Looking Back, 2001 Really Was a Terrific Year
--------------------------------------------------------------------------------
Record Earnings
Record Asset Levels
Record Deposit Levels
Record Loan Levels
Record Revenue Levels
92% Share Price Increase
Successfully Raised $22 Million Through Common Stock Offering
Agreed to Acquire Wayne Hummer Companies--Full Service Brokerage,
Asset Management and Mutual Fund Firm
We have always had a policy of presenting our goals, objectives and financial
results in an up front manner to our shareholders. In this annual report, we are
confirming our policy of reporting thoroughly the financial results, accounting
policies and objectives of Wintrust Financial Corporation and our operating
subsidiaries. We hope you enjoy the report.
--------------------------------------------------------------------------------
All share and per share amounts reflected in this report have been restated to
reflect the 3-for-2 stock split, effected in the form of a 50% stock dividend,
declared in January 2002, paid on March 14, 2002 to shareholders of record on
March 4, 2002.
Selected Financial Trends
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*** TOTAL ASSETS BAR CHART OMITTED ***
*** EARNINGS PER SHARE BAR CHART OMITTED ***
*** NET INCOME BAR CHART OMITTED ***
*** NET REVENUE BAR CHART OMITTED ***
*** BOOK VALUE PER COMMON SHARE BAR CHART OMITTED ***
*** RETURN ON AVERAGE EQUITY BAR CHART OMITTED ***
All share and per share amounts reflected in this annual report have been
restated to reflect the 3-for-2 stock split, effected in the form of a 50% stock
dividend, declared in January 2002, paid on March 14, 2002 to shareholders of
record on March 4, 2002.
- 2 -
Selected Financial Highlights
--------------------------------------------------------------------------------
All share and per share amounts reflected in this annual report have been
restated to reflect the 3-for-2 stock split, effected in the form of a 50% stock
dividend, declared in January 2002, paid on March 14, 2002 to shareholders of
record on March 4, 2002.
Years Ended December 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------------------------------------------------------------
(dollars in thousands, except per share data)
Selected Financial Condition Data (at end of year):
Total assets $ 2,705,422 $ 2,102,806 $ 1,679,382 $ 1,348,048 $ 1,053,400
Total deposits 2,314,636 1,826,576 1,463,622 1,229,154 917,701
Total net loans 2,061,383 1,558,020 1,278,249 992,062 712,631
Notes payable 46,575 27,575 8,350 - 20,402
Federal Home Loan Bank advances 90,000 - - - -
Long term debt - trust preferred securities 51,050 51,050 31,050 31,050 -
Total shareholders' equity 141,278 102,276 92,947 75,205 68,790
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Selected Statements of Operations Data:
Net interest income $ 74,014 $ 61,000 $ 47,734 $ 36,764 $ 26,772
Total net revenues 102,812 79,306 57,542 44,839 31,716
Net income 18,439 11,155 9,427 6,245 4,846
Net income per common share - Basic 1.34 0.85 0.76 0.51 0.42
Net income per common share - Diluted 1.27 0.83 0.73 0.49 0.40
Cash dividends declared per common share 0.093 0.067 - - -
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Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin 3.49% 3.66% 3.54% 3.43% 3.41%
Core net interest margin (1) 3.73 3.91 3.75 3.50 3.41
Non-interest income to average assets 1.24 0.99 0.66 0.69 0.58
Non-interest expense to average assets 2.83 3.12 2.65 3.04 3.18
Net overhead ratio 1.59 2.13 2.00 2.36 2.60
Net overhead ratio - excluding fraud charge 1.59 1.90 2.00 2.36 2.60
Efficiency ratio 63.66 72.33 68.63 79.75 86.03
Return on average assets 0.79 0.60 0.63 0.53 0.56
Return on average equity 15.24 11.51 11.58 8.68 7.88
Average total assets $ 2,328,032 $ 1,853,582 $ 1,496,566 $ 1,177,745 $ 858,084
Average total shareholders' equity 120,995 96,918 81,381 71,906 61,504
Ending loan-to-deposit ratio 89.1% 85.3% 87.3% 80.7% 77.7%
Average loans to average deposits ratio 87.4 87.7 86.6 80.1 80.1
Average interest earning assets to
average interest bearing liabilities 109.35 107.24 106.96 108.92 109.93
Asset Quality Ratios:
Non-performing loans to total net loans 0.63% 0.62% 0.54% 0.55% 0.59%
Non-performing assets to total assets 0.48 0.46 0.41 0.45 0.40
Allowance for possible loan losses to:
Total loans 0.66 0.67 0.69 0.71 0.72
Non-performing loans 105.63 107.75 126.10 129.66 121.64
Common Share Data at end of year:
Market price per common share $ 20.38 $ 10.63 $ 10.17 $ 13.09 $ 11.33
Book value per common share $ 9.72 $ 7.92 $ 7.06 $ 6.15 $ 5.65
Common shares outstanding 14,531,665 12,921,592 13,156,207 12,224,919 12,177,784
Other Data at end of year:
Number of:
Bank subsidiaries 7 7 6 6 6
Non-bank subsidiaries 3 3 3 2 1
Banking offices 29 28 24 21 17
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(1) The core net interest margin excludes the interest expense associated
with the Company's Trust Preferred Securities.
- 3 -
To our Fellow Shareholder,
--------------------------------------------------------------------------------
Welcome to Wintrust Financial Corporation's sixth annual report. 2001 was a
terrific year for our young organization and its growing list of subsidiaries.
During each quarter of 2001, our de novo strategy generated record levels in the
categories of loans, deposits, assets and net income. This makes us, once again,
one of the fastest growing bank groups in the U.S. We also achieved an annual
return on equity of 15.24%, the highest annual return on equity in our history,
and our stock price reached record levels in 2001. And we strategically
strengthened our full-service financial provider capabilities with the 2002
acquisition of Wayne Hummer Investments LLC and Wayne Hummer Management Company.
Wintrust Financial is well positioned for the future, and 2002 should be a
terrific year as well.
*** WAYNE HUMMER INVETMENTS LLC LOGO OMITTED ***
We declared our first stock split in January 2002, a 3-for-2 split effected in
the form of a 50% stock dividend, which was paid on March 14, 2002. As required,
all share and per share amounts shown in this report have been restated to
reflect the stock split.
FIRST, SOME THANK YOU'S
As we have done every year in this report, it is only right to start off by
thanking all of our dedicated employees who continue to provide our customers
with the best service around, bar none. And we would like to thank our
clients--banking, investment, trust, premium finance, employment agencies--for
allowing us to assist them with their financial affairs. We would also like to
thank our more than 100 directors of Wintrust Financial Corporation and our
subsidiaries for their sage advice and community contacts. And finally we'd like
to thank our shareholders, for keeping us focused on what we do best--profitably
growing our franchises by delivering our unique brand of superior customer
service.
*** NUMBER OF BANK FACILITIES OMITTED ***
WE'VE COME A LONG WAY IN TEN YEARS
It's humbling to step back and realize that our first bank, Lake Forest Bank &
Trust, is only ten years old. We've come a long way from that small, store-front
operation which we launched in 1991. Here are some of our accomplishments:
o We are now a $2.7 billion financial services holding company.
o We provide commercial and community banking services to over 50,000
customer households via our seven bank charters and 29 banking facilities
located in some of the best markets in Chicago.
o We can now provide all of the non- banking financial products and serv-
ices that our customers need, including retail brokerage, asset management,
trust services, proprietary mutual funds, annuities, insurance and a wide
array of other financial products, through the Wayne Hummer Companies and
Wintrust Asset Management Company. This full array of services will fur
ther enhance our ability to compete against the large national and regional
banks and brokerage institutions.
o We also augment our earning assets and fee revenue through First Insurance
Funding's premium finance business and Tricom's payroll funding and
processing business for the temporary staffing industry.
*** ASSET GROWTH BY BANK LINE GRAPH OMITTED ***
- 4 -
BUILDING SHAREHOLDER VALUE VIA DE NOVO GROWTH
Our de novo community banking growth strategy has served us well. We have
created strong community banking franchises in affluent, suburban-Chicago
markets and have achieved a leadership market share position in all of our
mature markets.
===========================================================
Deposit
Market
Initial Share
Bank Opening Rank*
----------------------------------------------------------
1. Lake Forest Bank & Trust--Lake Forest 12/91 2
2. Hinsdale Bank & Trust--Hinsdale 10/93 2
3. North Shore Community Bank & Trust--
Wilmette 09/94 2
4. Libertyville Bank & Trust--Libertyville 10/95 1
5. Barrington Bank & Trust--Barrington 12/96 2
6. Crystal Lake Bank & Trust--Crystal Lake 12/97 3
7. Northbrook Bank & Trust--Northbrook 11/00 7
===========================================================
* FDIC deposit market share as of June 30, 2001
In our fifth full year as a public corporation, we continued to make terrific
progress on all fronts. By balancing growth and improved profitability, we have
been able to achieve something that few banks around the country can boast about
these days--compound growth rates in both earnings and assets that exceed our
peer group by a large margin. Our core earnings are growing quickly as our
portfolio of de novo banks mature and we reap the benefits of becoming an
asset-driven organization.
=============================================================
Compound Growth Rates
1 year 2 year 3 year 4 year
-------------------------------------
Total Assets 28.7% 26.9% 26.1% 26.6%
Total Loans 32.3% 27.0% 27.6% 30.4%
Total Deposits 26.7% 25.8% 23.5% 26.0%
Total Revenue 29.6% 33.7% 31.9% 34.2%
Net Income 34.0%* 39.9% 43.5% 39.7%
=============================================================
* Excludes non-recurring after-tax charge reported in 2000
HIDDEN EARNINGS POTENTIAL
Importantly, we believe our de novo growth strategy has a sizeable hidden
earnings potential. The following graphs illustrate that as our young banks
mature and preform like our older banks, our internally generated growth rate
should continue and our earnings should explode.
*** NET REVENUE GROWTH BY BANK LINE GRAPH OMITTED ***
A number of trends are worth pointing out. First, we have generally been able to
grow our recently introduced banks at the same historical rate as we grew our
initial banks. That is because we use the same proven "recipe" for starting and
growing each of our banks. Secondly, we have also been able to continue to grow
our mature banks by adding de novo branches in new markets and improving their
market penetration in existing markets. Thirdly, we fully expect that these
young banks will follow the same improving profitability trend line as their
maturing siblings. The earnings performance of our young banks are enhanced as
they mature and grow into their infrastructure. If we can continue to achieve
increased performance as assets grow, the organization will experience
significant increases in earnings.
*** EARNINGS GROWTH BY BANK LINE GRAPH OMITTED ***
- 5 -
OUTPACING THE MARKETPLACE
The respected market maker, Stifel, Nicolaus & Company, recently published data
for the 57 bank holding companies they regularly track and this data ranks
Wintrust Financial's performance as:
o #1-Five year annual compound growth rate in revenue
o #1-Five year annual compound growth rate in earnings per share
While some banks are successful in growing either earnings by consolidating and
shrinking operations, or growing assets with significantly reduced earnings or
lowered share price due to acquisitions, very few have been able to
simultaneously grow both earnings and assets at the levels we have achieved.
*** TOTAL SHAREHOLDERS' EQUITY BAR CHART OMITTED ***
Our stock price ended the year at $20.38 per share, or 92% higher than at
December 31, 2000. We consider the sharp upward movement in the stock price to
be long overdue recognition of the Company's growth and performance. By
contrast, for the year 2001 the Nasdaq Composite Index was down 21% and the
Nasdaq Bank Index was up only 10%. We continue to believe that we can achieve
further increases in shareholder value over the long term as we continue to
execute our strategy.
*** PICTURE OF 3 EXECUTIVES OMITTED ***
WHAT COMES NEXT
Please enjoy the remainder of our 2001 Annual Report, which highlights the
following areas:
o Overall Financial Performance
o Our Subsidiaries--An Update
o The Newest Family Member--the Wayne Hummer Companies
o The Future Looks Bright Indeed
o Consolidated Financial Statements and Notes
o Report of Independent Auditors
o Management's Discussion and Analysis
o Directors & Officers
o Corporate Locations
o Corporate Information
We continue to be grateful for your support of our organization and are
enthusiastic about making the year 2002 an even better year in terms of growth
in earnings and assets. And we look forward to breaking even more records!
Thank you for being a shareholder.
Sincerely,
John S. Lillard
Chairman
/s/ John S. Lillard
Edward J. Wehmer
President & Chief Executive Officer
/s/ Edward J. Wehmer
David A. Dykstra
Senior EVP & Chief Operating Officer
/s/ David A. Dykstra
- 6 -
Overall Financial Performance
--------------------------------------------------------------------------------
In 2001 we again achieved record earnings, surpassed the $2.7 billion asset
level, and recorded 20-40% compound growth rates in all major financial
categories. Here is an overview summarizing our financial and other
accomplishments during 2001:
*** TOTAL DEPOSITS BAR CHART OMITTED ***
*** TOTAL NET LOANS BAR CHART OMITTED ***
o Wintrust generated record earnings for the year and, in fact, had
record earnings each quarter during the year. The Company recorded
earnings of $18.4 million for the year compared with $11.2 million in
2000, up 65%. Excluding a non-recurring charge in 2000, net income was
up 34% in 2001;
o Net income reached $5.2 million for the quarter ended December 31,
2001, an increase of 35% over the $3.8 million recorded in the fourth
quarter of 2000;
o On a per share basis, net income totaled $0.33 per diluted common
share for the fourth quarter of 2001, up from $0.29 in the fourth
quarter of 2000; and, on a year-to-date basis, net income per common
share totaled $1.27 compared to the $0.83 reported in 2000, a 53%
increase. Excluding the aforementioned non-recurring charge in 2000,
net income per diluted common share increased 23%. Strong growth,
despite increasing our outstanding shares with a common stock
offering;
o For the twelve months of 2001, return on average equity increased to
15.24%, the highest annual return on equity rate that our young
Company has achieved. By industry standards, that would make us a
"high performing" bank group;
o Total assets rose to $2.7 billion as of December 31, 2001, an increase
of $603 million, or 29%, compared to a year ago. We continue to show
strong and consistent asset growth in each of our banks;
o Total deposits reached $2.3 billion as of year-end 2001, an increase
of $488 million, or 27%, compared to December 31, 2000;
o Total loans grew to $2.1 billion as of December 31, 2001, an increase
of $503 million, or 32%, compared to a year ago;
o Our net overhead ratio, a measure of operating efficiency, improved to
1.50% in the fourth quarter of 2001 from 1.90% in the prior year
quarter;
o Our asset quality remains strong, as the level of non-performing
assets is very manageable;
o In late December, Northbrook Bank & Trust (our newest de novo bank)
moved into its new permanent facility. At the end of December 2001, it
has already surpassed the $85 million asset level, making this one of
the fastest growing Wintrust community banks ever;
o We continue to be one of the fastest growing bank groups in the
country, not only in assets, but in earnings and revenues as well;
o We successfully raised $22 million through a public offering of our
common stock;
o In January 2002, we approved a 29% increase in the semi-annual
dividend to $0.06 per common share;
o Also in January 2002, we declared a 3-for-2 stock split of the
Company's common stock;
o In December 2001, we announced an agreement to acquire Chicago-based
Wayne Hummer Investments LLC, a full service brokerage company, and
Wayne Hummer Management Company, an asset management and mutual fund
firm, for $28 million in cash, stock and deferred cash payments. We
successfully closed this transaction in February 2002.
- 7 -
FOURTH QUARTER "RUN RATE" INDICATES EVEN GREATER UPSIDE
As a relatively young banking group that is aggressively growing both assets and
earnings, looking at our "total year" results can understate our true
performance. If we were to annualize the fourth quarter's net income, we would
generate net income in 2002 of $20.7 million, before any improvement in
performance. This would represent a 12% pro-forma increase in net income over
2001 results, before any expected improvement. If we were to factor in growth,
which is reasonable given our track record and the continued maturation of our
young franchise, we conclude that Wintrust Financial Corporation should have
another impressive year in 2002.
PERFORMANCE VERSUS GOALS
At Wintrust, we set aggressive goals and evaluate our performance versus those
goals. Progressing towards these financial goals over the next few years will
make our Company a high performing bank relative to its peers. In 2001, we made
good progress towards achieving most of these goals and expect continued
improvement as our young franchises--the community banks and our other
subsidiaries--grow and mature. Although our Core Net Interest Margin has
declined slightly this year due to the precipitous cuts in interest rates by the
Federal Reserve Bank, the following performance statistics indicate that we are
making overall improvement in the financial performance of the Company.
PERFORMANCE MEASUREMENTS
--------------------------------------------------------------------------------
Our Year ended 12/31,
-------------------
Goal 2001 2000 1999
---------------------------------------
Core Net Interest Margin (1) 4 - 4.5% 3.73% 3.91% 3.75%
Net Overhead Ratio 1.5 - 2.0% 1.59% 2.13% 2.00%
Return on Average Equity 20 - 25% 15.24% 11.51% 11.58%
Return on Average Assets 1.5% 0.79% 0.60% 0.63%
Earnings per Diluted
Common Share $1.27 $0.83 $0.73
Non-Performing Assets
as a Percent of Total Assets 0.48% 0.46% 0.41%
--------------------------------------------------------------------------------
(1) By definition, our Core Net Interest Margin excludes the impact of interest
expense associated with the Company's Trust Preferred Securities offerings.
*** NET INTEREST MARGIN BAR CHART OMITTED ***
NET INTEREST MARGIN AND OTHER INCOME
While the 2001 interest rate environment was very volatile with eleven rate cuts
by the Federal Reserve Bank during the year, our net interest margin declined
just slightly and still was close to goal. However, our net interest income
increased 21% as compared to the prior year due to strong growth in our earning
asset base. We think we are well positioned to deal with this unprecedented rate
environment and our net interest margin should benefit in the event that rates
begin to rise in 2002 as forecasted.
One of our strategies is to diversify our revenue streams so we can weather any
adverse economic condition that may impact a section of our operating earnings.
As a result of this strategy, our non-interest income continues to grow and
totaled $28.8 million in 2001, an increase of 57% over the prior year. This
growth was mainly a result of a higher level of fees from originating and
selling residential mortgage loans into the secondary market, an increase in
income from premium finance receivables which were sold to an unrelated third
party, and enhanced fee income received
*** NET OVERHEAD RATIO BAR CHART OMITTED ***
- 8 -
from active management of our investment portfolio. As a result, our
non-interest revenues comprised 28% of our net revenues in 2001 compared to 23%
in 2000. Look for non-interest revenues to improve in 2002 with the addition of
the Wayne Hummer Companies.
ASSET QUALITY IS GOOD AND STABLE
Your management understands that maintaining good credit quality is extremely
important to overall profitability. To that end, we are pleased to report that
non-performing asset levels remain relatively low. In fact, our ratio of
non-performing assets as a percentage of total assets has consistently been
below 0.50%. While you read about many other banks experiencing higher levels of
problem loans, our conservative lending strategy is resulting in a low level of
non-performing assets. In fact, a small number of credits comprise the core
non-performing loans total. The small number of such non-performing loans allows
management to effectively monitor the status of these credits. Careful
underwriting of loans and diversification of credit risks contribute to the low
level of problem loans.
