| PRIVATEBANCORP INC ITEM 1A RISK FACTORS Our business, financial condition and results of operations are subject to various risks, including those discussed below, which may affect the value of our securities |
| The risks discussed below are those that we believe are the most significant risks, although additional risks not presently known to us or that we currently deem less significant may also impact our business, financial condition and results of operations, perhaps materially |
| 27 ______________________________________________________________________ [51]Table of Contents We may not be able to implement aspects of our growth strategy |
| Our growth strategy contemplates the further expansion of our business and operations, possibly through the addition of new product lines, the establishment of additional banking offices or the acquisition of other banks or banking offices in our existing markets or in new metropolitan markets in the Midwest or the Sunbelt as well as the acquisition of additional wealth management firms |
| Implementing these aspects of our growth strategy depends in part on our ability to successfully identify acquisition opportunities and strategic partners that will complement our private banking and wealth management approaches and to successfully integrate their operations with ours |
| To successfully acquire or establish new banks or banking offices, we must be able to correctly identify profitable or growing markets, as well as attract the necessary relationships to make these new facilities cost-effective |
| It is possible that the costs associated with future expansion or acquisitions may have adverse effects on our earnings per share |
| To the extent we undertake de novo (start-up) bank or banking office formations, our level of reported net income, return on average equity and return on average assets will be impacted by start-up costs and overhead expenses associated with such operation, the profitability of which will also depend on the time lag typically involved in redeploying deposits into attractively priced loans and other higher yielding assets |
| We are likely to experience the effects of higher expenses relative to operating income from any new operation |
| These expenses may be higher than we expected, and it may take longer than expected for new banks and/or offices to reach profitability |
| In addition, we cannot be sure that we will be able to identify suitable opportunities for further growth and expansion, or that if we do, that we will be able to successfully integrate these new operations into our business |
| If we are unable to effectively implement our growth strategies, our business may be adversely affected |
| Our growth and expansion may strain our ability to manage our operations and our financial resources |
| Our financial performance and profitability depend on our ability to execute our growth strategy |
| In addition to continuing to develop our existing client relationships and expanding the market presence of our current banking offices, we intend to continue to evaluate possible acquisition candidates and expansion opportunities in identified strategic markets |
| We also intend to direct our energies towards building the breadth and depth of our wealth management area, including through the possible acquisition of additional wealth management firms and financial planning capabilities |
| This continued growth, however, may present operating and other challenges that could adversely affect our business, financial condition, results of operations and cash flows |
| Accordingly, there can be no assurance that we will be able to execute our growth strategy or maintain the level of profitability that we have recently experienced |
| Our growth may also place a strain on our administrative, operation and financial resources and increased demands on our systems and controls |
| Our growth may require continued enhancements to and expansion of our operating and financial systems and controls and may strain or significantly challenge them |
| The process of consolidating the businesses and implementing the strategic integration of any acquired or newly-established banking offices and businesses with our existing business may take a significant amount of time |
| It may also place additional strain on our resources and require us to incur substantial expenses |
| We cannot assure you that we will be able to integrate any businesses we acquire or establish successfully or in a timely manner |
| Our continued growth may also increase our need for qualified personnel |
| We cannot assure you that we will be successful in attracting, integrating and retaining such personnel |
| The loss of key managing directors may adversely affect our operations |
| Our growth and development to date have resulted in large part from the efforts of our 114 managing directors |
| Our managing directors have primary contact with our clients and are extremely important in maintaining personalized relationships with our client base, which is a key aspect of our business strategy, and in increasing our market presence |
| The loss 28 ______________________________________________________________________ [52]Table of Contents of one or more of these key employees could have a material adverse effect on our operations if remaining managing directors are not successful in retaining client relationships of a departing managing director |
| We have entered into employment contracts with Ralph B Mandell, our chairman, president and chief executive officer, and ten managing directors, Richard Jensen, William Goldstein, Dennis Klaeser, Hugh McLean, Gary Collins, Jay Williams, Wallace Head, David Provost, Jim Ruckstaetter and Thomas Castronovo |
| In connection with our acquisition of Lodestar, we entered into employment contracts with each of Lodestar’s four portfolio managers |
| Despite these agreements, there can be no assurance that any of these individuals will decide to remain employed by us or that our business will be protected by various covenants not to compete or covenants not to solicit our clients that are contained in these agreements |
| Currently, we do not have employment agreements in place with any of our other managing directors or officers and none of these individuals are currently subject to any covenants not to compete or covenants not to solicit our clients |
| Our commercial real estate loans generally involve higher principal amounts than our other loans, and repayment of these loans may be dependent on factors outside our control or the control of our borrowers |
| At December 31, 2005, our commercial real estate loans totaled approximately dlra1dtta3 billion, or 49prca of our total loan portfolio |
| Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans generally is dependent, in large part, on the successful operation of the property securing the loan or the business conducted on the property securing the loan |
| These loans may be more adversely affected by general conditions in the real estate markets or in the economy |
| For example, if the cash flow from a borrower’s project is reduced due to leases not being obtained or renewed, that borrower’s ability to repay the loan may be impaired |
| Many commercial real estate loan principal payments are not fully amortized over the loan period, but have balloon payments due at maturity |
| A borrower’s ability to make a balloon payment typically will depend on its ability to either refinance the loan or complete a timely sale of the underlying property |
| Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio |
| However, every loan we make carries a certain risk of non-payment |
| This risk is affected by, among other things: • the credit risks of the particular borrower; • changes in economic and industry conditions; • the duration of the loan; and • in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral |
| We maintain an allowance for loan losses sufficient to absorb credit losses inherent in our loan portfolio |
| The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is supported by all available and relevant information |
| The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified |
| Loan quality is continually monitored by management and reviewed by the loan committees of the boards of directors of the banks on a quarterly basis |
| The amount of additions to the allowance for loan losses, which is charged to earnings through the provision for loan losses, is determined based on a variety of factors, including: • assessment of the credit risk of the portfolio, 29 ______________________________________________________________________ [53]Table of Contents • evaluation of loans classified as special mention, sub-standard and doubtful loans, • delinquent loans, • evaluation of current economic conditions in the market area, • actual charge-offs during the year, • historical loss experience, and • industry loss averages |
| Our allowance for loan losses as a percentage of non-performing loans was 2201prca at December 31, 2005, and 751prca at December 31, 2004 |
| As a percentage of total loans, the allowance was 1dtta13prca at December 31, 2005 compared to 1dtta15prca at December 31, 2004 |
| Over the past year, we decreased our allowance as a percentage of total loans based on management’s analysis of our historical credit quality |
| Although we believe our loan loss allowance is adequate to absorb probable losses in our loan portfolio, the allowance may not be adequate |
| If our actual loan losses exceed the amount that is anticipated, our earnings could suffer |
| There can be no assurance that our investment strategy will be successful |
| Our investment strategy is designed to reduce the sensitivity in our balance sheet to changes in interest rates |
| To implement this strategy, we invest in interest sensitive instruments, including derivatives |
| Securities available-for-sale decreased to dlra695dtta2 million at December 31, 2005, down 9prca from dlra764dtta0 million as of December 31, 2004 |
| The contraction in the investment security portfolio since December 31, 2004 resulted primarily from the redemption of dlra70dtta0 million of FHLB (Chicago) stock during 2005 |
| While the purpose of our investment security portfolio, including derivatives, is to mitigate our interest rate sensitivity, we cannot predict whether these instruments will perform as expected |
| In addition, the failure of any counterparty to meet its obligations under these financial instruments would cause such instruments to lose substantial value |
| The dividend and redemption practices of the FHLB (Chicago) relating to its stock and the Company’s ability to ultimately redeem the shares of FHLB (Chicago) stock it owns could have a material adverse effect on the operations and future prospects of the Company |
| ” Our investment policy gives us investment discretion and allows us to invest in certain asset classes and in certain amounts and concentrations that may increase losses in the event our investment portfolio performs in a manner we did not anticipate |
| The unavailability of alternative funding sources may constrain our growth |
| We have in the past and continue to utilize brokered deposits as one of our funding sources that supports our asset growth |
| In addition, as a part of our liquidity management strategy, we intend to limit our use of brokered deposits as a percentage of total deposits to levels no more than 40prca as we determine prudent from time to time |
| At December 31, 2005, brokered deposits comprised 21prca of our total deposits |
| If this funding source becomes more difficult to access, we will have to seek alternative funding sources in order to continue to fund our asset growth |
| This may include attempting to attract significant new core deposits, reducing our available-for-sale securities portfolio and selling loans |
| There can be no assurance that brokered deposits will be available, or if available, sufficient to support our continued growth |
| We rely on the services of third parties to provide services that are integral to our operations |
| We rely on third-party service providers to support our operations |
| In particular, in our wealth management segment, we have not, in the past, provided investment management services directly 30 ______________________________________________________________________ [54]Table of Contents through our own personnel |
| Rather, we have relied, and continue to rely, upon selected outside investment managers to provide investment advice and asset management services to our clients |
| We cannot be sure that we will be able to maintain these arrangements on favorable terms |
| Also, many of the investment managers with whom we work are affiliated with our competitors in the financial services field |
| We cannot be sure that our investment managers will continue to work with us in these arrangements or that our clients will continue to utilize the services of these investment managers through us, rather than directly from the investment management firms themselves |
| The loss of any of these outside investment managers may impact our ability to provide our clients with quality service or certain types of portfolio management without incurring the cost of replacing them |
| We also are dependent on third-party service providers for data processing and other information processing systems that support our day-to-day trust and banking activities |
| Any disruption to the services provided by these third parties could have an adverse impact on our operations |