-
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delivery systems providing the quality of service to which our clients are
accustomed.
. Extensive Financial Network. In order to compete with other financial
service providers, we rely on a network of professionals in the financial
and investment communities with whom we have developed strategic alliances
over the years. This enables us to offer our clients a broad array of high
quality services. For example, we work with selected investment management
firms in providing services to our wealth management clients. Our clients
can either maintain their existing investment management relationships when
they become wealth management 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:
. 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.
. 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.
. 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. We continue to direct our energies
towards building the breadth and depth of our wealth management area. We
are very focused on acquiring additional asset management and financial
planning capabilities as well as other fee income generating lines of
business.
. 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
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they want it. We tailor our products and services to fit our clients instead of
making our clients fit our products and services. Our services fall into four
general categories:
. Commercial Services. 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.
. 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.
. Wealth Management. Our services include investment management, personal
trust and estate services, custodial services, retirement accounts and
brokerage and investment services. Our wealth management 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. Our wealth management 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 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 wealth
management 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. Wealth management services are
currently offered at The PrivateBank (St. Louis) through the wealth
management department of The PrivateBank (Chicago).
. 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
4
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 25% of capital plus unencumbered
reserves. At December 31, 2001, The PrivateBank (Chicago)'s legal lending limit
was $19.8 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 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) purchases 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 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) applies the same credit policies and procedures as are
followed for any other loan approval. Likewise, The PrivateBank (St. Louis)
applies 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, 2001 and 2000:
December 31, Percentage of December 31, Percentage of
2001 total loans 2000 total loans
------------ ------------- ------------ -------------
(dollars in thousands)
Commercial real estate ......... $310,869 40% $206,464 35%
Commercial ..................... 163,279 21% 137,343 23%
Residential real estate ........ 89,889 11% 85,347 14%
Personal ....................... 64,411 8% 62,414 10%
Home equity .................... 59,795 8% 46,013 8%
Construction ................... 92,528 12% 61,143 10%
-------- --- -------- ---
Total loans .................... $780,771 100% $598,724 100%
======== === ======== ===
Commercial Real Estate Loans. Our commercial real estate portfolio is
comprised primarily of loans secured by multi-family housing units located in
the Chicago and St. Louis metropolitan areas. 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.
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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.
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.
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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 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. Knowing our borrowers is a key factor in originating
personal loans. 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 losses, average maturity, federal taxable
equivalent yields and appreciation or depreciation by investment categories.
7
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
buyer of such funds. The purchase of federal funds are effectively short-term
loans to us from 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 that 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.
The investment portfolio is structured to provide interest rate protection in a
rates down scenario. Our loan portfolio is primarily floating-rate and when
market rates decline, loans that are tied to floating rates reprice downward
immediately. Our investment portfolio is structured to perform well in a `rates
down' scenario. Alternatively, in a `rates up' environment, our loan portfolio
performs very well due to the large percentage of floating rate loans. The
investment portfolio will not outperform our loan portfolio in a rates up
environment. During periods of volatility, we actively monitor the investment
securities portfolio to maximize total returns in the construct of our asset
liability management structure.
Wealth 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 wealth
management 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 their stated objectives. As fiduciaries of a trust
or estate, our responsibilities may include:
. administering the account pursuant to the applicable document;
. collecting, holding and valuing assets;
. monitoring investment portfolios;
. paying debts, expenses and taxes;
. distributing property;
. advising beneficiaries; and
. preparation of tax returns.
In addition to trust and estate administration, we offer:
. financial planning accounts;
. investment agency accounts;
. guardianship administration;
. Section 1031 exchanges; and
. custodial accounts.
8
The average account value of new trusts administered by us is approximately
$2.1 million as of December 31, 2001. We seek to continue to grow our wealth
management 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 breakdown of our trust assets under administration at December 31,
2001 by account classification and related gross revenue for the twelve months
ended December 31, 2001:
At or for the twelve months ended
December 31, 2001
---------------------------------
Account Type Market Value Revenue
------------ ------------ -------
(in thousands)
Personal trust--managed .................... $252,820 $1,342
Agency--managed ............................ 116,935 653
Custody .................................... 324,385 578
Employee benefits--managed ................. 28,573 83
-------- ------
Total ................................. $722,713 $2,656
======== ======
We have chosen to outsource the investment management aspect of our wealth
management 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. We continue to direct our energies
towards building breadth and depth of our wealth management area. We are very
focused on acquiring additional asset management and financial planning
capabilities as well as other fee income generating lines of business.