SUCCESSFUL CAPITAL OFFERING
In June, we successfully completed an offering of 1,488,750 shares of common
stock at a price of $16.00 per share which generated net capital to the company
of approximately $22.2 million. We are very pleased with the results of the
offering which was over subscribed. The additional capital enables us to
continue to grow our community banking and financial services franchise. U.S.
Bancorp Piper Jaffray acted as lead manager of the underwriters for the offering
and Stifel, Nicolaus & Company, Incorporated, Advest, Inc. and Howe Barnes
Investments, Inc. acted as co-managers.
*** ADVERTISEMENT OMITTED ***
DIVIDEND INCREASE AND A STOCK SPLIT
In January 2002, our Board of Directors approved a semi-annual cash dividend of
$0.06 per common share outstanding. This dividend was paid on February 19, 2002
to shareholders of record as of February 5, 2002. This cash dividend, on an
annualized basis, represents a 28.6% increase over the $0.093 per share common
stock dividend paid during 2001. Although we have increased the dividend rate
every year since one was initiated, as a growing company, we continue to retain
approximately 90% of our core earnings to fund future growth and to build our
franchise.
As previously mentioned, the Board of Directors also declared a 3-for-2 stock
split of the Company's common stock to be effected in the form of a 50% stock
dividend, payable on March 14, 2002, to shareholders of record as of March 4,
2002. This is our first stock split and is designed to improve the liquidity of
the Company's stock.
*** ADVERTISEMENT OMITTED ***
- 9 -
Wintrust Financial Corporation Locations
*** LOCATION MAP OMITTED ***
- 10 -
Our Subsidiaries -- An Update
--------------------------------------------------------------------------------
OUR COMMUNITY BANKS
Each of our community banks and non-bank subsidiaries recorded record levels in
assets and improvements in earnings in 2001. In recognition of the outstanding
performance of our subsidiary management teams and board members, we wanted to
include a short update on their achievements in 2001 and plans for 2002.
LAKE FOREST BANK & TRUST
Lake Forest Bank & Trust(R) (LFB&T), which celebrated its 10th Anniversary in
2001, reached $702 million in assets, an increase of $121 million over year ago.
Not bad growth for the most mature member of the Wintrust community banks. LFB&T
operated with an impressive net overhead ratio of less than 1.0% and generated a
1.61% return on average assets in 2001. LFB&T operates six banking facilities in
Lake Forest, West Lake Forest, Lake Bluff and Highwood. As of 06/30/01, FDIC
data indicated that LFB&T was the #2 bank (in deposits) in its initial market
area. The Bank of Highwood-Fort Sheridan(R), a branch of LFB&T that we opened
just two years ago, is now the #1 bank in its market. In 2002 we will be
launching a new branch, Highland Park Bank & Trust(TM), in this community
immediately to the south of our current marketing area.
*** LAKE FOREST BANK & TRUST EMPLOYEES PICTURE OMITTED ***
HINSDALE BANK & TRUST
Hinsdale Bank & Trust(R) (HB&T), which was launched eight years ago, reached
$513 million in assets in 2001, an increase of $112 million from 2000. This
growth rate is impressive for the second oldest Wintrust community bank. HB&T
operated with an efficient 1.74% net overhead ratio and generated a 1.16% return
on average assets in 2001. HB&T operates five banking facilities in Hinsdale,
Clarendon Hills (Clarendon Hills Bank(R)), Western Springs (The Community Bank
of Western Springs(R)), and Riverside. Our newest branch, Riverside Bank(TM),
was just opened in January 2002 and is off to a great start. HB&T has grown to
be the #2 bank in its original market area and just won the local newspaper's
award for the best bank in the area.
*** NEW RIVERSIDE BANK FACILITY OMITTED ***
NORTH SHORE COMMUNITY BANK & Trust
North Shore Community Bank & Trust(R) (NSCB&T), which was opened seven years
ago, reached $563 million in assets in 2001, an increase of $113 million over
the prior year. NSCB&T operated with a 1.24% net overhead ratio that is well
below the Wintrust average, and generated a 0.98% return on average assets.
NSCB&T operates seven banking facilities in Wilmette, Winnetka, Glencoe, and
Skokie. In mid-2001, NSCB&T moved into a more convenient space with ATM service
and safe deposit boxes in Winnetka, and in early 2003, is planning to open a new
full service facility with a drive-through facility in Skokie. NSCB&T has grown
to be the #2 bank in its initial market area.
LIBERTYVILLE BANK & TRUST
Libertyville Bank & Trust(R) (LB&T), which opened in October 1995, reached $355
million in assets in 2001, an increase of $68 million from 2000. LB&T operated
with a 1.18% net overhead ratio, well below the Wintrust average, and generated
a 0.85% return on average assets. LB&T operates five banking facilities, three
located in Libertyville and two in Wauconda (Wauconda Community Bank). In 2002,
Wauconda Community Bank(R) will be moving into their beautiful new permanent
facility right across the street from its key big bank com-
- 11 -
petitor. LB&T is also in the process of beginning construction on a new
permanent full service facility in South Libertyville. As of 6/30/01, LB&T had
grown to be the #1 bank in Libertyville and the #2 bank in Wauconda.
BARRINGTON BANK & TRUST
Barrington Bank & Trust(R) (BB&T), which was opened five years ago, reached $314
million in assets in 2001, an increase of $73 million over year ago. BB&T
operated with a 1.64% net overhead ratio, and generated a 0.67% return on
average assets--impressive for a young bank. BB&T operates two banking
facilities, a main bank in Barrington and a new branch in Hoffman Estates.
Hoffman Estates Community Bank(TM), launched in September 2001, is performing
very well and is outpacing our original projections. BB&T has grown to be the #2
bank in Barrington. Community Advantage(R), BB&T's condominium association
lending division, has established itself as a market leader in the Chicago
metropolitan area.
CRYSTAL LAKE BANK & TRUST
Crystal Lake Bank & Trust(R) (CLB&T), which commenced operations four years ago,
reached $184 million in assets in 2001, an increase of $59 million over 2000.
CLB&T has 39 employees and operated with a 1.68% net overhead ratio.
Additionally, profitability was well ahead of budget. CLB&T operates four
banking facilities in Crystal Lake, South Crystal Lake, and McHenry. McHenry
Bank & Trust, launched in February 2001, is off to a terrific start and is well
ahead of original projections. In 2002, McHenry Bank & Trust will be moving into
their spacious new permanent facility. We're sure their customers (and
employees) will like moving out of the 750 sq. ft. temporary facility! By the
end of 2001, CLB&T has grown to be the #3 bank in its primary market. CLB&T also
launched their Aircraft Financing Division in 2001, generating $6.5 million in
small aircraft loans. This is a business that we will be aggressively growing in
2002.
*** NEW NORTHBROOK BANK & TRUST MAIN FACILITY OMITTED ***
NORTHBROOK BANK & TRUST
Northbrook Bank & Trust(TM) (NB&T), which was opened in late 2000, reached $86
million in assets in 2001, an increase of $64 million over year ago. This would
make NB&T one of the fastest growing Wintrust banks ever. Additionally, this
bank reached profitability in the 4th quarter of 2001...another record for a
Wintrust community bank. NB&T's staff of dedicated community bankers moved into
its beautiful, new full-service facility and drive-through in late 2001 with
rave reviews. Deerfield Bank & Trust(TM), a proposed new branch located directly
north of our marketing area, is in development at this time.
WINTRUST ASSET MANAGEMENT COMPANY
Wintrust Asset Management Company provides trust and asset management services
to all of the communities that the Banks serve. We consider these to be some of
the best trust markets in Illinois. Despite a difficult investment environment
in 2001, Wintrust Asset Management grew the number of accounts and increased
assets under management to $440 million.
Given the demographics of our Banks' marketplaces, we look to trust and asset
management revenue to be an ongoing major source of non-interest income for the
Company. In 2002, Wayne Hummer Management Company will become part of Wintrust
Asset Management. We believe combining these companies will improve distribution
and result in an enhanced array of investment products and services for our
customers.
- 12 -
FIRST INSURANCE FUNDING
FIRST Insurance Funding Corp(R). used 2001 to refocus its business and improve
its customer service and profitability. FIRST spent much of the year
reevaluating current customers and ending relationships with those that proved
to be unprofitable or marginally profitable. FIRST stopped doing business with
more than 1,300 insurance agents, returning to its original focus on large and
middle-market commercial insurance agencies.
These changes allowed FIRST to book 20,000 fewer loans in 2001 than in 2000 and
increase its average loan size by 50%. Even with these reductions, FIRST's total
loan volume topped $1.3 billion, a 21% increase over 2000. With dramatically
improved operations and customer service, FIRST will spend 2002 increasing its
marketing and sales efforts. These efforts, combined with an increase in
insurance premiums nationally, should allow FIRST to grow its volumes by an even
greater percentage in 2002.
TRICOM, INC.
In its second full year as a member of the Wintrust family, 2001 was another
profitable year for Tricom. Even in an economy where the placement of temporary
staffing individuals by Tricom's clients was significantly reduced, Tricom was
able to maintain its net revenue contribution to the Company at $8.0 million,
compared to $8.1 million in 2000. After expenses, Tricom contributed $1.2
million of net income to the Company in 2001, and on a cash basis, has added
approximately $4.0 million of earnings to our consolidated results since the
date of our acquisition in October 1999. Accordingly, we continue to be pleased
with the return on the investment of Wintrust's first acquisition. Tricom used
the downturn in the temporary staffing industry in 2001 as an opportunity to
concentrate on upgrading its systems and delivery capabilities and stands ready
to handle significant levels of new business as the economy begins to recover
and temporary staffing individuals get absorbed back into the marketplace.
- 13 -
The Newest Family Member -- The Wayne Hummer Companies
--------------------------------------------------------------------------------
WHO IS WHI?
Since 1931, Chicago-based Wayne Hummer Investments LLC(R) (WHI) has been
providing a full-range of investment products and services tailored to meet the
specific needs of individual investors throughout the country. Wayne Hummer is a
well respected name in the brokerage business that services a very loyal,
affluent client base. WHI also operates an office in Appleton, Wisconsin that
was opened in 1936. WHI has approximately 150 employees, including over 40
active brokers, and is a member of the New York Stock Exchange, the Chicago
Stock Exchange, the American Stock Exchange and the National Association of
Securities Dealers.
*** WHI MANAGEMENT PICTURE OMITTED ***
WHI's goal is to help clients define and achieve their financial goals. Whether
they are setting their sights on a comfortable retirement, planning to send
their children to college, or wanting extra monthly income, WHI is there to help
fulfill those dreams. WHI's success stems from the long-lasting relationships
that their Investment Executives develop with clients. Getting to know clients
by understanding their individual goals, risk tolerance, and investment
philosophy is an objective that each WHI Investment Executive shares. Because
clients know that advice is always given with their best interest in mind, they
have placed a high level of trust with WHI and their Investment Executive.
In 2001, the number of WHI client households is estimated to be in excess of
20,000, with over $4 billion in customer assets in custody. WHI's Appleton,
Wisconsin branch has a client base of over 4,000 accounts and serves the greater
Appleton area with over 100 years of investment experience on staff.
WHO IS WHMC?
Wayne Hummer Management Company(R) (WHMC), established in 1981, is the
investment advisory affiliate of Wayne Hummer Investments and is advisor to the
Wayne Hummer family of mutual funds. The Wayne Hummer family of funds include
the Wayne Hummer Growth Fund, the Wayne Hummer CorePortfolio Fund, the Wayne
Hummer Income Fund, and the Wayne Hummer Money Market Fund. Both the Growth Fund
and the CorePortfolio Fund have been recognized as outperforming mutual funds
within their respected categories.
** WAYNE HUMMER MANAGEMENT COMPANY EXECUTIVE MANAGEMENT TEAM PICTURE OMITTED **
With assets in excess of $1.0 billion, the investment management group provides
advisory services to individuals and institutions, municipal and tax-exempt
organizations, including approximately $600 million in the Wayne Hummer Mutual
Funds. Additionally, WHMC also provides portfolio management and continuous
financial supervision for a wide-range of pension and profit sharing plans.
These defined portfolios are managed for public and private clients, bank
portfolios and trusts, endowments and foundations, and both taxable and
tax-deferred portfolios of individual investors. WHMC managed over $400 million
in these portfolios at the end of 2001.
- 14 -
WHO IS FI?
Focused Investments LLC(R), a NASD member broker/dealer, is a wholly owned
subsidiary of WHI and provides a full range of investment solutions to clients
through a network of community-based financial institutions throughout the
Midwest. We anticipate continued growth and enhanced resources as a result of
synergies created through the Wintrust affiliation. Focused Investments will
continue to operate as a wholly owned subsidiary of WHI.
*** FOCUSED INVESTMENTS LOGO OMITTED ***
WHAT ARE THE TERMS OF THE TRANSACTION?
The purchase price of $28 million was comprised of $8 million of cash, 762,742
shares of Wintrust's common stock (valued at $15 million) and $5 million of
deferred cash payments to be made over a three-year period subsequent to the
closing date. We agreed to also pay additional contingent consideration upon the
attainment of certain performance measures over the next five years. And to
ensure continuity, all former principals of WHI and WHMC agreed to sign
management employment contracts.
The transaction is expected to be slightly accretive to our Wintrust 2002
earnings per share. Additional positive impact should be experienced to the
extent that amounts currently invested in the money market mutual fund are
transferred into bank deposits and invested in earning assets at Wintrust banks.
*** WAYNE HUMMER MANAGEMENT COMPANY LOGO OMITTED ***
HOW WILL THE MERGER WORK? WHAT BRANDING WILL BE USED BY THE RESULTING COMPANIES?
The Wayne Hummer brand name is well known and respected in the Chicago
metropolitan area and its client base is nationwide. Accordingly, it makes sense
for us to continue to use the Wayne Hummer name in our brokerage and asset
management operations. As such, during 2002, we will merge the asset management
business of WHMC and Wintrust Asset Management Company and create a new name for
the combined asset management business using the Wayne Hummer branding. WHI will
continue operating as Wayne Hummer Investments and will be managed by the
current WHI management team.
WHAT ARE THE BENEFITS TO WINTRUST FINANCIAL CORPORATION SHAREHOLDERS AND
CUSTOMERS?
For Wintrust, this was a transaction with a well-respected Chicago firm with
consistent profitability, a solid investment performance, a loyal client base,
and a strong corporate culture. It is fully supported by both parties. The
additional revenue provided by the Wayne Hummer Companies will further diversify
Wintrust's revenue stream and is expected to result in non-interest income in
excess of 40% of total net revenues, up from the current level of 28%.
Currently, the Wayne Hummer Companies have over $400 million in a money market
mutual fund that would be beneficial to eventually migrate into deposits in the
Wintrust banks. Using these deposits to fund our excess loan production would
generate attractive spreads and could significantly increase our earnings per
share. To accomplish this, we plan to offer a superior market-rate,
FDIC-insured, cash management account in which Wayne Hummer customers can invest
their liquid assets. We will also offer large balance clients the opportunity to
receive up to $700,000 in FDIC insurance by depositing these excess balances in
up to seven Wintrust banks. This extra-FDIC insurance product takes strategic
advantage of Wintrust's seven (and eventually more) bank charters.
- 15 -
The Future Looks Bright Indeed
--------------------------------------------------------------------------------
Wintrust will now be able to offer full-service WHI brokerage services and WH
mutual funds to its bank and trust/investment customers. The addition of these
services allows the Wintrust organization to take another big step forward in
its efforts to be a "one-stop" shop for all of its customers' financial needs.
Our Wintrust banks will also benefit from offering additional banking deposit
and loan products to over 20,000 Wayne Hummer customer households. This merger
will also help make Wintrust's trust and investment business profitable and will
result in over $1.0 billion in assets under direct management including the
existing mutual funds.
WHAT ARE THE BENEFITS TO WAYNE HUMMER OWNERS AND CUSTOMERS?
This merger gives Wayne Hummer Companies the opportunity to expand market share
and earnings at a much faster pace by joining Wintrust Financial and its group
of community banks. Wintrust's seven banks and 29 banking facilities provide
additional distribution channels in high potential affluent markets. In addition
to the aforementioned market-rate FDIC insured cash management account which
will provide up to $700,000 of FDIC insurance per customer,cross selling WHI
brokerage and the WHMC family of mutual funds to Wintrust's 50,000 customer
households represents a sizeable growth opportunity.
We will be able to offer trust and estate services via our trust company powers
to Wayne Hummer's asset management and brokerage clients. These services are
currently outsourced by the Wayne Hummer Companies.
NET, NET--WIN, WIN
This transaction is a win-win situation for both companies and more importantly
for our customers. Wintrust is partnering with a company that has a terrific
history and operating culture, outstanding growth and profit potential, and a
dedicated management team. We are both very excited about this new relationship.
The union of our two companies just feels like a good fit. Wayne Hummer and
Wintrust are organizations that share similar values. Wayne Hummer's beliefs
regarding the importance of superior customer service, staying ahead of the
curve on technology, and following the highest ethical standards makes for a
good fit. A strong corporate culture and employee loyalty are pervasive in both
companies. And, importantly, there is very little overlap in the products and
services that the merging firms offer. It looks like a win/win for both
organizations, our employees, and our customers.
*** ADVERTISING OMITTED ***
*** ADVERTISING OMITTED ***
- 16 -
PROFITABLE GROWTH STRATEGIES
At Wintrust, we believe that profitable growth is a key ingredient in building
long-term shareholder value. Future growth will be fueled by adhering to a
variety of proven successful de novo strategies and new acquisition-related
strategies that will enable us to gain market share in key areas and continue
this growth. Some of these strategies may include:
o Growing our existing bank and investment franchises--Increase market
share by 1) cross selling existing customers additional banking,
investment, trust, and other financial services, 2) attracting new
customers, and 3) adding new branches and distribution channels;
o Creating new de novo franchises--Introduce new banks in high
opportunity markets and create new earning asset niches;
o Partnering with or acquiring existing community banks in high
opportunity markets;
o Partnering with or acquiring non-banking financial services firms to
expand our portfolio of investment services, asset niches, and fee
revenues;
o Being "asset driven"--Generating excess earning assets to augment our
community bank lending;
o Continuing to diversify our revenue streams by starting up or
acquiring fee based businesses;
o Bringing money market balances at Wayne Hummer into our banks to
profitably fund our excess loan volume; and,
o Utilizing the internet as an additional distribution vehicle for
current products and a portal to marketing and distributing new
products.
GROWING OUR BANK AND INVESTMENT FRANCHISES--A HUGE OPPORTUNITY
We have built our de novo franchises from scratch with aggressive, hard-hitting
consumer marketing that includes both customer acquisition and cross selling
programs. With our acquisition of the Wayne Hummer Companies, we have
significantly increased the cross sell opportunities. Now we can offer our
banking customers a full range of non-bank financial services, including retail
brokerage, managed investments, mutual funds, annuities, insurance and a wide
array of other financial services products. And we can offer our Wayne Hummer
customers banking and trust products and services. We also will grow the Wayne
Hummer brand with awareness building marketing, targeted product marketing, and
expansion of Wayne Hummer distribution channels to our affluent bank locations.
