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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, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 000-25887
PRIVATEBANCORP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3681151
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Ten North Dearborn Street Chicago, Illinois 60602
(Address of principal executive offices)
(312) 683-7100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
9.50% Cumulative Trust Preferred Securities
(and the Guarantee with respect thereto)
Indicate by checkmark whether the Registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The aggregate market value of the voting common equity of the Registrant held by
non-affiliates of the Registrant was approximately $107,273,278 based on the
closing price of the common stock of $20.10 on June 30, 2002, as reported by the
NASDAQ National Market.
As of February 28, 2003, the Registrant had outstanding 7,738,164 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III.
FORM 10-K
TABLE OF CONTENTS
PAGE
NUMBER
PART I
Item 1. Business........................................................................................... 2
Item 2. Properties......................................................................................... 22
Item 3. Legal Proceedings.................................................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders................................................ 23
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 24
Item 6. Selected Financial Data............................................................................ 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......................................... 46
Item 8. Financial Statements and Supplementary Data........................................................ 48
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............. 48
PART III
Item 10. Directors and Executive Officers................................................................... 49
Item 11. Executive Compensation............................................................................. 49
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 49
Item 13. Certain Relationships and Related Transactions..................................................... 49
Item 14. Controls and Procedures............................................................................ 50
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 50
Index to Consolidated Financial Statements........................................................................ F-1
1
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.
As the financial industry has consolidated, and smaller, independent
banks have been acquired by national, multi-bank holding companies, 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 have been accustomed to
dealing directly with senior bank executives. These clients 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. The St. Louis-based bank also focuses on clients who are seeking a higher
level of service and a broad array of personalized banking and wealth management
products and services. The PrivateBank (St. Louis) clients consist of
individuals, small to medium-size businesses, commercial real estate investors
and professionals.
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). Using the European tradition of
"private banking" as our model, we provide our clients with traditional
individual and corporate banking services, including a variety of loan and
deposit products, and wealth management services. Our goal is to be the primary
source of financial products and services for our clients. We strive to develop
a valued relationship with our clients, using an experienced team of managing
directors, to serve each client's individual and corporate banking needs, and by
tailoring our products and services to consistently meet those 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. On
December 30, 2002, we purchased a controlling interest in a Chicago-based
investment adviser, Lodestar Investment Counsel, LLC.
Since year-end 1995 to December 31, 2002, we have grown our asset base
at a compound annual rate of 35% to $1.5 billion. During the same period, loans
have grown at a compound annual rate of 34% to $965,600, deposits at a compound
annual rate of 32% to $1.2 billion and trust assets under administration at a
compound annual rate of 22% to $757.8 million. Diluted earnings per share (EPS)
have grown at a compound annual rate of 30% to $1.42 (adjusted to reflect the
3-for-2 stock dividend effective January 17, 2003) since year-end 1995.
THE PRIVATEBANK APPROACH
.. We are a client-driven organization and believe we have developed a unique
approach to private banking designed to provide our clients with superior
service. 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
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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, who is 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. The purpose of this
approach is to give our clients a sense of security and continuity of
personal service in their banking relationship. On the basis of this trust
and confidence, we then 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. 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 Trust Plus Online Access, Private NetBanking,
and Business NetBanking directly through the Internet. Clients can also connect
to PrivateLine Access directly through the telephone. 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 clients to access deposit and loan information, initiate stop payments,
initiate bill payments, establish repetitive wire transfers and authorize
transactions that clear through the Automated Clearing House (ACH). Private
NetBanking and Business NetBanking are 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 Private NetBanking and Business NetBanking 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-delivery systems providing the quality of service to which our
clients are accustomed.
.. Affluent Target Client. In the Chicago and St. Louis metropolitan areas, we
target affluent individuals, professionals, owners of closely-held
businesses, and commercial real estate investors with annual incomes in
excess of $150,000 and their business interests, because we believe that
they have significant unmet demand for personalized financial services. 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. 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. Although we generally
target individuals with high annual incomes and net
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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.
