-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CV46bDMqx+spRd9srpWvpa6FaE9YCC+Bt+kSNhqiht7oHHPMzshSkLUTD/MkC7qT o2+sRFjzZbCbvNRxVyV6Vg== 0000913849-03-000241.txt : 20030514 0000913849-03-000241.hdr.sgml : 20030514 20030514155612 ACCESSION NUMBER: 0000913849-03-000241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRIVATEBANCORP INC CENTRAL INDEX KEY: 0000889936 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363681151 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25887 FILM NUMBER: 03699111 BUSINESS ADDRESS: STREET 1: TEN NORTH DEARBORN SUITE 900 CITY: CHICAGO STATE: IL ZIP: 60602 MAIL ADDRESS: STREET 1: TEN NORTH DEARBORN STREET CITY: CHICAGO STATE: IL ZIP: 60602 10-Q 1 f10q_051203.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period from ________ to ________ Commission File Number: 000-25887 PRIVATEBANCORP, INC. (Exact name of Registrant as specified in its charter.) DELAWARE 36-3681151 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) TEN NORTH DEARBORN STREET CHICAGO, ILLINOIS 60602 (Address of principal executive offices) (Zip Code) (312) 683-7100 (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. =============================================================================== CLASS OUTSTANDING AS OF MAY 12, 2003 - ------------------------------------------------------------------------------- Common, no par value 7,768,134 =============================================================================== PRIVATEBANCORP, INC. FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS
Page Number ------ Selected Financial Data..........................................................................................2 PART I Item 1. Financial Statements....................................................................................4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................17 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................35 Item 4. Controls and Procedures................................................................................37 PART II Item 1. Legal Proceedings......................................................................................38 Item 2. Changes in Securities and Use of Proceeds..............................................................38 Item 3. Defaults upon Senior Securities........................................................................38 Item 4. Submission of Matters to a Vote of Security Holders....................................................38 Item 5. Other Information......................................................................................38 Item 6. Exhibits and Reports on Form 8-K.......................................................................38 Signatures......................................................................................................40
SELECTED FINANCIAL DATA The following table summarizes certain selected unaudited consolidated financial information of PrivateBancorp, Inc. at or for the periods indicated. This information should be read in conjunction with the unaudited consolidated financial statements and related notes included pursuant to Item 1 of this report.
QUARTER ENDED ------------------------------------------------------------- 03/31/03 12/31/02 09/30/02 06/30/02 03/31/02 --------- ---------- ---------- ---------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED STATEMENT OF INCOME DATA: Interest income: Loans, including fees........................ $15,167 $14,043 $13,704 $12,665 $12,148 Federal funds sold and interest-bearing deposits..................................... 25 63 38 8 17 Securities............................... 5,379 5,507 4,557 4,886 4,206 ------- ------- ------- ------- ------- Total interest income........................ 20,571 19,613 18,299 17,559 16,371 ------- ------- ------- ------- ------- Interest expense: Interest-bearing demand deposits.......... 128 129 168 168 171 Savings and money market deposit accounts 1,709 1,923 1,923 1,763 1,719 Other time deposits....................... 3,940 4,037 3,976 3,810 4,323 Funds borrowed............................ 1,312 1,226 1,304 1,353 1,309 Trust preferred interest expense.......... 485 485 485 485 485 ------- ------- ------- ------- ------- Total interest expense................. 7,574 7,800 7,856 7,579 8,007 ------- ------- ------- ------- ------- Net interest income....................... 12,997 11,813 10,443 9,980 8,364 Provision for loan losses................. 956 914 828 1,609 511 ------- ------- ------- ------- ------- Net interest income after provision for loan losses............................ 12,041 10,899 9,615 8,371 7,853 ------- ------- ------- ------- ------- Non-interest income: Banking, wealth management services and other income........................... 2,701 1,975 1,763 1,802 1,542 Securities (losses) gains, net............ (55) (313) 280 274 (230) Trading losses on swap................... (230) (282) (662) -- -- ------- ------- ------- ------- ------- Total non-interest income.............. 2,416 1,380 1,381 2,076 1,312 ------- ------- ------- ------- ------- Non-interest expense: Salaries and employee benefits............ 4,778 3,903 3,393 3,469 3,214 Occupancy expense, net.................... 1,419 1,319 1,227 1,206 1,139 Data processing........................... 393 393 433 374 308 Marketing................................. 486 557 351 374 365 Amortization of other intangibles......... 42 -- -- -- -- Professional fees......................... 1,284 774 997 1,027 891 Insurance................................. 168 137 118 106 93 Other expense................................ 849 851 569 557 462 ------- ------- ------- ------- ------- Total non-interest expense................ 9,419 7,934 7,088 7,113 6,472 ------- ------- ------- ------- ------- Minority Interest expense................. 38 -- -- -- -- Income before income taxes................ 5,000 4,345 3,908 3,334 2,693 ------- ------- ------- ------- ------- Income tax provision...................... 1,397 1,125 875 724 549 ------- ------- ------- ------- ------- Net income................................... $ 3,603 $ 3,220 $ 3,033 $ 2,610 $ 2,144 ======= ======= ======= ======= ======= PER SHARE DATA: Basic earnings............................... $ 0.47 $ 0.43 $ 0.41 $ 0.35 $ 0.29 Diluted earnings............................. 0.44 0.41 0.39 0.33 0.28 Dividends.................................... 0.040 0.027 0.027 0.020 0.020 Book value (at end of period)................ 12.29 11.56 10.71 9.71 8.80
All previously reported share and per share data has been restated to reflect the 3-for-2 stock split which occurred on January 17, 2003. 2
QUARTER ENDED ------------------------------------------------------------- 03/31/03 12/31/02 09/30/02 06/30/02 03/31/02 --------- ---------- ---------- ---------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SELECTED FINANCIAL DATA (AT END OF PERIOD): Total securities (1)......................... $505,877 $487,020 $403,192 $392,090 $388,728 Total loans.................................. 1,018,196 965,641 913,197 865,778 782,434 Total assets................................. 1,628,995 1,543,414 1,404,326 1,332,008 1,231,208 Total deposits............................... 1,365,344 1,205,271 1,163,327 1,074,475 981,865 Funds borrowed............................... 124,933 209,954 125,422 154,499 155,523 Trust preferred securities................... 20,000 20,000 20,000 20,000 20,000 Total stockholders' equity................... 95,373 89,092 79,281 71,697 64,926 Wealth management assets under management.... 1,204,239 1,239,779 693,869 733,939 758,242 Lodestar assets under management............. 501,276 481,904 -- -- -- SELECTED FINANCIAL RATIOS AND OTHER DATA: Performance Ratios: Net interest margin(2) (8)............... 3.68% 3.56% 3.46% 3.53% 3.18% Net interest spread(3).................... 3.53 3.37 3.27 3.34 2.96 Non-interest income to average assets..... 0.62 0.38 0.41 0.65 0.36 Non-interest expense to average assets.... 2.41 2.16 2.08 2.24 2.07 Net overhead ratio(4)..................... 1.80 1.78 1.68 1.59 1.71 Efficiency ratio (5)...................... 58.5 57.3 56.3 55.4 61.1 Return on average assets (6).............. 0.92 0.88 0.89 0.82 0.73 Return on average equity (7).............. 15.49 15.99 15.86 15.07 13.35 Dividend payout ratio..................... 8.62 6.14 6.51 5.66 6.88 Asset Quality Ratios: Non-performing loans to total loans....... 0.35% 0.14% 0.33% 0.37% 0.37% Allowance for loan losses to: total loans............................ 1.22 1.20 1.17 1.14 1.12 non-performing loans................... 355 828 357 313 303 Net charge-offs (recoveries) to average total loans............................ 0.03 (0.01) 0.04 0.24 0.01 Non-performing assets to total assets..... 0.22 0.09 0.21 0.24 0.24 Non-accrual loans to total loans.......... 0.15 0.08 0.05 0.07 0.19 Balance Sheet Ratios: Loans to deposits......................... 74.6% 80.1% 78.5% 80.6% 79.7% Average interest-earning assets to average interest-bearing liabilities... 107.1 108.2 108.0 107.8 107.5 Capital Ratios: Total equity to total assets.............. 5.85% 5.77% 5.65% 5.38% 5.27% Total risk-based capital ratio............ 8.30 8.29 9.10 9.37 9.93 Tier 1 risk-based capital ratio........... 6.99 6.91 7.61 7.84 8.37 Leverage ratio............................ 5.27 5.47 5.91 6.07 6.25 - ------------------ (1) The entire securities portfolio was classified as "available-for-sale" for the periods presented. (2) Net interest income, on a tax-equivalent basis, divided by average interest-earning assets. (3) Yield on average interest-earning assets less rate on average interest-bearing liabilities. (4) Non-interest expense less non-interest income divided by average total assets. (5) Non-interest expense divided by the sum of net interest income (tax equivalent) plus non-interest income. (6) Net income divided by average total assets. (7) Net income divided by average common equity. (8) The company adjusts GAAP reported net interest income by the tax equivalent adjustment amount to account for the tax attributes on federally tax exempt municipal securities. For GAAP purposes, tax benefits associated with federally tax exempt municipal securities are reflected in income tax expense. The following table reconciles reported net interest income to net interest income on a tax equivalent basis for the periods presented:
RECONCILIATION OF NET INTEREST INCOME TO NET INTEREST INCOME ON A TAX EQUIVALENT BASIS 1Q03 4Q02 3Q02 2Q02 1Q02 -------------------------------------------------------------- Net interest income............................ $12,997 $11,813 $10,443 $9,980 $8,364 Tax equivalent adjustment to net interest income....................................... 695 661 756 790 687 -------- ------- ------- ------- ------ Net interest income, tax equivalent basis $13,692 $12,474 $11,199 $10,770 $9,051 -------- ------- ------- ------- ------
3 PART I ITEM 1. FINANCIAL STATEMENTS PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, DECEMBER 31, MARCH 31, 2003 2002 2002 ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) ASSETS Cash and due from banks................................. $ 46,643 $ 34,529 $ 25,852 Federal funds sold and other short-term investments..... 7,415 258 3,558 ---------- ---------- ---------- Total cash and cash equivalents...................... 54,058 34,787 29,410 ---------- ---------- ---------- Loans held for sale..................................... 12,591 14,321 1,785 Available-for-sale securities, at fair value............ 505,877 487,020 388,728 Loans, net of unearned discount......................... 1,018,196 965,641 782,434 Allowance for loan losses............................... (12,471) (11,585) (8,790) ---------- ---------- ---------- Net loans............................................... 1,005,725 954,056 773,644 ---------- ---------- ---------- Goodwill and other intangibles.......................... 21,743 21,742 10,805 Premises and equipment, net............................. 6,516 6,851 4,026 Accrued interest receivable............................. 7,258 9,427 8,307 Other assets............................................ 15,227 15,210 14,503 ---------- ---------- ---------- Total assets............................................ $1,628,995 $1,543,414 $1,231,208 ========== ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits: Noninterest-bearing.................................. $ 88,243 $ 88,986 $ 62,359 Interest-bearing..................................... 73,699 64,893 54,214 Savings and money market deposit accounts............... 476,100 488,941 369,811 Brokered deposits....................................... 387,006 279,806 278,918 Other time deposits..................................... 340,296 282,645 216,563 ---------- ---------- ---------- Total deposits....................................... 1,365,344 1,205,271 981,865 Funds borrowed.......................................... 124,933 209,954 155,523 Trust preferred securities.............................. 20,000 20,000 20,000 Accrued interest payable................................ 3,779 4,986 2,812 Other liabilities....................................... 19,566 14,111 6,082 ---------- ---------- ---------- Total liabilities....................................... 1,533,622 1,454,322 1,166,282 ---------- ---------- ---------- STOCKHOLDERS' EQUITY Preferred Stock, 1,000,000 shares authorized............ -- -- -- Common stock, without par value, $1 stated value; 12,000,000 shares authorized; 7,762,014, 7,704,203, and 7,375,530 shares issued and outstanding as of March 31, 2003, December 31, 2002 and March 31, 2002, respectively................................... 7,762 7,704 7,376 Surplus................................................. 45,594 45,367 39,813 Retained earnings....................................... 31,076 27,784 19,465 Accumulated other comprehensive income.................. 11,403 8,826 31 Deferred compensation................................... (462) (589) (809) Loans to officers....................................... -- -- (950) ---------- ---------- ---------- Total stockholders' equity.............................. 95,373 89,092 64,926 ---------- ---------- ---------- Total liabilities and stockholders' equity.............. $1,628,995 $1,543,414 $1,231,208 ========== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. All previously reported share and per share data has been restated to reflect the 3-for-2 stock split which occurred on January 17, 2003. 4 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, -------------------- 2003 2002 --------- -------- INTEREST INCOME Loans, including fees........................................................ $15,167 $12,148 Taxable securities........................................................... 3,792 2,862 Securities exempt from federal income taxes.................................. 1,587 1,344 Federal funds sold and interest bearing deposits............................. 25 17 ------- ------- Total interest income..................................................... 20,571 16,371 ------- ------- INTEREST EXPENSE Deposits: Interest-bearing demand................................................... 128 171 Savings and money market deposit accounts................................. 1,709 1,719 Brokered deposits and other time deposits................................. 3,940 4,323 Funds borrowed............................................................... 1,312 1,309 Trust preferred securities................................................... 485 485 ------- ------- Total interest expense.................................................... 7,574 8,007 ------- ------- Net interest income....................................................... 12,997 8,364 Provision for loan losses.................................................... 956 511 ------- ------- Net interest income after provision for loan losses....................... 12,041 7,853 ------- ------- NON-INTEREST INCOME Banking, wealth management services and other income...................... 2,701 1,542 Securities losses, net.................................................... (55) (230) Trading losses, net....................................................... (230) -- ------- ------- Total non-interest income.............................................. 2,416 1,312 ------- ------- NON-INTEREST EXPENSE Salaries and employee benefits............................................... 4,778 3,214 Occupancy expense, net....................................................... 1,419 1,139 Professional fees............................................................ 1,284 891 Amortization of other intangibles............................................ 42 -- Other non-interest expense................................................... 1,896 1,228 ------- ------- Total non-interest expense................................................ 9,419 6,472 ------- ------- Minority interest............................................................ 38 -- ------- ------- Income before income taxes................................................... 5,000 2,693 ------- ------- Income tax provision......................................................... 1,397 549 ------- ------- Net income................................................................ $ 3,603 $ 2,144 ======= ======= Basic earnings per share..................................................... $0.47 $0.29 Diluted earnings per share................................................... $0.44 $0.28
The accompanying notes to consolidated financial statements are an integral part of these statements. All previously reported share and per share data has been restated to reflect a 3-for-2 stock split which occurred on January 17, 2003. 5 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
ACCUMULATED OTHER LOANS TOTAL COMMON RETAINED COMPREHENSIVE DEFERRED TO STOCKHOLDERS' STOCK SURPLUS EARNINGS INCOME COMPENSATION OFFICERS EQUITY -------- ------- -------- ------------- ------------ -------- ------------- BALANCE, JANUARY 1, 2002 $7,206 $39,114 $17,468 $ 323 $ (857) $(950) $62,304 Net income............. -- -- 2,144 -- -- -- 2,144 Net decrease in fair value of securities classified as available-for-sale, net of income taxes and reclassification adjustments......... -- -- -- (292) -- -- (292) ------ ------- ------ ------ ------- ----- ------ Total comprehensive income.............. -- -- 2,144 (292) -- -- 1,852 ------ ------- ------ ------ ------- ----- ------ Cash dividends declared ($0.02 per share).............. -- -- (147) -- -- -- (147) Issuance of common stock............... 530 699 -- -- -- -- 869 Awards granted......... -- -- -- -- (39) -- (39) Amortization of deferred compensation........ -- -- -- -- 87 -- 87 Repayment of loans to officers............ -- -- -- -- -- -- -- ------ ------- ------- ------- ------- ----- ------ BALANCE, MARCH 31, 2002 $7,736 $39,813 $19,465 $ 31 $ (809) $(950) $64,926 ====== ======= ======= ======= ======= ===== ======= BALANCE, JANUARY 1, 2003 $7,704 $45,367 $27,784 $ 8,826 $ (589) $-- $89,092 Net income............. -- -- 3,603 -- -- -- 3,603 Net increase in fair value of securities classified as available-for-sale, net of income taxes and reclassification adjustments......... -- -- -- 2,577 -- -- 2,577 ------ ------- ------ ------ ------- ----- ------ Total comprehensive income.............. -- -- 3,603 2,577 -- -- 6,180 ------ ------- ------ ------ ------- ----- ------ Cash dividends declared ($0.04 per share).............. -- -- (311) -- -- -- (311) Issuance of common stock............... 58 227 -- -- -- -- 285 Awards granted and forfeited........... -- -- -- -- 119 -- 119 Amortization of deferred compensation........ -- -- -- -- 8 -- 8 ------ ------- ------- ------- ------- ----- ------- BALANCE, MARCH 31, 2003 $7,762 $45,594 $31,076 $11,403 $(462) $ -- $95,373 ====== ======= ======= ======= ======= ===== =======