We believe this represents a huge growth opportunity for the banks and our
investment companies.
*** ADVERTISING OMITTED ***
DE NOVO EXPANSION
We continue to selectively expand our current franchises into new high
opportunity market areas. We have generally allocated approximately ten cents
per share to de novo growth. Depending on the opportunities available in the
marketplace, on occasion we may deviate from that amount, but we believe that
level of investment is appropriate. Clearly, the additional market share
garnered by this expansion should add to future earnings growth and increased
franchise value.
*** McB&T LOGO OMITTED ***
In 2001, we opened the following de novo banks and branches:
o McHenry Bank & Trust (branch of Crystal Lake Bank & Trust)
o Hoffman Estates Community Bank (branch of Barrington Bank & Trust)
o Launched Northbrook Bank & Trust new permanent facility
- 17 -
In the near future we plan to open the following banks and branches: Riverside
Bank (a branch of Hinsdale Bank & Trust that opened in January 2002), Highland
Park Bank & Trust (a branch of Lake Forest Bank & Trust), North Shore Community
Bank & Trust-Skokie (a full service location including a drive through),
Wauconda Community Bank's (a branch of Libertyville Bank & Trust) new permanent
facility, Libertyville Bank & Trust-South Libertyville's full service location,
McHenry Bank & Trust's (a branch of Crystal Lake Bank & Trust) new permanent
facility, and bank #8, We have also purchased property for Deerfield Bank &
Trust, a branch of Northbrook Bank & Trust.
POTENTIAL ACQUISITIONS
We continue to evaluate other Chicagoland community banks with the goal of
partnering with us by merging their community-based bank or branches into the
Wintrust family of banks. As we have said in the past, Wintrust is a logical
partner for many smaller community banks because of the liquidity and
value-added operational benefits we could bring, and the fact that we would
allow the bank to continue to operate locally with their own name and management
team.
In addition to the Wayne Hummer acquisition, we are looking at other managed
investments acquisitions that will "bulk up" this important fee generator. We
also continue to look to add earning asset niches, either as start-up operations
or through acquisition. This type of growth will add diversified earning asset
and fee-based business niches to supplement Wintrust's banking revenues.
As our stock price rises and our "currency" becomes more valuable, acquisitions
become a more viable avenue for future growth and enhanced shareholder value.
Your management team and Board of Directors are dedicated to being disciplined
with regard to pricing potential acquisitions to be accretive to earnings per
share. We will keep evaluating potential acquisitions and will update you
regularly on our progress.
EARNING ASSET NICHES--A KEY STRATEGY TO FUEL OUR GROWTH
Experience tells us that the typical community bank can generate loans from
local consumers and small businesses that represent about 60% of their lending
capacity without compromising credit quality. That's because in most suburban
communities, there are more consumer and small business deposit opportunities
than there are loans. Most community banks can't overcome this limitation and
are unable to grow beyond a certain size.
*** ADVERTISING OMITTED ***
We augment our community banks' loan portfolios with additional earning assets
generated by our specialty earning asset niches. This not only allows us to
improve the profitability of our community banks by optimizing their earning
asset base, but also allows them to diversify their loan portfolios. Our ability
to compete in the future will continue to be aided by this asset strategy.
*** PIE CHART OMITTED ***
- 18 -
We generate additional loan volume from a number of specialty earning asset
niches, most of which were developed internally:
o Commercial premium finance lending
o Temporary staffing industry financing (acquisition)
o Indirect auto lending
o Equipment leasing (acquisition)
o Condominium and association lending
o Mortgage warehouse lending
o Small craft aviation lending
THE BENEFITS OF BEING "ASSET DRIVEN"
In 2001, with the help of our growing earning asset niches, we again
accomplished our objective of being an "asset driven" organization. Having an
excess of loans is beneficial to the Company for a number of reasons. It allows
us:
o To be more profitable and to fund more aggressive growth. Excess loan
volume allows us to immediately invest any new deposit dollars in
loans that have higher interest rates than alternative short-term
investments. This allows us be more aggressive in key markets where we
want to increase market share because we are generating sufficient
higher yielding assets to invest the new deposits;
o To increase revenues on excess loan volumes. In 2001, we sold
approximately $245 million of premium finance receivables to an
unrelated financial institution. We anticipate continuing this
practice in the future as we balance growth and earnings. We should
note that these assets are also profitable sources of interest income
and to the extent we have the future liquidity, capital and
opportunity to absorb these excess loan volumes, we could maintain
such assets on our books at even higher profit levels. Specifically,
these assets are well suited for investment of the funds that we
anticipate migrating from the Wayne Hummer money market fund.
Accordingly, as the fund migration occurs, the level of loan sale
activity could be less in 2002 than in 2001; and
o To diversify our asset mix into various different loan types, thereby
reducing any concentration of credit risk.
*** HE WEBSITE LOGO OMITTED ***
..COMMUNITY BANKING(TM), WINTRUST STYLE
Our innovative on-line financial services called .community banking(TM) helps
customers track and control finances, all from the comfort of their home or
office, at any time. In 2001, we made a series of enhancements to our community
banks' on-line financial services including:
o Check Register--which allows users to better manage payments, maintain
their checkbook online, help reconcile these items with their bank
statements, and store up 16 months of checking or money market account
history;
o On-line Mortgage Application--which allows users to easily enter their
home loan application data on-line and provide quick on-line approval;
o Customizable User ID--which allows users to change their User ID's
from the bank assigned User ID; and
o Longer Deposit History--deposit history can now be queried for last
posting date, last 7 days, last 75 transactions, current statement,
prior statement, or all history that is available on-line.
OTHER PLANNED TECHNOLOGY INITIATIVES
Our Wintrust banks are firm believers in the value of investing in technology to
improve our services and improve our operating efficiency. To that end we have
created a Wintrust Information Technology Services (WITS) operational facility
in Villa Park, Illinois, to house the operational end of a number of technology
initiatives. Here are our 2002 consumer technology initiatives:
o Statement Processing--new internally produced statement and notices
o Imaging--historical imaged checks and statements
o CheckManager Plus--a better way to manage your checks via optional
imaged checks with statement
o Annual CD ROM--historical statements and check images
- 19 -
We also plan to introduce a number of technology initiatives for our business
customers:
o Improved retail lock box services--additional cash management services
o i-businessbanking.com--improved on-line business banking services
o E-mail statements and check images
o Quarterly and/or annual CD ROM--historical statements and check images
*** I BUSINESS BANKING LOGO OMITTED ***
MAXSAFE(TM) CD--THE RIGHT INVESTMENT ALTERNATIVE WHEN BOTH HIGH RETURN AND ADDED
SECURITY ARE IMPORTANT
In 2002, we will begin testing an innovative new kind of investment account--the
MaxSafe CD--with seven times the security of a normal CD. This product leverages
our seven bank charters by "waterfalling" deposits in excess of $96,000 into
other Wintrust community bank account(s). Seven banks equal seven times the
usual level of FDIC insurance for maximum protection. And we can increase this
coverage in the future as we add new banks. In today's volatile marketplace, the
added security of up to $700,000 in FDIC insurance offers a very relevant and
unique value-added benefit. Our plans are to initially introduce this idea as a
value-added jumbo CD, but eventually rollout this service to other
products--e.g. cash management and money market accounts.
INVESTOR RELATIONS PROGRAM
In 2002, we are continuing our investor relations program which includes:
presentations at investor conferences, providing interviews and story ideas to
financial publications, distributing investor packages to interested investors
through various programs, and making presentations to interested institutional
buyers. We believe that communicating our story is important to creating
awareness about our Company and thereby creating demand for our stock which will
help us raise capital on a cost effective basis.
We have received a lot of nice compliments on our new investor relations web
site (www.wintrust.com) complete with a new look and sophisticated navigation
system and many new features, including authorizing Wintrust to automatically
e-mail interested investors key reports and updates when they become available.
Currently, the following respected investment firms are now writing research on
Wintrust and all are currently recommending the purchase of Wintrust common
stock.
o Advest, Inc.
o Howe Barnes Investments, Inc.
o Midwest Research
o RBC Dain Rauscher Capital Markets
o Stifel, Nicolaus & Company, Inc.
o U.S. Bancorp Piper Jaffray
*** MAXSAFE POSTCARD OMITTED ***
- 20 -
SUMMARY
In summary, we are pleased with the Company's significant growth in 2001. This
was a very good year in terms of executing our strategy of balancing growth of
the balance sheet with growth in earnings. For the future, we are confident in
our corporate strategy and believe we have strong momentum going into 2002.
We are grateful for your support of our organization and are enthusiastic about
making the year 2002 another good year in terms of growth in earnings and
assets.
*** ADVERTISING OMITTED ***
- 21 -
CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
----------------------------------------------------------------------------------------------------------------
December 31,
----------------------------
2001 2000
----------------------------
ASSETS
Cash and due from banks $ 71,575 65,413
Federal funds sold and securities purchased under resale agreements 51,955 164,641
Interest bearing deposits with banks 692 182
Available-for-sale securities, at fair value 385,350 193,105
Loans, net of unearned income 2,061,383 1,558,020
Less: Allowance for possible loan losses 13,686 10,433
----------------------------------------------------------------------------------------------------------------
Net loans 2,047,697 1,547,587
Premises and equipment, net 99,132 86,386
Accrued interest receivable and other assets 38,936 34,722
Goodwill and other intangible assets, net of accumulated
amortization of $1,918 in 2001 and $1,233 in 2000 10,085 10,770
----------------------------------------------------------------------------------------------------------------
Total assets $ 2,705,422 2,102,806
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 254,269 198,319
Interest bearing 2,060,367 1,628,257
----------------------------------------------------------------------------------------------------------------
Total deposits 2,314,636 1,826,576
Short-term borrowings 28,074 43,639
Notes payable 46,575 27,575
Federal Home Loan Bank advances 90,000 --
Long-term debt - trust preferred securities 51,050 51,050
Accrued interest payable and other liabilities 33,809 51,690
----------------------------------------------------------------------------------------------------------------
Total liabilities 2,564,144 2,000,530
----------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, no par value; 20,000,000 shares authorized, of which 100,000
shares are designated as Junior Serial Preferred Stock A; no shares issued
and outstanding at December 31, 2001 and 2000 -- --
Common stock, no par value; $1.00 stated value; 30,000,000 shares authorized;
14,531,665 and 13,285,042 issued at December 31, 2001 and 2000, respectively 14,532 13,285
Surplus 97,956 79,282
Common stock warrants 99 100
Treasury stock, at cost; 363,450 shares at December 31, 2000 -- (3,863)
Retained earnings 30,995 13,835
Accumulated other comprehensive loss (2,304) (363)
----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 141,278 102,276
----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,705,422 2,102,806
================================================================================================================
See accompanying notes to consolidated financial statements
- 22 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
--------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------
2001 2000 1999
--------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 149,057 130,910 97,270
Interest bearing deposits with banks 10 26 204
Federal funds sold and securities purchased under resale agreements 5,632 1,627 1,536
Securities 11,756 15,621 10,321
--------------------------------------------------------------------------------------------------------------------------
Total interest income 166,455 148,184 109,331
--------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 83,503 78,670 56,026
Interest on short-term borrowings and notes payable 2,845 4,371 2,633
Interest on Federal Home Loan Bank advances 942 - -
Interest on long-term debt - trust preferred securities 5,151 4,143 2,938
--------------------------------------------------------------------------------------------------------------------------
Total interest expense 92,441 87,184 61,597
--------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 74,014 61,000 47,734
Provision for possible loan losses 7,900 5,055 3,713
--------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 66,114 55,945 44,021
--------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Fees on mortgage loans sold 7,831 2,911 3,206
Service charges on deposit accounts 2,504 1,936 1,562
Trust and asset management fees 1,996 1,971 1,171
Gain on sale of premium finance receivables 4,564 3,831 1,033
Administrative services revenue 4,084 4,402 996
Net available-for-sale securities gains (losses) 337 (40) 5
Fees from covered call options 4,344 882 441
Other 3,138 2,413 1,394
--------------------------------------------------------------------------------------------------------------------------
Total non-interest income 28,798 18,306 9,808
--------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 35,628 28,119 20,808
Equipment expense 6,297 5,101 3,199
Occupancy, net 4,821 4,252 2,991
Data processing 3,393 2,837 2,169
Advertising and marketing 1,604 1,309 1,402
Professional fees 2,055 1,681 1,203
Amortization of intangibles 685 713 251
Premium finance defalcation - 4,320 -
Other 11,300 9,471 7,655
--------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 65,783 57,803 39,678
--------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of accounting change 29,129 16,448 14,151
Income tax expense 10,436 5,293 4,724
--------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 18,693 11,155 9,427
Cumulative effect of change in accounting for derivatives, net of tax of $161 254 - -
--------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 18,439 11,155 9,427
==========================================================================================================================
BASIC EARNINGS PER SHARE:
Income before cumulative effect of accounting change $ 1.36 0.85 0.76
Cumulative effect of accounting change, net of tax 0.02 - -
--------------------------------------------------------------------------------------------------------------------------
Net income per common share - Basic $ 1.34 0.85 0.76
==========================================================================================================================
DILUTED EARNINGS PER SHARE:
Income before cumulative effect of accounting change $ 1.29 0.83 0.73
Cumulative effect of accounting change, net of tax 0.02 - -
--------------------------------------------------------------------------------------------------------------------------
Net income per common share - Diluted $ 1.27 0.83 0.73
==========================================================================================================================
See accompanying notes to consolidated financial statements
- 23 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
-----------------------------------------------------------------------------------------------------------------------------
Accumulated
Compre- other
hensive Common Retained comprehensive Total
income Common stock Treasury earnings income shareholders'
(loss) stock Surplus warrants stock (deficit) (loss) equity
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 12,225 68,803 100 - (5,872) (51) 75,205
Comprehensive income:
Net income $ 9,427 - - - - 9,427 - 9,427
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (2,220) - - - - - (2,220) (2,220)
-------
Comprehensive income 7,207
Common stock issuance, net of costs 871 9,113 - - - - 9,984
Common stock issued upon
exercise of stock options 48 355 - - - - 403
Common stock issued through
employee stock purchase plan 12 136 - - - - 148
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 13,156 78,407 100 - 3,555 (2,271) 92,947
Comprehensive income:
Net income 11,155 - - - - 11,155 - 11,155
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment 1,908 - - - - - 1,908 1,908
-------
Comprehensive Income 13,063
Cash dividends declared on common stock - - - - (875) - (875)
Purchase of 363,450 shares
of common stock - - - (3,863) - - (3,863)
Common stock issued upon
exercise of stock options 115 763 - - - - 878
Common stock issued through
employee stock purchase plan 14 112 - - - - 126
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 13,285 79,282 100 (3,863) 13,835 (363) 102,276
COMPREHENSIVE INCOME:
NET INCOME 18,439 - - - - 18,439 - 18,439
OTHER COMPREHENSIVE LOSS, NET OF TAX:
UNREALIZED LOSSES ON SECURITIES, NET OF
RECLASSIFICATION ADJUSTMENT (1,378) - - - - - (1,378) (1,378)
UNREALIZED LOSSES ON DERIVATIVE
INSTRUMENTS (563) - - - - - (563) (563)
-------
COMPREHENSIVE INCOME $ 16,498
CASH DIVIDENDS DECLARED ON COMMON STOCK - - - - (1,279) - (1,279)
COMMON STOCK ISSUANCE, NET OF COSTS 1,125 17,234 - 3,863 - - 22,222
COMMON STOCK ISSUED UPON
EXERCISE OF STOCK OPTIONS 106 1,190 - - - - 1,296
COMMON STOCK ISSUED THROUGH
EMPLOYEE STOCK PURCHASE PLAN 15 239 - - - - 254
CONVERSION OF COMMON STOCK WARRANTS 1 11 (1) - - - 11
-----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 $ 14,532 97,956 99 - 30,995 (2,304) 141,278
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
- 24 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
-----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------
2001 2000 1999
------------------------------------------
OPERATING ACTIVITIES:
Net income $ 18,439 11,155 9,427
Adjustments to reconcile net income to net cash
used for, or provided by, operating activities:
Cumulative effect of accounting change 254 -- --
Provision for possible loan losses 7,900 5,055 3,713
Depreciation and amortization 8,082 6,619 4,246
Deferred income tax expense (benefit) 1,791 597 (835)
Net (accretion) amortization of securities (578) 1,775 (490)
Originations of mortgage loans held for sale (515,170) (161,017) (263,857)
Proceeds from sales of mortgage loans held for sale 482,690 158,716 273,765
Gain on sale of premium finance receivables (4,564) (3,831) (1,033)
Purchase of trading securities (17,662) (2,940) (5,558)
Proceeds from sale of trading securities 17,678 2,945 5,567
Gain on sale of trading securities (16) (5) (9)
(Gain) loss on sale of Available-for-Sale securities (337) 40 (5)
(Gain) loss on sale of premises and equipment, net (209) 18 --
Increase in accrued interest receivable and other assets, net (6,031) (404) (3,585)
Increase (decrease) in accrued interest payable and other liabilities, net (17,720) 28,120 5,580
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (25,453) 46,843 26,926
-----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of Available-for-Sale securities 484,292 235,275 368,889
Proceeds from maturities of Held-to-Maturity securities -- -- 5,000
Proceeds from sales of Available-for-Sale securities 1,260,838 675,458 15,166
Purchases of Available-for-Sale securities (1,938,546) (896,922) (383,723)
Proceeds from sales of premium finance receivables 244,684 229,277 68,875
Acquisition of Tricom Inc , net of cash acquired -- -- (4,227)
Net (increase) decrease in interest bearing deposits with banks (510) 2,365 5,316
Net increase in loans (715,894) (506,321) (346,778)
Purchases of premises and equipment, net (19,934) (19,459) (17,217)
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (685,070) (280,327) (288,699)
-----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase in deposit accounts 488,060 362,954 234,468
Increase (decrease) in short-term borrowings, net (15,565) (16,204) 41,254
Increase in notes payable, net 19,000 19,225 8,350
Proceeds from Federal Home Loan Bank advances 90,000 -- --
Proceeds from trust preferred securities offering -- 20,000 --
Issuance of common stock, net of issuance costs 22,222 -- 5,984
Common stock issued upon exercise of stock options 1,296 878 403
Common stock issued through employee stock purchase plan 254 126 148
Proceeds from conversion of common stock warrants 11 -- --
Purchase of common stock -- (3,863) --
Dividends paid (1,279) (875) --
-----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 603,999 382,241 290,607
-----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (106,524) 148,757 28,834
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 230,054 81,297 52,463
-----------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 123,530 230,054 81,297
-----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 92,802 85,581 60,667
Income taxes, net 8,023 4,084 4,241
Acquisition of Tricom, Inc of Milwaukee:
Fair value of assets acquired -- -- 22,116
Goodwill recorded from acquisition -- -- 10,052
Fair value of liabilities assumed -- -- 23,941
NON-CASH INVESTING ACTIVITIES:
Common stock issued for acquisition of Tricom, Inc of Milwaukee -- -- 4,000
Transfer to other real estate owned from loans 244 -- --
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
- 25 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
DESCRIPTION OF THE BUSINESS
Wintrust Financial Corporation ("Wintrust" or "Company") is a financial services
holding company currently engaged in the business of providing community banking
services, trust and investment services, commercial insurance premium financing,
short-term accounts receivable financing, and certain administrative services,
such as data processing of payrolls, billing and cash management services.