.. Customized Financial Services. In taking a long-term relationship approach
with 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 banking products, we believe that it is our personalized
service that distinguishes us from our competitors. 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 many other 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. Generally, we use an "on call" approach, rather than structured
meetings, to approve credit. As the amount and the complexity of the credit
increases, we often use a more traditional approval process.
.. Network of Comprehensive Financial Services. 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, use
our subsidiary, Lodestar, 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, which relies on our
development, maintenance, and expansion of our superior management group,
entails five key components:
.. Developing Our Existing Relationships. An important part of our future
growth will be the continued development of our existing client
relationships. As the needs of our clients change and grow, we seek to grow
with them and continue to provide them with our custom-tailored, flexible
services. For example, we strive to follow our clients from the purchase of
their homes, through the financing of their own business, to the
development and planning of their estate 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. In particular, we seek to develop our
wealth management business through our existing clients.
.. 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, particularly in the wealth
management area. Key to this strategy is attracting quality people. 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
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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.
.. Acquisition of Asset Management Firms. We intend to 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. As part of this ongoing strategy, we acquired a
controlling interest in Lodestar, a Chicago-based investment advisor, in
December 2002.
.. Expanding into New Product Lines and Services. 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.
.. Expanding into New Markets. We believe that 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 with over 1 million people in the Midwest 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. We organized The PrivateBank (St. Louis)
as a federal savings bank to create flexibility in pursuing these
geographic expansion opportunities.
THE PRIVATEBANK (CHICAGO) AND THE PRIVATEBANK (ST. LOUIS)
We offer banking services to our clients at a personal level. We
believe this is not the same as personal banking service. We define private
banking as offering banking products and services to our clients when they want
it, how they want it and where they want it. We tailor our products and services
to fit our clients instead of making our clients fit our products and services.
Our services fall into four general categories:
.. 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. In certain circumstances, we
also provide 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.
5
.. Wealth Management. Our services include investment management, personal
trust and estate services, custodial services, retirement accounts and
brokerage and investment services. Our trust personnel work with our
clients to define objectives, goals and strategies for their investment
portfolios. We assist the client with the selection of an outside
investment manager and work to tailor the investment program accordingly.
During 1999, we introduced PrivateBank Counselor, an asset allocation
program that combines outside professional portfolio management with an
investment plan that our wealth management personnel tailor to the
individual client's personal financial goals. 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). In December 2002, we acquired a controlling interest in Lodestar
Investment Counsel, a Chicago-based investment adviser. We expect that this
acquisition will provide additional sources of revenue in our wealth
management segment.
.. 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 also use 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 as well as domestic and international wire transfers and foreign
currency exchange. 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.
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 our asset
quality. 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 to our clients. When extending credit, our decisions are
based upon our client's ability to repay the loan from non-speculative sources.
The quality and integrity of the borrower is crucial in the loan approval
process. We monitor the performance of our loan portfolio through regular
contacts with our clients, continual portfolio review, careful monitoring of
delinquency reports and reliance on our loan review function.
We have retained an independent, outside resource to perform our loan
review function, which 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 the loan reviewer'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, 2002, The PrivateBank (Chicago)'s legal lending limit
was $25.5 million and The PrivateBank (St. Louis)'s legal lending limit was
$1.25 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
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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 gain a better understanding of our overall portfolio and credit
culture.
Our chief credit officer, or his designee, 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 the loan/investment committee 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
credit officers as required by the loan policy. 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. As a thrift,
The PrivateBank (St. Louis) is required to maintain a specific percentage of its
loan portfolio in qualified residential real estate loans. To address this
regulatory requirement, from time to time, The PrivateBank (St. Louis) intends
to purchase qualifying loans from The PrivateBank (Chicago) in exchange for
loans generated in the St. Louis market that do not meet the criteria for
qualified-thrift-loans. We expect to price sales of loans between the banks so
as to allow each bank to achieve equal risk rewards from a yield perspective.