Our wealth management 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 wealth management 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:
. data on economic conditions;
. current interest rate outlook;
. current forecast on loans and deposits;
. mix of interest rate sensitive assets and liabilities;
. bank liquidity position;
. investment portfolio purchases and sales; and
. other matters as presented.
9
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, wealth management 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
wealth management 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 wealth management
services, we compete with the largest Chicago-area banks and some investment
managers as well as financial planning and regional and national securities
brokerage firms. 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 firms. 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, 2001, we had approximately 160.5 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 Ms. Lisa M. O'Neill, our Chief Accounting Officer,
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.
10
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:
. common stockholders' equity;
. qualifying noncumulative perpetual preferred stock;
. qualifying cumulative perpetual preferred stock (subject to some
limitations); and
. minority interests in the common equity accounts of consolidated
subsidiaries.
less:
. goodwill; and
. specified intangible assets.
Tier 2, or "supplementary," capital consists of:
. the allowance for loan and lease losses;
. perpetual preferred stock and related surplus;
. hybrid capital instruments;
. unrealized holding gains on equity securities;
. perpetual debt and mandatory convertible debt securities;
. term subordinated debt, including related surplus; and
. intermediate-term preferred stock, including related securities.
11
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, 2001, we had regulatory capital in excess of the Federal
Reserve's minimum requirements. Our total risk-based capital ratio at December
31, 2001 was 9.71% and our leverage ratio was 6.64%.
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 Branching 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 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.
12
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 FDIC the power to issue cease and desist orders. A cease and
desist order could either prohibit a bank from engaging in certain unsafe and
unsound bank activities 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:
. extensions of credit to the bank holding company and any non-banking
affiliates,
. the purchase of assets from affiliates,
. the issuance of guarantees, acceptances or letters of credit on behalf of
affiliates, and
. investments in stock or other securities issued by affiliates or acceptance
thereof as collateral for an extension of credit.
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:
. the nature and amount of loans which it may make to a single borrower (and,
in some instances, a group of affiliated borrowers),
. the nature and amount of securities in which it may invest,
. the amount of investment in The PrivateBank (Chicago) premises, and
. the manner in and extent to which it may borrow money.
Furthermore, all banks are affected by the credit policies of the Federal
Reserve, which regulates the national supply of bank credit. Such regulation
influences overall growth of bank loans, investments, and deposits and may also
affect interest rates charged on loans and paid on deposits. The Federal
Reserve's monetary policies have had a significant effect on the operating
results of commercial banks in the past and we expect this trend to continue in
the future.
Dividends. The Illinois Banking Act provides that an Illinois bank may not
pay dividends of an amount greater than its current net profits after deducting
losses and bad debts while such bank continues to operate a banking business.
For the purpose of determining the amount of dividends that an Illinois bank may
pay, bad debts are defined as debts upon which interest is past due and unpaid
for a period of six months or more unless such debts are well-secured and in the
process of collection.
In addition to the foregoing, the ability of 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.
13
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 $42.8 million of transaction accounts plus 10%
on the remainder. The first $5.5 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 institution 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 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 2001, and must therefore provide
an annual report as required by FDICIA.
As of December 31, 2001, The PrivateBank (Chicago) had capital in excess of
the requirements for a "well-capitalized" institution under the prompt
corrective action provisions of FDICIA.
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
2001, The PrivateBank (Chicago) paid deposit insurance premiums in the aggregate
amount of $124,188. During 2001, The PrivateBank (St. Louis) paid deposit
insurance premiums in the aggregate amount of $13,746.
14
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 of 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, or 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 tested in three areas: (a) lending,
to evaluate the institution's record of making loans in its assessment areas;
(b) investment, to evaluate the institution's record of investing in community
development projects, affordable housing, and programs benefiting low or
moderate income individuals and business; and (c) service, 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 February
2002 as a result of its last CRA examination.