The accompanying notes to consolidated financial statements are an integral part of these statements. All previously reported share and per share data has been restated to reflect the 3-for-2 stock split which occurred on January 17, 2003. 6 PRIVATEBANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------------ 2003 2002 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income..................................................................... $ 3,603 $ 2,144 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization............................................... 408 289 Johnson Bank Illinois purchase accounting fair value accretion, net......... (89) (73) Amortization of deferred compensation, net of forfeitures................... 8 87 Provision for loan losses................................................... 956 511 Net losses on sale of securities............................................ 55 230 Trading losses on interest rate swap........................................ 230 -- Net proceeds on loans held for sale......................................... 1,729 9,550 Decrease in deferred loan fees.............................................. (132) (75) Decrease (increase) in accrued interest receivable.......................... 2,169 (1,045) (Decrease) increase in accrued interest payable............................. (1,207) 700 (Increase) decrease in other assets......................................... (5,511) 813 Increase (decrease) in other liabilities.................................... 9,585 (4,288) -------- -------- Total adjustments........................................................... 8,201 6,699 -------- -------- Net cash provided by operating activities................................... 11,804 8,843 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities, paydowns, and sales of securities.................... 13,232 31,366 Purchase of securities available-for-sale...................................... (28,468) (87,834) Net loan principal advanced ................................................... (52,403) (1,567) Investment in Lodestar Investment Counsel, LLC ................................ 36 -- Premises and equipment expenditures............................................ (86) (479) -------- -------- Net cash used in investing activities....................................... (67,689) (58,514) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in total deposits................................................. 160,084 131,374 Proceeds from exercise of stock options........................................ 404 830 Dividends paid................................................................. (311) (147) Net decrease in funds borrowed................................................. (85,021) (75,777) -------- -------- Net cash provided by financing activities................................... 75,156 56,280 -------- -------- Net increase in cash and cash equivalents...................................... 19,271 6,609 Cash and cash equivalents at beginning of year................................. 34,787 22,801 -------- -------- Cash and cash equivalents at end of period..................................... $ 54,058 $ 29,410 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements. All previously reported share and per share data has been restated to reflect the 3-for-2 stock split which occurred on January 17, 2003. 7 PRIVATEBANCORP, INC. AND SUBSIDIARIES NOTE 1 -- BASIS OF PRESENTATION The consolidated financial information of PRIVATEBANCORP, Inc. (the "Company") and its subsidiaries, The PrivateBank and Trust Company (the "Bank" or "The PrivateBank (Chicago)") and The PrivateBank (St. Louis), included herein is unaudited; however, such information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation for the interim periods. The financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The annualized results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results expected for the full year ending December 31, 2003. The accompanying consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations, or cash flows in accordance with generally accepted accounting principles. The March 31, 2003 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2002 included in the Company's Annual Report on Form 10-K (File No. 000-25887). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reported period. Actual results could differ from these estimates. Certain reclassifications have been made to prior periods' consolidated financial statements to place them on a basis comparable with the current period's consolidated financial statements. Pursuant to FAS No. 148, Accounting for Stock-Based Compensation (FAS No. 148), pro forma net income and pro forma earnings per share are presented in the following table as if the fair value method of accounting for stock-based compensation plans had been utilized. THREE MONTHS ENDED MARCH 31, 2003 2002 ---- ---- (DOLLARS IN THOUSANDS) Net income-- As reported............................ $3,603 $2,144 Pro forma.............................. 3,576 2,030 Basic earnings per share-- As reported............................ $0.47 $0.29 Pro forma.............................. 0.47 0.27 Diluted earnings per share-- As reported............................ $0.44 $0.28 Pro forma.............................. 0.44 0.27 Note: The pro forma results above may not be representative of the effect reported in net income for future years. In determining the fair value of each option grant for purposes of the above pro forma disclosures, the Company used an option pricing model with the following assumptions for grants made in 2002: dividend yield of 0.35%; risk-free interest rate of 5.07%; expected lives of 10 years for the Stock Incentive Plan options, for the compensation replacement options and for the various director options; 8 and expected volatility of approximately 50%. No stock option grants have been made in 2003 as of the date of the filing of this report. NOTE 2 -- EARNINGS PER SHARE The following table shows the computation of basic and diluted earnings per share (in thousands except per share data): THREE MONTHS ENDED MARCH 31, ------------------------- 2003 2002 -------- -------- Net Income......................................... $ 3,603 $ 2,144 Average common shares outstanding.................. 7,601 7,287 Average common shares equivalent(1)................ 541 326 ------- ------- Weighted average common shares and common share equivalents..................................... 8,142 7,613 ======= ======= Net income per average common share - basic........ $ 0.47 $ 0.29 Net income per average common share - diluted...... $ 0.44 $ 0.28 - ------------------ (1) Common shares equivalent result from stock options being treated as if they had been exercised and are computed by application of the treasury stock method. NOTE 3 - NEW ACCOUNTING STANDARDS In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. This interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligations under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. Significant guarantees that have been entered into by the Company are disclosed in Note 14 to the audited consolidated financial statements included in our report on Form 10-K for the year ended December 31, 2002. In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure (FAS No. 148), which provides guidance on how to transition from the intrinsic value method of accounting for stock-based employee compensation under APB No. 25 to FAS No. 123's fair value method of accounting, if a company so elects. The statement also amends the disclosure provisions of FAS No. 123 and APB No. 25 to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While FAS No. 148 does not amend FAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of FAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of FAS No. 123 or the intrinsic value method of APB No. 25. Although the recognition provisions of FAS No. 148 are not applicable to the Company at this time, as it continues to account for 9 stock-based compensation using the intrinsic value method, the Company has provided the required disclosures in Note 1 to these consolidated financial statements. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interest, and results of operations of a VIE need to be included in a company's consolidated financial statements. Because the Company does not have any interest in VIEs, the Company does not expect the adoption of FIN 46 to have a material impact on its results of operations, financial position, or liquidity. NOTE 4 - OPERATING SEGMENTS For purposes of making operating decisions and assessing performance, management regards The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management and the Holding Company as four operating segments. The Company's investment portfolios are included in total assets and reported in the results of The PrivateBank (Chicago) and The PrivateBank (St. Louis). The business segments summarized below and in the following tables are primarily managed with a focus on various performance objectives including total assets, total deposits, borrowings, gross loans, total capital and net income. THE PRIVATEBANK (CHICAGO) The PrivateBank (Chicago), through its main office located in downtown Chicago as well as six full-service Chicago suburban locations, provides personal and commercial banking services primarily to affluent individuals, professionals, entrepreneurs and their business interests. The PrivateBank (Chicago)'s commercial lending products include lines of credit for working capital, term loans for equipment and letters of credit to support the commitments made by its clients. Non-credit products include lock-box, cash concentration accounts, merchant credit card processing, electronic funds transfer, other cash management products and insurance. The PrivateBank (Chicago) offers a full range of real estate lending products including fixed and floating rate permanent and mini-permanent mortgages, construction and commercial real estate loans. Personal loans include installment loans and lines of credit, home equity loans and a wide variety of home mortgage loans. Individual banking services include interest bearing checking, money market accounts, certificates of deposit, ATM/debit cards and investment brokerage accounts. Additionally, The PrivateBank (Chicago) offers secured and unsecured personal loans and lines of credit. Through The PrivateBank (Chicago)'s affiliations with Mesirow Financial, Inc. and Sterling Investment Services, Inc., clients have access to insurance products and securities brokerage services. The PrivateBank (Chicago) also offers domestic and international wire transfers and foreign currency exchange. During the second quarter of 2002, the PrivateBank (Chicago) introduced an Index Powered Certificate of Deposit product ("IPCD") with a five-year term. This non-fee based, FDIC-insured product is a five-year certificate of deposit with a yield based on the performance of the S&P 500. The PrivateBank (Chicago) balance sheet reflects the goodwill and intangibles of $21.7 million at March 31, 2003, which remained relatively flat compared to December 31, 2002 balances. 10 THE PRIVATEBANK (CHICAGO) ----------------------------- MARCH 31, ----------------------------- 2003 2002 ------------ ------------ (IN THOUSANDS) Total gross loans.................. $ 903,579 $ 701,105 Total assets....................... 1,459,706 1,134,858 Total deposits..................... 1,216,101 915,111 Total borrowings................... 93,697 120,523 Total capital...................... 130,599 88,869 Net interest income................ 10,601 8,035 Net income......................... 4,153 2,666 THE PRIVATEBANK (ST. LOUIS) The PrivateBank (St. Louis), through its main office located in St. Louis, Missouri, provides personal and commercial banking services primarily to affluent individuals, professionals, entrepreneurs and their business interests. The PrivateBank (St. Louis) offers a full range real estate lending products including fixed and floating rate permanent and mini-permanent mortgages and construction loans. Personal loans include installment loans and lines of credit, home equity loans and a wide variety of home mortgage loans. Commercial lending products provided by The PrivateBank (St. Louis) include lines of credit for working capital, term loans for equipment and letters of credit to support the commitments made by its clients. Non-credit products include lock-box, cash concentration accounts, merchant credit card processing, electronic funds transfer, other cash management products and insurance. Individual banking services include interest bearing checking, money market deposit accounts, certificates of deposit, ATM/debit cards and investment brokerage accounts. The PrivateBank (St. Louis) also offers domestic and international wire transfers and foreign currency exchange. THE PRIVATEBANK (ST. LOUIS) --------------------------- MARCH 31, --------------------------- 2003 2002 --------- -------- (IN THOUSANDS) Total gross loans................... $116,559 $82,278 Total assets........................ 180,177 96,661 Total deposits...................... 151,293 66,807 Total borrowings.................... 12,486 21,000 Total capital....................... 13,987 8,249 Net interest income................ 1,012 890 Net income.......................... 390 122 WEALTH MANAGEMENT Wealth Management includes investment management, personal trust and estate services, custodial services, retirement accounts and brokerage and investment services. Investment management professionals work with wealth management clients to define objectives, goals and strategies of the clients' investment portfolios. Wealth Management personnel assist trust clients with the selection of an outside portfolio manager to direct account investments. Trust and estate account administrators work with clients and their attorneys to establish estate plans. Consistent with the Company's philosophy, Wealth Management emphasizes a high level of personal service, including prompt collection and 11 reinvestment of interest and dividend income, weekly valuation, tracking of tax information, customized reporting and ease of security settlement. On December 30, 2002, The PrivateBank (Chicago) acquired a controlling interest in Lodestar Investment Counsel LLC, a Chicago-based investment adviser with $501.3 million of assets under management at March 31, 2003. Lodestar manages equity, balanced, and fixed income accounts primarily for high net-worth individuals, retirement plans and charitable organizations with investable assets generally in excess of $1.0 million, and emphasizes highly personalized client service. WEALTH MANAGEMENT ---------------------------- MARCH 31, ---------------------------- 2003 2002 ---------- --------- (IN THOUSANDS) Wealth management assets under management....................... $1,204,239 $758,242 Trust fee revenue................... 759 724 Lodestar assets under management revenue.......................... 726 -- Net income.......................... 75 123 The following table indicates the breakdown of our wealth management assets under management at March 31, 2003 by account classification and related gross revenue for the three months ended March 31, 2003: AT OR FOR THE THREE MONTHS ENDED MARCH 31, 2003 --------------------------- MARKET VALUE REVENUE ------------ ------- ACCOUNT TYPE (IN THOUSANDS) ------------ Personal trust--managed.............. $ 592,433 $ 889 Agency--managed...................... 172,455 280 Custody............................. 338,391 261 Employee benefits--managed........... 100,960 55 ---------- ------ Total............................ $1,204,239 $1,485 ========== ====== HOLDING COMPANY ACTIVITIES Holding Company Activities consist of parent company only matters. The Holding Company's most significant assets are its net investments in its two banking subsidiaries, The PrivateBank (Chicago) and The PrivateBank (St. Louis). During the first quarter 2002, in connection with the issuance of $20.0 million of 9.50% trust preferred securities, the Holding Company issued $20.0 million of subordinated debentures which are accounted for as long-term debt and also qualify as Tier 1 and Tier 2 capital (see note 9). The Tier 1 qualifying amount is limited to 25% of Tier 1 capital under Federal Reserve regulations. The excess amount qualifies as Tier 2 capital. Holding Company Activities are reflected primarily by interest expense on borrowings and operating expenses. Recurring holding company operating expenses consist of compensation (amortization of restricted stock awards, other salary expense) and miscellaneous professional fees. In May of 2002, PrivateBancorp, Inc. acquired an office building located in St. Charles, Illinois, for $1.8 million from Towne Square Realty. The St. Charles location of The PrivateBank (Chicago) continues to lease space in the building and pays rent to the Holding Company at the same terms and conditions as was paid to the prior owner. 12 HOLDING COMPANY ACTIVITIES -------------------------- MARCH 31, -------------------------- 2003 2002 -------- -------- (IN THOUSANDS) Total assets....................... $149,311 $98,643 Total borrowings................... 33,750 14,000 Long-term debt - trust preferred securities...................... 20,000 20,000 Interest expense................... 758 565 Total capital...................... 95,373 64,926 Net loss........................... (1,015) (767) The following table reconciles the differences between the sum of the reportable segments and the reported consolidated balance of total assets: TOTAL ASSETS ---------------------------- MARCH 31, ---------------------------- 2003 2002 ----------- ----------- (IN THOUSANDS) Sum of reportable segments.......... $1,789,194 $1,330,162 Adjustments......................... (160,199) (98,954) ---------- ---------- Consolidated PrivateBancorp, Inc.... $1,628,995 $1,231,208 ========== ========== The adjustments to total assets presented in the table above represent the elimination of the net investment in banking subsidiaries in consolidation, the elimination of the Company's cash that is maintained in a subsidiary bank account, the elimination of fed funds purchased and sold between Chicago and St. Louis, the reclassification of the unearned discount of loans and the reclassification related to current and deferred taxes. NOTE 5 -- ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of financial instruments as of March 31, 2003 have not materially changed on a relative basis from the carrying values and estimated fair values of financial instruments disclosed as of December 31, 2002. 13 NOTE 6 -- OTHER COMPREHENSIVE INCOME Change in the fair value of securities available-for-sale is presented on a net basis on the Consolidated Statement of Changes in Stockholders' Equity. The following table discloses the changes in other accumulated comprehensive income for the three months ended March 31, 2003 and 2002, on a gross basis (in thousands):
MARCH 31, 2003 ------------------------------------------- BEFORE NET OF TAX TAX TAX AMOUNT BENEFIT AMOUNT -------- ------- ------ Unrealized gains on securities available-for-sale-- Unrealized holding gains, net..................... $ 3,850 $ 1,309 $ 2,541 Less: reclassification adjustment for net losses, included in net income................. (55) (19) (36) ------- ------- ------- Unrealized gains, net............................. $ 3,905 $ 1,328 $ 2,577 ======= ======= ======= MARCH 31, 2002 ------------------------------------------- BEFORE NET OF TAX TAX TAX AMOUNT BENEFIT AMOUNT -------- ------- ------ Unrealized losses on securities available-for-sale-- Unrealized holding losses, net.................... $ (597) $ (122) $ (475) Less: reclassification adjustment for net gain included in net income......................... (230) (47) (183) ------ -------- ------ Unrealized losses, net............................ $ (367) $ (75) $ (292) ====== ======== ======
14 NOTE 7 -- FUNDS BORROWED A summary of all funds borrowed and outstanding at March 31, 2003, December 31, 2002 and March 31, 2002 is presented in the table below:
FUNDS BORROWED: CURRENT RATE MATURITY 3/31/03 12/31/02 3/31/02 Subordinated note 3.35% 02/11/07 $ 5,000 $ 5,000 $ 5,000 FHLB fixed advance (1) 6.50% 10/23/05 26,648 26,616 24,698 FHLB fixed advance 1.61% 01/16/04 1,000 -- -- FHLB fixed advance 6.21% 12/05/03 30,000 30,000 30,000 FHLB fixed advance 1.73% 11/07/03 6,000 6,000 -- FHLB fixed advance 2.21% 07/17/03 1,000 1,000 -- FHLB fixed advance 2.74% 07/17/03 1,000 1,000 1,000 FHLB fixed advance 2.46% 06/16/03 500 500 -- FHLB fixed advance 2.70% 05/08/03 1,000 1,000 -- Borrowing under revolving line of credit facility 3.50% 04/11/03 28,750 25,000 9,000 FHLB fixed advance 2.98% 03/10/03 -- 1,000 1,000 FHLB fixed advance 2.38% 01/13/03 -- 1,000 1,000 FHLB fixed advance 5.89% 12/20/02 -- -- 1,000 FHLB fixed advance 2.39% 11/12/02 -- -- 5,000 FHLB fixed advance 5.33% 07/22/02 -- -- 1,000 FHLB fixed advance 5.91% 06/21/02 -- -- 500 FHLB fixed advance 4.21% 05/13/02 -- -- 1,000 FHLB open line advance 1.48% daily -- 9,700 -- Fed funds purchased 1.56% daily 9,000 98,000 69,000 Demand repurchase agreements(2) 1.25% daily 15,035 4,138 6,325 -------- -------- -------- TOTAL FUNDS BORROWED $124,933 $209,954 $155,523 ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------- (1) This FHLB advance is subject to a fair value hedge utilizing an interest rate swap with a fair value of $2.8 million at March 31, 2003. The contractual par amount on the advance is $25.0 million. (2) Demand repurchase agreements are a form of retail repurchase agreement offered to certain clients of The PrivateBank. Funds are swept each business day from the client's demand deposit account. These amounts are not deposits and are not insured, but are secured by a pool of securities pledged specifically for this purpose.