Prior to purchasing any loans, the chief credit officer of The PrivateBank
(Chicago) will apply the same credit policies and procedures as are followed for
any other loan approval. Likewise, The PrivateBank (St. Louis) will apply the
same lending discipline to loans purchased from The PrivateBank (Chicago) as it
does for externally generated loans.
The following table sets forth our loan portfolio by category as of
December 31, 2002 and 2001:
DECEMBER 31, PERCENTAGE OF DECEMBER 31, PERCENTAGE OF
2002 TOTAL LOANS 2001 TOTAL LOANS
------------ ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
Commercial real estate.................. $ 452,703 47% $ 310,869 40%
Commercial.............................. 165,993 17% 163,279 21%
Construction............................ 123,204 13% 92,528 12%
Home equity............................. 80,776 8% 59,795 8%
Residential real estate................. 72,289 8% 89,889 11%
Personal................................ 70,676 7% 64,411 8%
------------ ------------- ------------ -------------
Total loans............................. $ 965,641 100% $ 780,771 100%
============ ============= ============ =============
Commercial Real Estate Loans. Our commercial real estate portfolio is
comprised primarily of loans secured by multi-family housing units located in
the Chicago metropolitan area. Other types of commercial real estate collateral
include: commercial properties owned by clients housing their manufacturing,
warehousing or service businesses, investments in small retail centers, and
investments in other business properties.
Risks inherent in real estate lending are related to the market value
of the property taken as collateral, the underlying cash flows and
documentation. It is important to accurately assess property values through
careful review of appraisals. Some examples of risky commercial real estate
lending include loans secured by properties with widely fluctuating market
values or income properties occupied by renters with unstable sources of income,
and not perfecting liens on property taken as collateral. We mitigate these
risks by understanding real estate values in areas in which we lend,
investigating the sources of cash flow servicing the debt on the property and
adhering to our 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
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typically structure mini-permanent and permanent financing as adjustable rate
mortgages, or ARMs. ARM structure allows our clients to lock in an interest rate
for a fixed period of time in order to avoid interest rate risk 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 addresses
selection of appraisers, appraisal standards, environmental issues and specific
requirements for different types of properties, and has been approved by our
board loan/investment committee.
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. In
general, lines of credit 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 generally 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 loan is underwritten to ensure that it has 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.
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INVESTMENT ACTIVITIES
The objective of our investment policy is to maximize income consistent
with asset/liability objectives, liquidity, asset quality and regulatory
constraints. 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.
We invest primarily in direct obligations of the United States,
obligations of agencies of the United States, bank-qualified tax-exempt
obligations of state and local political subdivisions, mortgage-backed pools,
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 by 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 Investment Committee has responsibility for the oversight of
management of our investment portfolio as well as the implementation of our
investment strategy. 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 currently 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.
As currently structured, 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. The Investment Committee
meets periodically with our Asset-Liability Committee to discuss our investment
policies.
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;
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.. investment agency accounts;
.. guardianship administration;
.. Section 1031 exchanges; and
.. custodial accounts.
The average account value of trusts administered by us was
approximately $2.1 million as of December 31, 2002. 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. Trust assets
under administration totaled $758.0 million at December 31, 2002. This is the
result of continued new business, which more than offset declines in existing
account balances due to deterioration in the equity markets throughout the year.