Wintrust provides banking services to customers in the Chicago metropolitan area
through its seven wholly-owned banking subsidiaries (collectively, "Banks"), all
of which started as de novo institutions, including Lake Forest Bank & Trust
Company ("Lake Forest Bank"), Hinsdale Bank & Trust Company ("Hinsdale Bank"),
North Shore Community Bank & Trust Company ("North Shore Bank"), Libertyville
Bank & Trust Company ("Libertyville Bank"), Barrington Bank & Trust Company,
N.A. ("Barrington Bank"), Crystal Lake Bank & Trust Company, N.A. ("Crystal Lake
Bank") and Northbrook Bank & Trust Company ("Northbrook Bank"). Wintrust
provides trust and investment services at each of the Wintrust banks through
Wintrust Asset Management Company, N.A. ("WAMC"). The Company provides financing
for the payment of commercial insurance premiums ("premium finance
receivables"), on a national basis, through First Insurance Funding Corp.
("FIFC"), a wholly-owned subsidiary of Crabtree Capital Corporation
("Crabtree"), which is a wholly-owned subsidiary of Lake Forest Bank. Tricom,
Inc. ("Tricom"), a wholly-owned subsidiary of Hinsdale Bank, provides short-term
accounts receivable financing ("Tricom finance receivables") and value-added
out-sourced administrative services, such as data processing of payrolls,
billing and cash management services, to temporary staffing service clients
located throughout the United States.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Wintrust and its subsidiaries conform
to generally accepted accounting principles in the United States and prevailing
practices of the banking industry. In the preparation of the consolidated
financial statements, management is required to make certain estimates and
assumptions that affect the reported amounts contained in the consolidated
financial statements. Management believes that the estimates made are
reasonable; however, changes in estimates may be required if economic or other
conditions change beyond management's expectations. Reclassifications of certain
prior year amounts have been made to conform with the current year presentation.
The following is a summary of the more significant accounting policies of the
Company.
Principles of Consolidation
The consolidated financial statements of Wintrust include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Stock Split
On January 24, 2002, the Board of Directors declared a 3-for-2 stock split of
the Company's common stock, to be effected in the form of a 50% stock dividend,
payable on March 14, 2002 to shareholders of record as of March 4, 2002. In
accordance with Statement of Accounting Standard (SFAS) 128, "Earnings Per
Share", all per-share computations and references to number of shares presented
in this report have been restated to reflect the stock split.
Cash Equivalents
For purposes of the consolidated statements of cash flows, Wintrust considers
cash on hand, cash items in the process of collection, non-interest bearing
amounts due from correspondent banks, federal funds sold and securities
purchased under resale agreements to be cash equivalents.
Securities
The Company classifies securities upon purchase in one of three categories:
trading, held-to-maturity, or available-for-sale. Trading securities are bought
principally for the purpose of selling them in the near term. Held-to-maturity
securities are those debt securities in which the Company has the ability and
positive intent to hold until maturity. All other securities are currently
classified as available-for-sale as they may be sold prior to maturity.
Held-to-maturity securities are stated at amortized cost which represents actual
cost adjusted for premium amortization and discount accretion using methods that
approximate the effective interest method. Available-for-sale securities are
stated at fair value. Unrealized gains and losses on available-for-sale
securities, net of related taxes, are included as accumulated other
comprehensive income and reported as a separate component of shareholders'
equity.
Trading account securities are stated at fair value. Realized and unrealized
gains and losses from sales and fair value adjustments are included in other
non-interest income. The Company did not maintain any trading account securities
at December 31, 2001 or 2000.
- 26 -
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to earnings,
resulting in the establishment of a new cost basis for the security. Interest
and dividends, including amortization of premiums and accretion of discounts,
are recognized as interest income when earned. Realized gains and losses for
securities classified as available-for-sale are included in non-interest income
and are derived using the specific identification method for determining the
cost of securities sold.
Securities Purchased Under Resale Agreements and Securities Sold Under
Repurchase Agreements
Securities purchased under resale agreements and securities sold under
repurchase agreements are generally treated as collateralized financing
transactions and are recorded at the amount at which the securities were
acquired or sold plus accrued interest. Securities, generally U.S. government
and Federal agency securities, pledged as collateral under these financing
arrangements cannot be sold by the secured party. The fair value of collateral
either received from or provided to a third party is monitored and additional
collateral obtained or requested as deemed appropriate.
Loans and Allowance for Possible Loan Losses
Loans, which include premium finance receivables, Tricom finance receivables and
lease financing, are recorded at the principal amount outstanding. Interest
income is recognized when earned. Loan origination fees and certain direct
origination costs associated with loans retained in the portfolio are deferred
and amortized over the expected life of the loan as an adjustment to the yield
using methods that approximate the effective interest method. Finance charges on
premium finance receivables are earned over the term of the loan based on actual
funds outstanding, beginning with the funding date, using a method which
approximates the effective yield method.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market, after consideration of related loan sale commitments, if any. Fees
received from the sale of these loans into the secondary market are included in
non-interest income.
Interest income is not accrued on loans where management has determined that the
borrowers may be unable to meet contractual principal and/or interest
obligations, or where interest or principal is 90 days or more past due, unless
the loans are adequately secured and in the process of collection. Cash receipts
on non-accrual loans are generally applied to the principal balance until the
remaining balance is considered collectible, at which time interest income may
be recognized when received.
The allowance for possible loan losses is maintained at a level believed
adequate by management to cover probable losses inherent in the portfolio and is
based on an assessment of individual problems loans, actual and anticipated loss
experience, current economic events and other pertinent factors. Determination
of the allowance is inherently subjective as it requires significant estimates,
including the amounts and timing of expected future cash flows on impaired loans
and estimated losses on pools of homogeneous loans based on historical loss
experience, delinquency levels and current economic trends. In estimating
potential losses, the Company evaluates loans for impairment in accordance with
SFAS 114, "Accounting by Creditors for Impairment of a Loan". A loan is
considered impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due. Impaired
loans are generally considered by the Company to be commercial and commercial
real estate loans that are non-accrual loans, restructured loans or loans with
principal and/or interest at risk, even if the loan is current with all payments
of principal and interest. Impairment is measured by estimating the fair value
of the loan based on the present value of expected cash flows, the market price
of the loan, or the fair value of the underlying collateral. If the estimated
fair value of the loan is less than the recorded book value, a valuation
allowance is established as a component of the allowance for possible loan
losses.
Mortgage Servicing Rights
The Company originates mortgage loans for sale to the secondary market, the
majority of which are sold without retaining servicing rights. There are certain
loans, however, that are originated and sold to a governmental agency, with
servicing rights retained. Mortgage servicing rights associated with loans
originated and sold, where servicing is retained, are capitalized and included
in other assets in the consolidated statements of condition. The Company
capitalizes the rights to service these originated mortgage loans at the time of
sale. The capitalized value of loan servicing rights is amortized in proportion
to, and over the period of, estimated net future servicing revenue. Mortgage
servicing rights are periodically evaluated for impairment. For purposes of
measuring impairment, the servicing rights are stratified into
- 27 -
pools based on loan type, interest rate and term. Impairment represents the
excess of the remaining capitalized cost of a stratified pool over its fair
value, and is recorded through a valuation allowance. The fair value of each
servicing rights pool is calculated based on the present value of estimated
future cash flows using a discount rate commensurate with the risk associated
with that pool, given current market conditions. Estimates of fair value include
assumptions about prepayment speeds, interest rates and other factors which are
subject to change over time. Changes in these underlying assumptions could cause
the fair value of mortgage servicing rights, and the related valuation
allowance, if any, to change significantly in the future.
Sales of Premium Finance Receivables
Transfers of premium finance receivables to an unrelated third party are
recognized as sales in accordance with SFAS 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." The Company
recognizes as a gain the difference between the proceeds received and the
allocated cost basis of the loans. The cost basis of the loans is determined by
allocating the Company's initial investment in the loan between the loan and the
Company's retained interests, based on their relative fair values. The retained
interests include assets for the servicing rights and interest only strip less a
liability for the Company's guarantee obligation pursuant to the terms of the
sale agreement. The net retained interest is included in other assets. If actual
cash flows are less than estimated, the net retained interest would be impaired
and charged to earnings. Loans sold in these transactions have terms of less
than twelve months, resulting in minimal prepayment risk.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related assets. Expenditures for
major additions and improvements are capitalized, and maintenance and repairs
are charged to expense as incurred. Internal costs related to the configuration
and installation of new software and the modification of existing software that
provides additional functionality are capitalized and amortized over periods of
three to five years. Equipment owned and subject to leasing contracts
characterized as operating leases is also included in premises and equipment.
Other Real Estate Owned
Other real estate owned is comprised of real estate acquired in partial or full
satisfaction of loans and is included in other assets at the lower of cost or
fair market value less estimated selling costs. When the property is acquired
through foreclosure, any excess of the related loan balance over the adjusted
fair market value less expected selling costs, is charged against the allowance
for possible loan losses. Subsequent write-downs or gains and losses upon sale,
if any, are charged to other non-interest expense.
Intangible Assets
Goodwill, representing the cost in excess of the fair value of net assets
acquired, is primarily amortized on a straight-line basis over periods of
fifteen to twenty years. The Company periodically evaluates the carrying value
and remaining amortization period of intangible assets and other long-lived
assets for impairment, and adjusts the carrying amounts, as appropriate.
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other
Intangible Assets," which changes the way goodwill and certain other intangible
assets are recognized and accounted for in the consolidated financial
statements. See Note 2 for further discussion of the impact of this new
accounting pronouncement on the Company's financial statements.
Derivative Instruments
The Company enters into derivative transactions principally to protect against
the risk of adverse price or interest rate movements on the future cash flows or
the value of certain assets and liabilities. Effective January 1, 2001, the
Company adopted SFAS 133, "Accounting for Derivative Instruments and Hedging
Activates," which requires that all derivative instruments be recorded in the
statement of condition at fair value. The accounting for changes in the fair
value of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. Derivatives owned at the time of adoption were not designated as
hedges pursuant to SFAS 133, and resulted in a charge of $254,000 (net of tax)
to reflect the cumulative effect of an accounting change in the Consolidated
Statements of Income.
Derivative instruments designated in a hedge relationship to mitigate exposure
to changes in the fair value of an asset or liability attributable to a
particular risk, such as interest rate risk, are considered fair value hedges.
Derivative instruments designated in a hedge relationship to mitigate exposure
to variability in expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges. The Company formally documents
relationships between derivative instruments and
- 28 -
hedged items, as well as its risk-management objective and strategy for
undertaking each hedge transaction.
Fair value hedges are accounted for by recording the fair value of the
derivative instrument and the fair value related to the risk being hedged of the
hedged asset or liability on the balance sheet with corresponding offsets
recorded in the income statement. Cash flow hedges are accounted for by
recording the fair value of the derivative instrument on the balance sheet with
a corresponding offset recorded in other comprehensive income, net of tax.
Amounts are reclassified from other comprehensive income to interest expense in
the period or periods the hedged forecasted transaction affects earnings.
Derivative instruments that do not qualify as hedges pursuant to SFAS 133 are
reported at fair value and the changes in fair value are recognized in earnings
as noninterest income or noninterest expense, as appropriate, during the period
of the change.
Under both the fair value and cash flow hedge scenarios, changes in the fair
value of derivatives not considered to be highly effective in hedging the change
in fair value or the expected cash flows of the hedged item are recognized in
earnings as noninterest expense during the period of the change.
Trust Preferred Securities Offering Costs
In connection with the Company's October 1998 and June 2000 offerings of
Cumulative Trust Preferred Securities ("Trust Preferred Securities"),
approximately $1.4 million and $1.1 million, respectively, of offering costs
were incurred, including underwriting fees, legal and professional fees, and
other costs. These costs are included in other assets and are being amortized
over a ten year period as an adjustment of interest expense using a method that
approximates the effective interest method. See Note 12 for further information
about the Trust Preferred Securities.
Trust Assets
Assets held in fiduciary or agency capacity for customers are not included in
the consolidated financial statements as they are not assets of Wintrust or its
subsidiaries. Fee income is recognized on an accrual basis for financial
reporting purposes and is included as a component of non-interest income.
Income Taxes
Wintrust and its subsidiaries file a consolidated Federal income tax return. The
subsidiaries provide for income taxes on a separate return basis and remit to
Wintrust amounts determined to be currently payable.
Wintrust and subsidiaries record income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
currently enacted tax rates in effect for the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Stock Option Plans
The Company follows APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Since the exercise price of options granted is equal to the market value
of the stock on the grant date, no compensation cost is required. The Company
follows the disclosure requirements of SFAS 123, "Accounting for Stock-Based
Compensation", rather than the recognition provisions of SFAS 123, as allowed by
the statement. Further disclosures are presented in Note 15.
Advertising Costs
All advertising costs incurred by the Company are expensed in the period in
which they are incurred.
Start-up Costs
Start-up and organizational costs are expensed in the period in which they are
incurred.
Earnings per Share
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of this entity.
- 29 -
(2) RECENT ACCOUNTING PRONOUNCEMENTS
Business Combinations
In June 2001, the Financial Accounting Standards Board issued SFAS 141,
"Business Combinations," which replaces APB Opinion 16. SFAS 141 requires all
business combinations be accounted for by the purchase method and eliminates the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001.
While SFAS 141 will affect how future business combinations are accounted for
and disclosed in the financial statements, the issuance of the new guidance had
no effect on the Company's results of operations, financial position, or
liquidity during 2001.
Goodwill and Other Intangible Assets
In conjunction with the issuance of the new guidance for business combinations,
the Financial Accounting Standards Board also issued SFAS 142, "Goodwill and
Other Intangible Assets," which addresses the accounting and reporting for
acquired goodwill and other intangible assets and supercedes APB Opinion 17.
Under the provisions of SFAS 142, goodwill and certain other intangible assets
which do not possess finite useful lives, will no longer be amortized into net
income but rather will be tested at least annually for impairment based on
specific guidance provided in the Statement. Intangible assets determined to
have finite lives will continue to be amortized over their estimated useful
lives and also continue to be subject to impairment testing.
The provisions of SFAS 142 were adopted by the Company effective January 1,
2002. Application of the nonamortization provision of the Statement is expected
to reduce noninterest expense by approximately $607,000, resulting in an
increase in net income of approximately $413,000, in 2002 as compared to 2001.
SFAS 142 requires a transitional impairment test be applied to all goodwill and
other indefinite-lived intangible assets within the first half of 2002 and any
resulting impairment loss be reported as a change in accounting principle.
Management does not currently expect any impairment to result from such testing.
In general, application of the new provisions may result in more income
statement volatility due to the potential periodic recognition of impairment
losses, which are likely to vary in amount and regularity, for goodwill and
other indefinite-lived intangible assets, versus reducing those assets through
the recognition of recurring, consistent amortization amounts.
(3) SECURITIES
A summary of the securities portfolio presenting carrying amounts and gross
unrealized gains and losses as of December 31, 2001 and 2000 is as follows (in
thousands):
----------------------------------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
------------------------------------------ ---------------------------------------------
Gross Gross Gross Gross
Amortized unrealized unrealized Fair Amortized unrealized unrealized Fair
cost gains losses Value cost gains losses Value
------------------------------------------ ---------------------------------------------
Available-for-sale:
U S Treasury $ 3,045 3 - 3,048 29,987 45 (45) 29,987
U S Government agencies 151,911 295 (21) 152,185 61,937 57 (123) 61,871
Municipal securities 6,507 179 - 6,686 5,020 130 (8) 5,142
Corporate notes and other 26,691 599 (1,395) 25,895 30,208 31 (1,042) 29,197
Mortgage-backed securities 184,483 761 (3,819) 181,425 54,182 239 (147) 54,274
Federal Reserve/FHLB stock
and other equity securities 15,384 727 - 16,111 12,358 317 (41) 12,634
------------------------------------------ ---------------------------------------------
Total available-for-sale securities $ 388,021 2,564 (5,235) 385,350 193,692 819 (1,406) 193,105
----------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair value of securities as of December 31, 2001 and
2000, by contractual maturity, are shown in the following table. Contractual
maturities may differ from actual maturities as borrowers may have the right to
call or repay obligations with or without call or prepayment penalties.
Mortgage-backed securities are not included in the maturity categories in the
following maturity summary as actual maturities may differ from contractual
maturities because the underlying mortgages may be called or prepaid without any
penalties.
- 30 -
--------------------------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------------- -------------------------
(in thousands)
Available-for-sale securities:
Due in one year or less $ 139,245 139,591 58,515 58,392
Due in one to five years 32,971 32,979 51,159 51,116
Due in five to ten years 3,032 3,181 4,579 4,707
Due after ten years 12,906 12,063 12,899 11,982
Mortgage-backed securities 184,483 181,425 54,182 54,274
Federal Reserve/FHLB stock
and other equity securities 15,384 16,111 12,358 12,634
------------------------- -------------------------
Total available-for-sale securities $ 388,021 385,350 193,692 193,105
--------------------------------------------------------------------------------------------------------------------------
In 2001, 2000 and 1999, the Company had gross realized gains on sales of
available-for-sale securities of $524,000, $79,000 and $19,000, respectively.
During 2001, 2000 and 1999, gross realized losses on sales of available-for-sale
securities totaled $187,000, $119,000 and $14,000, respectively. Proceeds from
sales of available-for-sale securities during 2001, 2000 and 1999, were
$1,260,838,000, $675,458,000 and $15,166,000, respectively. At December 31, 2001
and 2000, securities having a carrying value of $115,981,000 and $116,774,000,
respectively, were pledged as collateral for public deposits, trust deposits and
securities sold under repurchase agreements.
(4) LOANS
A summary of the loan portfolio at December 31, 2001 and 2000 is as follows (in
thousands):
---------------------------------------------------------------------------
2001 2000
-------------------------
Core loans:
Commercial and commercial real estate $ 1,007,580 647,947
Home equity 261,049 179,168
Residential real estate 182,945 141,919
Installment and other 59,157 51,995
-------------------------
Total core loans 1,510,731 1,021,029
-------------------------
Niche loans:
Premium finance receivables 348,163 313,066
Indirect auto 184,209 203,571
Tricom finance receivables 18,280 20,354
-------------------------
Total niche loans 550,652 536,991
-------------------------
Total loans, net of unearned income $ 2,061,383 1,558,020
---------------------------------------------------------------------------
Residential real estate loans include mortgage loans held for sale totaling
$42.9 million and $10.4 million at December 31, 2001 and 2000, respectively. The
significant increase in mortgage loans held for sale in 2001 reflects heavy
origination volumes driven by the low interest rate environment and a strong
local housing market.