Bank Secrecy Act. Under the Bank Secrecy Act ("BSA"), a financial
institution is required to have systems in place to detect certain transactions,
based on the size and nature of the transaction. Financial Institutions are
generally required to report cash transactions involving more than $10,000 to
the United States Treasury. In addition, financial institutions are required to
file suspicious activity reports for transactions that involve more than $5,000
and which the financial institution knows, suspects or has reason to suspect
involves illegal funds, is designed to evade the requirements of the BSA or has
no lawful purpose. The Patriot Act of 2001, enacted in response to the September
11, 2001 terrorist attacks, requires bank regulations to consider a financial
institution's compliance with the BSA when reviewing applications from financial
institutions.
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 Mortgage Disclosure Act. Among other things, these acts:
. require banks to meet the credit needs of their communities;
. require banks to disclose credit terms in meaningful and consistent ways;
. prohibit discrimination against an applicant in any consumer or business
credit transaction;
. prohibit discrimination in housing-related lending activities;
. require banks to collect and report applicant and borrower data regarding
loans for home purchases or improvement projects;
. require lenders to provide borrowers with information regarding the nature
and cost of real estate settlements;
. prohibit certain lending practices and limit escrow account amounts with
respect to real estate transactions; and
. prescribe possible penalties for violations of the requirements of consumer
protection statutes and regulations.
From time to time we have been made aware of certain deficiencies in our
consumer compliance program. Management believes that any deficiencies have
already been or are in the process of being corrected. In the event that
consumer compliance deficiencies were to continue over time, enforcement or
administrative actions by the appropriate federal banking regulators 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.
15
Impact of the Gramm-Leach-Bliley Act. On November 12, 1999, the
Gramm-Leach-Bliley Act (the "GLB Act") was enacted. The GLB Act amended or
repealed certain provisions of the Glass-Steagall Act and other legislation that
restricted the ability of bank holding companies, securities firms and insurance
companies to affiliate with one another. The GLB Act has established a
comprehensive framework to permit affiliations among commercial banks, insurance
companies and securities firms. Also, a bank holding company that meets certain
criteria may certify that it satisfies certain 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 non-public personal
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 FDIC and the other federal regulators have promulgated
implementing regulations outlining the duties and responsibilities of financial
institutions with regard to customer privacy. These regulations do not supersede
state regulations regarding privacy, except to the extent that state regulations
conflict with these regulations. The privacy regulations of the Illinois Banking
Act continue to apply to The PrivateBank, except to the extent they conflict
with the GLB Act and its implementing regulations.
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).
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. In addition, the
PrivateBank (St. Louis) is required in many situations to either apply to or
provide notice to the OTS before declaring a dividend. The OTS also 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, such as not being able to retain or operate
out-of-state branches, 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).
16
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and 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 products and services we offer; 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. We undertake no
obligation to update publicly any of these statements in light of future events
except as required in subsequent periodic reports we file with the SEC.
EXECUTIVE OFFICERS
The following persons serve as executive officers of PrivateBancorp:
Ralph B. Mandell (61), a Director since 1989, is a co-founder of
PrivateBancorp and The PrivateBank (Chicago). A Director of The PrivateBank
(Chicago) and 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 held 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 1985
until 1988. Prior thereto, Mr. Mandell had served as Executive Vice President of
Oak Park Trust & Savings Bank since 1979.
Gary S. Collins (43) has been Co-Vice Chairman of The PrivateBank (Chicago)
since 2001 and a Managing Director 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.
Richard C. Jensen (56), has been a Director since January 2000. Mr. Jensen
has been a Managing Director of The PrivateBank (Chicago) since November 1999.
He became Chairman, Chief Executive Officer and a Managing Director of The
PrivateBank (St. Louis) upon receipt of its banking charter in June 2000. From
May 1998 until joining us, Mr. Jensen served as Chairman and Chief Executive
Officer of Missouri Holding, Inc. From March to May 1998, he served as President
and Chief Executive Officer of Royal Banks of Missouri. For the previous 18
years, Mr. Jensen served in various executive positions with National Bank and
it predecessor, Boatmen's Bank, in St. Louis.
Hugh H. McLean (42) has been Co-Vice Chairman of The PrivateBank (Chicago)
since 2001 and a Managing Director 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 from 1987 to 1990, where he was employed from
1980 to 1990.