The acquisition of Lodestar Investment Counsel added $482.0 million of assets
under management as of December 31, 2002. On a consolidated basis, the Wealth
Management Area had approximately $1.2 billion in assets under management at
December 31, 2002. The following table indicates the breakdown of our trust
assets under administration at December 31, 2002 by account classification and
related gross revenue for the twelve months ended December 31, 2002 (not
including Lodestar):
AT OR FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 2002
-----------------------------
ACCOUNT TYPE MARKET VALUE REVENUE
------------ -------------- -------
(IN THOUSANDS)
Personal trust--managed.......................... $ 247,530 $ 1,295
Agency--managed.................................. 181,599 907
Custody.......................................... 277,598 580
Employee benefits--managed....................... 51,148 74
---------- ---------
Total....................................... $ 757,875 $ 2,856
We have chosen to outsource some of the investment management aspects
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 the breadth and depth of our
wealth management area. To that end, The PrivateBank (Chicago) acquired Lodestar
Investment Counsel, a Chicago-based investment adviser with $482 million of
assets under management at December 31, 2002. Lodestar manages equity, balanced,
and fixed income accounts primarily for high net-worth individuals, retirement
plans and charitable organizations with investable assets in excess of $1.0
million, and shares a similar focus on highly personalized client service.
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
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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.
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 delivery of the superior levels of personal service and
responsiveness desired by our clients. 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. For private
banking services, we compete with the private banking departments of major
Chicago and St. Louis-area financial institutions, some suburban banks, and
brokerage houses. For residential mortgage lending, we compete with banks,
savings and loans, mortgage brokers and numerous other financial services firms
offering mortgage loans in our market areas. Several of our competitors are
national or international in scope.
Some of our competitors are not subject to the same degree of
regulation as that imposed on bank holding companies, federally insured state
chartered banks, national banks and federal savings banks and may be able to
price loans and deposits more aggressively. 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, 2002, we had approximately 184 full-time equivalent
employees and an additional 6 full-time employees including our controlling
interest in Lodestar Investment Counsel, LLC. The salaries of all of our
employees are paid by either The PrivateBank (Chicago) or The PrivateBank (St.
Louis), with the exception of Messrs. Mandell and Svec and Lisa M. O'Neill, our
Director of Financial Reporting, a portion of whose salaries are paid by
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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.
AVAILABLE INFORMATION
Our Internet address is www.privatebankandtrust.com. We make available
at this address, free of charge, our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC.
13
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.
Under the Federal Reserve's capital guidelines, bank holding companies
are required to maintain a minimum
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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, 2002, we had regulatory capital in excess of the
Federal Reserve's minimum requirements. Our total risk-based capital ratio at
December 31, 2002 was 8.29% and our leverage ratio was 5.47%.
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. The Federal Reserve, as a matter of policy, may require a
bank holding company to be well-capitalized at the time of filing an acquisition
application and upon consummation of the acquisition. 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, bank holding companies are allowed to
acquire banks across state lines subject to various requirements of the Federal
Reserve. 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
15
holding companies.
Under a longstanding policy of the Federal Reserve, we are expected to
act as a source of financial strength to our banking subsidiaries and to commit
resources to support them. The Federal Reserve takes the position that in
implementing this policy, it may require us to provide financial support when we
otherwise would not consider ourselves able to do so.
In addition to the restrictions on dividends imposed by the Federal
Reserve, Delaware law also places limitations on our ability to pay dividends.
For example, we may not pay dividends to our stockholders if, after giving
effect to the dividend, we would not be able to pay our debts as they become
due. Because a major source of our revenue could be dividends that 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 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, in addition to several other mandates, 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.
16
Dividends. The Illinois Banking Act provides that an Illinois bank may
not pay dividends of an amount greater than its current net profits after
deducting losses and bad debts while such bank continues to operate a banking
business. For the purpose of determining the amount of dividends that an
Illinois bank may pay, bad debts are defined as debts upon which interest is
past due and unpaid for a period of six months or more unless such debts are
well-secured and in the process of collection.
In addition to the foregoing, the ability of PrivateBancorp and The
PrivateBank (Chicago) to pay dividends may be affected by the various minimum
capital requirements and the capital and non-capital standards established under
the Federal Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"),
as described below.
Federal Reserve System. The PrivateBank (Chicago) is subject to Federal
Reserve regulations requiring depository institutions to maintain
noninterest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations generally
require 3% reserves on the first $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 2002, and must therefore provide an annual report as required by
FDICIA.