Certain real estate and home equity loans with balances totaling approximately
$312.8 million and $142.0 million, at December 31, 2001 and 2000, respectively,
were pledged as collateral to secure the availability of borrowings from certain
Federal agency banks. The majority of these pledged loans are included in a
blanket pledge of qualifying loans by four of the Banks to the Federal Home Loan
Bank (FHLB). The increase in pledged loans at December 31, 2001 compared to the
previous year end is due to the general increase in qualifying loans under those
blanket pledge agreements as well as only three of the Banks having entered into
such agreements at December 31, 2000. At December 31, 2001, the Banks borrowed
$90.0 million from the FHLB in connection with these collateral arrangements.
See Note 11 for a summary of these borrowings.
The Company's core loan portfolio is generally comprised of loans to consumers
and small to medium-sized businesses located within the geographic market areas
that the Banks serve. The niche premium finance and Tricom receivables
portfolios are made to customers on a national basis and the niche indirect auto
loans are generated through a network of local automobile dealers. As a result,
the Company strives to maintain a loan portfolio that is diverse in terms of
loan type, industry, borrower and geographic concentrations. Such
diversification reduces the exposure to economic downturns that may occur in
different segments of the economy or in different industries.
It is the policy of the Company to review each prospective credit in order to
determine the appropriateness and, when required, the adequacy of security or
collateral necessary to obtain in making a loan. The type of collateral, when
required, will vary in ranges from liquid assets to real estate. The Company
seeks to assure access to collateral, in the event of default, through adherence
to state lending laws and the Company's credit monitoring procedures.
- 31 -
Certain officers and directors of Wintrust and its subsidiaries and certain
corporations and individuals related to such persons borrowed funds from the
Banks. These loans were made at substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other borrowers. A rollforward of these loans during 2001 is
as follows (in thousands):
-----------------------------------------------------------
Balance at December 31, 2000 $ 30,499
New loans and advances 6,809
Maturities and paydowns (14,119)
------------
Balance at December 31, 2001 $ 23,189
-----------------------------------------------------------
(5) ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the activity in the allowance for possible loan losses for the
years ended December 31, 2001, 2000, and 1999 is as follows (in thousands):
----------------------------------------------------------------------
Year Ended December 31,
------------------------------
2001 2000 1999
------------------------------
Allowance at beginning of year $ 10,433 8,783 7,034
Provision 7,900 5,055 3,713
Acquired allowance for loan losses - - 175
Charge-offs (5,322) (3,756) (2,449)
Recoveries 675 351 310
------------------------------
Allowance at end of year $ 13,686 10,433 8,783
----------------------------------------------------------------------
A summary of non-accrual loans and their impact on interest income and impaired
loans and their impact on interest income is as follows (in thousands):
----------------------------------------------------------------------
Year Ended December 31,
------------------------------
2001 2000 1999
------------------------------
Total non-accrual loans
(as of year end) $ 8,967 4,329 4,338
Reduction of interest income
from non-performing loans 91 111 100
Average balance of impaired loans 503 1,212 1,295
Interest income recognized
on impaired loans 9 6 14
----------------------------------------------------------------------
Management evaluates the value of the impaired loans primarily by using the fair
value of the collateral. A summary of impaired loan information at December 31,
2001 and 2000 is as follows (in thousands):
----------------------------------------------------------------------
2001 2000
------------------
Impaired loans $ 641 770
Impaired loans that had allocated
specific allowance for possible loan losses 500 214
Allocated allowance for possible loan losses 347 214
----------------------------------------------------------------------
(6) MORTGAGE SERVICING RIGHTS
The outstanding principal balance of mortgage loans serviced for others totaled
$131.5 million at December 31, 2001, $97.2 million at December 31, 2000 and
$87.1 million at December 31, 1999. The following is a summary of the changes in
mortgage servicing rights for the years ended December 31, 2001, 2000 and 1999
(in thousands):
----------------------------------------------------------------------
Year Ended December 31,
------------------------------
2001 2000 1999
------------------------------
Balance at beginning of year $ 633 648 715
Servicing rights capitalized 775 146 214
Amortization of servicing rights (502) (161) (281)
Valuation allowance - - -
------------------------------
Balance at end of year $ 906 633 648
----------------------------------------------------------------------
At December 31, 2001, 2000 and 1999, the aggregate fair value of mortgage
servicing rights was $950,000, $895,000 and $793,000, respectively. Fair values
are determined by discounting anticipated future net cash flows from servicing
activities considering market consensus loan prepayment speeds, interest rates,
servicing costs and other economic factors.
(7) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at December 31, 2001 and 2000 is as follows
(in thousands):
------------------------------------------------------------------------
2001 2000
------------------------
Land $ 16,179 15,294
Buildings and leasehold improvements 64,497 57,015
Furniture, equipment and
computer software 28,597 24,210
Construction in progress 8,215 1,418
------------------------
117,488 97,937
Less: Accumulated depreciation
and amortization 21,495 15,530
------------------------
95,993 82,407
Equipment under leasing contracts,
net of accumulated depreciation 3,139 3,979
------------------------
Premises and equipment, net $ 99,132 86,386
------------------------------------------------------------------------
Equipment under leasing contracts represents the Company's investment in
equipment leased to others under operating lease agreements. The portfolio
consists of various types of equipment including medical, technological and
machine tools.
- 32 -
(8) TIME DEPOSITS
The scheduled maturities of time deposits at December 31, 2001 and 2000 are as
follows (in thousands):
-------------------------------------------------------------
2001 2000
-----------------------------
Due in one year $ 1,012,626 912,543
Due in one to two years 164,487 120,095
Due in two to three years 99,705 22,021
Due in three to four years 15,544 13,196
Due after four years 12,750 9,275
-----------------------------
Total time deposits $ 1,305,112 1,077,130
-------------------------------------------------------------
Certificates of deposit in amounts of $100,000 or more approximated $659,136,000
and $564,747,000 at December 31, 2001 and 2000, respectively.
(9) SHORT-TERM BORROWINGS
At December 31, 2001, short-term borrowings totaled $28,074,000 and were
comprised of $16,274,000 of securities sold under repurchase agreements and
$11,800,000 of federal funds purchased. At December 31, 2000, short-term
borrowings totaled $43,639,000 and were comprised entirely of securities sold
under repurchase agreements. As of December 31, 2001 and 2000, the weighted
average borrowing rate was 1.73% and 4.35%, respectively.
(10) NOTES PAYABLE
A summary of the outstanding balances of notes payable at December 31, 2001 and
2000 is as follows (in thousands):
-----------------------------------------------------------
2001 2000
-----------------------
Maturity less than one year $ 21,575 27,575
Maturity greater than one year 25,000 -
-----------------------
Total notes payable $ 46,575 27,575
-----------------------------------------------------------
The notes payable balances represent the outstanding balances on a revolving
loan agreement ("Agreement") with an unaffiliated bank. At December 31, 2001,
the total amount of the Agreement is $70 million, comprised of a $45 million
revolving note that matures on December 31, 2002 and a $25 million revolving
note that matures on February 27, 2006. Interest is calculated at a floating
rate equal to, at the Company's option, either the lender's prime rate or LIBOR
plus 125 basis points. The Agreement is secured by the stock of all Banks and
contains several restrictive covenants, including the maintenance of various
capital adequacy levels, asset quality and profitability ratios, and certain
restrictions on dividends and other indebtedness. The Agreement may be utilized,
as needed, to provide capital to fund continued growth at the company's existing
Banks, expand its asset management business, fund possible acquisitions of
financial institutions or other finance related companies, purchase treasury
stock or for other general corporate matters.
(11) FEDERAL HOME LOAN BANK ADVANCES
A summary of the outstanding balances of Federal Home Loan Bank ("FHLB")
advances is as follows (in thousands):
-----------------------------------------------------------
2001 2000
---------------------
4.60% advance due July 2011 $ 30,000 -
3.95% advance due November 2011 35,000 -
3.30% advance due November 2011 25,000 -
---------------------
Federal Home Loan Bank advances $ 90,000 -
-----------------------------------------------------------
The FHLB advances bear fixed rates with varying one-time call dates ranging from
July 2004 to November 2006. The Company has an arrangement with the FHLB whereby
based on available collateral (residential mortgages), the Company could have
borrowed an additional $32.6 million at December 31, 2001.
(12) LONG-TERM DEBT - TRUST PREFERRED SECURITIES
The Company issued $51,050,000 of Trust Preferred Securities through two
separate issuances by Wintrust Capital Trust I and Wintrust Capital Trust II
("Trusts"). The Trusts issued $1,579,000 of common securities, all of which are
owned by the Company. The Trust Preferred Securities represent preferred
undivided beneficial interests in the assets of the Trusts. The Trusts invested
the proceeds from the issuances of the Trust Preferred Securities and the common
securities in Subordinated Debentures ("Debentures"), with the same maturities
and fixed interest rates as the Trust Preferred Securities, issued by the
Company. The debentures are the sole assets of the Trusts and are eliminated,
along with the related income statement effects, in the consolidated financial
statements.
A summary of the Company's trust preferred securities at December 31, 2001 and
2000, is as follows (in thousands):
----------------------------------------------------------------
2001 2000
------------------------
9.00% trust preferred securities of
Wintrust Capital Trust I, due
September 30, 2028 $ 31,050 31,050
10.50% trust preferred securities of
Wintrust Capital Trust II, due
June 30, 2030 20,000 20,000
------------------------
Total trust preferred securities $ 51,050 51,050
----------------------------------------------------------------
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 Trusts. The Company and the Trusts believe that,
taken together, the obligations of the Com-
- 33 -
pany under the guarantees, the subordinated 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 Trusts
under the Trust Preferred Securities. 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. The Debentures of the Trusts are redeemable in whole or in part
prior to maturity, at the discretion of the Company if certai conditions are
met, and only after the Company has obtained Federal Reserve approval, if then
required under applicable guidelines or regulations. The early redemption dates
are on or after September 30, 2003 for Wintrust Capital Trust I and June 30,
2005 for Wintrust Capital Trust II.
The Trust Preferred Securities, subject to certain limitations, qualify as Tier
1 capital of the Company for regulatory purposes. Interest expense on the Trust
Preferred Securities is deductible for tax purposes.
(13) MINIMUM LEASE COMMITMENTS
The Company occupies certain facilities under operating lease agreements. Gross
rental expense related to the Company's premises was $1,050,000, $1,129,000 and
$1,106,000 in 2001, 2000 and 1999, respectively. The Company also leases certain
owned premises and receives rental income from such agreements. Gross rental
income related to the Company's buildings totaled $502,000, $486,000 and
$415,000, in 2001, 2000 and 1999, respectively. In 2001, 2000 and 1999, the
Company also recorded equipment lease income of approximately $1,567,000,
$1,263,000 and $397,000, respectively. Future minimum gross rental payments for
office space, future minimum gross rental income, and future minimum equipment
lease income as of December 31, 2001 for all noncancelable leases are as follows
(in thousands):
------------------------------------------------------------
FUTURE FUTURE FUTURE
MINIMUM MINIMUM MINIMUM
GROSS GROSS EQUIPMENT
RENTAL RENTAL LEASE
PAYMENTS INCOME INCOME
------------------------------
2002 $ 828 400 1,172
2003 676 346 813
2004 458 195 587
2005 275 87 256
2006 106 80 16
2007 and thereafter 75 182 -
------------------------------
Total minimum future amounts $ 2,418 1,290 2,844
------------------------------------------------------------
(14) INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2001, 2000 and
1999 is summarized as follows (in thousands):
----------------------------------------------------------------------
Year Ended December 31,
-------------------------------
2001 2000 1999
-------------------------------
Current income taxes:
Federal $ 8,492 4,509 5,571
State 153 187 -
-------------------------------
Total current income taxes 8,645 4,696 5,571
-------------------------------
Deferred income taxes:
Federal 1,348 847 (1,240)
State 443 (250) 393
-------------------------------
Total deferred income taxes 1,791 597 (847)
-------------------------------
Total income tax expense $ 10,436 5,293 4,724
----------------------------------------------------------------------
The exercise of certain stock options produced tax benefits of $312,000 in 2001,
$151,000 in 2000 and $90,000 in 1999 which were recorded directly to
shareholders' equity.
A reconciliation of the differences between taxes computed using the statutory
Federal income tax rate of 35% and actual income tax expense is as follows (in
thousands):
---------------------------------------------------------------------
Year Ended December 31,
-------------------------------
2001 2000 1999
-------------------------------
Computed "expected" income
tax expense $ 10,195 5,757 4,953
Increase (decrease) in tax
resulting from:
Tax-exempt interest,
net of interest
expense disallowance (469) (295) (179)
State taxes, net of
federal tax benefit 388 (40) 255
Decrease in valuation
allowance for deferred
tax assets - (346) (460)
Other, net 322 217 155
-------------------------------
Income tax expense $ 10,436 5,293 4,724
---------------------------------------------------------------------
- 34 -
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 2001 and 2000 are as
follows (in thousands):
----------------------------------------------------------------
2001 2000
-------------------
Deferred tax assets:
Allowance for possible loan losses $ 5,310 4,065
Net unrealized losses on securities 930 224
Net unrealized losses on derivatives 303 -
Federal net operating loss carryforward 4,091 4,653
State net operating loss carryforward 440 563
Deferred compensation 621 392
Other 292 -
-------------------
Total gross deferred tax assets 11,987 9,897
-------------------
Deferred tax liabilities:
Premises and equipment 2,067 26
Deferred loan fees 1,119 1,076
Capitalized servicing rights 780 251
Other 505 246
-------------------
Total gross deferred tax liabilities 4,471 1,599
-------------------
Net deferred tax assets $ 7,516 8,298
----------------------------------------------------------------
At December 31, 2001, Wintrust and its subsidiaries had Federal net operating
losses of approximately $11.7 million and state net operating losses of
approximately $9.3 million. Such amounts are available for carryforward to
offset future taxable income and expire in 2003 - 2010. Utilization of the net
operating losses are subject to certain statutory limitations.
Management believes that it is more likely than not that the recorded net
deferred tax assets will be fully realized and therefore no valuation allowance
is necessary. The basis for the conclusion that it is more likely than not that
the deferred tax assets will be realized is based on the Company's historical
earnings trend, its current level of earnings and prospects for continued growth
and profitability.
(15) EMPLOYEE BENEFIT AND STOCK PLANS
The Wintrust Financial Corporation 1997 Stock Incentive Plan ("the Plan")
provides options to purchase shares of Wintrust's common stock at the fair
market value of the stock on the date the option was granted. The Plan permits
the grant of incentive stock options, nonqualified stock options, rights and
restricted stock. The Plan covers substantially all employees of Wintrust.
A total of 3,581,038 shares of Common Stock may be granted under the Plan. The
incentive and nonqualified options expire at such time as the Compensation
Committee shall determine at the time of grant, however, in no case shall they
be exercisable later than ten years after the grant.
A summary of the aggregate activity of the Plan for 2001, 2000 and 1999 is as
follows:
------------------------------------------------------------------
Weighted
Common Range of Average
Shares Strike Prices Strike Price
-------------------------------------------
Outstanding at
December 31, 1998 2,287,476 $ 3 87 - 14.50 $ 8.33
Granted 391,754 11.13 - 13.37 11.59
Exercised 47,900 5.17 - 9.69 6.53
Forfeited or canceled 62,687 7.18 - 12.83 11.82
-------------------------------------------
Outstanding at
December 31, 1999 2,568,643 3.87 - 14.50 8.77
Granted 206,550 9.21 - 11.92 10.33
Exercised 115,394 3.87 - 9.69 6.30
Forfeited or canceled 149,853 5.17 - 14.50 12.18
-------------------------------------------
Outstanding at
December 31, 2000 2,509,946 3.87 - 14.50 8.81
Granted 279,675 12.63 - 20.65 13.78
Exercised 105,774 5.17 - 12.92 9.30
Forfeited or canceled 46,626 5.17 - 12.92 11.31
-------------------------------------------
Outstanding at
December 31, 2001 2,637,221 $ 3.87 - 20.65 $ 9.26
----------------------------------------------------------------
At December 31, 2001, 2000 and 1999, the weighted-average remaining contractual
life of outstanding options was 5.0 years, 5.6 years and 6.2 years,
respectively. Additionally, at December 31, 2001, 2000 and 1999, the number of
options exercisable was 1,935,569, 1,835,887 and 1,778,545, respectively, and
the weighted-average per share exercise price of those options was $8.16, $7.85
and $7.49, respectively. Expiration dates for options outstanding at December
31, 2001 range from April 30, 2002 to November 26, 2011.
- 35 -
The following table presents certain information about the outstanding options
and the currently exercisable options as of December 31, 2001:
-----------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS CURRENTLY EXERCISABLE
------------------------------------------------------- -------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE REMAINING NUMBER EXERCISE
PRICES OF SHARES PRICE TERM OF SHARES PRICE
------------------------------------------------------- -------------------------------
$ 3.87 - 5.17 561,767 $ 4.59 1.25 years 561,767 $ 4.59
5.53 - 8.28 433,729 6.86 3.15 years 433,729 6.86
8.29 - 10.17 387,633 9.39 4.87 years 335,959 9.37
10.25 - 11.52 384,769 11.08 7.93 years 249,754 11.27
11.58 - 11.96 82,038 11.74 7.52 years 36,678 11.75
12.00 - 12.00 451,210 12.00 5.94 years 279,702 12.00
12.29 - 20.65 336,075 13.64 8.81 years 37,980 12.93
------------------------------------------------------- -------------------------------
$ 3.87 - 20.65 2,637,221 $ 9.26 5.03 years 1,935,569 $ 8.16
-----------------------------------------------------------------------------------------
The Company applies APB No. 25, and related Interpretations, in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized for
its stock option plan. For purposes of providing the pro forma disclosures
required under SFAS 123, the fair value of each option grant was estimated using
the Black-Scholes option-pricing model. This model is sensitive to changes in
the subjective assumptions, which can materially affect the fair value
estimates. As a result, the pro forma amounts indicated below may not be
representative of the effects on reported net income for future years.
The following weighted average assumptions were used in the option pricing model
for options granted in each of the last three years: a dividend yield of 0.6%,
0.7% and 0.6% for 2001, 2000 and 1999, respectively; an expected volatility of
25.7%, 25.6% and 27.5% for 2001, 2000 and 1999, respectively; a risk free rate
of return of 4.9%, 6.2% and 5.6% for 2001, 2000 and 1999, respectively; and an
expected life of 6.8 years, 7.3 years and 7.2 years, respectively. The per share
weighted average fair value of stock options granted during 2001, 2000 and 1999
was $4.91, $4.05 and $4.65, respectively.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the date of grant for awards under the stock option plan
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
--------------------------------------------------------------------
Year Ended December 31,
----------------------------
2001 2000 1999
----------------------------
Net income
As reported $ 18,439 11,155 9,427
Pro forma 17,742 10,453 8,082
Earnings per share - Basic
As reported $ 1.34 0.85 0.76
Pro forma 1.29 0.80 0.65
Earnings per share - Diluted
As reported $ 1.27 0.83 0.73
Pro forma 1.22 0.78 0.63
--------------------------------------------------------------------
Wintrust and its subsidiaries also provide 401(k) Retirement Savings Plans
("401(k) Plans"). The 401(k) Plans cover all employees meeting certain
eligibility requirements. Contributions by employees are made through salary
reductions at their direction, limited to $11,000 in 2001, $10,500 in 2000 and
$10,000 in 1999. Employer contributions to the 401(k) Plans are made at the
employer's discretion. Generally, participants completing 501 hours of service
are eligible to share in an allocation of employer contributions. The Company's
expense for the employer contributions to the 401(k) Plans was approximately
$246,000, $151,000 and $57,000 in 2001, 2000 and 1999, respectively.