Thomas S. Palmer (54) has been a Managing Director and Senior Trust Officer
of The PrivateBank (Chicago) since July 2000. He serves as director of Wealth
Management services. Mr. Palmer has spent over 30 years servicing the investment
and banking needs of clients. Prior to joining the bank, he was Regional
Director for Bank One Investment Management Company. He spent over 20 years with
Bank One and its predecessor, First Chicago, in management as Senior Vice
President, Head of Affluent Clients and Specialized Trust Divisions.
James A. Ruckstaetter (54) has been a Managing Director and the Chief
Credit Officer of The PrivateBank (Chicago) since 1999. His diverse experience
includes credit and loan administration, commercial lending and residential real
estate
17
lending. Mr. Ruckstaetter's career spans 30 years including various executive
positions with leading Chicago area financial institutions. From January 1998
until June 1999, he was President and CEO of Pan American Bank, a community bank
on the west side of Chicago. From September 1994 to December 1997, Mr.
Ruckstaetter served as a Senior Relationship Manager at Bank of America.
Gary L. Svec (36), 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 2001. 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 LLP 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 eight 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 28,251 square feet comprising the entire seventh, 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, 2006.
In January 2000, we opened our Fox Valley office at 24 South Second Street,
St. Charles, Illinois. We lease approximately 6,000 square feet of a commercial
building. This lease expires October 31, 2009.
In May 2001, we opened a second branch office in the Fox Valley area at the
Herrington Train Station at 308 Crescent Place in Geneva, Illinois. We lease
approximately 1,700 square feet within the commuter station building. This lease
expires March 1, 2006.
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.
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.
18
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 7, 2002, we had approximately 307 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.
2001 High Low
-------- --------
First Quarter .................................... $15.9375 $ 9.3125
Second Quarter ................................... 16.7300 13.5000
Third Quarter .................................... 19.0000 15.0000
Fourth Quarter ................................... 20.0000 15.8900
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
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 that are legally available for that purpose. Because our 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.
2001
First Quarter .................................... $ 0.025
Second Quarter ................................... 0.025
Third Quarter .................................... 0.030
Fourth Quarter ................................... 0.030
2000
First Quarter..................................... $ 0.025
Second Quarter.................................... 0.025
Third Quarter..................................... 0.025
Fourth Quarter.................................... 0.025
19
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, 2001 consolidated
financial statements that 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,
------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Selected Statement of Income Data:
Interest income:
Loans, including fees .................................. $ 50,975 $ 48,633 $ 26,597 $ 19,619 $ 16,729
Federal funds sold and interest-bearing deposits ....... 244 1,058 330 2,181 875
Securities ............................................. 14,377 7,455 5,141 3,492 2,519
---------- -------- -------- -------- --------
Total interest income ............................. 65,596 57,146 32,068 25,292 20,123
---------- -------- -------- -------- --------
Interest expense:
Interest-bearing demand deposits ....................... 923 869 604 487 377
Savings and money market deposit accounts .............. 11,365 13,711 7,671 6,651 5,880
Other time deposits .................................... 17,291 14,635 7,399 6,155 3,821
Funds borrowed ......................................... 6,327 4,116 931 19 3
Long term debt -- trust preferred securities ........... 1,731 -- -- -- --
---------- -------- -------- -------- --------
Total interest expense ............................ 37,637 33,331 16,605 13,312 10,081
---------- -------- -------- -------- --------
Net interest income ............................... 27,959 23,815 15,463 11,980 10,042
Provision for loan losses .............................. 3,179 1,690 1,208 362 603
---------- -------- -------- -------- --------
Net interest income after provision for loan losses 24,780 22,125 14,255 11,618 9,439
---------- -------- -------- -------- --------
Non-interest income:
Banking, trust services and other income ............... 4,028 3,077 1,947 1,280 1,210
Securities gains, net .................................. 2,095 92 57 40 --
---------- -------- -------- -------- --------
Total non-interest income ......................... 6,123 3,169 2,004 1,320 1,210