17
As of December 31, 2002, 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
2002, The PrivateBank (Chicago) paid deposit insurance premiums in the aggregate
amount of $148,350. During 2001, The PrivateBank (St. Louis) paid deposit
insurance premiums in the aggregate amount of $38,017.
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 USA PATRIOT Act of 2001, enacted in response to the
September 11, 2001 terrorist attacks, requires bank regulations to consider a
financial institutions compliance with the BSA when reviewing applications.
Finalized rulings regarding customer identification procedures are expected to
be released in 2003 by the United States Treasury Department for this Act.
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:
18
.. 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.
Impact of the Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (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 for 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 or 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.
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,
19
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).
20
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We
intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and we are including this statement for purposes
of these safe harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe our future plans, strategies and expectations,
can generally be identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Our ability to
predict results or the actual effect of future plans or strategies is inherently
uncertain and actual results may differ materially from the results discussed in
forward-looking statements. Factors which might cause such a difference include,
but are not limited to, further decline in market rates of interest and
fluctuations in loan and deposit pricing; greater than anticipated deterioration
in asset quality due to a prolonged economic downturn in the greater Chicago and
St. Louis metropolitan areas or nationally, or other unanticipated
circumstances; legislative or regulatory changes; adverse developments in our
loan or investment portfolios; significant increases in competition;
difficulties in identifying attractive acquisition opportunities or strategic
partners to complement our private banking approach; and the possible dilutive
effect of potential acquisitions or expansion. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
EXECUTIVE OFFICERS
The following persons serve as executive officers of PrivateBancorp:
Ralph B. Mandell (62), a director since 1989, is a co-founder of
PrivateBancorp and The PrivateBank (Chicago). A Managing Director of The
PrivateBank (Chicago) and a director of The PrivateBank (St. Louis), he has
served as Chairman and Chief Executive Officer of PrivateBancorp and The
PrivateBank (Chicago) since 1994 and assumed the additional title of President
of both entities in March 1999. From inception until 1994, Mr. Mandell had the
title of Co-Chairman. Prior to starting The PrivateBank (Chicago) and
PrivateBancorp, Mr. Mandell was the Chief Operating Officer of First United
Financial Services, Inc., from 1985 to 1989, and served as its President from
1988 to 1989. First United, a company that was traded on the NASDAQ National
Market, was sold to First Chicago Corporation in 1987. He also served as
President of Oak Park Trust & Savings Bank from 1985 until 1988. Prior thereto,
Mr. Mandell had served as Executive Vice President of Oak Park Trust & Savings
Bank since 1979.
Gary S. Collins (44) has been a Managing Director of The PrivateBank
(Chicago) since 1991. As a specialist in real estate lending, Mr. Collins has
spent more than 20 years managing diverse real estate transactions and the full
range of mortgage financing. Before joining the bank in 1991, he held senior
positions at several Chicago metropolitan area financial institutions, including
First Chicago Bank of Oak Park, First Colonial Bancshares and Avenue Bank of Oak
Park.
Richard C. Jensen (57), 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 (44) has been a Managing Director of The PrivateBank
(Chicago) since 1996. He serves as head of credit marketing and manager of the
Oak Brook office. Prior to joining the bank, he served as a regional manager
with Firstar Bank Illinois and its predecessor from 1990 to 1996, and as head of
a commercial banking division at American National Bank and Trust Company in
Chicago from 1987 to 1990, where he was employed from 1980 to 1990.
Kathleen Jackson (51) was named director of wealth management, Managing
Director and senior trust officer in August 2002. Ms. Jackson began her career
in 1978 as an agent with Aetna Life and Casualty. She left Aetna in the
mid-1980's to work in a variety of entrepreneurial endeavors advising financial
services companies on marketing and sales strategies. In 1993, she joined
Experian, a lending provider of direct marketing resources, as director of
marketing. Two years later she joined Bank One Investment Management Company,
Chicago (formerly
21
First Chicago NBD Investment Management Company) as national sales manager. She
was promoted to senior managing director of product management in 1998. In 1999,
she joined The Chicago Trust Company, then a wholly owned subsidiary of
Alleghany Asset Management, as senior vice president responsible for P & L,
strategy and overall leadership of the $2 billion personal trust and investment
services business.