The Wintrust Financial Corporation Employee Stock Purchase Plan ("SPP") is
designed to encourage greater stock ownership among employees, thereby enhancing
employee commitment to the Company. The SPP gives eligible employees the right
to accumulate funds over an offering period to purchase shares of Common Stock.
- 36 -
The Company has reserved 375,000 shares of its authorized Common Stock for the
SPP. All shares offered under the SPP will be either newly issued shares of the
Company or shares issued from treasury, if any. In accordance with the SPP, the
purchase price of the shares of Common Stock may not be lower than the lessor of
85% of the fair market value per share of the Common Stock on the first day of
the offering period or 85% of the fair market value per share of the Common
Stock on the last date for the offering period. The Company's Board of Directors
authorized a purchase price calculation at 90% of fair market value for each of
the offering periods. During 2001, 2000 and 1999, a total of 14,454 shares,
13,441 shares and 12,523 shares, respectively, were issued to participant
accounts and approximately $98,000, $23,000 and $19,000, respectively, was
recognized as compensation expense. The seventh offering period concludes on
March 31, 2002. The Company plans to continue to periodically offer Common Stock
through this SPP subsequent to March 31, 2002.
The Company does not currently offer other postretirement benefits such as
health care or other pension plans.
(16) REGULATORY MATTERS
Banking laws place restrictions upon the amount of dividends which can be paid
to Wintrust by the Banks. Based on these laws, the Banks could, subject to
minimum capital requirements, declare dividends to Wintrust without obtaining
regulatory approval in an amount not exceeding (a) undivided profits, and (b)
the amount of net income reduced by dividends paid for the current and prior two
years. During 2001 and 2000, cash dividends totaling $13.5 million and $16.0
million, respectively, were paid to Wintrust by the Banks. No cash dividends
were paid to Wintrust by the Banks for the year ended December 31, 1999. As of
January 1, 2002, the Banks had approximately $10.1 million available to be paid
as dividends to Wintrust, subject to certain capital limitations.
The Banks are also required by the Federal Reserve Act to maintain reserves
against deposits. Reserves are held either in the form of vault cash or balances
maintained with the Federal Reserve Bank and are based on the average daily
deposit balances and statutory reserve ratios prescribed by the type of deposit
account. At December 31, 2001 and 2000, reserve balances of approximately $4.9
million and $12.5 million, respectively, were required.
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Banks must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and the Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier 1 leverage capital
(as defined) to average quarterly assets (as defined). Management believes, as
of December 31, 2001 and 2000, that the Company and the Banks met all minimum
capital adequacy requirements.
As of December 31, 2001, the most recent notification from the Banks' primary
federal regulators, the Banks were categorized as well capitalized under the
regulatory framework for prompt corrective action. The ratios required for the
Banks to be "well capitalized" by regulatory definition are 10.0%, 6.0%, and
5.0% for the Total Capital-to-Risk Weighted Assets, Tier 1 Capital-to-Risk
Weighted Assets and Tier 1 Leverage Capital-to-Average Quarterly Assets,
respectively. To be categorized as adequately capitalized, the Banks must
maintain minimum ratios as set forth in the following table. There are no
conditions or events since the most recent notification that management believes
would materially affect the Banks' regulatory capital categories.
- 37 -
The Company's and the Banks' actual capital amounts and ratios as of December
31, 2001 and 2000 are presented in the following table (dollars in thousands):
-------------------------------------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000
---------------------------------------------- -------------------------------------------------
To Be Adequately To Be Adequately
Capitalized by Capitalized by
Actual Regulatory Definition Actual Regulatory Definition
---------------------------------------------- -------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------- -------------------------------------------------
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $ 198,991 8.5% $188,056 8.0% $ 153,354 8.4% $145,482 8.0%
Lake Forest 60,219 10.1 47,720 8.0 43,889 9.1 38,725 8.0
Hinsdale 45,374 10.7 33,896 8.0 31,089 9.8 25,449 8.0
North Shore 46,201 10.1 36,743 8.0 34,594 9.3 29,747 8.0
Libertyville 30,732 10.2 24,166 8.0 24,288 10.3 18,813 8.0
Barrington 27,756 10.2 21,732 8.0 20,679 10.5 15,832 8.0
Crystal Lake 16,936 11.5 11,828 8.0 11,666 11.3 8,248 8.0
Northbrook 8,339 13.8 4,826 8.0 * * * *
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $ 181,967 7.7% $ 94,028 4.0% $ 126,085 6.9% $ 72,741 4 0%
Lake Forest 56,921 9.5 23,860 4.0 41,052 8.5 19,362 4.0
Hinsdale 42,608 10.1 16,548 4.0 29,017 9.1 12,724 4.0
North Shore 43,470 9.5 18,371 4.0 32,415 8.7 14,873 4.0
Libertyville 28,596 9.5 12,083 4.0 22,674 9.6 9,406 4.0
Barrington 26,188 9.6 10,866 4.0 19,583 9.9 7,916 4.0
Crystal Lake 16,130 10.9 5,914 4.0 11,031 10.7 4,124 4.0
Northbrook 7,959 13.2 2,413 4.0 * * * *
TIER 1 LEVERAGE CAPITAL (TO AVERAGE QUARTERLY ASSETS):
Consolidated $ 181,967 7.1% $102,589 4.0% $ 126,085 6.3% $ 80,164 4.0%
Lake Forest 56,921 7.8 29,110 4.0 41,052 6.6 25,038 4.0
Hinsdale 42,608 9.1 18,751 4.0 29,017 7.9 14,681 4.0
North Shore 43,470 8.1 21,573 4.0 32,415 7.3 17,693 4.0
Libertyville 28,596 8.2 14,043 4.0 22,674 8.0 11,314 4.0
Barrington 26,188 8.8 11,916 4.0 19,583 8.4 9,321 4.0
Crystal Lake 16,130 9.2 7,002 4.0 11,031 9.1 4,858 4.0
Northbrook 7,959 10.9 2,913 4.0 * * * *
-------------------------------------------------------------------------------------------------------------------
* Northbrook Bank, which opened opened in November 2000, was "well
capitalized" in all categories at December 31, 2000; however, its capital
ratios at December 31, 2000 were not meaningful.
(17) COMMITMENTS AND CONTINGENCIES
The Company has outstanding, at any time, a number of commitments to extend
credit to its customers. These commitments include revolving home line and other
credit agreements, term loan commitments and standby letters of credit. These
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the Consolidated Statements of
Condition. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments. Commitments to extend
credit at December 31, 2001 and 2000 were $683.5 million and $511.2 million,
respectively. Standby and commercial letters of credit amounts were $25.9
million and $27.5 million at December 31, 2001 and 2000, respectively.
In connection with the sale of premium finance receivables, the Company
continues to service the receivables and maintains a recourse obligation to the
purchasers should the underlying borrowers default on their obligations. The
estimated recourse obligation is taken into account in recording the sale,
effectively reducing the gain recognized. As of December 31, 2001 and 2000,
outstanding premium finance receivables sold to and serviced for third parties
for which the Company has a recourse obligation were $107.8 million and $94.6
million, respectively.
- 38 -
In the ordinary course of business, there are legal proceedings pending against
the Company and its subsidiaries. Management considers that the aggregate
liabilities, if any, resulting from such actions would not have a material
adverse effect on the financial position of the Company.
(18) DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into certain derivative financial instruments as part of its
strategy to manage its exposure to market risk. Market risk is the possibility
that, due to changes in interest rates or other economic conditions, the
Company's net interest income will be adversely affected. The derivative
financial instruments that are currently being utilized by the Company to manage
this risk include interest rate cap and interest rate swap contracts. The
amounts potentially subject to market and credit risks are the streams of
interest payments under the contracts and not the notional principal amounts
used to express the volume of the transactions.
As of January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138
(collectively referred to as SFAS 133).
As a result of the adoption of SFAS 133, the Company recognizes all derivative
financial instruments, such as interest rate cap and interest rate swap
agreements, in the Consolidated Financial Statements at fair value regardless of
the purpose or intent for holding the instrument. Derivatives are included in
other assets or other liabilities, as appropriate, on the Consolidated Statement
of Condition. Changes in the fair value of derivative financial instruments are
either recognized periodically in income or in shareholders' equity as a
component of comprehensive income depending on whether the derivative financial
instrument qualifies for hedge accounting, and if so, whether it qualifies as a
fair value hedge or cash flow hedge. Generally, changes in fair values of
derivatives accounted for as fair value hedges are recorded in income along with
the portions of the changes in the fair values of the hedged items that relate
to the hedged risk(s). Changes in fair values of derivatives accounted for as
cash flow hedges, to the extent they are effective hedges, are recorded in other
comprehensive income net of deferred taxes. Changes in fair values of
derivatives not qualifying as hedges are reported in income.
Derivatives owned by the Company on January 1, 2001, were not designated as
hedges in accordance with SFAS 133. As a result, the effect of recording the
derivatives at fair value upon adoption resulted in a charge of $254,000 (net of
tax) in the Consolidated Statement of Income to reflect the cumulative effect of
a change in accounting principle.
At December 31, 2001, the Company had $255 million of notional principal amounts
of interest rate caps with maturities ranging from March 2002 to February 2003.
These contracts were purchased to mitigate the effect of rising rates on certain
floating rate deposit products and provide for the receipt of payments when the
91-day Treasury bill rate exceeds the predetermined strike rates that range from
3.75% to 6.50%. The payment amounts, if any, are determined and received on a
monthly basis and are recorded as an adjustment to net interest income.
At December 31, 2001, the Company had $25 million notional principal amount of
interest rate swap agreements maturing in February 2004. This contract
effectively converts a portion of the Company's floating-rate notes payable to a
fixed-rate basis, thus reducing the impact of interest rate changes on future
interest expense.
The following table presents a summary of derivative instruments owned as of
December 31, 2001 and whether the changes in fair values are accounted for in
the income statement (IS) or as other comprehensive income (OCI):
---------------------------------------------------------------
Accounting Fair Value
Notional for change in at year
Contract Amount fair value end
---------------------------------------------------------------
Interest rate caps $ 185,000,000 IS $ -
Interest rate caps 70,000,000 OCI 54,000
Interest rate swap 25,000,000 OCI (681,000)
---------------------------------------------------------------
The estimated amount of the existing losses on derivatives at December 31, 2001
that is expected to be reclassified into earnings within the next twelve months
is approximately $675,000.
Please see Note 19 - Fair Value of Financial Instruments, and Note 20 -
Shareholders' Equity, for additional information related to the market values
and recording of changes in the market values of interest rate cap and swap
agreements.
Periodically, the Company will sell options to a bank or dealer for the right to
purchase certain securities held within the Banks' investment portfolios. These
covered call option transactions are designed primarily to increase the total
return associated with holding these securities as earning assets. The option
premium income generated by these transactions is recognized as other
non-interest income. There were no call options outstanding as of December 31,
2001 or 2000.
- 39 -
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments," defines the
fair value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties. The following
table presents the carrying amounts and estimated fair values of the Company's
financial instruments at December 31, 2001 and 2000 (in thousands):
---------------------------------------------------------------------------------------------------------
At December 31, 2001 At December 31, 2000
--------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------- --------------------------
Financial Assets:
Cash and demand balances from banks $ 71,575 $ 71,575 $ 65,413 $ 65,413
Fed funds sold and securities purchased
under resale agreements 51,955 51,955 164,641 164,641
Interest bearing deposits with other banks 692 692 182 182
Available-for-sale securities 385,350 385,350 193,105 193,105
Loans, net of unearned income 2,061,383 2,079,408 1,558,020 1,547,571
Accrued interest receivable 10,702 10,702 10,850 10,850
Financial Liabilities:
Non-maturity deposits 1,009,524 1,009,524 749,448 749,448
Deposits with stated maturities 1,305,112 1,318,137 1,077,128 1,080,224
Short-term borrowings 28,074 28,074 43,639 43,639
Notes payable 46,575 46,575 27,575 27,575
Federal Home Loan Bank advances 90,000 88,819 -- --
Long-term debt - trust preferred securities 51,050 54,122 51,050 48,166
Accrued interest payable 3,999 3,999 4,360 4,360
Off-balance sheet derivative contracts:
Interest rate cap agreements 54 54 472 57
Interest rate swap contracts (681) (681) -- --
---------------------------------------------------------------------------------------------------------
Cash, demand balances from banks, Federal funds sold and securities purchased
under resale agreements: The carrying value of cash, demand balances from banks,
Federal funds sold and securities purchased under resale agreements approximates
fair value due to the short maturity of those instruments. Securities purchased
under resale agreements are short-term and have a fixed sales price equal to the
carrying amount.
Interest bearing deposits with banks and securities: Fair values of these
instruments are based on quoted market prices, when available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable assets.
Loans: Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are analyzed by type such as commercial, residential real
estate, etc. Each category is further segmented into fixed and variable interest
rate terms.
For variable-rate loans that reprice frequently, estimated fair values are based
on carrying values. The fair value of residential loans is based on secondary
market sources for securities backed by similar loans, adjusted for differences
in loan characteristics. The fair value for other loans is estimated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect credit and interest rate inherent in the
loan.
Accrued interest receivable and accrued interest payable: The carrying value of
accrued interest receivable and accrued interest payable approximates market
value due to the relatively short period of time to expected realization.
Deposit liabilities: The fair value of deposits with no stated maturity, such as
non-interest bearing deposits, savings, NOW accounts and money market accounts,
is equal to the amount payable on demand as of year-end (i.e. the carrying
value). The fair value of certificates of deposit is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently in effect for deposits of similar remaining maturities.
Short-term borrowings: The carrying value of short-term borrowings approximates
fair value due to the relatively short period of time to maturity or repricing.
- 40 -
Notes payable: The carrying value of notes payable approximates fair value due
to the relatively short period of time to repricing of variable interest rates.
Federal Home Loan Bank advances: The fair value of Federal Home Loan Bank
advances are determined using a discounted cash flow analysis based on current
market rates of similar maturity debt securities to discount cash flows.
Long-term debt: The fair value of long-term debt, which consists entirely of
Trust Preferred Securities, are determined based on the quoted market prices as
of the last business day of the year.
Interest rate cap and swap agreements: The fair value is based on quoted market
prices as of the last business day of the year.
Commitments to extend credit and standby letters of credit: The fair value of
commitments to extend credit is based on fees currently charged to enter into
similar arrangements, the remaining term of the agreement, the present
creditworthiness of the counterparty, and the difference between current
interest rates and committed interest rates on the commitments. The majority of
the Company's commitments contain variable interest rates; thus, the carrying
value approximates fair value.
The fair value of letters of credit is based on fees currently charged for
similar arrangements. The fair value of such commitments is not material and is
not shown here.
The above fair value estimates were made at a point in time based on relevant
market information and other assumptions about the financial instruments. As no
active market exists for a significant portion of the Company's financial
instruments, fair value estimates were based on judgments regarding current
economic conditions, future expected cash flows and loss experience, risk
characteristics and other factors. These estimates are subjective in nature and
involve uncertainties and therefore cannot be calculated with precision. Changes
in these assumptions could significantly affect these estimates. In addition,
the fair value estimates only reflect existing on and off-balance sheet
financial instruments and do not attempt to assess the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the value of depositor relationships,
premises and equipment, intangible assets and the Company's trust and asset
management busines have not been considered.
(20) SHAREHOLDERS' EQUITY
A summary of the Company's common and preferred stock at December 31, 2001 and
2000, is as follows:
-----------------------------------------------------------------------
2001 2000
-------------------------------
Common Stock:
Shares authorized 30,000,000 30,000,000
Shares issued 14,531,665 13,285,042
Shares outstanding 14,531,665 12,921,592
Cash dividend per share $0.093 $0.067
Preferred Stock:
Shares authorized 20,000,000 20,000,000
Shares issued - -
Shares outstanding - -
-----------------------------------------------------------------------
The Company reserves shares of its authorized common stock specifically for its
Stock Incentive Plan and its Employee Stock Purchase Plan. The reserved shares,
and these plans, are detailed in Note 15 - Employee Benefit and Stock Plans.
The Company has designated 100,000 shares of its preferred stock as Junior
Serial Preferred Stock A. These shares were designated in connection with the
adoption of a Shareholder Rights Plan in 1998, and are reserved for issuance in
the event the Rights become exercisable under the plan. The Rights could be
triggered in certain circumstances related to a person or group acquiring more
than 15% of the Company's stock or commencing a tender or exchange offer to
acquire 15% or more of the Company's stock without prior approval of the
Company's Board of Directors. The Rights are evidenced by the certificates
representing shares of Common Stock, are nondetachable and do not trade
separately. The Rights will expire in April 2008.
The Company has issued warrants to acquire common stock. The warrants entitle
the holders to purchase one share of the Company's common stock at purchase
prices ranging from $9.90 to $10.00 per share. Warrants outstanding at December
31, 2001 and 2000 were 232,054 and 233,149, respectively. Expiration dates on
the remaining outstanding warrants at December 31, 2001 range from December 2002
through November 2005.
In June 2001, the Company issued 1,488,750 additional shares of its common stock
through a public offering, realizing net proceeds of approximately $22.2
million. The shares issued included the reissuance of 363,450 treasury shares.
- 41 -
During the first quarter of 2000, the Company initiated a stock buyback program
authorizing the repurchase of up to 450,000 shares of its common stock. Through
September 30, 2000, the Company repurchased a total of 363,450 shares at an
average price of $10.63 per share. No additional repurchases were made
subsequent to September 30, 2000. As previously noted, the shares repurchased
pursuant to this buyback program were reissued with the Company's common stock
offering in June 2001.
At its January 2002 Board of Directors meeting, a semi-annual cash dividend of
$0.06 per share ($0.12 on an annualized basis) was declared payable on February
19, 2002 to shareholders of record as of February 5, 2002.
At the same meeting, a 3-for-2 stock split of the Company's common stock, to be
effected in the form of a 50% stock dividend, payable on March 14, 2002 to
shareholders of record as of March 4, 2002, was declared. All historical share
data and per share amounts in this report have been restated to reflect the
stock split.