In February 2002, the Company renewed the term on an $18.0 million revolving credit facility with a commercial bank originally entered into in February 2000. On April 11, 2002, the loan agreement was amended and the revolving line was increased to $25.0 million. On December 24, 2002, the loan agreement was amended to increase the revolving line to $35.0 million and to extend the maturity to December 1, 2003. The interest rate on borrowings under this revolving line resets quarterly, and is based on, at our option, either the lender's prime rate or three-month LIBOR plus 120 basis points with a floor of 3.50%. The Company has elected to pay interest based on the three-month LIBOR rate plus 120 basis points. The initial rate of interest on the revolver was 7.20%, and most recently reset to 3.50% on March 1, 2003. The collateral for this borrowing consists of the common stock of The PrivateBank (Chicago) and The PrivateBank (St. Louis), which is held in custody by the lender. As of March 31, 2003, the outstanding balance on the revolving credit facility was $28.8 million. In February 2000, the Company issued a subordinated note, in the principal amount of $5.0 million as part of the purchase price for its acquisition of Johnson Bank Illinois. The interest on the subordinated note is reset each quarter based on the three-month LIBOR rate. The note is payable in full on or before February 11, 2007, and provides for certain rate escalation beginning after February 11, 2002. On February 11, 2002, the interest rate increased from LIBOR +50 basis points to LIBOR +200 15 basis points. This pricing is in effect until February 11, 2004, at which point the pricing increases to LIBOR +350 until maturity on February 11, 2007. The average rate of interest on the subordinated note was 3.51% during the first quarter of 2003 compared to 3.27% during 2002 and most recently reset to 3.35% on February 11, 2003. The Company has the right to repay the subordinated note at any time after giving at least 30 days, but not more than 60 days advance notice. NOTE 8 -- LONG TERM DEBT -- TRUST PREFERRED SECURITIES Effective February 8, 2001, PrivateBancorp Capital Trust I, a newly created Delaware business trust and wholly-owned finance subsidiary of the Company, issued 2,000,000 shares (including the underwriters' over-allotment) of 9.50% trust preferred securities, which represent preferred undivided interests in the assets of the trust. The sole assets of the trust are 9.50% junior subordinated debentures issued by the Company with a maturity date of December 31, 2030. Subject to certain limitations, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for a period not to exceed 20 consecutive quarters. The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the debentures at maturity or their earlier redemption. At the option of the Company, the debentures may be redeemed in whole or in part prior to maturity on or after December 31, 2005, if certain conditions are met, and only after the Company has obtained Federal Reserve approval, if then required under applicable guidelines or regulations. The Company has guaranteed the payment of distributions and payments upon liquidation or redemption of the trust preferred securities, in each case to the extent of funds held by the trust. The Company and the trust believe that, taken together, the obligations of the Company under the guarantee, the debentures and other related agreements provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the trust under the trust preferred securities. The trust preferred securities are recorded as a liability of the Company. The aggregate principal amount of the trust preferred securities outstanding is $20 million. As of March 31, 2003, the entire amount of the preferred securities is eligible for treatment as Tier I capital as allowed by the Federal Reserve. At March 31, 2003, the unamortized balance of the underwriting commissions paid and offering expenses was $1.1 million and is classified as part of other assets on the balance sheet. This amount is being amortized on a straight-line basis until maturity at $9,764 per quarter. The amortization is recognized as interest expense on the income statement. In the event the Company exercises its right to redeem the securities prior to maturity, any unamortized commissions would be expensed upon redemption. NOTE 9 -- SUBSEQUENT EVENT In April 2003, The PrivateBank Chicago suffered a potential loss of $400,000 in a check fraud scheme involving a new account deposit. The Company expects to recoup the majority of the loss through insurance and will record a second quarter pretax charge of $150,000, the amount of the insurance deductible. Upon discovery of the fraud shortly after its occurrence, the Company took steps to avoid further loss relating to the account and as a result was able to assist law enforcement officials in apprehending one of the perpetrators. Based on its investigation of the incident, the Bank is in the process of implementing enhancements to its procedures designed to improve fraud prevention efforts relating to new accounts. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW PrivateBancorp, Inc. ("the Company") was organized as a Delaware corporation in 1989 to serve as the holding company for a Chicago-based de novo bank designed to provide highly personalized financial services primarily to affluent individuals, professionals, entrepreneurs and their business interests. Through the Company's banking subsidiaries, The PrivateBank and Trust Company ("The PrivateBank (Chicago)") and The PrivateBank (St. Louis), the Company provides its clients with traditional personal and commercial banking services, lending programs, and wealth management services. Using the European tradition of "private banking" as the model, the Company strives to develop a unique relationship with clients, utilizing a team of managing directors to serve the clients' individual and corporate banking needs, and tailoring products and services to meet such needs. Currently, the Company has seven Chicago-area offices: Downtown Chicago, Wilmette, Oak Brook, St. Charles, Lake Forest, Winnetka, and Geneva, Illinois. During 2000, the Company expanded to the St. Louis market where it opened a new federal savings bank, The PrivateBank (St. Louis). Currently, the Company operates one location in the St. Louis market. Managing directors are strategically located at all of these locations. On December 30, 2002, The PrivateBank (Chicago) acquired a controlling interest in Lodestar Investment Counsel, LLC, a Chicago-based investment adviser with $501.3 million of assets under management at March 31, 2003. Lodestar manages equity, balanced, and fixed income accounts primarily for high net-worth individuals, retirement plans and charitable organizations with investable assets generally in excess of $1.0 million, and shares a similar focus on highly personalized client service. For financial information regarding the Company's four separate lines of business, The PrivateBank (Chicago), The PrivateBank (St. Louis), Wealth Management and Holding Company Activities, see "Note 4 -- Operating Segments" to the unaudited consolidated financial statements of the Company included in this report. The profitability of our operations depends on our net interest income, provision for loan losses, non-interest income, and non-interest expense. Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest as well as to the execution of our asset/liability management strategy. The provision for loan losses reflects the cost of credit risk in the loan portfolio and is affected by changes in the loan portfolio, management's assessment of the collectability of the loan portfolio, loss experience, as well as economic and market factors. Non-interest income consists primarily of net security gains (losses) and wealth management fee income, and to a lesser extent, fees for ancillary banking services. Non-interest income from fees and deposit service charges are below peer group levels. This is largely the result of the profile of our typical client. Our clients tend to have larger deposit account balances than customers of traditional banks. Because average balances tend to be high, we do not earn the high service charge income typical of many retail banks. Non-interest expense includes salaries and employee benefits as well as occupancy, data processing, marketing, professional fees, insurance and other expenses. Non-interest expenses are influenced by the growth of operations. Our growth directly affects the majority of our expense categories. 17 CRITICAL ACCOUNTING POLICIES Generally accepted accounting principles are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions and estimates to apply these principles where actual measurements are not possible or practical. The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited consolidated financial statements included herein. For a complete discussion of our significant accounting policies, see the footnotes to our Consolidated Financial Statements included on pages F-8 through F-13 in our Form 10-K for the fiscal year ended December 31, 2002 (Commission file number 000-25887). Below is a discussion of our critical accounting policies. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such estimates may have a significant impact on the financial statements. Actual results could differ from those estimates. Management has reviewed the application of these policies with the Audit Committee of the Company's Board of Directors. For PrivateBancorp, Inc., accounting policies that are viewed as critical to us are those relating to estimates and judgments regarding the determination of the adequacy of the reserve for loan losses and the estimation of the valuation of goodwill and the useful lives applied to intangible assets. ALLOWANCE FOR LOAN LOSSES We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in our loan portfolio. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based on review of available and relevant information. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships as well as probable losses inherent in our loan portfolio and credit undertakings that are not specifically identified. Our allowance for probable loan losses is reassessed monthly to determine the appropriate level of the reserve. The amount of the allowance for loan losses is determined based on a variety of factors, including assessment of the credit risk of the loans in the portfolio, volume of loans and commitments in the portfolio, delinquent loans, evaluation of current economic conditions in the market area, actual charge-offs during the period and historical loss experience. The unallocated portion of the reserve involves the exercise of judgment by management and reflects various considerations, including management's view that the reserve should have a margin that recognizes the imprecision inherent in the process of estimating credit losses. Management adjusts the allowance for loan losses by recording a provision for loan losses in an amount sufficient to maintain the allowance at the level determined appropriate. Loans are charged-off when deemed to be uncollectible by management. We believe that the allowance for loan losses is adequate to provide for estimated probable credit losses inherent in our loan portfolio. The allowance for loan losses as a percentage of total loans was 1.22% as of March 31, 2003 compared to 1.20% as of December 31, 2002. GOODWILL AND INTANGIBLE ASSETS During 2001, the PrivateBank (Chicago) recorded approximately $12.2 million in goodwill in connection with the Johnson Bank Illinois acquisition. During 2002, the Company recorded $8.4 million of goodwill and $2.5 million in customer intangibles in connection with the Lodestar Investment Counsel LLC acquisition. Intangible assets are amortized over an estimated useful life of 15 years. Effective January 1, 2002, the Company adopted FAS No. 142, which requires that goodwill and intangible assets that have indefinite lives no longer be amortized but be reviewed for impairment annually, or more frequently if certain indicators arise. Prior to the adoption of FAS No. 142, goodwill was being amortized using the straight-line method over a period of 15 years. The Company did not incur any goodwill impairment in 2002 in adopting FAS 142. An annual impairment test of goodwill is performed each year by the Company. Impairment losses on recorded goodwill will be recorded as operating expenses. 18 Goodwill at March 31, 2003 was $ 21.7 million compared to a similar amount of $21.7 million at December 31, 2002. The acquisition of Lodestar Investment Counsel, LLC on December 30, 2002, increased goodwill by $ 8.4 million and Lodestar customer intangible assets by $2.5 million. Amortization expense related to the Lodestar customer intangible assets is expected to be recorded in the amount of $167,000 each year for 15 years. 19 RESULTS OF OPERATIONS -THREE MONTHS ENDED MARCH 31, 2003 AND 2002 NET INCOME Net income for the first quarter ended March 31, 2003, was $3.6 million, up 68% compared to first quarter 2002 net income of $2.1 million. Earnings per diluted share increased 57% to $0.44 per diluted share in the first quarter 2003 compared to $0.28 per diluted share in the first quarter 2002. The improvement in earnings per diluted share in the first quarter 2003 as compared to the prior year first quarter reflects improvements in net interest income and non-interest income, which grew at a higher rate than non-interest expenses. The acquisition of Lodestar Investment Counsel, LLC in December 2002 contributed to higher non-interest income. NET INTEREST INCOME Net interest income is the difference between interest income and fees on earning assets and interest expense on deposits and borrowings. Net interest margin represents net interest income on a tax equivalent basis as a percentage of average earning assets during the period. Net interest margin reflects the spread between average yields earned on interest earning assets and the average rates paid on interest bearing deposits and borrowings. Interest income includes amortization of loan origination fees recorded from loans. Interest expense includes amortization of prepaid fees on brokered deposits and issuance costs of trust preferred securities. The volume of non-interest bearing funds, largely comprised of demand deposits and capital, also affects the net interest margin. Net interest income was $13.0 million during the three months ended March 31, 2003 compared to $8.4 million for the first quarter 2002, an increase of 55%. Average earning assets during the first quarter 2003 were $1.5 billion, compared to $1.1 billion in the prior year quarter, an increase of 31%. Compared to fourth quarter 2002, average earning assets increased by $110.3 million, or 8% during the first quarter of 2003. Average earning loans during the first quarter 2003 increased to $1.0 billion compared to $946.8 million during the fourth quarter of 2002. Net interest margin (on a tax equivalent basis) was 3.68% in the first quarter 2003, up from 3.18% in the prior year first quarter and 3.56% in the fourth quarter of 2002. The improvement in net interest margin compared to the fourth quarter 2002 is primarily attributable to continued reductions in the rate paid on interest bearing liabilities, which more than offset lower interest earning asset yields in a modestly lower rate environment. A changing interest rate environment has an effect on our net interest margin. A large portion of our loan portfolio is based on floating interest rates and will likely reprice faster than our deposits and floating rate borrowings. For the remainder of 2003, we expect our net interest margin to improve if market interest rates increase relative to 2002 levels. Alternatively, if market interest rates decrease, we expect our net interest margin to continue to experience pressure. 20 The following tables present a summary of our net interest income and related net interest margin, calculated on a tax equivalent basis (dollars in thousands):
THREE MONTHS ENDED MARCH 31, -------------------------------------------------------------------------- 2003 2002 ----------------------------------- ------------------------------------ AVERAGE AVERAGE BALANCE(1) INTEREST RATE BALANCE INTEREST RATE ----------- --------- ---- ---------- -------- ---- Fed funds sold and other short-term investments......... $ 11,833 $ 25 0.85% $ 3,737 $ 17 1.79% Investment securities (taxable)... 351,486 3,792 4.35% 243,782 2,863 4.73% Investment securities(non-taxable) (2).... 128,942 2,282 7.08% 109,831 2,031 7.40% Loans, net of unearned discount(3)....................... 1,000,312 15,167 6.10% 781,059 12,147 6.26% ---------- -------- ---------- -------- Total earning assets.............. $1,492,573 $ 21,266 5.73% $1,138,409 $ 17,058 6.02% ========== ======== ========== ======== Interest-bearing deposits......... $1,181,714 $ 5,777 1.98% $ 902,915 $ 6,213 2.79% Funds borrowed.................... 191,897 1,312 2.73% 135,979 1,309 3.85% Trust preferred securities........ 20,000 485 9.70% 20,000 485 9.70% ---------- -------- ---------- -------- Total interest-bearing liabilities $1,393,611 7,574 2.20% $1,058,894 8,007 3.06% ========== -------- ========== -------- Tax equivalent net interest income $ 13,692 $ 9,051 ======== ======== Net interest spread (4)........... 3.53% 2.96% Net interest margin (5) (6)....... 3.68% 3.18% - ------------------ (1) Average balances were generally computed using daily balances. (2) Interest income on tax-advantaged investment securities reflects a tax equivalent adjustment based on a marginal federal corporate tax rate of 34%. The total tax equivalent adjustment reflected in the above table is approximately $695,428 and $687,109 in the first quarters of 2003 and 2002, respectively. (3) Nonaccrual loans are included in the average balances and do not have a material effect on the average yield. Interest due on non-accruing loans was not material for the periods presented. (4) Yield on average interest-earning assets less rate on average interest-bearing liabilities. (5) Net interest income, on a tax-equivalent basis, divided by average interest-earning assets. (6) The company adjusts GAAP reported net interest income by the tax equivalent adjustment amount to account for the tax attributes on federally tax exempt municipal securities. For GAAP purposes, tax benefits associated with federally tax-exempt municipal securities are reflected in income tax expense. The following table reconciles reported net interest income to net interest income on a tax equivalent basis for the periods presented:
RECONCILIATION OF NET INTEREST INCOME TO NET INTEREST INCOME ON A TAX EQUIVALENT BASIS 1Q03 1Q02 --------- -------- Net interest income............................ $ 12,997 $ 8,364 Tax equivalent adjustment to net interest income........................................ 695 687 --------- -------- Net interest income, tax equivalent basis $ 13,692 $ 9,051 --------- -------- The following table shows the dollar amount of changes in interest income (tax-equivalent) and interest expense by major categories of interest-earning assets and interest-bearing liabilities attributable to changes in volume or rate, or a mix of both, for the periods indicated. Volume variances are computed using the change in volume multiplied by the previous period's rate. Rate variances are computed using the changes in rate multiplied by the previous period's volume. 21 THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
CHANGE CHANGE CHANGE DUE TO DUE TO DUE TO TOTAL RATE VOLUME MIX CHANGE (DOLLARS IN THOUSANDS) INTEREST INCOME/ EXPENSE FROM: Fed funds sold and other short-term investments........................ $ (9) $ 36 $ (19) $ 8 Investment securities (taxable)....... (228) 1,256 (98) 930 Investment securities (non-taxable)(1) (87) 349 (11) 251 Loans, net of unearned discount....... (308) 3,384 (57) 3,019 ------- ------- ------ ------ Total tax equivalent interest income (1)...................... (632) 5,025 (185) 4,208 ------- ------- ------ ------ Interest-bearing deposits............. (1,803) 1,918 (551) (436) Funds borrowed........................ (376) 531 (152) 3 Trust Preferred Securities............ -- -- -- -- ------- ------- ------ ------ Total interest expense............. (2,179) 2,449 (703) (433) ------- ------- ------ ------ Net tax equivalent interest income (1)................................ $ 1,547 $ 2,576 $ 518 $4,641 ======= ======= ====== ====== (1) Interest income on tax-advantaged investment securities reflects a tax equivalent adjustment based on a marginal federal corporate tax rate of 34%. The total tax equivalent adjustment reflected in the above table is approximately $695,428 and $687,109 in the first quarters of 2003 and 2002, respectively.