James A. Ruckstaetter (56) has been a Managing Director since 1999 and
the Chief Credit Officer of The PrivateBank (Chicago) since January, 2002. His
diverse experience includes credit and loan administration, commercial lending
and residential real estate 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 Vice President
Relationship Manager at Bank of America.
Gary L. Svec (37), has been the Secretary/Treasurer and Chief Financial
Officer of PrivateBancorp since August 2000. Prior to joining the company,
Mr. Svec served as Vice President and as Investment and Asset/Liability
Specialist for Betzold, Berg, Nussbaum & Heitman, Inc., working with the firm's
financial institutions clients, from August 1995 to August 2000. He also served
as Chief Financial Officer of Betzold Berg Investment Management from
August 1995 to August 1998. From 1988 until July 1995, Mr. Svec was employed by
Crowe, Chizek & Company as an auditor, tax advisor and consultant to their
financial institutions group. Mr. Svec is a certified public accountant.
On January 27, 2003, Mr. Svec announced his intent to resign his position at
PrivateBancorp.
William A. Goldstein (63), is the Chief Executive Officer of Lodestar
Investment Counsel, LLC, an investment advisory firm recently acquired by the
Company, and has over 39 years of experience in the investment industry. Mr.
Goldstein was appointed to the Board of Directors of The PrivateBank (Chicago)
in January 2003 following completion of the acquisition and is also considered
an executive officer of the Company. Prior to founding Lodestar in 1989, he was
a Principal in the founding of Burton J. Vincent, Chesley & Co. where he served
as Executive Vice President and Director. In 1983 the firm was acquired by
Prescott, Ball & Turben (a subsidiary of Kemper Corporation). There Mr.
Goldstein was Chairman and Director of Prescott Asset Management, and President
of Selected Special Shares, a publicly traded mutual fund.
ITEM 2. PROPERTIES
We currently have seven physical banking locations and recently added
the space of Lodestar Investment Counsel, LLC. 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 35,579 square
feet comprising the entire second, 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. The Company purchased this building from Towne
Square Realty in June of 2002. The branch currently pays rent to the Holding
company.
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
22
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.
On December 31, 2002, The PrivateBank and Trust Company acquired a
controlling interest in an asset management company, Lodestar Investment
Counsel, LLC. Lodestar leases approximately 4,759 square feet in a building
located at 208 South Lasalle Street in downtown Chicago. The lease expires on
December 31, 2007.
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.
23
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 February 28, 2003, we had approximately 278 holders of record 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 (on a
split-adjusted basis).
HIGH LOW
--------- ---------
2002
First Quarter............................. $ 16.3333 $ 12.8000
Second Quarter............................ 21.9667 16.3333
Third Quarter............................. 20.9267 15.4633
Fourth Quarter............................ 26.5533 20.5733
2001
First Quarter............................. $ 10.6267 $ 6.2067
Second Quarter............................ 11.1533 9.0000
Third Quarter............................. 12.6667 10.0000
Fourth Quarter............................ 13.3333 10.5933
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 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.
2002
First Quarter....................................... $ 0.020
Second Quarter...................................... 0.020
Third Quarter....................................... 0.027
Fourth Quarter...................................... 0.027
2001
First Quarter....................................... $ 0.017
Second Quarter...................................... 0.017
Third Quarter....................................... 0.020
Fourth Quarter...................................... 0.020
EQUITY COMPENSATION PLAN INFORMATION
Information regarding our equity compensation plans are included in our
Proxy Statement under the heading "Equity Compensation Plan Information" and is
incorporated herein by reference.