The following table summarizes the components of other comprehensive income,
including the related income tax effects, for the years ending December 31,
2001, 2000 and 1999 (in thousands):
----------------------------------------------------------------------
2001 2000 1999
-------------------------
Unrealized net gains (losses) on
available-for-sale securites $ (1,747) 2,895 (3,460)
Related tax (expense) benefit 588 (1,013) 1,243
-------------------------
Net after tax unrealized gains (losses)
on available-for-sale securities (1,159) 1,882 (2,217)
-------------------------
Less: reclassification adjustment for
net gains (losses) realized in net
income during the year 337 (40) 5
Related tax (expense) benefit (118) 14 (2)
-------------------------
Net after tax reclassification adjustment 219 (26) 3
-------------------------
Net unrealized gains (losses) on
available-for-sale securities, net of
reclassification adjustment (1,378) 1,908 (2,220)
-------------------------
Net unrealized losses on derivatives
used as cash flow hedges (866) - -
Related tax benefit 303 - -
-------------------------
Net unrealized losses on derivatives
used as cash flow hedges (563) - -
-------------------------
Total other comprehensive income (loss) $ (1,941) 1,908 (2,220)
----------------------------------------------------------------------
A rollforward of the change in accumulated other comprehensive income for the
years ending December 31, 2001, 2000 and 1999 is as follows (in thousands):
----------------------------------------------------------------------
2001 2000 1999
-------------------------
Accumulated other comprehensive
loss at beginning of year $ (363) (2,271) (51)
Other comprehsive income (loss) (1,941) 1,908 (2,220)
-------------------------
Accumulated other comprehensive
loss at end of year $ (2,304) (363)(2,271)
----------------------------------------------------------------------
Accumulated other comprehensive income at December 31, 2001, 2000 and 1999 is
comprised of the following components (in thousands):
----------------------------------------------------------------------
2001 2000 1999
-------------------------
Accumulated unrealized losses
on securities available-for-sale $ (1,741) (363) (2,271)
Accumulated unrealized losses on
derivatives used as cash flow hedges (563) - -
-------------------------
Total accumulated other comprehensive
loss at end of year $ (2,304) (363) (2,271)
----------------------------------------------------------------------
(21) SEGMENT INFORMATION
The Company's operations consist of five primary segments: banking, premium
finance, indirect auto, Tricom and trust and asset management. Through its seven
bank subsidiaries located in several affluent suburban Chicago communities, the
Company provides traditional community banking products and services to
individuals and businesses such as accepting deposits, advancing loans,
administering ATMs, maintaining safe deposit boxes, and providing other related
services. The premium finance operations consist of financing the payment of
commercial insurance premiums, on a national basis, through FIFC. A significant
portion of the loans originated by FIFC are sold to the Banks and are retained
in each of their loan portfolios. The indirect auto segment is operated from one
of the Company's bank subsidiaries and is in the business of providing high
quality new and used auto loans through a network of auto dealerships within the
Chicago metropolitan area. All loans originated by this segment are currently
retained within the Banks' loan portfolios. The Tricom segment encompasses the
operations of the Company's non-bank subsidiary that provides short-term
accounts receivable financing and value-added out-sourced administrative
services, such as data processing of payrolls, billing and cash management
services, to temporary staffing service clients throughout the United States.
The operating segment information of Tricom is included in the following tables
since October 1, 1999, the effective date of the Company's acquisition of
Tricom. The trust and asset management segment is operated through WAMC, which
offers trust and investment management services at each of the
- 42 -
Banks. In addition to offering these services to existing customers of the
Banks, WAMC targets affluent individuals and small to mid-size businesses whose
needs command personalized attention by experienced trust and asset management
professionals.
Each of the five reportable segments are strategic business units that are
separately managed as they offer different products and services and have
different marketing strategies. In addition, each segment's customer base has
varying characteristics. The banking and indirect auto segments also have a
different regulatory environment than the premium finance, Tricom and trust and
asset management segments. While the Company's chief decision makers monitor
each of the seven bank subsidiaries' operations and profitability separately,
these subsidiaries have been aggregated into one reportable operating segment
due to the similarities in products and services, customer base, operations,
profitability measures, and economic characteristics.
The segment financial information provided in the following tables has been
derived from the internal profitability reporting system used by management and
the chief decision makers to monitor and manage the financial performance of the
Company. The accounting policies of the segments are generally the same as those
described in the Summary of Significant Accounting Policies in Note 1 to the
Consolidated Financial Statements. The Company evaluates segment performance
based on after-tax profit or loss and other appropriate profitability measures
common to each segment. Certain indirect expenses have been allocated based on
actual volume measurements and other criteria, as appropriate. Intersegment
revenue and transfers are generally accounted for at current market prices. The
Parent and Intersegment Eliminations reflects parent company information and
intersegment eliminations.
The following is a summary of certain operating information for reportable
segments (in thousands):
--------------------------------------------------------------------------------------------------------------------------------
PARENT &
PREMIUM INDIRECT INTERSEGMENT
BANKING FINANCE AUTO TRICOM TRUST ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------------------------
2001
NET INTEREST INCOME (EXPENSE) $ 69,937 26,911 6,796 3,936 755 (34,321) 74,014
PROVISION FOR LOAN LOSSES 7,023 3,611 928 88 - (3,750) 7,900
NONINTEREST INCOME 18,520 4,520 10 4,084 1,99 (332) 28,798
NONINTEREST EXPENSE (1) 49,059 10,288 2,203 5,813 3,42 (4,586) 66,198
INCOME TAX EXPENSE (BENEFIT) (1) 11,528 6,960 1,459 870 (257) (10,285) 10,275
------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 20,847 10,572 2,216 1,249 (413) (16,032) 18,439
------------------------------------------------------------------------------------------------
TOTAL ASSETS AT END OF PERIOD $ 2,674,121 375,221 189,912 28,121 5,588 (567,541) 2,705,422
--------------------------------------------------------------------------------------------------------------------------------
2000
Net interest income (expense) $ 57,220 14,824 6,489 3,640 508 (21,681) 61,000
Provision for loan losses 4,833 1,409 1,640 15 -- (2,842) 5,055
Noninterest income 8,627 3,831 2 4,476 1,971 (601) 18,306
Noninterest expense 38,198 12,952 2,205 5,358 3,156 (4,066) 57,803
Income tax expense (benefit) 8,045 1,705 1,050 1,113 (264) (6,356) 5,293
------------------------------------------------------------------------------------------------
Net income (loss) $ 14,771 2,589 1,596 1,630 (413) (9,018) 11,155
------------------------------------------------------------------------------------------------
Total assets at end of period $ 2,071,147 360,218 209,813 31,883 5,492 (575,747) 2,102,806
--------------------------------------------------------------------------------------------------------------------------------
1999
Net interest income (expense) $ 44,293 12,643 8,201 826 469 (18,698) 47,734
Provision for loan losses 3,774 263 1,665 10 -- (1,999) 3,713
Noninterest income 7,140 1,033 1 1,009 1,171 (546) 9,808
Noninterest expense 31,544 6,443 2,165 1,247 2,498 (4,219) 39,678
Income tax expense (benefit) 5,831 2,697 1,692 238 (299) (5,435) 4,724
------------------------------------------------------------------------------------------------
Net income (loss) $ 10,284 4,273 2,680 340 (559) (7,591) 9,427
------------------------------------------------------------------------------------------------
Total assets at end of period $ 1,676,983 260,323 266,040 29,213 2,578 (555,755) 1,679,382
--------------------------------------------------------------------------------------------------------------------------------
(1) Includes amounts reported as a cumulative effect of accounting changes
The premium finance and indirect auto segment information shown in the above
tables was derived from their internal profitability reports, which assumes that
all loans originated and sold to the banking segment are retained within the
segment that originated the loans. All related loan interest income, allocations
for interest expense, provisions for possible loan losses and allocations for
other expenses are included in the premium finance and indirect
- 43 -
auto segments. The banking segment information also includes all amounts related
to these loans, as these loans are retained within the Banks' loan portfolios.
Accordingly, the intersegment eliminations include adjustments necessary for
each category to agree with the related consolidated financial amounts. The
intersegment eliminations amount reflected in the Income Tax Expense (Benefit)
category also includes the recognition of income tax benefits from the
realization of previously unvalued tax loss benefits.
(22) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
---------------------------------------------------------------------------
CONDENSED BALANCE SHEETS
(in thousands):
December 31,
------------------------
2001 2000
------------------------
ASSETS
Cash $ 232 312
Other Investments 1,772 1,609
Loans 1,200 1,200
Investment in subsidiaries 233,637 176,501
Other assets 6,428 4,401
------------------------
Total assets $ 243,269 184,023
------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 2,787 1,543
Notes payable 46,575 27,575
Long-term debt - trust
preferred securities 52,629 52,629
Shareholders' equity 141,278 102,276
------------------------
Total liabilities and
shareholders' equity $ 243,269 184,023
---------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
(in thousands):
Year Ended December 31,
-----------------------------
2001 2000 1999
-----------------------------
INCOME
Dividends from subsidiaries $ 13,500 16,000 -
Other income 284 101 60
-----------------------------
Total income 13,784 16,101 60
-----------------------------
EXPENSES
Interest expense 7,082 5,297 3,187
Salaries and employee benefits 692 641 252
Amortization of goodwill and
organizational costs 104 104 212
Other expenses 1,723 1,382 945
-----------------------------
Total expenses 9,601 7,424 4,596
-----------------------------
Income (loss) before income taxes
and equity in undistributed net
income of subsidiaries 4,183 8,677 (4,536)
Income tax benefit (3,515) (2,841) (1,709)
-----------------------------
Income (loss) before equity in
undistributed net income
of subsidiaries 7,698 11,518 (2,827)
Equity in undistributed net
income (loss) of subsidiaries 10,741 (363) 12,254
-----------------------------
NET INCOME $ 18,439 11,155 9,427
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands):
Year Ended December 31,
-----------------------------
2001 2000 1999
-----------------------------
OPERATING ACTIVITIES:
Net income $ 18,439 11,155 9,427
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 398 338 365
Deferred income tax benefit (135) (337) (249)
Increase in other assets (2,971) (1,286) (237)
Increase in other liabilities 1,345 401 320
Equity in undistributed net
(income) loss of subsidiaries (10,741) 363 (12,254)
-----------------------------
Net cash provided by (used for)
operating activities 6,335 10,634 (2,628)
-----------------------------
INVESTING ACTIVITIES:
Capital contributions
to subsidiaries (48,150) (44,169) (14,300)
Other investing activity, net 231 (2,532) -
-----------------------------
Net cash used for
investing activities (47,919) (46,701) (14,300)
-----------------------------
FINANCING ACTIVITIES:
Increase in notes payable, net 19,000 19,225 8,350
Proceeds from long-term debt - 20,619 -
Common stock issuance, net 22,222 - 5,984
Common stock issued upon
exercise of stock options 1,296 878 403
Common stock issued through
employee stock purchase plan 254 126 148
Proceeds from conversion of
Common stock warrants 11 - -
Cash dividends paid (1,279) (875) -
Purchase of common stock - (3,863) -
-----------------------------
Net cash provided by
financing activities 41,504 36,110 14,885
-----------------------------
Net increase (decrease) in cash (80) 43 (2,043)
Cash at beginning of year 312 269 2,312
-----------------------------
Cash at end of year $ 232 312 269
-------------------------------------------------------------------------------
- 44 -
(23) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share for 2001, 2000 and 1999 (in thousands, except per share data):
----------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------
Net income (A) $ 18,439 11,155 9,427
---------------------------------------------
Average common shares outstanding (B) 13,734 13,066 12,373
Effect of dilutive common shares 811 345 464
---------------------------------------------
Weighted average common shares and
effect of dilutive common shares (C) 14,545 13,411 12,837
---------------------------------------------
Net income per
common share - Basic (A/B) $ 1.34 0.85 0.76
---------------------------------------------
Net income per
common share - Diluted (A/C) $ 1.27 0.83 0.73
----------------------------------------------------------------------------------------------------------------------------
The effect of dilutive common shares outstanding results from stock options,
stock warrants and shares to be issued under the SPP, all being treated as if
they had been either exercised or issued, and are computed by application of the
treasury stock method.
(24) QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
The following is a summary of quarterly financial information for the years
ended December 31, 2001 and 2000 (in thousands, except per share data):
-----------------------------------------------------------------------------------------------------------------------------
2001 Quarters 2000 Quarters
--------------------------------------- -----------------------------------------
First Second Third Fourth First Second Third Fourth
--------------------------------------- -----------------------------------------
Interest income $ 41,782 41,390 42,529 40,754 32,309 35,074 38,908 41,893
Interest expense 24,506 23,375 23,399 21,161 18,441 20,225 23,268 25,250
--------------------------------------- -----------------------------------------
Net interest income 17,276 18,015 19,130 19,593 13,868 14,849 15,640 16,643
Provision for possible loan losses 1,638 2,264 2,100 1,898 1,141 1,223 1,307 1,384
--------------------------------------- -----------------------------------------
Net interest income after provision
for possible loan losses 15,638 15,751 17,030 17,695 12,727 13,626 14,333 15,259
Non-interest income, excluding
net securities gains (losses) 6,564 7,305 7,158 7,434 4,275 4,532 4,562 4,977
Net securities gains (losses) 286 86 (57) 22 3 (28) (69) 54
Non-interest expense (1) 15,971 16,282 16,339 17,191 12,109 12,889 18,126 14,679
--------------------------------------- -----------------------------------------
Income before income taxes 6,517 6,860 7,792 7,960 4,896 5,241 700 5,611
Income tax expense (benefit) 2,359 2,497 2,784 2,796 1,774 1,922 (199) 1,796
Cumulative effect of a change in accounting
for derivatives, net of tax 254 - - - - - - -
--------------------------------------- -----------------------------------------
Net income $ 3,904 4,363 5,008 5,164 3,122 3,319 899 3,815
--------------------------------------- -----------------------------------------
Net income per common share:
Basic $ 0.30 0.34 0.34 0.36 0.24 0.25 0.07 0.29
Diluted $ 0.29 0.32 0.33 0.33 0.23 0.24 0.07 0.29
Cash dividends declared per common share $ 0.047 - 0.047 - 0.033 - 0.033 -
-----------------------------------------------------------------------------------------------------------------------------
(1) During the third quarter of 2000, the Company recorded a non-recurring $4.5
million pre-tax charge ($2.7 million after tax) related to a fraudulent
loan scheme perpetrated against its premium finance subsidiary. During the
fourth quarter of 2000, a partial recovery of $200,000 related to this
fraud was recorded as a reduction of the charge reported in the previous
quarter.
- 45 -
(25) SUBSEQUENT EVENTS
On February 20, 2002, Wintrust completed its previously announced acquisition of
Wayne Hummer Investments LLC (including its wholly-owned subsidiary, Focused
Investments LLC) and Wayne Hummer Management Company (collectively, the "Wayne
Hummer Companies"). Wayne Hummer Investments LLC is a registered broker/dealer
and investment services firm that provides a full range of private client and
brokerage services to clients located primarily in the Midwest. Wayne Hummer
Management Company is a registered investment adviser, providing services to
individual accounts as well as four proprietary mutual funds managed by the
firm.
Wintrust paid $28 million for the Wayne Hummer Companies, consisting of $8
million in cash, 762,742 shares of Wintrust's common stock (valued at $15
million) and $5 million of deferred cash payments. Wintrust could pay additional
contingent consideration upon the attainment of certain performance measures
over the next five years.
The acquisition of the Wayne Hummer Companies will augment and diversify
Wintrust's revenue stream by adding brokerage services to its fee based revenues
as well as offering traditional banking products to the customers of the Wayne
Hummer Companies, thereby providing a more comprehensive menu of financial
products and services to the customers of Wintrust and the Wayne Hummer
Companies.
- 46 -
REPORT OF INDEPENDENT AUDITORS
--------------------------------------------------------------------------------
The Board of Directors
Wintrust Financial Corporation
We have audited the accompanying consolidated statements of condition of
Wintrust Financial Corporation and subsidiaries (the "Company") as of December
31, 2001 and 2000, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
February 28, 2002
- 47 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion highlights the significant factors affecting the
operations and financial condition of Wintrust for the three years ended
December 31, 2001. This discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes thereto, and
Selected Financial Highlights appearing elsewhere within this report. This
discussion contains forward-looking statements concerning the Company's business
that are based on estimates and involve risks and uncertainties. Therefore,
future results could differ significantly from management's current expectations
and the related forward-looking statements. See the last section of this
discussion for further information regarding forward-looking statements.
On January 24, 2002, the Company's Board of Directors approved a 3-for-2 stock
split of the Company's common stock to be effected in the form of a 50% stock
dividend. The Board believes that the split will make Wintrust's stock more
readily available to a broader base of investors and therefore improve the
liquidity of the stock. All references to numbers of shares and per share
amounts included in this report have been restated to reflect the effect of the
stock split.
OPERATING SUMMARY
Wintrust's key measures of profitability and balance sheet growth continued to
show impressive improvement in 2001, as evidenced by the following table
(dollars in thousands, except per share data):
-------------------------------------------------------------------------
Year Ended December 31 Percent
---------------------------
2001 2000 Improvement
--------------------------------------
Net income $ 18,439 $ 13,761* 34.0%
Net income per common
share - Diluted $ 1 27 $ 1.03* 23.3%
Net revenues $ 102,812 $ 79,306 29 6%
Net interest income $ 74,014 $ 61,000 21 3%
Net interest margin 3.49% 3.66% -4.6%
Net overhead ratio 1.59% 1.90%* 16.3%
Return on average assets 0.79% 0.74%* 6.8%
Return on average equity 15.24% 14.20%* 7.3%
At end of period:
Total assets $ 2,705,422 $2,102,806 28.7%
Total loans $ 2,061,383 $1,558,020 32.3%
Total deposits $ 2,314,636 $1,826,576 26.7%
Book value per
common share $ 9.72 $ 7.92 22.7%
Market price per
common share $ 20.38 $ 10.63 91.7%
-------------------------------------------------------------------------
* Excludes non-recurring charge of $4.3 million ($2.6 million after tax)
reported in 2000 related to a fraudulent loan scheme perpetrated against
the Company's premium finance subsidiary.
Wintrust's net income increased 34.0% in 2001 compared to 2000, after increasing
46.0% in 2000 over 1999, excluding a non-recurring charge reported in 2000. On a
per share basis, net income per diluted common share increased 23.3% in 2001,
after increasing 41.1% in 2000. The lower growth rate in the earnings per share
in 2001, as compared to net income, was due to the issuance of approximately 1.5
million additional shares of common stock in June 2001.
Please refer to the Consolidated Results of Operations section later in this
discussion for further analysis of the Company's operations for the past three
years.
OVERVIEW AND STRATEGY
Wintrust's operating subsidiaries were organized within the last ten years, with
an average life of its seven subsidiary banks of approximately six years. The
Company has grown rapidly during the past few years and its Banks have been
among the fastest growing community-oriented de novo banking operations in
Illinois and the country. Because of the rapid growth, the historical financial
performance of the Company has been affected by costs associated with growing
market share, establishing new de novo banks, opening new branch facilities, and
building an experienced management team. The Company's financial performance
over the past several years generally reflects improving profitability of the
Banks, as they mature, offset by the costs of opening new banks and branch
facilities. The Company's experience has been that it generally takes 13-24
months for new banking offices to first achieve operational profitability.
While committed to a continuing growth strategy, management's ongoing focus is
also to balance further asset growth with earnings growth by seeking to more
fully leverage the existing capacity within each of the Banks, FIFC, WAMC and
Tricom. One aspect of this strategy is to continue to pursue specialized earning
asset niches in order to maintain the mix of earning assets in higher-yielding
loans as well as diversify the loan portfolio. Another aspect of this strategy
is a continued focus on less aggressive deposit pricing at the Banks with
significant market share and more established customer bases.