PROVISION FOR LOAN LOSSES Our provision for loan losses was $956,000 for the first quarter of 2003, compared to $511,000 for the comparable period in 2002. Net charge-offs totaled $70,000 in the quarter ended March 31, 2003 versus net recoveries of $29,000 in the fourth quarter 2002 and net charge-offs of $27,000 for the quarter ended March 31, 2002. A discussion of the allowance for loan losses and the factors management considers in assessing the adequacy of the allowance begins on page 26. NON-INTEREST INCOME Non-interest income was $2.4 million in the first quarter of 2003, reflecting an increase of approximately $1.1 million or 84% from the first quarter of 2002. The increase in fee income was attributable primarily to the inclusion of the full quarter operating results of Lodestar Investment Counsel, LLC and increases in fee income from the sale of residential mortgages in the secondary market. PrivateBancorp, Inc. acquired a controlling interest in Lodestar Investment Counsel in late 2002. 22 The following table presents the breakdown of banking, wealth management services and other income for the periods presented (dollars in thousands): THREE MONTHS ENDED MARCH 31, ------------------------- 2003 2002 ---------- ----------- Residential real estate secondary market fees........................ $ 782 $ 402 Trust fee revenue..................... 759 724 Lodestar assets management revenue.... 726 -- Banking and other services............ 308 273 Bank owned life insurance............. 126 143 ------ ------ Total................................. $2,701 $1,542 ====== ====== Sales of residential real estate loans generated $782,000 of income during the first quarter 2003 compared to $402,000 during the prior year quarter primarily due to increased volume of loans sold. Trust fee revenue increased by 5% to $759,000 during the first quarter 2003 as compared to the prior year quarter. Lodestar asset management revenue totaled approximately $726,000 for the first quarter ended March 31, 2003. Wealth management assets under management were $1.2 billion at March 31, 2003 compared to $758.2 million at March 31, 2002 and $1.2 billion at December 31, 2002. Lodestar had $501.3 million of assets under management at March 31, 2003. During the first quarter of 2003, we recognized income of $126,000 related to the increased cash surrender value of a bank owned life insurance (BOLI) policy that was entered into in the fourth quarter of 2001 as compared to $142,500 of income in the first quarter 2002. This policy covers certain higher-level employees who are deemed to be significant contributors to the company. All employees included in this policy are aware and have consented to the coverage. The cash surrender value of BOLI at March 31, 2003 was $10.8 million and is included in other assets on the balance sheet. Noninterest income for the first quarter of 2003 also reflects the fair market value adjustment on a previously disclosed $25.0 million 10-year treasury rate for 3-month LIBOR interest rate swap which resulted in losses of $230,000 during the first quarter of 2003. During the first quarter 2003, the Company recognized $55,000 of net securities losses compared to net securities losses of $230,000 during the first quarter of 2002. The securities losses for the current quarter include a permanent impairment write-down of $330,000. The Company wrote down $300,000 on the Company's interest-only collateralized mortgage obligation ("CMO") portfolio and $30,000 on an investment that qualifies for CRA purposes. Continued low levels of market interest rates during the first quarter 2003 led to accelerated mortgage prepayments, which impaired the fair value of our interest-only CMO security portfolio. Also included in net security losses of $55,000 are net security gains of $275,000. 23 NON-INTEREST EXPENSE THREE MONTHS ENDED MARCH 31, -------------------- 2003 2002 ------ -------- (IN THOUSANDS) Salaries and employee benefits........ $ 4,778 $ 3,214 Occupancy............................. 1,419 1,139 Professional fees..................... 1,284 891 Marketing............................. 486 365 Data processing....................... 393 308 Postage, telephone and delivery....... 211 178 Office supplies and printing.......... 159 67 Insurance............................. 168 93 Amortization of intangibles........... 42 -- Other expense......................... 479 217 ------- ------- Total non-interest expense............ $ 9,419 $ 6,472 ======= ======= Non-interest expense increased to $9.4 million in the first quarter of 2003 from $6.5 million in the first quarter of 2002, an increase of 46%. The increase in non-interest expense between quarters reflects the continued growth of the organization during the twelve-month period ended March 31, 2003. Our efficiency ratio improved to 58.5% for the first quarter 2003 as compared to 62.5% for the first quarter 2002. On a tax-equivalent basis, this ratio indicates that in the first quarter of 2003, we spent 58.5 cents to generate each dollar of revenue, compared to 62.5 cents in the first quarter of 2002. During the remainder of 2003, we expect the operating efficiency to remain at a similar level as reported in the first quarter 2003. The efficiency ratio is equal to non-interest expense divided by the sum of net interest income on a tax equivalent basis plus non-interest income. Please refer to footnote 6 on page 22 for a reconciliation of net interest income to net interest income on a tax equivalent basis. Salaries and benefits increased to $4.8 million, or 49% during the first quarter 2003 as compared to the year ago quarter, reflecting the increased level of full-time equivalent employees to 194 people at March 31, 2003 as compared to 162 people at March 31, 2002. The increase is due primarily to overall growth in the organization and the addition of six Lodestar Investment Counsel employees in the fourth quarter of 2002. Occupancy expense increased to $1.4 million during the first quarter 2003, reflecting an increase of 25% over the prior year quarter. Occupancy expense during the first quarter 2003 reflects the addition of additional floor space that is being leased in our downtown Chicago location as well as the Lodestar office space. Professional fees, which include legal, accounting, consulting services and investment management fees, increased to $1.3 million during the first quarter of 2003, reflecting an increase of 44% over the prior year quarter. The increase in professional fees is primarily attributable to higher legal, accounting and information systems consultation services as well as consulting fees paid for the management of our investment portfolio. Insurance expense increased 81% over prior year quarter due to the increased cost of insurance in the marketplace, and the renewal of our annual insurance coverage, which was previously under a three-year contract that expired in June 2002. 24 In 2003, we amortized $42,000 in intangible assets related to the acquisition of a controlling interest in Lodestar Investment Counsel. INCOME TAXES The following table shows our income before income taxes, applicable income taxes and effective tax rate for the three months ended March 31, 2003 and 2002, respectively (in thousands): THREE MONTHS ENDED MARCH 31, ---------------------- 2003 2002 -------- ------- Income before taxes.......... $5,000 $2,693 Income tax provision......... 1,397 549 Effective tax rate........... 27.9% 20.4% The effective income tax rate varies from statutory rates principally due to certain interest income, which is tax-exempt for federal or state purposes, and certain expenses, which are disallowed for tax purposes. The higher effective tax rate for the first quarter 2003 as compared to the prior year first quarter reflects growth in pretax income of 85.7% that has outpaced the growth on our federally tax-exempt municipal bonds income. Federally tax-exempt municipal bonds increased to $149.2 million as of March 31, 2003, a 22.3% increase from $122.0 million at March 31, 2003. In addition, the higher effective tax rate for the first quarter 2003 as compared to the prior year quarter is also attributable to the increased profitability of The PrivateBank St. Louis for 2003 relative to 2002 and has resulted in increased Missouri state tax expense requirements. 25 FINANCIAL CONDITION TOTAL ASSETS Total assets increased to $1.6 billion at March 31, 2003, an increase of $85.6 million, or 6% over total assets of $1.5 billion at December 31, 2002, and an increase of $397.8 million, or 32% over $1.2 billion of total assets at March 31, 2002. The balance sheet growth during the three months ended March 31, 2003 was accomplished mainly through loan growth throughout the Company and growth in the investment securities portfolio. The growth in assets was funded primarily through increases in brokered deposits and to a lesser extent, from growth in core deposits. LOANS Total loans increased to $1.0 billion, an increase of $52.6 million, or 5%, from $965.6 million at December 31, 2002 and an increase of $235.8 million, or 30%, from $782.4 million at March 31, 2002. Loan growth since March 31, 2002 has occurred primarily in the commercial real estate and construction loan categories. The PrivateBank (St. Louis) had loans outstanding of $116.6 million as of March 31, 2003, which reflects growth of $34.3 million since March 31, 2002. The remaining loan growth of $201.5 million experienced by the Company since March 31, 2002 was generated by The PrivateBank (Chicago). All of The PrivateBank (Chicago) offices posted strong gains in loan volume as compared to March 31, 2002 loan levels. The following table sets forth the composition of our loan portfolio net of unearned discount by category (in thousands) at the following dates: MARCH 31, DECEMBER 31, MARCH 31, 2003 2002 2002 ---------- ------------ --------- LOANS Commercial real estate....... $ 492,952 $452,703 $330,348 Residential real estate...... 76,885 72,289 80,423 Commercial................... 158,227 165,993 153,340 Personal(1).................. 152,043 151,452 126,316 Construction................. 138,089 123,204 92,007 ---------- -------- -------- Total loans, net of unearned discount.... $1,018,196 $965,641 $782,434 ========== ======== ======== - ------------------ (1) Includes home equity loans and overdraft lines. ALLOWANCE FOR LOAN LOSSES Loan quality is continually monitored by management and reviewed by the loan/investment committees of the boards of directors of the banks on a monthly basis. In determining the adequacy of the allowance for loan losses, management considers a variety of factors, including assessment of the credit risk of the portfolio, delinquent loans, evaluation of current economic conditions in the market area, actual charge-offs during the year and historical loss experience. The unallocated portion of the reserve involves the exercise of judgment by management and reflects various considerations, including management's view that the reserve should have a margin that recognizes the imprecision inherent in the process of estimating credit losses. We maintain an allowance for loan losses at a level management believes is sufficient to absorb credit losses inherent in our loan portfolio. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date based on review of available and relevant information, including 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. The allowance for loan losses as a percentage of total loans was 1.22% at March 26 31, 2003, 1.20% at December 31, 2002 and 1.12% at March 31, 2002. Management believes that the allowance for loan losses is adequate to provide for estimated probable credit losses inherent in the loan portfolio as of March 31, 2003. Net charge-offs totaled $70,000 for the quarter ended March 31, 2003 versus net charge-offs of $27,000 in the year earlier period. The provision for loan losses was $956,000 in the first quarter of 2003, versus $511,000 in the first quarter of 2002. Management judges the adequacy of the allowance by formally reviewing and analyzing potential problem credits, which entails assessing current and historical loss experience, loan portfolio trends, prevailing economic and business conditions, specific loan review and other relevant factors. Following is a summary of changes in the allowance for loan losses for the three months ended March 31, 2003 and 2002 (in thousands): 2003 2002 --------- -------- Balance, January 1.......................... $11,585 $8,306 Provisions charged to earnings.............. 956 511 Loans charged-off, net of recoveries........ (70) (27) ------- ------ Balance, March 31........................... $12,471 $8,790 ======= ====== NONPERFORMING LOANS The following table classifies our non-performing loans as of the dates shown:
3/31/03 12/31/02 9/30/02 6/30/02 3/31/02 ------- -------- ------- ------- ------- (DOLLARS IN THOUSANDS) Nonaccrual loans...................... $1,483 $ 749 $ 430 $ 649 $1,458 Loans past due 90 days or more........ 2,032 650 2,549 2,518 1,448 ------ ------ ------ ------ ------ Total nonperforming loans............. 3,515 1,399 2,979 3,167 2,906 ------ ------ ------ ------ ------ Total nonperforming assets............ $3,515 $1,399 $2,979 $3,167 $2,906 ====== ====== ====== ====== ====== Total nonaccrual loans to total loans. 0.146% 0.078% 0.047% 0.075% 0.186% Total nonperforming loans to total loans.............................. 0.35% 0.14% 0.33% 0.37% 0.37% Total nonperforming assets to total assets............................. 0.22% 0.09% 0.21% 0.24% 0.24%
Nonperforming loans include nonaccrual loans and accruing loans, which are 90 days or more delinquent. Loans in this category include those with characteristics such as past maturity more than 90 days, those that have recent adverse operating cash flow or balance sheet trends, or loans that have general risk characteristics that management believes might jeopardize the future timely collection of principal and interest payments. The balance in this category at any reporting period can fluctuate widely based on the timing of cash collections, renegotiations and renewals. Nonaccrual loans were $1.5 million at March 31, 2003 as compared to $749,000 at December 31, 2002 and $1.5 million at March 31, 2002. Nonaccrual loans increased by $734,000 since December 31, 2002. The increase relates primarily to two commercial credit relationships and a letter of credit at The PrivateBank (Chicago). Loans delinquent over 90 days increased by $1.4 million since December 31, 2002. 27 INVESTMENT SECURITIES The amortized cost and the estimated fair value of securities at March 31, 2003 and December 31, 2002, were as follows (in thousands):
INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE --------------------------------------------------------- MARCH 31, 2003 --------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- ---------- U.S. government agency mortgage backed securities and collateralized mortgage obligations.................. $159,456 $3,898 $(65) $163,289 Corporate collateralized mortgage obligations........................... 14,093 471 (2) 14,562 Tax exempt municipal securities.......... 137,993 11,254 (17) 149,230 Taxable municipal securities............. 3,865 5 -- 3,870 Federal Home Loan Bank stock............. 159,975 -- -- 159,975 Other.................................... 13,217 1,734 -- 14,951 -------- ------- ---- -------- Total.................................... $488,599 $17,362 $(84) $505,877 ======== ======= ==== ======== INVESTMENT SECURITIES -- AVAILABLE-FOR-SALE --------------------------------------------------------- DECEMBER 31, 2002 --------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- ---------- U.S. government agency mortgage backed securities and collateralized mortgage obligations.................. $155,510 $ 3,132 $(248) $158,394 Corporate collateralized mortgage obligations........................... 18,166 509 -- 18,675 Tax exempt municipal securities.......... 126,504 8,332 -- 134,836 Taxable municipal securities............. 4,583 114 -- 4,697 Federal Home Loan Bank stock............. 155,606 -- -- 155,606 Other.................................... 13,279 1,533 -- 14,812 -------- ------- ---- -------- Total.................................... $473,648 $13,620 $(248) $487,020 ======== ======= ===== ========