24
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, 2002 consolidated
financial statements that have been audited by Ernst & Young 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,
--------------------------------------------------------------
2002(1) 2001 2000 1999 1998
----------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED STATEMENT OF INCOME DATA:
INTEREST INCOME:
Loans, including fees........................................ $ 52,560 $ 50,975 $ 48,633 $ 26,597 $ 19,619
Federal funds sold and interest-bearing deposits............. 126 244 1,058 330 2,181
Securities................................................... 19,156 14,377 7,455 5,141 3,492
----------- ---------- --------- --------- ---------
Total interest income................................... 71,842 65,596 57,146 32,068 25,292
----------- ---------- --------- --------- ---------
INTEREST EXPENSE:
Interest-bearing demand deposits............................. 636 923 869 604 487
Savings and money market deposit accounts.................... 7,328 11,365 13,711 7,671 6,651
Time deposits................................................ 16,014 17,291 14,635 7,399 6,155
Funds borrowed............................................... 5,325 6,327 4,116 931 19
Long term debt - trust preferred securities.................. 1,939 1,731 -- -- --
----------- ---------- --------- --------- ---------
Total interest expense................................... 31,242 37,637 33,331 16,605 13,312
----------- ---------- --------- --------- ---------
Net interest income..................................... 40,600 27,959 23,815 15,463 11,980
Provision for loan losses.................................... 3,862 3,179 1,690 1,208 362
----------- ---------- --------- --------- ---------
Net interest income after provision for loan losses..... 36,738 24,780 22,125 14,255 11,618
----------- ---------- --------- --------- ---------
NON-INTEREST INCOME:
Banking, trust services and other income..................... 7,081 4,028 3,077 1,947 1,280
Securities gains............................................. 11 2,095 92 57 40
Trading losses............................................... (943) -- -- -- --
----------- ---------- --------- --------- ---------
Total non-interest income.................................. 6,149 6,123 3,169 2,004 1,320
----------- ---------- --------- --------- ---------
NON-INTEREST EXPENSE:
Salaries and employee benefits............................... 13,979 9,111 8,174 5,156 4,077
Severance charge............................................. -- -- 562 -- --
Occupancy expense, net....................................... 4,891 4,158 2,987 1,563 1,379
Data processing.............................................. 1,509 1,295 820 478 508
Marketing.................................................... 1,648 1,208 1,202 692 567
Professional fees............................................ 3,689 2,939 2,135 1,295 561
Goodwill amortization........................................ -- 824 731 -- --
Insurance.................................................... 455 354 303 214 134
Towne Square Financial Corporation acquisition............... -- -- -- 1,300 --
Other expense................................................ 2,436 2,763 1,692 1,389 863
----------- ---------- --------- --------- ---------
Total non-interest expense.............................. 28,607 22,652 18,606 12,087 8,089
----------- ---------- --------- --------- ---------
Income before income taxes.............................. 14,280 8,251 6,688 4,172 4,849
Income tax provision......................................... 3,273 2,051 2,263 1,257 1,839
----------- ---------- --------- --------- ---------
Net income.............................................. $ 11,007 $ 6,200 $ 4,425 $ 2,915 $ 3,010
=========== ========== ========= ========= =========
PER SHARE DATA (2):
Basic earnings............................................... $ 1.49 $ 0.88 $ 0.64 $ 0.49 $ 0.61
Diluted earnings............................................. $ 1.42 0.85 0.62 0.46 0.57
Dividends.................................................... 0.09 0.07 0.07 0.07 0.05
Book value (at end of period)................................ 11.56 8.65 7.82 6.84 5.69
SELECTED FINANCIAL CONDITION DATA (AT END OF PERIOD):
Total securities(3).......................................... $ 487,020 $ 332,933 $ 172,194 $ 71,134 $ 116,891