---------- -------- -------- -------- --------
Non-interest expense:
Salaries and employee benefits ......................... 9,111 8,174 5,156 4,077 3,902
Severance charge ....................................... -- 562 -- -- --
Occupancy expense, net ................................. 4,158 2,987 1,563 1,379 1,274
Data processing ........................................ 1,295 820 478 508 396
Marketing .............................................. 1,208 1,202 692 567 500
Professional fees ...................................... 2,939 2,135 1,295 561 448
Goodwill amortization .................................. 824 731 -- -- --
Insurance .............................................. 354 303 214 134 115
Towne Square Financial Corporation acquisition ......... -- -- 1,300 -- --
Other expense .......................................... 2,763 1,692 1,389 863 627
---------- -------- -------- -------- --------
Total non-interest expense ........................ 22,652 18,606 12,087 8,089 7,262
---------- -------- -------- -------- --------
Income before income taxes ........................ 8,251 6,688 4,172 4,849 3,387
Income tax provision ................................... 2,051 2,263 1,257 1,839 1,242
---------- -------- -------- -------- --------
Net income ........................................ $ 6,200 $ 4,425 $ 2,915 $ 3,010 $ 2,145
========== ======== ======== ======== ========
Per Share Data:
Basic earnings ......................................... $ 1.32 $ 0.96 $ 0.73 $ 0.91 $ 0.69
Diluted earnings ....................................... 1.28 0.92 0.69 0.86 0.65
Dividends .............................................. 0.11 0.10 0.10 0.08 0.07
Book value (at end of period) .......................... 12.97 11.73 10.26 8.53 7.67
Selected Financial Condition Data (at end of period):
Total securities(1) .................................... $ 332,933 $172,194 $ 71,134 $116,891 $ 65,383
Total loans ............................................ 780,771 598,724 397,277 281,965 218,495
Total assets ........................................... 1,176,768 829,509 518,697 416,308 311,872
Total deposits ......................................... 850,495 670,246 453,092 364,994 285,773
Funds borrowed ......................................... 231,488 96,879 15,000 20,000 --
Total stockholders' equity ............................. 62,304 54,249 47,080 29,274 24,688
Trust assets under administration ...................... 722,713 777,800 729,904 611,650 469,646
20
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
---------- -------- -------- -------- --------
(dollars in thousands, except per share data)
Selected Financial Ratios and Other Data:(1)
Performance Ratios:
Net interest margin(2).................................. 3.27% 3.63% 3.79% 3.64% 4.01%
Net interest spread(3).................................. 2.87 3.02 3.15 2.98 3.31
Non-interest income to average assets................... 0.64 0.45 0.45 0.37 0.45
Non-interest expense to average assets(8)............... 2.37 2.64 2.71 2.29 2.71
Net overhead ratio(4)(8)................................ 1.73 2.19 2.26 1.91 2.26
Efficiency ratio(5)(8).................................. 63.17 66.76 65.76 60.82 64.53
Return on average assets(6)(8).......................... 0.65 0.63 0.65 0.85 0.80
Return on average equity(7)(8).......................... 10.59 8.81 7.66 11.27 9.49
Dividend payout ratio................................... 8.39 10.43 13.78 8.74 10.13
Asset Quality Ratios:
Non-performing loans to total loans..................... 0.41% 0.24% 0.21% 0.36% 0.24%
Allowance for probable loan losses to:
Total loans............................................. 1.06 1.02 1.14 1.21 1.40
Non-performing loans.................................... 262 423 548 336 578
Net charge-offs to average total loans.................. 0.15 0.18 0.03 -- --
Non-performing assets to total assets................... 0.27 0.17 0.16 0.24 0.17
Balance Sheet Ratios:
Loans to deposits....................................... 91.8% 89.4% 87.7% 77.3% 76.5%
Average interest-earning assets to average interest-
bearing liabilities..................................... 109.8 112.2 116.3 116.4 117.7
Capital Ratios:
Total equity to total assets............................ 5.29% 6.54% 9.08% 7.03% 7.92%
Total risk-based capital ratio.......................... 9.71 8.15 13.96 11.53 11.75
Tier 1 risk-based capital ratio......................... 8.18 6.47 12.84 10.40 10.50
Leverage ratio.......................................... 6.64 5.54 10.77 7.88 8.70
Ratio of Earnings to Fixed Charges(9):
Including deposit interest.............................. 1.22 x 1.20 x 1.25 x 1.36 x 1.34 x
Excluding deposit interest.............................. 2.02 2.62 5.48 256.21 1,130.00
- ----------
(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):
After-Tax Pre-Tax
--------- -------
Severance charges ........................................ $ 562 $ 377
Towne Square Corporation acquisition ..................... 1,433 1,382
St. Louis start-up costs ................................. 324 214
21
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 asset ................. 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.