All securities are classified as available-for-sale and may be sold as part of our asset/liability management strategy in response to changes in interest rates, liquidity needs or significant prepayment risk. Securities available-for-sale are carried at fair value, with related unrealized net gains or losses, net of deferred income taxes, recorded as an adjustment to equity capital. At March, 31, 2003, net unrealized gains of $17.3 million resulted in an increase of $11.4 million in reported stockholders' equity. This was an increase of $2.6 million from net unrealized gains of $8.8 million recorded as part of equity at December 31, 2002. The credit quality of the investment portfolio remains strong. The vast majority of investments are rated "AAA" by bond rating agencies. It is our policy not to take any undue credit risk with the investment portfolio. Securities available for sale increased to $505.9 million at March 31, 2003, up 4% from $487.0 million at December 31, 2002. The growth in the investment security portfolio since December 31, 2002 resulted from the continued implementation of our asset/liability management strategy. Tax exempt municipal securities increased by $14.4 million. These securities provide net interest margin protection in a falling interest-rate environment. Investments in Federal Home Loan Bank stock increased by $4.4 million due to stock dividends received in the first quarter 2003. 28 DEPOSITS AND FUNDS BORROWED The following table presents the balances of deposits by category and each category as a percentage of total deposits at March 31, 2003 and December 31, 2002: MARCH 31, DECEMBER 31, 2003 2002 ---------------------- ----------------------- PERCENT PERCENT BALANCE OF TOTAL BALANCE OF TOTAL ---------- ---------- --------- ---------- (DOLLARS IN THOUSANDS) Demand..................... $ 88,243 7% $ 88,986 7% Savings.................... 8,251 1% 6,344 1% Interest-bearing demand.... 73,699 5% 64,893 5% Money market............... 467,849 34% 482,597 40% Brokered deposits ......... 387,006 28% 279,806 23% Other time deposits........ 340,296 25% 282,645 24% ---------- --- ---------- --- Total deposits......... $1,365,344 100% $1,205,271 100% ========== === ========== === Total deposits of $1.4 billion at March 31, 2003 represent an increase of $160.1 million or 13% as compared to total deposits of $1.2 billion as of December 31, 2002. Noninterest-bearing deposits decreased by 0.8% to $88.2 million at March 31, 2003 as compared to $88.9 million at December 31, 2002. Interest-bearing demand deposits increased by 14% to $73.7 million as compared to $64.9 million at December 31, 2002. Money market accounts decreased by $14.7 million to $467.8 million at March 31, 2003 as compared to $482.6 million at December 31, 2002. Other time deposits increased by approximately $57.7 million to $340.3 million as compared to $282.6 million at year-end 2002. Brokered deposits increased by 38% to $387.0 million at March 31, 2003 as compared to $279.8 million at December 31, 2002. 29 We continued to utilize brokered deposits as a source of funding for growth in the loan and investment portfolios. Brokered deposits increased to $387.0 at March 31, 2003 from $279.8 at December 31, 2002. Certain brokered deposits may include call option provisions, which can provide us with the opportunity to repay the certificates of deposit on a specified date prior to the contractual maturity date. As of March 31, 2003, there were no outstanding brokered deposits containing call provisions. The following table presents the maturity and rate of our brokered deposits, net of unamortized prepaid broker commissions as of March 31, 2003. BROKERED DEPOSITS NET OF UNAMORTIZED PREPAID BROKER COMMISSIONS AT MARCH 31, 2003 (IN THOUSANDS) MATURITY DATE RATE(1) AMOUNT ------------- ------ ------- 11/13/2007 3.400% $ 7,000 02/28/2005 2.050% 7,233 01/31/2005 2.150% 15,000 01/24/2005 2.250% 10,000 10/18/2004 2.300% 7,668 09/27/2004 1.750% 11,448 08/30/2004 2.500% 25,000 08/04/2004 1.750% 10,000 07/09/2004 1.950% 5,000 04/21/2004 2.100% 10,000 04/19/2004 2.250% 5,000 03/26/2004 1.500% 10,549 02/26/2004 1.800% 30,000 02/19/2004 1.600% 25,000 01/30/2004 1.850% 11,872 01/22/2004 1.700% 10,000 01/22/2004 1.900% 12,000 01/15/2004 1.700% 28,000 01/15/2004 1.850% 18,448 01/09/2004 1.850% 10,000 12/31/2003 1.800% 953 10/29/2003 1.750% 20,000 10/17/2003 2.050% 5,000 10/17/2003 1.850% 6,699 10/17/2003 2.050% 3,000 09/05/2003 3.800% 2,394 07/24/2003 2.400% 17,425 07/21/2003 2.450% 15,312 07/17/2003 2.250% 20,000 06/27/2003 7.050% 4,548 06/23/2003 7.200% 2,594 04/21/2003 2.200% 11,063 04/16/2003 2.000% 10,000 -------- Total brokered deposits 388,206 Unamortized prepaid broker commissions (1,200) -------- Total brokered deposits, net of unamortized prepaid broker commissions $387,006 ======== (1) Represents the coupon rate of each brokered deposit. 30 Membership in the Federal Home Loan Bank System gives us the ability to borrow funds from the Federal Home Loan Bank of Chicago (FHLB) and from the Federal Home Loan Bank of Des Moines (FHLB) for short- or long-term purposes under a variety of programs. We have periodically used the services of the FHLB for short-term funding needs and other correspondent services. During 2003, our utilization of Federal Home Loan Bank advances to fund loan growth slightly decreased as advances matured. Management anticipates that our reliance on Federal Home Loan Bank borrowings as a funding source will likely remain at current levels or increase slightly in 2003 to the extent that rates on Federal Home Loan Bank advances continue to be more attractive than deposit pricing. Federal Home Loan Bank borrowings totaled $67.1 million at March 31, 2003 compared to $77.8 million at December 31, 2002. A summary of all funds borrowed and outstanding at March 31, 2003, December 31, 2002 and March 31, 2002 is presented in the table below:
FUNDS BORROWED: CURRENT RATE MATURITY 3/31/03 12/31/02 3/31/02 - ---------------------- ------- -------- ------- -------- ------- Subordinated note 3.35% 02/11/07 $ 5,000 $ 5,000 $ 5,000 FHLB fixed advance (1) 6.50% 10/23/05 26,648 26,616 24,698 FHLB fixed advance 1.61% 01/16/04 1,000 -- -- FHLB fixed advance 6.21% 12/05/03 30,000 30,000 30,000 FHLB fixed advance 1.73% 11/07/03 6,000 6,000 -- FHLB fixed advance 2.21% 07/17/03 1,000 1,000 -- FHLB fixed advance 2.74% 07/17/03 1,000 1,000 1,000 FHLB fixed advance 2.46% 06/16/03 500 500 -- FHLB fixed advance 2.70% 05/08/03 1,000 1,000 -- Borrowing under revolving line of credit facility 3.50% 04/11/03 28,750 25,000 9,000 FHLB fixed advance 2.98% 03/10/03 -- 1,000 1,000 FHLB fixed advance 2.38% 01/13/03 -- 1,000 1,000 FHLB fixed advance 5.89% 12/20/02 -- -- 1,000 FHLB fixed advance 2.39% 11/12/02 -- -- 5,000 FHLB fixed advance 5.33% 07/22/02 -- -- 1,000 FHLB fixed advance 5.91% 06/21/02 -- -- 500 FHLB open line advance 1.48% daily -- 9,700 -- Fed funds purchased 1.56% daily 9,000 98,000 69,000 Demand repurchase agreements(2) 1.25% daily 15,035 4,138 6,325 -------- -------- -------- TOTAL FUNDS BORROWED $124,933 $209,954 $155,523 ======== ======== ======== (1) This FHLB advance is subject to a fair value hedge utilizing an interest rate swap with a fair value of $2.8 million. The contractual par amount on the advance is $25.0 million. (2) Demand repurchase agreements are a form of retail repurchase agreements offered to certain clients of The PrivateBank. Funds are swept each business day from the client's demand deposit account. These amounts are not deposits and are not insured, but are secured by a pool of securities pledged specifically for this purpose.
The decrease in funds borrowed as of March 31, 2003 as compared to December 31, 2002, reflects a decrease in our federal funds purchased position and decreases in FHLB fixed advances, offset by an increase in our borrowings under a revolving line of credit. In February 2002, the Company renewed the term on an $18.0 million revolving credit facility with a commercial bank originally entered into in February 2000. On April 11, 2002, the loan agreement was amended and the revolving line was increased to $25.0 million. On December 24, 2002, the loan agreement was amended to increase the revolving line to $35.0 million and to extend the maturity to 31 December 1, 2003. The interest rate on borrowings under this revolving line resets quarterly, and is based on, at our option, either the lender's prime rate or three-month LIBOR plus 120 basis points with a floor of 3.50%. The Company has elected to pay interest based on the three-month LIBOR rate plus 120 basis points. The initial rate of interest on the revolver was 7.20%, and most recently reset to 3.50% on March 1, 2003. The collateral for this borrowing consists of the common stock of The PrivateBank (Chicago) and The PrivateBank (St. Louis), which is held in custody by the lender. As of March 31, 2003, the outstanding balance was $28.8 million. In February 2000, the Company issued a subordinated note, in the principal amount of $5.0 million as part of the purchase price for its acquisition of Johnson Bank Illinois. The interest on the subordinated note is reset each quarter based on the three-month LIBOR rate. The note is payable in full on or before February 11, 2007, and provides for certain rate escalation beginning after February 11, 2002. On February 11, 2002, the interest rate increased from LIBOR +50 basis points to LIBOR +200 basis points. This pricing is in effect until February 11, 2004, at which point the pricing increases to LIBOR +350 until maturity on February 11, 2007. The average rate of interest on the subordinated note was 3.51% during the first quarter of 2003 compared to 3.27% during 2002 and most recently reset to 3.35% on February 11, 2003. The Company has the right to repay the subordinated note at any time after giving at least 30 days, but not more than 60 days advance notice. CAPITAL RESOURCES At March 31, 2003, $20.0 million of the trust preferred securities was treated as Tier 1 capital. Stockholders' equity rose to $95.4 million at March 31, 2003, an increase of $6.3 million from the 2002 year-end level, due to an increase in year-to-date 2003 net income. The Company and its banking subsidiaries are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and the regulators can lower classifications in certain areas. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If a banking subsidiary is not "well capitalized," regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion and plans for capital restoration are required. The following table reflects our consolidated measures of capital at March 31, 2002, December 31, 2001 and March 31, 2001: MARCH 31, DECEMBER 31, MARCH 31, 2003 2002 2002 --------- ----------- -------- Leverage ratio.................. 5.27% 5.47% 6.25% Tier 1 risk-based capital ratio. 6.99% 6.91% 8.37% Total risk-based capital ratio.. 8.30% 8.29% 9.93% Total equity to total assets..... 5.85% 5.77% 5.27% To be considered "well-capitalized," an entity must maintain a leverage ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 10.0%. To be "adequately capitalized," a bank must maintain a leverage ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at least 4.0%, and a total risk-based capital ratio of at least 8.0%. 32 At March 31, 2003, the Company and each of the banking subsidiaries continued to exceed the minimum levels of all regulatory capital requirements, and each banking subsidiary was considered "well capitalized" under all regulatory standards. The Company plans to issue additional common stock to raise additional equity capital and increase its regulatory capital ratios during the second quarter of 2003. RISK MANAGEMENT We are exposed to market risk from changes in interest rates that could affect our results of operations and financial condition. We manage our exposure to these market risks through our regular operating and financing activities. We hedge our interest rate risk through the use of derivatives financial instruments. We use derivative financial instruments as risk management tools. INTEREST RATE RISK One of two interest rate swaps we have entered into is designated as a fair value hedge of a fixed-rate $25.0 million advance from the Federal Home Loan Bank of Chicago (FHLB). We entered into this interest rate swap transaction in 2001 and we agreed to receive a fixed rate in exchange for payment of a floating rate based on an agreed-upon notional amount of $25.0 million. The fair value of the interest rate swap was $2.8 million as of March 31, 2003, a decrease of $89,993 as compared to December 31, 2002. The Company entered into a $25 million interest rate swap during the third quarter of 2002, swapping the 10-year treasury rate for 3-month LIBOR to serve as an economic hedge of a portion of the Company's available-for-sale municipal bond securities portfolio. The March 31, 2003 fair market value adjustment on this swap resulted in the trading loss of $230,000 for the quarter, with a corresponding derivative liability of the same amount. This swap does not qualify for hedge accounting treatment and the mark-to-market adjustment on the swap is recognized in earnings. At March 31, 2003, the carrying value of the trading swap was a liability of $807,703. LIQUIDITY Liquidity measures our ability to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund our operations and to provide for clients' credit needs. Our liquidity principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and our ability to borrow funds in the money or capital markets. Net cash provided by operations was $11.8 million in the first three months of 2003 compared to net cash inflows of $8.8 million a year earlier. The net cash provided during the first quarter 2003 was impacted by the growth and timing of receipts of interest and cash settlement payments. Net cash outflows from investing activities were $67.7 million in the first three months of 2003 compared to a net cash outflow of $58.5 million a year earlier. Cash inflows from financing activities in the first three months of 2003 were $75.2 million compared to a net inflow of $56.3 million in the first three months of 2002. In the event of short-term liquidity needs, our banking subsidiaries may purchase federal funds from correspondent banks. Membership in the Federal Home Loan Bank System gives the banking subsidiaries the ability to borrow funds from the FHLB for short- or long-term purposes under a variety of programs. 33 Our investment in Federal Home Loan Bank ("FHLB") stock is a source of liquidity for the Company. At March 31, 2003, we owned $160.0 million of FHLB stock. FHLB stock can be sold at par by the Company, back to the FHLB at any time, excluding the required FHLB stock minimum that needs to be maintained in order to support existing FHLB advances. FHLB has communicated to the Company that generally the stock will be redeemed immediately upon a request by the Company, however, FHLB can legally require six months advance notice of the stock sale before the stock is actually liquidated for cash at its par value. Alternatively, FHLB can redeem, at any time any FHLB stock we own, in excess of the required minimum FHLB stock that needs to be maintained in order to support existing advances. During the first quarter of 2003, our utilization of FHLB advances decreased slightly due to scheduled maturities of advances. For the remainder of 2003, we expect to continue to utilize FHLB advances as a funding source to the extent that rates on FHLB advances are more attractive than other sources of liquidity. On May 6, 2003, we purchased $45.0 million of additional FHLB stock to take advantage of the favorable dividend yield in addition to the liquid nature of the investment. During the first quarter 2003, we continued to rely on brokered deposits to fund growth in loans and investment securities as well as liquidity at our banks. For the remainder of 2003, we expect to continue to rely on brokered deposits for liquidity purposes if brokered rates continue to compare favorably to other sources of liquidity. Brokered deposits represented 28% of total deposits at March 31, 2003 compared to 23% of total deposits at December 31, 2002. 34 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ASSET/LIABILITY MANAGEMENT POLICY As a continuing part of our financial strategy, we attempt to manage the impact of fluctuations in market interest rates on our net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Asset/liability management policy is established by our Board of Directors and is monitored by management. Our asset/liability policy sets standards within which we are expected to operate. These standards include guidelines for exposure to interest rate fluctuations, liquidity, loan limits as a percentage of funding sources, exposure to correspondent banks and brokers, and reliance on non-core deposits. The policy also states the reporting requirements to the Board of Directors. The investment policy complements the asset/liability management policy by establishing criteria by which we may purchase securities. These criteria include approved types of securities, brokerage sources, terms of investment, quality standards, and diversification. We measure the impact of interest rate changes on our income statement through the use of gap analysis. The gap represents the net position of assets and liabilities subject to repricing in specified time periods. During any given time period, if the amount of rate sensitive liabilities exceeds the amount of rate sensitive assets, a company would generally be considered negatively gapped and would benefit from falling rates over that period of time. Conversely, a positively gapped company would generally benefit from rising rates. The following tables illustrate the estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of March 31, 2003 and December 31, 2002:
MARCH 31, 2003 TIME TO MATURITY OR REPRICING (DOLLARS IN THOUSANDS) 91-365 OVER 5 0-90 DAYS DAYS 1-5 YEARS YEARS TOTAL INTEREST-EARNING ASSETS Total Net Loans $634,062 $83,215 $226,607 $61,841 $1,005,725 Investments 38,875 69,853 58,407 161,520 328,655 Total FHLB Stock 159,945 - - - 159,945 Total Fed Funds Sold 7,415 - - - 7,415 -------- -------- -------- -------- ---------- Total Interest-Earning Assets $840,297 $153,068 $285,014 $223,361 $1,501,740 INTEREST-BEARING LIABILITIES PrivateBank Deposit Accounts $ - $ - $ - $ 73,699 $ 73,699 Savings Deposits 8,251 - - - 8,251 Money Market Deposits 467,849 - - - 467,849 Total Time Deposits 162,434 132,905 44,957 - 340,296 Total Brokered Deposits 28,205 246,652 112,149 - 387,006 Total Borrowings 55,933 39,000 30,000 20,000 144,933 -------- -------- -------- -------- ---------- Total Interest-Bearing Liabilities $722,672 $418,557 $187,106 $93,699 $1,422,034 CUMULATIVE Rate sensitive assets (RSA) 840,297 993,365 1,278,379 1,501,740 Rate sensitive liabilities (RSL) 722,672 1,141,229 1,328,335 1,422,034 GAP (GAP=RSA-RSL) 117,625 (147,864) (49,956) 79,706 RSA/RSL 116.28% 87.04% 96.24% 105.61% RSA/Total assets 51.58% 60.98% 78.48% 92.19% RSL/Total assets 44.36% 70.06% 81.54% 87.30% GAP/Total assets 7.22% -9.08% -3.07% 4.89% GAP/Total RSA 14.00% -14.89% -3.91% 5.31%
35
DECEMBER 31, 2002 TIME TO MATURITY OR REPRICING (DOLLARS IN THOUSANDS) 91-365 OVER 5 0-90 DAYS DAYS 1-5 YEARS YEARS TOTAL INTEREST-EARNING ASSETS Loans $635,664 $77,465 $175,066 $79,197 $967,392 Investments 163,621 21,138 26,576 261,208 472,543 Short-term investments 258 - - - 258 -------- -------- -------- -------- ---------- Total interest-earning assets $799,543 $98,603 $201,642 $340,405 $1,440,193 ======== ======== ======== ======== ========== INTEREST-BEARING LIABILITIES Interest-bearing demand $ - $ - $ - $ 64,892 $64,892 Savings and money market 486,819 1,262 - 859 488,940 Time deposits 191,238 205,474 91,872 73,868 562,452 Funds borrowed 143,838 31,500 53,000 - 228,338 -------- -------- -------- -------- ---------- Total interest-bearing liabilities $821,895 $238,236 $ 144,872 $ 139,619 $1,344,622 ======== ======== ======== ======== ========== CUMULATIVE Rate sensitive assets (RSA) $799,543 $898,146 $1,099,788 $1,440,193 Rate sensitive liabilities (RSL) 821,895 1,060,131 1,205,003 1,344,622 GAP (GAP=RSA-RSL) (22,352) (161,985) (105,215) 95,571 RSA/RSL 97.28% 84.72% 91.27% 107.11% RSA/Total assets 51.80% 58.19% 71.26% 93.31% RSL/Total assets 53.25% 68.69% 78.07% 87.12% GAP/Total assets -1.45% -10.50% -6.82% 6.19% GAP/Total RSA -2.80% -18.04% -9.57% 6.64%
The following table shows the impact of an immediate 200 basis point change in interest rates as of March 31, 2003 and December 31, 2002. The effects are determined through the use of a simulation model based on our earning asset and interest-bearing liability portfolios, assuming the size of these portfolios remains constant from the balance sheet date throughout the one-year measurement period. The simulation assumes that assets and liabilities accrue interest on their current pricing basis. Assets and liabilities then reprice based on their terms and remain at that interest rate through the end of the measurement period. The model attempts to illustrate the potential change in net interest income if the foregoing occurred.
MARCH 31, 2003 DECEMBER 31, 2002 ---------------- ----------------- +200 -200 +200 -200 BASIS BASIS BASIS BASIS POINTS POINTS POINTS POINTS ------ ------ ------ ------ Percentage change in net interest income due to an immediate 200 basis point change in interest rates over a one-year time horizon.... -1.5% -8.9% 2.9% -10.5%