Total loans.................................................. 965,641 780,771 598,724 397,277 281,965
Total assets................................................. 1,543,414 1,176,768 829,509 518,697 416,308
Total deposits............................................... 1,205,271 850,495 670,246 453,092 364,994
Funds borrowed............................................... 209,954 231,488 96,879 15,000 20,000
Total stockholders' equity................................... 89,092 62,304 54,249 47,080 29,274
Trust assets under administration............................ 1,239,779 722,713 777,800 729,904 611,650
25
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL RATIOS AND OTHER DATA:(3)
Performance Ratios:
Net interest margin(4)....................................... 3.44% 3.27% 3.63% 3.79% 3.64%
Net interest spread(5)....................................... 3.25 2.87 3.02 3.15 2.98
Non-interest income to average assets........................ 0.47 0.64 0.45 0.45 0.37
Non-interest expense to average assets (10).................. 2.17 2.37 2.64 2.71 2.29
Net overhead ratio(6)(10).................................... 1.70 1.73 2.19 2.26 1.91
Efficiency ratio(7)(10)...................................... 57.63 63.17 66.76 65.76 60.82
Return on average assets(8)(10).............................. 0.83 0.65 0.63 0.65 0.85
Return on average equity(9)(10).............................. 15.17 10.59 8.81 7.66 11.27
Dividend payout ratio........................................ 6.27 8.39 10.43 13.78 8.74
Asset Quality Ratios:
Non-performing loans to total loans........................ 0.14% 0.41% 0.24% 0.21% 0.36%
Non-accrual loans to total loans............................. 0.08 0.09 0.00 0.00 0.00
Allowance for probable loan losses to:
Total loans.................................................. 1.20 1.06 1.02 1.14 1.21
Non-performing loans......................................... 828 262 423 548 336
Net charge-offs to average total loans....................... 0.07 0.15 0.18 .03 --
Non-performing assets to total assets........................ 0.09 0.27 0.17 0.16 0.24
Balance Sheet Ratios:
Loans to deposits............................................ 80.1% 91.8% 89.3% 87.7% 77.3%
Average interest-earning assets to average interest-
bearing liabilities......................................... 107.9 109.8 112.2 116.3 116.4
Capital Ratios:
Average equity to average assets............................. 5.50% 6.13% 7.13% 8.51% 7.03%
Total risk-based capital ratio............................... 8.29 9.71 8.15 13.96 11.53
Tier 1 risk-based capital ratio.............................. 6.91 8.18 6.47 12.84 10.40
Leverage ratio............................................... 5.47 6.64 5.54 10.77 7.88
Ratio of Earnings to Fixed Charges(11):
Including deposit interest................................... 1.46x 1.22x 1.20x 1.25x 1.36x
Excluding deposit interest................................... 2.97 2.02 2.62 5.48 256.21
(1) Audited by Ernst & Young LLP. Prior year results audited by Arthur Andersen
LLP.
(2) Per share data has been adjusted to reflect the 3-for-2 dividend of our
common stock effective January 17, 2003.
(3) For all periods, the entire securities portfolio was classified "Available
for Sale."
(4) Net interest income divided by average interest-earning assets.
(5) Yield on average interest-earning assets less rate on average
interest-bearing liabilities.
(6) Non-interest expense less non-interest income divided by average total
assets.
(7) Non-interest expense divided by the sum of net interest income, on a tax
equivalent basis, plus non-interest income.
(8) Net income divided by average total assets.
(9) Net income divided by average common equity.
(10) 2000 performance ratios presented in the table above include a third
quarter one-time severance and recruitment of new executive officers
charge, and 1999 performance ratios include one-time charges related to the
Towne Square Financial Corporation acquisition and St. Louis start-up costs
incurred in the third and fourth quarter, respectively, in the following
amounts (in thousands):
PRE-TAX AFTER-TAX
------- ---------
Severance charges................................ $ 562 $ 377
Towne Square Corporation acquisition............. 1,433 1,382
St. Louis start-up costs......................... 324 214
26
2000 and 1999 performance ratios excluding the special charges described
above are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999