22
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, or start-up, bank. Our flagship
downtown Chicago location opened in 1991. We expanded to Wilmette in north
suburban Cook County in 1994 and the Oak Brook facility in west suburban DuPage
County was established in 1997. We established the St. Charles office in January
2000, in connection with our purchase of Towne Square Financial Corporation (a
company which was in the process of forming a de novo bank) on August 3, 1999.
On February 11, 2000, we consummated our acquisition of Johnson Bank Illinois
adding two additional locations 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). In May 2001, The PrivateBank (Chicago)
opened a second branch in the Fox Valley area in Geneva, Illinois.
Since year-end 1995 to December 31, 2001, we have grown our asset base at a
compound annual rate of 35% to $1.2 billion. During the same period, loans have
grown at a compound annual rate of 36% to $780.8 million, deposits at a compound
annual rate of 30% to $850.5 million and trust assets under administration at a
compound annual rate of 24% to $722.7 million. Diluted earnings per share (EPS)
have grown at a compound annual rate of 25% to $1.28 since year-end 1995.
For financial information regarding our four separate lines of business,
The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management
Services and Holding Company Activities, see "Note 2 -- Operating Segments" to
our consolidated financial statements as of and for the year ended December 31,
2001, included on page F-10.
The profitability of our operations depends on our net interest income,
provision for loan losses, non-interest income, and non-interest expense. Net
interest income is dependent on the amounts and yields of interest-earning
assets as compared to the amounts and rates on interest-bearing liabilities. Net
interest income is sensitive to changes in market rates of interest as well as
to the execution of our asset/liability management strategy. The provision for
loan losses is affected by changes in the loan portfolio, management's
assessment of the collectability of the loan portfolio, loss experience, as well
as economic and market factors.
Non-interest income consists primarily of net security gains and wealth
management fee income, and to a lesser extent, fees for ancillary banking
services. Non-interest income from fees and deposit service charges are below
peer group levels. This is largely the result of the profile of our typical
client. Our clients tend to have larger deposit account balances than customers
of traditional banks. Because average balances tend to be high, we do not earn
the 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 in St. Charles, the acquisition of Johnson Bank Illinois, and
the opening of The PrivateBank (St. Louis). During 2001 we were impacted by the
start-up nature of operations in St. Louis, and to a lesser extent, by the new
office in Geneva, Illinois. The PrivateBank (St. Louis) began to operate
profitably during the fourth quarter of 2001 and will have a positive impact on
our profitability in 2002. During 2002 we expect profitability and expense
ratios to improve relative to 2001.
The Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with our consolidated financial
statements included herein. Reference should also be made to our accounting
policies set out in the notes to consolidated financial statements. Certain
critical policies involve estimates and assumptions by management. By their
nature, changes in these assumptions and estimates could significantly affect
our financial position or results of operations. Actual results could differ
from those estimates. Estimates and judgments regarding the determination of the
adequacy of the reserve for loan losses, as described in both Management's
Discussion and Analysis and in the financial statement notes, is of particular
significance to us. In addition, effective January 1, 2002, we adopted SFAS No.
142, which requires an annual impairment test of goodwill. Currently, goodwill
is recorded at its estimated net realizable value as discussed in Notes 1o. and
1q. to the consolidated financial statements.
23
CONSOLIDATED RESULTS OF OPERATIONS
Net Income
Our net income for the year ended December 31, 2001 was $6.2 million, or
$1.28 per diluted share, compared to $4.4 million, or $0.92 per diluted share,
for the year ended December 31, 2000. Excluding one-time charges, our earnings
were $4.8 million, or $1.00 per diluted share, in 2000. Our 2001 earnings per
share increased 28% as compared to the prior year earnings per share, adjusted
to exclude the 2000 one-time charges. 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, 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. 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 7% between 2000 and 1999 is due to growth in net interest
income, reflecting higher average loan balances and improvement in net interest
margin, and growth in non-interest income mainly from wealth management
services, 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 contributed $1.0 million to
our net income in 2000. Excluding the Towne Square Financial Corporation
acquisition-related charge and St. Louis start-up costs, 1999 earnings were $4.5
million. Bef