This table shows that if there had been an instantaneous parallel shift in the yield curve of -200 basis points on March 31, 2003 and December 31, 2002, we would suffer a decline in net interest income of -8.9% and -10.5%, respectively, over each one-year period. Conversely, a shift of +200 basis points would decrease net interest income -1.5% over a one-year horizon based on March 31, 2003 balances, as compared to an increase of net interest income of 2.9% measured on the basis of the December 31, 2002 portfolio. 36 Changes in the effect on net interest income from a 200 basis point movement at March 31, 2003, compared to December 31, 2002 are due to the timing and nature of the repricing of rate sensitive assets to rate sensitive liabilities within the one year time frame. Although we are negatively gapped within one year, the asset sensitive position of the balance sheet in the first 90 days of the simulation, coupled with the timing of repricing within the 91 to 365 day bucket, would lead to only a moderate decrease in net interest income from an immediate +200 basis point move. The difference in the effect on net interest income at March 31, 2003 as compared to December 31, 2002 is due to the differences in the timing, balances, and current rates versus simulated rates of repricing assets and liabilities. Management's likely reaction to changes in interest rates is incorporated in assumptions made in these calculations. Differences in these assumptions between the reporting periods have also had the effect of reducing the impact of a changing interest rate environment. The preceding sensitivity analysis is based on numerous assumptions including the nature and timing of interest rate levels including the shape of the yield curve, prepayments on loans and securities, changes in deposit levels, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows and others. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how client preferences or competitor influences might change. ITEM 4. CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company's Chief Executive Officer and Chief Financial Officer carried out an evaluation under their supervision, with the participation of other members of management as they deemed appropriate, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act. There have been no significant changes to the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date that the internal controls were most recently evaluated. There were no significant deficiencies or material weaknesses identified in that evaluation and, therefore, no corrective actions were taken. 37 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain and actual results may differ materially from the results discussed in forward-looking statements. Factors which might cause such a difference include, but are not limited to, fluctuations in market rates of interest and loan and deposit pricing; a deterioration of general economic conditions in our market areas; legislative or regulatory changes; adverse developments in our loan or investment portfolios; significant increases in competition; difficulties in identifying attractive acquisition opportunities or strategic partners to complement our private banking approach and the products and services we offer; and the possible dilutive effect of potential acquisitions or expansion. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update publicly any of these statements in light of future events except as required in subsequent periodic reports we file with the SEC. PART II ITEM 1. LEGAL PROCEEDINGS Although our subsidiaries may be involved from time to time in routine litigation incidental to their respective businesses, currently there are no material pending legal proceedings to which either the Company or its subsidiaries is a party. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp, Inc., as amended. 3.2 Amended and Restated By-laws of PrivateBancorp, Inc. 38 4.1 Subordinated Note of PrivateBancorp, Inc., dated February 11, 2000, principal amount of $5 million due February 11, 2007, issued to Johnson International, Inc. (filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference.) 4.2 Certain instruments defining the rights of the holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request. 15.0 Acknowledgment of Independent Auditors 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Independent Accountants' Review Report (b) Reports on Form 8-K (1) Current Report on Form 8-K dated January 3, 2003, filed with the SEC on January 3, 2003. (2) Current Report on Form 8-K dated January 9, 2003, filed with the SEC on January 9, 2003. (3) Current Report on Form 8-K dated January 21, 2003, filed with the SEC on January 21, 2003. (4) Current Report on Form 8-K dated January 27, 2003, filed with the SEC on January 27, 2003. (5) Current Report on Form 8-K dated February 27, 2003, filed with the SEC on February 27, 2003. (6) Current Report on Form 8-K dated March 24, 2003, filed with the SEC on March 24, 2003. 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PRIVATEBANCORP, INC. Registrant) By: /s/ Ralph B. Mandell ----------------------------- Ralph B. Mandell, Chairman, President and Chief Executive Officer By: /s/ Dennis L. Klaeser ----------------------------- Dennis L. Klaeser, Chief Financial Officer (principal financial officer) By: /s/ Lisa M. O'Neill ----------------------------- Lisa M. O'Neill, Controller (principal accounting officer) Date: May 14, 2003 40 CERTIFICATIONS I, Ralph B. Mandell, Chairman, President and Chief Executive Officer of PrivateBancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of PrivateBancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Ralph B. Mandell - ---------------------------- Ralph B. Mandell Chairman, President and Chief Executive Officer PrivateBancorp, Inc. 41 CERTIFICATIONS I, Dennis L. Klaeser, Chief Financial Officer of PrivateBancorp, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of PrivateBancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Dennis L. Klaeser - --------------------------- Dennis L. Klaeser Chief Financial Officer PrivateBancorp, Inc. 42 EXHIBIT INDEX 3.1 Amended and Restated Certificate of Incorporation of PrivateBancorp, Inc., as amended. 3.3 Amended and Restated By-laws of PrivateBancorp, Inc. 4.1 Subordinated Note of PrivateBancorp, Inc., dated February 11, 2000, principal amount of $5 million due February 11, 2007, issued to Johnson International, Inc. (filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference.) 4.2 Certain instruments defining the rights of the holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the SEC upon request. 15.0 Acknowledgment of Independent Auditors 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Independent Accountants' Review Report 43 EX-3.1 3 ex3-1_051203.txt AMENDED & RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.1 ----------- CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PRIVATEBANCORP, INC. PrivateBancorp, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors of the Corporation by the vote of a majority of its members at a meeting duly held and constituted, duly adopted resolutions setting forth a proposed amendment to the Amended and Restated Certificate of Incorporation of said corporation, declaring said amendment to be advisable and calling for such amendment to be considered at the annual meeting of the stockholders of said corporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, the first paragraph of Article FOURTH of the Corporation's Amended and Restated Certificate of Incorporation would be amended to read as follows: "The total number of shares of stock which the Corporation shall have authority to issue is twenty-five million (25,000,000) divided into two classes as follows: one million (1,000,000) of which shall be Preferred Stock, without par value, and twenty-four million (24,000,000) of which shall be Common Stock, without par value." SECOND: That such amendment has been duly adopted in accordance with provisions of the General Corporation Law of the State of Delaware by the affirmative vote of the holders of a majority of all outstanding stock entitled to vote at the annual meeting of stockholders. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Section 242 of the General Corporation Law of the State of Delaware. * * * * IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed this 24th day of April, 2003. PRIVATEBANCORP, INC. By: /s/ Dennis Klaeser ------------------------- Name: Dennis Klaeser Title: Chief Financial Officer AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF PRIVATEBANCORP, INC. -------------------- PRIVATEBANCORP, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY as follows: 1. The name of the Corporation is PrivateBancorp, Inc. The Corporation was originally incorporated under the name PrivateBancorp, Inc., and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on November 7, 1989. 2. This Amended and Restated Certificate of Incorporation, which was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware, restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation. 3. The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated and amended to read in its entirety as follows: FIRST: The name of the Corporation is PrivateBancorp, Inc. SECOND: The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, 19801, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of business to be conducted or promoted and the purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is thirteen million (13,000,000), divided into two classes as follows: one million (1,000,000) of which shall be Preferred Stock, without par value, and twelve million (12,000,000) of which shall be Common Stock, without par value. The designations, powers, preferences and rights, and the qualifications, limitations or restrictions of the above classes of stock are as follows: PREFERRED STOCK 1. The Board of Directors is expressly authorized at any time, and from time to time, to issue shares of Preferred Stock in one or more series, and for such consideration as the Board of Directors may determine, with such voting powers, full or limited, or without voting powers, and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issuance thereof, and as are not stated in this Certificate of Incorporation, or any amendment thereto. All shares of any one series shall be of equal rank and identical in all respects. 2. No dividend shall be paid or declared on any particular series of Preferred Stock unless dividends shall be paid or declared pro rata on all shares of Preferred Stock at the time outstanding in each other series which ranks equally as to dividends with such particular series. 3. Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever. Subject to the protective conditions or restrictions of any outstanding series of Preferred Stock, any amendment to this Certificate of Incorporation which shall increase or decrease the authorized capital stock of any class or classes may be adopted by the affirmative vote of the holders of a majority of the outstanding shares of voting stock of the Corporation. 4. Shares of Preferred Stock redeemed, converted, exchanged, purchased, retired or surrendered to the Corporation, or which have been issued and reacquired in any manner, shall, upon compliance with any applicable provisions of the Delaware General Corporation Law, have the status of authorized and unissued shares of Preferred Stock and may be reissued by the Board of Directors as part of the series of which they were originally a part or may be reclassified into and reissued as part of a new series or as part of any other series, all subject to the protective conditions or restrictions of any outstanding series of Preferred Stock. COMMON STOCK 1. Subject to preferential dividend rights, if any, applicable to shares of the Preferred Stock and subject to applicable requirements, if any, with respect to the setting aside of sums for purchase, retirement or sinking funds for the Preferred Stock, the holders of the Common Stock shall be entitled to receive to the extent permitted by law, such dividends as may be declared from time to time by the Board of Directors. 2. In the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock, holders of the Common Stock shall be entitled to receive all the remaining assets of the Corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. 3. Except as may be otherwise required by law or this Certificate of Incorporation, each holder of the Common Stock shall have one vote in respect of each share of stock held by -2- him or her of record on the books of the corporation on all matters voted upon by the stockholders. FIFTH: The names and mailing address of the incorporators are as follows: Mr. William R. Langley and Mr. Ralph B. Mandell One First National Plaza Suite 2648 Chicago, Illinois 60603 SIXTH: The number of directors of the Corporation shall be fixed from time to time by the By-laws of the Corporation. Election of directors need not be by written ballot unless the By-laws so provide. Commencing with the annual meeting of stockholders held in 1998, the directors shall be divided into three (3) classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1999 annual meeting of stockholders, the term of office of the second class to expire at the 2000 annual meeting of stockholders and the third class expiring at the 2001 annual meeting of stockholders. At each annual meeting of stockholders following such initial classification, directors elected by the stockholders to succeed those directors whose term expires shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. SEVENTH: The name and mailing address of the persons who are to serve as directors until the first annual meeting of stockholders or until their successors are elected and qualified are as follows: William R. Langley Ralph B. Mandell EIGHTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal the By-laws of the Corporation. NINTH: The Corporation shall indemnify, to the full extent that it shall have power under applicable law to do so and in a manner permitted by such law, any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Corporation against liabilities and expenses reasonably incurred or paid by such person in connection with such action, suit or proceeding. The Corporation may indemnify, to the full extent that it shall have power under applicable law to do so and in a manner permitted by such law, any person made or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigate, by reason of the fact that he is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against liabilities and expenses reasonably incurred or paid by such person in connection with such action, suit or proceeding. The words "liabilities" and "expenses" shall include, without -3- limitation: liabilities, losses, damages, judgments, fines, penalties, amounts paid in settlement, expenses, attorneys' fees and costs. The indemnification provided by this Article NINTH shall not be deemed exclusive of any other rights to which any person indemnified may be entitled under any statute, by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be such director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. The Corporation may purchase and maintain insurance on behalf of any person referred to in the preceding paragraph against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article NINTH or otherwise. For purposes of this Article NINTH, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. The provisions of this Article NINTH shall be deemed to be a contract between the Corporation and each director or officer who serves in any such capacity at any time while this Article and the relevant provisions of the General Corporation Law of the State of Delaware or other applicable law, if any, are in effect, and any repeal or modification of any such law or of this Article shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. For purposes of this Article, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Corporation. TENTH: Notwithstanding any other provision of this Amended and Restated Certificate of Incorporation or the By-laws of the Corporation to the contrary and notwithstanding that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds (2/3) of the voting power of the outstanding shares of all classes of -4- stock of the Corporation, voting together as a single class, shall be required to amend or repeal, or adopt any provision inconsistent with, Articles SIXTH, TENTH and THIRTEENTH of this Amended and Restated Certificate of Incorporation. ELEVENTH: Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or a class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the Court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation. TWELFTH: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. THIRTEENTH: Except as may be otherwise required by law or this Amended and Restated Certificate of Incorporation, each holder of the Common Stock shall have one vote in respect of each share of stock held by him or her of record on the books of the corporation on all matters voted upon by the stockholders. No action required to be taken at any annual or special meeting of the stockholders of the Corporation may be taken without an annual or special meeting of the stockholders, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. IN WITNESS WHEREOF, PRIVATEBANCORP, INC. has caused this Amended and Restated Certificate of Incorporation to be signed by Ralph B. Mandell, its Chief Executive Officer, Chairman and President, and attested to by Donald A. Roubitchek, its Secretary, this 24th day of June, 1999. -5- PRIVATEBANCORP, INC. By: /s/ Ralph B. Mandell ---------------------------------- Ralph B. Mandell Its Chairman, President and Chief Executive Officer Attest: /s/ Donald A. Roubitchek ------------------------ Donald A. Roubitchek Its Secretary -6- EX-3.2 4 ex3-2_051203.txt AMENDED & RESTATED BY-LAWS Exhibit 3.2 ----------- CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED BY-LAWS OF PRIVATEBANCORP, INC. PRIVATEBANCORP, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: The Board of Directors of the Corporation, at its meeting duly held on March 1, 2003, adopted resolutions approving the following amendments to the Amended and Restated By-Laws of the Corporation declaring said amendment to be advisable and calling for such amendment to be considered at the annual meeting of the stockholders of said corporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that Section 3.2 of the Corporation's Amended and Restated By-laws would be amended to read in its entirety as follows: "Section 3.2. Number, Tenure and Qualifications. The number of directors shall be fifteen (15); provided, however, that the number of directors may be increased or decreased from time to time by a resolution duly adopted by the Board of Directors. Commencing with the annual meeting of stockholders held in 1998, the directors shall be divided into three (3) classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1999 annual meeting of stockholders, the term of office of the second class to expire at the 2000 annual meeting of stockholders, and the third class expiring at the 2001 annual meeting of stockholders. At each annual meeting of stockholders following such initial classification, directors elected by the stockholders to succeed those directors whose term expires shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders or residents of Delaware." SECOND: That such amendment has been duly adopted in accordance with provisions of the General Corporation Law of the State of Delaware by the affirmative vote of the holders of a majority of all outstanding stock entitled to vote at the annual meeting of stockholders. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed and attested on its behalf as of April 24, 2003. PRIVATEBANCORP, INC. By: /s/ Dennis Klaeser ------------------------------ Name: Dennis Klaeser Title: Chief Financial Officer ATTEST: By: /s/ Lisa M. O'Neill ------------------- Name: Lisa M. O'Neill Title: Director of Financial Reporting and Assistant Secretary -2- AMENDED AND RESTATED -------------------- BY-LAWS ------- OF -- PRIVATEBANCORP, INC. -------------------- ARTICLE I OFFICES OF REGISTERED AGENT Section 1.1 Registered Office and Agent. The Corporation shall have and maintain a registered office in Delaware and a registered agent having a business office identical with such registered office. Section 1.2 Other Offices. The Corporation may also have such other office or offices in Delaware or elsewhere as the Board of Directors may determine or as the business of the Corporation may require. ARTICLE II STOCKHOLDERS Section 2.1 Annual Meeting. An annual meeting of the stockholders shall be held on the Fourth Thursday in April in each year at the hour of 4:00 P.M., or in the event the annual meeting is not held on such date and at such time, then on the date and at the time designated by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. If the directors shall not be elected at the annual meeting, or at any adjournment thereof, the Board of Directors shall cause the election to be held as soon thereafter as may be convenient. Section 2.2 Special Meetings. Special meetings of the stockholders may be called at any time by the Chairman of the Board, the President or the Secretary, and shall be called by the Chairman of the Board, the President or the Secretary at the request, in writing, of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting. Section 2.3 Place of Meeting. Meetings of stockholders, whether annual or special, shall be held at such time and place as may be determined by the Board of Directors and designated in the call and notice or waiver of notice of such meeting; provided, that a waiver of notice signed by all stockholders may designate any time or place as the time and place for the holding of such meeting. If no designation is made, the place of meeting shall be at the Corporation's principal place of business. Section 2.4 Notice of Meeting. Written notice stating the place, date and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting, or, in the case of a merger, consolidation or sale, lease or exchange of all or substantially all of the Corporation's property and assets, at least twenty days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board, the President or the Secretary to each stockholder of record entitled to vote at such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Section 2.5 Fixing Record Date for Determination of Stockholders. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of stockholders, such date to be not more than sixty days prior to the date of a meeting of stockholders, the date of payment of a dividend or the date on which other action requiring determination of stockholders is to be taken, as the case may be. In addition, the record date for a meeting of stockholders shall not be less than ten days, or in the case of a merger, consolidation or sale, lease or exchange of all or substantially all of the Corporation's property and assets, not less than twenty days immediately preceding such meeting. When a determination of stockholders entitled to vote at any meeting of stockholders -2- has been made as provided in this Section, such determination shall apply to any adjournment thereof; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 2.6 List of Stockholders Entitled to Vote. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of the stockholders, the corporate books, or to vote at any meeting of the stockholders. Section 2.7 Quorum and Manner of Acting. Unless otherwise provided by the Certificate of Incorporation or these By-laws, a majority of the outstanding shares of the Corporation, entitled to vote on a matter present in person or represented by proxy, shall constitute a quorum for consideration of such matter, at any meeting of stockholders; provided, that if less than a majority of the outstanding shares entitled to vote on a matter are present in person or represented by proxy at said meeting, a majority of the shares so present in person or represented by proxy may adjourn the meeting from time to time without further notice other than announcement at the meeting at which the adjournment is taken of the time and place of the adjourned meeting. At the adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. If a quorum is present, the affirmative vote of the majority of the shares present in person or represented by proxy at the meeting and entitled to vote shall be the act of the stockholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law of the State of Delaware, the Certificate of Incorporation or these By-laws. Section 2.8 Voting Shares and Proxies. Each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder, except as otherwise provided in the Certificate of Incorporation. Each stockholder entitled to vote shall be entitled to vote in person, or may authorize another person or persons to act for him by proxy executed in writing by such stockholder or by his duly authorized attorney-in-fact, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 2.9 Inspectors. At any meeting of stockholders, the chairman of the meeting may, or upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting, based upon the list of stockholders produced at the meeting in accordance with Section 2.6 hereof and upon their determination of the validity and effect of proxies, and they shall count all votes, report the results and do such other acts as are proper to conduct the -3- election and voting with impartiality and fairness to all the stockholders. Each such report shall be in writing and signed by at least a majority of the inspectors, the report of a majority being the report of the inspectors, and such reports shall be prima facie evidence of the number of shares represented at the meeting and the result of a vote of the stockholders. Section 2.10 Voting of Shares by Certain Holders. Shares of its own stock belonging to the Corporation, unless held by it in a fiduciary capacity, shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time. Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the by-laws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Persons holding stock in a fiduciary capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his Proxy, may represent such stock and vote thereon. Section 2.11 Action by Stockholders. Any action required to be taken or which may be taken at a meeting of stockholders must be effected at a duly called annual or special meeting of the stockholders of the Corporation, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Section 2.12 Notice of Stockholder Business. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before the annual meeting of stockholders, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, (b) otherwise properly brought before the meeting by or at the direction of the Board, or (c) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting of the stockholders, the stockholder must have the legal right and authority to make the proposal for consideration at the meeting and the stockholder must have given timely notice thereof in writing to the Chairman of the Board, the President or the Secretary of the Corporation. To be timely, a stockholder's written notice of intent to make a proposal or proposals must be personally delivered to or mailed by United States mail, certified or registered with return receipt requested, and received by the Chairman of the Board, the President or the Secretary of the Corporation at the principal executive offices of the Corporation not less than 120 days prior to the meeting; provided, however, that in the event that less than 130 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which notice of the day of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Chairman of the Board, the President or the Secretary shall set forth as to each item of business the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the meeting, and in the case of a nomination for election of director, such nominee's name and qualifications, and the reasons for conducting business at the meeting, (b) the name and the record address of the stockholder or stockholders proposing such business, (c) the number of shares of stock of the Corporation which are beneficially owned by such stockholder or stockholders, and (d) any material interest of the stockholder in such -4- business. The chairman of the meeting may refuse to acknowledge the proposal of any stockholder not made in compliance with this Section 2.12. Notwithstanding anything in these By-laws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.12. -5- ARTICLE III DIRECTORS Section 3.1 General Powers. The business and affairs of the Corporation shall be managed by its Board of Directors, except as may be otherwise provided by statute or the Certificate of Incorporation. Section 3.2 Number, Tenure and Qualifications. The number of directors shall be fifteen (15). The number may be increased or decreased from time to time by amendment of this Section except as otherwise provided for in the Amended and Restated Certificate of Incorporation. Commencing with the annual meeting of stockholders held in 1998, the directors shall be divided into three (3) classes, as nearly equal in number as possible, with the term of office of the first class to expire at the 1999 annual meeting of stockholders, the term of office of the second class to expire at the 2000 annual meeting of stockholders, and the third class expiring at the 2001 annual meeting of stockholders. At each annual meeting of stockholders following such initial classification, directors elected by the stockholders to succeed those directors whose term expires shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders or residents of Delaware. Section 3.3 Regular Meetings. A regular meeting of the Board of Directors shall be held, without other notice than this Section, immediately after and at the same place as the annual meeting of stockholders. The Board of Directors may provide, by resolution, the time and place, either within or without Delaware, for the holding of additional regular meetings without other notice than such resolution. Section 3.4 Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, the President or any two directors. The person or persons who call a special meeting of the Board of Directors may designate any place, either within or without Delaware, as the place for holding such special meeting. In the absence of such a designation the place of meeting shall be the Corporation's principal place of business. Section 3.5 Notice of Special Meetings. Notice stating the place, date and hour of a special meeting shall be mailed not less than five days before the date of the meeting, or shall be sent by telegram or be delivered personally or by telephone not less than two days before the date of the meeting, to each director, by or at the direction of the person or persons calling the meeting. Attendance of a director at any meeting shall constitute a waiver of notice of such meeting except where a director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 3.6 Quorum and Manner of Acting. A majority of the number of directors as fixed in Section 3.2 hereof shall constitute a quorum for the transaction of business at any meeting of the Board of Directors; provided, that if less than a majority of such number of -6- directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless otherwise provided in the General Corporation Law of the State of Delaware, the Certificate of Incorporation or these By-laws. Section 3.7 Informal Action by Directors. Any action which is required by law or by these By-laws to be taken at a meeting of the Board of Directors, or any other action which may be taken at a meeting of the Board of Directors or any committee thereof, may be taken without a meeting if a consent in writing, setting forth the action to be taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof, or by all the members of such committee, as the case may be. Such consent shall have the same force and effect as a unanimous vote of all of the directors or all of the members of such committee, as the case may be, at a duly called meeting thereof, and shall be filed with the minutes of proceedings of the Board or committee. Section 3.8 Telephonic Meetings. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, members of the Board of Directors or of any committee designated by such Board, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence at such meeting. Section 3.9 Resignations. Any director may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the President, or the Secretary. Such resignation shall take effect at the time specified therein; and, unless tendered to take effect upon acceptance thereof, the acceptance of such resignation shall not be necessary to make it effective. Section 3.10 Vacancies. (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors to be elected by all of the stockholders having the right to vote, voting as a single class, may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until their successors are elected and qualified or until their earlier resignation or removal. (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected, and the directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen, and until their successors shall be elected and qualified or until their earlier resignation or removal. -7- Section 3.11 Removal. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, provided, however, that: (a) if the Board is classified and unless otherwise provided in the Certificate of Incorporation, the stockholders may affect such removal only for cause; or (b) if the Corporation has cumulative voting, and less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors, or, if there be classes of directors, at an election of the class of directors of which he is a part. Whenever the holders of any class or series are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, the provisions of this Section shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. Section 3.12 Interested Directors. (a) No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. (b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. -8- ARTICLE IV COMMITTEES Section 4.1 Appointment and Powers. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation which, to the extent provided in said resolution or in these By-laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that any such committee may, to the extent authorized in the resolution or resolutions providing for the issuance of such shares of stock adopted by the Board of Directors, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation thereof, or amending the By-laws; and, unless the resolution, By-laws or Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the Delaware General Corporation Law. Section 4.2 Absence or Disqualification of Committee Member. In the absence or disqualification of any member of such committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Section 4.3 Record of Proceedings. The committees shall keep regular minutes of their proceedings and when required by the Board of Directors shall report the same to the Board of Directors. -9- ARTICLE V OFFICERS Section 5.1 Number and Titles. The officers of the Corporation shall be a Chairman of the Board, a President, a Treasurer and a Secretary. There shall be such other officers and assistant officers as the Board of Directors may from time to time deem necessary. Any two or more offices may be held by the same person. Section 5.2 Election, Term of Office and Qualifications. The officers shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after the annual meeting of stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as may be convenient. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall be elected to hold office until his successor shall have been elected and qualified, or until his earlier death, resignation or removal. Election of an officer shall not of itself create contract rights. Section 5.3 Removal. Any officer may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 5.4 Resignation. Any officer may resign at any time by giving written notice to the Board of Directors, the Chairman of the Board, the President or the Secretary. Such resignation shall take effect at the time specified therein; and, unless tendered to take effect upon acceptance thereof, the acceptance of such resignation shall not be necessary to make it effective. Section 5.5 Duties. In addition to and to the extent not inconsistent with the provisions in these By-laws, the officers shall have such authority, be subject to such restrictions and perform such duties in the management of the business, property and affairs of the Corporation as may be determined from time to time by the Board of Directors. Section 5.6 Chairman of the Board. The Chairman of the Board shall be elected by and from the membership of the Board of Directors. He shall be the chief executive officer of the Corporation unless the Board of Directors expressly designates otherwise. Subject to the control of the Board of Directors, the Chairman of the Board shall, in general, supervise and manage the business and affairs of the Corporation, and he shall see that the resolutions and directions of the Board of Directors are carried into effect. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the Corporation, or a different mode of execution is expressly prescribed by the Board of Directors or these By-laws, or where otherwise required by law, the Chairman of the Board may execute for the Corporation any contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed or the execution of which is in the ordinary course of the Corporation's business, and they may each accomplish such execution either under or without the seal of the Corporation and either individually, together or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors or these By-laws. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors (and of any executive committee thereof), and shall perform such other duties as from -10- time to time shall be prescribed by the Board of Directors. In the absence of the President or in the event of his inability or refusal to act or while such office is vacant, the Chairman of the Board shall assume the duties of the President. The offices of Chairman of the Board and President may be held by the same person. Section 5.7 President. The President shall be the chief operating officer of the Corporation unless the Board of Directors expressly designates otherwise. Subject to the control of the Board of Directors, the President shall, in general, assist the Chairman in supervising and managing the business and affairs of the Corporation and in seeing that the resolutions and directions of the Board of Directors are carried into effect. In the absence of the Chairman of the Board or in the event of his inability or refusal to act or while such office is vacant, the President shall perform the duties of the Chairman of the Board and when so acting shall have all of the powers and authority of, and shall be subject to the restrictions upon, the Chairman of the Board. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the Corporation or a different mode of execution is expressly prescribed by the Board of Directors or these By-laws or where otherwise required by law, he may execute for the Corporation any contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed or the execution of which is in the ordinary course of the Corporation's business, and he may accomplish such execution either under or without the seal of the Corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors or these By-laws. In general, he shall perform such other duties as from time to time may be prescribed by the Chairman of the Board or the Board of Directors. The offices of Chairman of the Board and President may be held by the same person. Section 5.8 Vice Presidents. The Board of Directors may, but need not, appoint one or more Vice Presidents of the Corporation. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the Corporation or a different mode of execution is expressly prescribed by the Board of Directors or these By-laws or where otherwise required by law, the Vice President (or each of them if there are more than one) may execute for the Corporation any contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, and he may accomplish such execution either under or without the seal of the Corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors or these By-laws. The Vice Presidents shall perform such other duties as from time to time may be prescribed by the Chairman of the Board, the President or the Board of Directors. Section 5.9 Treasurer. The Treasurer shall be the principal financial and accounting officer of the Corporation, and shall (a) have charge and custody of, and be responsible for, all funds and securities of the Corporation; (b) keep or cause to be kept correct and complete books and records of account including a record of all receipts and disbursements; (c) deposit all funds and securities of the Corporation in such banks, trust companies or other depositaries as shall be selected in accordance with these By-laws; (d) from time to time prepare or cause to be prepared and render financial statements of the Corporation at the request of the Chairman of the Board, the President or the Board of Directors; and (e) in general, perform all duties incident to the office of Treasurer and such other duties as from time to time may be prescribed by the Chairman of the Board, the President or the Board of Directors. If required by the Board of -11- Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. Section 5.10 Secretary. The Secretary shall (a) keep the minutes of the proceedings of the stockholders and of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-laws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation and see that the seal of the Corporation is affixed to all stock certificates prior to the issue thereof and to all documents the execution of which on behalf of the Corporation under its seal is necessary or appropriate; (d) keep or cause to be kept a register of the name and address of each stockholder, which shall be furnished to the Corporation by each such stockholder, and the number and class of shares held by each stockholder; (e) have general charge of the stock transfer books; and (f) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be prescribed by the Chairman of the Board, the President or the Board of Directors. Section 5.11 Assistant Treasurers and Assistant Secretaries. In the absence of the Treasurer or Secretary or in the event of the inability or refusal of the Treasurer or Secretary to act, the Assistant Treasurer and the Assistant Secretary (or in the event there is more than one of either, in the order designated by the Board of Directors or in the absence of such designation, in the order of their election) shall perform the duties of the Treasurer and Secretary, respectively, and when so acting, shall have all the authority of and be subject to all the restrictions upon such office. The Assistant Treasurers and Assistant Secretaries shall also perform such duties as from time to time may be prescribed by the Treasurer or the Secretary, respectively, or by the Chairman of the Board, the President or the Board of Directors. If required by the Board of Directors, an Assistant Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. Section 5.12 Salaries. The salaries and additional compensation, if any, of the officers shall be determined from time to time by the Board of Directors; provided, that if such officers are also directors such determination shall be made by a majority of the directors then in office. -12- ARTICLE VI CERTIFICATES OF STOCK AND THEIR TRANSFER Section 6.1 Stock Certificates. The issued shares of the Corporation shall be represented by certificates, and no class or series of shares of the Corporation shall be uncertificated shares. Stock certificates shall be in such form as determined by the Board of Directors and shall be signed by, or in the name of the Corporation by the Chairman of the Board or the President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Any of or all the signatures on the certificates may be a facsimile. All certificates of stock shall bear the seal of the Corporation, which seal may be a facsimile, engraved or printed. Section 6.2 Transfer of Shares. The shares of the Corporation shall be transferable. The Corporation shall have a duty to register any such transfer (a) provided there is presented to the Corporation or its transfer agents (i) the stock certificate endorsed by the appropriate person or persons; and (ii) reasonable assurance that such endorsement is genuine and effective; and, (b) provided that (i) the Corporation has no duty to inquire into adverse claims or has discharged any such duty; (ii) any applicable law relating to the collection of taxes has been complied with; and (iii) the transfer is in fact rightful or is to a bona fide purchaser. Upon registration of such transfer upon the stock transfer books of the Corporation the certificates representing the shares transferred shall be canceled and the new record holder, upon request, shall be entitled to a new certificate or certificates. The terms and conditions described in the foregoing provisions of this Section shall be construed in accordance with the provisions of the Delaware Uniform Commercial Code, except as otherwise provided by the Delaware General Corporation Law. No new certificate shall be issued until the former certificate or certificates for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed, wrongfully taken or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors, the Chairman of the Board or the President may prescribe consistent with applicable law. -13- ARTICLE VII DIVIDENDS Section 7.1 Dividends. Subject to the provisions of the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Board of Directors may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the Corporation's capital stock. -14- ARTICLE VIII FISCAL YEAR Section 8.1 Fiscal Year. The fiscal year of the Corporation shall be fixed by the Board of Directors. -15- ARTICLE IX SEAL Section 9.1 Seal. The corporate seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal" and "Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced. -16- ARTICLE X WAIVER OF NOTICE Section 10.1 Waiver of Notice. Whenever any notice is required to be given under these By-laws, the Certificate of Incorporation or the General Corporation Law of the State of Delaware, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. -17- ARTICLE XI INDEMNIFICATION Section 11.1 Third-Party Actions. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, including all appeals (other than an action by or in the right of the Corporation) by reason of the fact that the person is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, judgment, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with the action, suit, or proceeding; if the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or on a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner that he or she reasonably believed to be in or not opposed to the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Section 11.2 Derivative Actions. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or suit, including all appeals, by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, trustee, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, against expenses, including attorneys' fees, actually and reasonably incurred by the person in connection with the defense or settlement of the action or suit, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation. However, no indemnification shall be made in respect of any claim, issue, or matter as to which the person is adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Corporation unless and only to the extent that the court of common pleas or the court in which the action or suit was brought determines on application that, despite the adjudication of liability but in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for expenses that the court of common pleas or other court shall deem proper. Section 11.3 Rights After Successful Defense. To the extent that a director, trustee, officer, employee, or agent has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Section 11.1 or 11.2, above, or in defense of any claim, issue, or matter in that action, suit, or proceeding, he or she shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by him or her in connection with the action, suit, or proceeding. -18- Section 11.4 Other Determination of Rights. Unless ordered by a court, any indemnification made under Section 11.1 or 11.2, above, shall be made by the Corporation only as authorized in the specific case on a determination that indemnification of the director, trustee, officer, employee, or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 11.1 or 11.2, above. The determination shall be made (a) by a majority vote of a quorum consisting of directors who were not and are not parties to or threatened with the action, suit, or proceeding; (b) if the described quorum is not obtainable or if a majority vote of a quorum of disinterested directors so directs, by independent legal counsel in a written opinion; (c) by the stockholders; or (d) by the court in which the action, suit, or proceeding was brought. Section 11.5 Advances of Expenses. Expenses of each person seeking indemnification under Section 11.1 or 11.2, above, may be paid by the Corporation as they are incurred, in advance of the final disposition of the action, suit, or proceeding, as authorized by the Board of Directors in the specific case, on receipt of an undertaking by or on behalf of the director, trustee, officer, employee, or agent to repay the amount if it is ultimately determined that he or she is not entitled to be indemnified by the Corporation. Section 11.6 Nonexclusiveness; Heirs. The indemnification provided by this Article shall not be deemed exclusive of, and shall be in addition to, any other rights to which those seeking indemnification may be entitled as a matter of law or under the Certificate of Incorporation, these By-Laws, any agreement, vote of stockholders, any insurance purchased by the Corporation, or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding that office, and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of that person. -19- ARTICLE XII MISCELLANEOUS PROVISIONS Section 12.1 Contracts. The Board of Directors may authorize any officer or agent to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and the Chairman of the Board or the President may so authorize any officer or agent with respect to contracts or instruments in the usual and regular course of its business. Such authority may be general or confined to specific instances. Section 12.2 Loans. No loan shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the Board of Directors. Such authority may be general or confined to specific instances. Section 12.3 Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, or notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent as shall from time to time be authorized by the Board of Directors. Section 12.4 Deposits. The Board of Directors may select banks, trust companies or other depositaries for the funds of the Corporation. Section 12.5 Stock in Other Corporations. Shares of any other corporation which may from time to time be held by the Corporation may be represented and voted by the Chairman of the Board or the President, or by any proxy appointed in writing by the Chairman of the Board or the President, or by any other person or persons thereunto authorized by the Board of Directors, at any meeting of stockholders of such corporation or by executing written consents with respect to such shares where stockholder action may be taken by written consent. Shares represented by certificates standing in the name of the Corporation may be endorsed for sale or transfer in the name of the Corporation by the Chairman of the Board, the President or by any other officer thereunto authorized by the Board of Directors. Shares belonging to the Corporation need not stand in the name of the Corporation, but may be held for the benefit of the Corporation in the name of any nominee designated for such purpose by the Board of Directors. Section 12.6 Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. -20- ARTICLE XIII AMENDMENT Section 13.1 Procedure. These By-laws may be altered, amended or repealed and new by-laws may be adopted by the Board of Directors. Section 13.2 Amendment by Stockholders. Notwithstanding any other provision of the Amended and Restated Certificate of Incorporation or these By-laws of the Corporation to the contrary and notwithstanding that a lesser percentage may be specified by law, in the event these By-laws shall be amended by vote of stockholders, the affirmative vote of the holders of at least two-thirds (2/3) of the voting power of the outstanding shares of all classes of stock of the Corporation, voting together as a single class, shall be required to amend or repeal or adopt any provision inconsistent with Sections 2.2, 2.11, 2.12, 3.2, 3.10 or 13.2 of these By-laws. -21- EX-15 5 ex15_051203.txt ACKNOWLEDGEMENT OF INDEP. AUDITORS Exhibit 15.0 ACKNOWLEDGEMENT OF INDEPENDENT AUDITORS The Board of Directors and Audit Committee PrivateBancorp, Inc. We are aware of the incorporation by reference in the following Registration Statements of our report dated May 14, 2003 relating to our review of the unaudited consolidated interim financial statements of PrivateBancorp, Inc. as of and for the three month period ended March 31, 2003 that is included in its Form 10-Q for the quarter ended March 31, 2003: o Registration Statement on Form S-3 (File No. 333-104779) o Registration Statement (Form S-8 No. 333-104807) pertaining to the PrivateBancorp, Inc. Incentive Compensation Plan and the PrivateBancorp, Inc. Deferred Compensation Plan o Registration Statement (Form S-8 No. 333-43830) pertaining to the PrivateBancorp, Inc. Amended and Restated Stock Incentive Plan and the PrivateBancorp, Inc. Savings and Retirement Plan (formerly known as The PrivateBank and Trust Company Savings and Retirement Plan) o Registration Statement (Form S-8 No. 333-88289) pertaining to the PrivateBancorp, Inc. Amended and Restated Stock Incentive Plan /s/ Ernst & Young LLP Chicago, Illinois May 14, 2003 EX-99.1 6 ex99-1_051203.txt CERTIFICATION Exhibit 99.1 THE FOLLOWING CERTIFICATION IS PROVIDED BY THE UNDERSIGNED CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF PRIVATEBANCORP, INC. ON THE BASIS OF SUCH OFFICER'S KNOWLEDGE AND BELIEF FOR THE SOLE PURPOSE OF COMPLYING WITH 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. CERTIFICATION ------------- In connection with the Quarterly Report of PrivateBancorp, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2003 as filed with the Securities and Exchange Commission on May 14, 2003 (the "Report"), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Ralph B. Mandell ---------------------------- Name: Ralph B. Mandell Title: Chairman, President and Chief Executive Officer Date: May 14, 2003 By: /s/ Dennis L. Klaeser ---------------------------- Name: Dennis L. Klaeser Title: Chief Financial Officer Date: May 14, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission upon request. This certification accompanies the Report and shall not be treated as having been filed as part of the Report. EX-99.2 7 ex99-2_051203.txt INDEPENDENT ACCOUNTANTS' REVIEW REPORT Exhibit 99.2 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors and Audit Committee PrivateBancorp, Inc. We have reviewed the accompanying consolidated balance sheet of PrivateBancorp, Inc. as of March 31, 2003, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the three month period ended March 31, 2003. These financial statements are the responsibility of the Company's management. We did not make a similar review of the consolidated financial statements for the corresponding period of the prior year (2002). We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements at March 31, 2003, and for the three month period then ended, for them to be in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP May 14, 2003 Chicago, Illinois -----END PRIVACY-ENHANCED MESSAGE-----