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