- 48 -
DE NOVO BANK FORMATION AND BRANCH OPENING ACTIVITY
The Company has developed its community banking franchise through the formation
of seven de novo banks as well as opening branch offices of the banks. As of
December 31, 2001, the Company had 29 banking facilities. One additional
full-service branch office was opened in January 2002, and construction of
several other offices are currently underway. The following table illustrates
the progression of bank and branch openings that have contributed to the
Company's growth and results of operations since inception.
-----------------------------------------------------------------------------------------------------------------------------
MONTH YEAR BANK LOCATION TYPE OF FACILITY
-----------------------------------------------------------------------------------------------------------------------------
January 2002 Hinsdale Bank Riverside, Illinois (7) Branch
December 2001 Northbrook Bank Northbrook, Illinois New permanent facility
September 2001 Barrington Bank Hoffman Estates (6) Branch
February 2001 Crystal Lake Bank McHenry, Illinois (5) Branch
November 2000 Northbrook Bank Northbrook, Illinois Bank (temporary facility)
July 2000 Libertyville Bank Wauconda, Illinois (4) Branch
May 2000 Libertyville Bank Wauconda, Illinois (4) Drive-up
February 2000 Lake Forest Bank Highwood, Illinois (3) Branch
October 1999 North Shore Bank Skokie, Illinois Branch
September 1999 Crystal Lake Bank Crystal Lake, Illinois Branch
June 1999 Lake Forest Bank Lake Forest, Illinois Bank/Corporate expansion
March 1999 Crystal Lake Bank Crystal Lake, Illinois Drive-up/walk-up
January 1999 Hinsdale Bank Western Springs, Illinois (2) New permanent facility
October 1998 Libertyville Bank Libertyville, Illinois Branch
September 1998 Crystal Lake Bank Crystal Lake, Illinois New permanent facility
May 1998 North Shore Bank Glencoe, Illinois Drive-up/walk-up
April 1998 North Shore Bank Wilmette, Illinois Walk-up
December 1997 Crystal Lake Bank Crystal Lake, Illinois Bank
November 1997 Hinsdale Bank Western Springs, Illinois (2) Branch
February 1997 Lake Forest Bank Lake Forest, Illinois Drive-up/walk-up
December 1996 Barrington Bank Barrington, Illinois Bank
August 1996 Hinsdale Bank Clarendon Hills, Illinois (1) Branch
May 1996 North Shore Bank Winnetka, Illinois Branch
November 1995 North Shore Bank Wilmette, Illinois Drive-up/walk-up
October 1995 Hinsdale Bank Hinsdale, Illinois Drive-up/walk-up
October 1995 Libertyville Bank Libertyville, Illinois Bank
October 1995 Libertyville Bank Libertyville, Illinois Drive-up/walk-up
October 1995 North Shore Bank Glencoe, Illinois Branch
May 1995 Lake Forest Bank West Lake Forest, Illinois Branch
December 1994 Lake Forest Bank Lake Bluff, Illinois Branch
September 1994 North Shore Bank Wilmette, Illinois Bank
April 1994 Lake Forest Bank Lake Forest, Illinois New permanent facilities
October 1993 Hinsdale Bank Hinsdale, Illinois Bank
April 1993 Lake Forest Bank Lake Forest, Illinois Drive-up/walk-up
December 1991 Lake Forest Bank Lake Forest, Illinois Bank
-----------------------------------------------------------------------------------------------------------------------------
(1) Operates in this location as Clarendon Hills Bank, a branch of Hinsdale Bank.
(2) Operates in this location as Community Bank of Western Springs, a branch of Hinsdale Bank.
(3) Operates in this location as Bank of Highwood-Fort Sheridan, a branch of Lake Forest Bank.
(4) Operates in this location as Wauconda Community Bank, a branch of Libertyville Bank.
(5) Operates in this location as McHenry Bank & Trust, a branch of Crystal Lake Bank.
(6) Operates in this location as Hoffman Estates Community Bank, a branch of Barrington Bank.
(7) Operates in this location as Riverside Bank, a branch of Hinsdale Bank.
--------------------------------------------------------------------------------
- 49 -
EARNING ASSET AND BUSINESS NICHES
As previously mentioned, the Company continues to pursue specialized earning
asset and business niches in order to maximize the Company's revenue stream as
well as diversify its loan portfolio. A summary of the Company's more
significant earning asset and business niches follows.
FIFC is the Company's most significant specialized earning asset niche and
originated approximately $1.3 billion in premium finance receivable volume
during 2001. The majority of these receivables are retained within the Banks'
loan portfolios. However, as a result of continued growth in origination volume
in 2001, FIFC sold approximately $245 million, or 19%, of the receivables
generated during the year to an unrelated third party. The Company began selling
the excess of FIFC's originations over the capacity to retain such loans within
the Banks' loan portfolios during the second quarter of 1999. In addition to
recognizing gains on the sale of these receivables, the proceeds provide the
Company with additional liquidity. Consistent with the Company's strategy to be
asset-driven, it is probable that similar sales of these receivables will occur
in the future; however, future sales of these receivables depends on the level
of new volume growth in relation to the capacity to retain such loans within the
Banks' loan portfolios. See Consolidated Results of Operations for further
information on these loan sales.
In October 1999, the Company acquired Tricom as part of its continuing strategy
to pursue specialized earning asset niches. Tricom is a Milwaukee-based company
that has been in business for more than ten years and specializes in providing,
on a national basis, short-term accounts receivable financing and value-added
out-sourced administrative services, such as data processing of payrolls,
billing and cash management services, to clients in the temporary staffing
industry. Tricom currently finances and processes payrolls with associated
client billings of approximately $248 million and generated approximately $8.0
million in net revenues in 2001. By virtue of the Company's funding resources,
this acquisition has provided Tricom with additional capital necessary to expand
its financing services in a national market. Tricom's revenue principally
consists of interest income from financing activities and fee-based revenues
from administrative services. In addition to expanding the Company's earning
asset niches, this acquisition has added to the level of fee-based income.
In addition to the earning asset niches provided by the Company's non-bank
subsidiaries, several earning asset niches operate within the Banks, including
the indirect auto division at Hinsdale Bank, Lake Forest Bank's MMF Leasing
Services ("MMF") equipment leasing division and Barrington Bank's Community
Advantage program that provides lending, deposit and cash management services to
condominium, homeowner and community associations. In addition, Hinsdale Bank's
mortgage warehouse lending program provides loan and deposit services to
mortgage brokerage companies located predominantly in the Chicago metropolitan
area and Crystal Lake Bank has recently developed a specialty in small aircraft
lending. The Company plans to continue pursuing the development or acquisition
of other specialty earning asset niches or finance businesses that generate
assets suitable for bank investment and/or secondary market sales.
In September 1998, the Company formed WAMC, a trust subsidiary, to expand the
trust and investment management services that were previously provided through
the trust department of Lake Forest Bank. With a separately chartered trust
subsidiary, the Company is better able to offer trust and investment management
services to all communities served by the Banks, which management believes are
some of the best trust markets in Illinois. In addition to offering these
services to existing bank customers at each of the Banks, the Company believes
WAMC can successfully compete for trust business by targeting small to mid-size
businesses and affluent individuals whose needs command the personalized
attention offered by WAMC's experienced trust professionals. Services offered by
WAMC typically include traditional trust products and services, as well as
investment management, financial planning and 401(k) management services. The
trust and asset management services and products will be expanded in 2002 to
include brokerage services as a result of the Company's recent acquisition of
the Wayne Hummer Companies.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There are a number of accounting policies that require the use of judgment. One
of the most significant accounting policies which requires the use of judgment
is establishing the amount of the allowance for possible loan losses. Management
has established credit committees at each of the Banks which evaluate the credit
quality of the loan portfolio and the level of the adequacy of the allowance for
possible loan losses. See Notes to Consolidated Financial Statements (Note 1,
Summary of Significant Accounting Policies - "Loans and Allowance for Possible
Loan Losses") and the section titled "Credit Risk and Asset Quality" later in
this report for discussions on
- 50 -
the methodology used in determining the level of the allowance for possible loan
losses.
Another area that requires judgment relates to the calculation of the gains on
the sale of premium finance receivables. Essentially, the initial investment in
a loan is allocated between the loan and the Company's retained interest based
on their relative fair values, and a gain is recognized for the difference
between the proceeds received and the cost basis allocated to the loan. The
retained interest includes a servicing asset, an interest only strip and a
guarantee obligation pursuant to the terms of the sale agreement. The fair
values of the servicing asset and interest only strip are calculated based on
estimates of the future cash flows from the underlying loans which incorporate
assumptions for prepayments and other factors. The Company's guarantee
obligation is estimated based on the historical loss experience and credit risk
factors of the loans. If actual cash flows from the underlying loans are less
than originally anticipated, the net retained interest may be impaired, and such
impairment would be recorded as a charge to earnings. However, since these loans
are short-term in nature, with terms of less than twelve months, the Company's
exposure to prepayment and market value risk is minimal.
GENERAL COMPONENTS OF PROFITABILITY
The Company's operating profitability depends on its net interest income,
provision for possible loan losses, non-interest income and non-interest
expense. Net interest income is the difference between the income the Company
receives on its loan and security portfolios and its cost of funds, which
consists of interest paid on deposits and borrowed funds. The provision for
possible loan losses reflects the cost of credit risk in the Company's loan
portfolio. Non-interest income consists of fees on mortgage loans sold, service
charges on deposit accounts, trust and asset management fees, gains on sales of
premium finance receivables, administrative services revenue, premium income
from call option contracts and other miscellaneous fees and income. Non-interest
expense includes salaries and employee benefits as well as occupancy, equipment,
data processing, advertising and marketing, professional fees, amortization of
intangible assets and other operating expenses.
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 and the
Company's asset/liability management actions. The provision for loan losses is
dependent on increases in the loan portfolio, management's assessment of the
collectibility of the loan portfolio, net loans charged-off, historical loss
experience, as well as economic conditions and other market factors. Fees on
mortgage loans sold relate to the Company's practice of originating long-term
fixed-rate mortgage loans for sale into the secondary market in order to satisfy
customer demand for such loans while avoiding the interest-rate risk associated
with holding long-term fixed-rate mortgage loans in the Banks' portfolios. These
fees are highly dependent on the mortgage interest rate environment and the
volume of real estate transactions and mortgage refinancing activity. The
Company earns trust and asset management fees for managing and administering
trust and investment accounts for individuals and businesses. Gains on sales of
premium finance receivables result from FIFC's sale of a portion of new
origination volumes to an unaffiliated third party. Administrative services
revenue results from various value-added services that Tricom provides to its
temporary staffing service clients such as data processing of payrolls, billing
and cash management services. Miscellaneous fees and income primarily include
income generated from other ancillary banking services, premium income from the
sale of covered call options and rental income from leased equipment.
Non-interest expenses are heavily influenced by the growth of operations, with
additional employees necessary to staff new banks, branch facilities and trust
expansion, higher levels of occupancy and equipment costs, as well as
advertising and marketing expenses necessary to promote the growth. The increase
in the number of account relationships directly affects such expenses as data
processing costs, supplies, postage, loan expenses, and other miscellaneous
operating expenses.
- 51 -
AVERAGE BALANCE SHEETS, INTEREST INCOME AND EXPENSE, AND INTEREST RATE YIELDS
AND COSTS
The following table sets forth the average balances, the interest earned or paid
thereon, and the effective interest rate, yield or cost for each major category
of interest-earning assets and interest-bearing liabilities for the years ended
December 31, 2001, 2000 and 1999. The yields and costs include loan origination
fees and certain direct origination costs which are considered adjustments to
yields. Interest income on non-accruing loans is reflected in the year that it
is collected, to the extent it is not applied to principal. Such amounts are not
material to net interest income or net change in net interest income in any
year. Non-accrual loans are included in the average balances and do not have a
material effect on the average yield. Net interest income and the related net
interest margin have been adjusted to reflect tax-exempt income, such as
interest on municipal securities and loans, on a tax-equivalent basis. This
table should be referred to in conjunction with this analysis and discussion of
the financial condition and results of operations (dollars in thousands).
----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------ ------------------------------- -----------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance(1) Interest Cost Balance(1) Interest Cost Balance(1) Interest Cost
------------------------------ ------------------------------- -----------------------------------
ASSETS
Interest bearing deposits with
banks $ 385 $ 10 2.60% $ 439 $ 26 5.92% $ 3,840 $ 204 5.31%
Securities (2) 223,280 11,821 5.29 237,025 15,669 6.61 187,258 10,336 5.52
Federal funds sold 136,778 5,632 4.12 26,202 1,627 6.21 30,844 1,536 4.98
Loans, net of unearned
income (2)(3) 1,786,596 149,850 8.39 1,416,419 131,428 9.28 1,135,200 97,529 8.59
------------------------------ ------------------------------- -----------------------------------
Total earning assets 2,147,039 167,313 7.79 1,680,085 148,750 8.85 1,357,142 109,605 8.08
------------------------------ ------------------------------- -----------------------------------
Cash and due from banks 49,536 49,893 39,285
Allowance for possible loan losses (12,202) (9,929) (7,980)
Premises and equipment, net 91,590 80,778 65,539
Other assets 52,069 52,755 42,580
------------------------------ ------------------------------- -----------------------------------
Total assets $ 2,328,032 $ 1,853,582 $ 1,496,566
------------------------------------------------------------- ------------------------------- -----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits - interest bearing:
NOW accounts $ 205,306 $ 4,790 2.33% $ 152,731 $ 5,248 3.44% $ 123,846 $ 3,607 2.91%
Savings and money market
deposits 411,929 12,387 3.01 351,095 15,313 4.36 309,525 11,194 3.62
Time deposits 1,219,584 66,326 5.44 946,011 58,109 6.14 751,286 41,225 5.49
Total interest bearing
------------------------------ ------------------------------- -----------------------------------
deposits 1,836,819 83,503 4.55 1,449,837 78,670 5.43 1,184,657 56,026 4.73
------------------------------ ------------------------------- -----------------------------------
Short-term borrowings
and notes payable 53,649 2,845 5.30 74,893 4,371 5.84 53,076 2,633 4.96
Federal Home Loan Bank advances 21,945 942 4.29 - - - - - -
Long-term debt - trust preferred
securities 51,050 5,151 10.09 41,990 4,143 9.87 31,050 2,938 9.46
Total interest bearing
------------------------------ ------------------------------- -----------------------------------
liabilities 1,963,463 92,441 4.71 1,566,720 87,184 5.56 1,268,783 61,597 4.85
------------------------------ ------------------------------- -----------------------------------
Non-interest bearing deposits 206,267 166,050 126,388
Other liabilities 37,307 23,894 20,014
Shareholders' equity 120,995 96,918 81,381
------------------------------ ------------------------------- -----------------------------------
Total liabilities and
shareholders' equity $ 2,328,032 $ 1,853,582 $ 1,496,566
------------------------------------------------------------- ------------------------------- -----------------------------------
Net interest income/spread $ 74,872 3.08% $ 61,566 3.29% $ 48,008 3.23%
Net interest margin 3.49% 3.66% 3.54%
Core net interest margin (4) 3.73% 3.91% 3.75%
----------------------------------------------------------------------------------------------------------------------------------
(1) Average balances were generally computed using daily balances.
(2) Interest income on tax advantaged securities and loans reflects a
tax-equivalent adjustment based on a marginal federal tax rate of 35%. This
total adjustment reflected in the above table is $858, $566 and $274 in
2001, 2000 and 1999, respectively.
(3) The average balances of loans include non-performing loans and loans held
for sale.
(4) The core net interest margin excludes the interest expense associated with
the Company's Trust Preferred Securities.
- 52 -
CHANGES IN INTEREST INCOME AND EXPENSE
The following table shows the dollar amount of changes in interest income (on a
tax-equivalent basis) and expense by major categories of interest-earning assets
and interest-bearing liabilities attributable to changes in volume or rate or
both, for the periods indicated (in thousands):
----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
-------------------------------------- ---------------------------------
Change Change Change Change
Due to Due to Total Due to Due to Total
Rate Volume Change Rate Volume Change
-------------------------------------- ---------------------------------
Interest income:
Interest bearing deposits with banks $ (13) (3) (16) 22 (200) (178)
Federal funds sold (719) 4,724 4,005 344 (253) 91
Securities (2,980) (868) (3,848) 2,274 3,059 5,333
Loans (13,513) 31,935 18,422 8,290 25,609 33,899
-------------------------------------- ---------------------------------
Total interest income (17,225) 35,788 18,563 10,930 28,215 39,145
-------------------------------------- ---------------------------------
INTEREST EXPENSE:
NOW accounts (1,965) 1,507 (458) 717 924 1,641
Savings and money market deposits (5,284) 2,358 (2,926) 2,488 1,631 4,119
Time deposits (7,208) 15,425 8,217 5,308 11,576 16,884
Short-term borrowings and notes payable (371) (1,155) (1,526) 522 1,216 1,738
Federal Home Loan Bank advances - 942 942 - - -
Long-term debt - trust preferred securities 96 912 1,008 131 1,074 1,205
-------------------------------------- ---------------------------------
Total interest expense (14,732) 19,989 5,257 9,166 16,421 25,587
-------------------------------------- ---------------------------------
NET INTEREST INCOME $ (2,493) 15,799 13,306 1,764 11,794 13,558
----------------------------------------------------------------------------------------------------------------------------
The changes in net interest income are created by various changes in both
interest rates and volumes and, therefore, require significant analysis.
However, it is clear that the change in the Company's net interest income for
the periods under review was predominantly impacted by the growth in the volume
of the overall interest-earning assets (specifically loans) and interest-bearing
deposit liabilities. In the table above, volume variances are computed using the
change in volume multiplied by the previous year's rate. Rate variances are
computed using the change in rate multiplied by the previous year's volume. The
change in interest due to both rate and volume has been allocated between
factors in proportion to the relationship of the absolute dollar amounts of the
change in each.
ANALYSIS OF FINANCIAL CONDITION
The dynamics of community bank balance sheets are generally dependent upon the
ability of management to attract additional deposit accounts to fund the growth
of the institution. As several of the Company's banks and branch offices are
still less than five years old, the generation of new deposit relationships to
gain market share and establish themselves in the community as the bank of
choice is particularly important. When determining a community to establish a de
novo bank, the Company generally will only enter a community where it believes
the bank can gain the number one or two position in deposit market share. This
is usually accomplished by initially paying competitively high deposit rates to
gain the relationship and then by introducing the customer to the Company's
unique way of providing local banking services.
Deposits. Over the past three years, the Company has experienced significant
growth in both the number of accounts and the balance of deposits primarily as a
result of de novo bank formations, new branch openings and strong marketing
efforts. Total deposit balances increased 26.7% to $2.31 billion at December 31,
2001, as compared to $1.83 billion at December 31, 2000, which increased 24.8%
when compared to the balance of $1.46 billion at December 31, 1999.
- 53 -
The composition of the deposit base has remained relatively consistent over the
last three years as evidenced by the deposit balances and relative composition
of each deposit category to total deposits as of December 31, 2001, 2000 and
1999, in the following table (dollars in thousands):
------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------- --------------------------------- --------------------------
Ending Percent Ending Percent Endig Percent
Balance of Total Balance of Total Balance of Total
------------------------- --------------------------------- --------------------------
Non-interest bearing deposits $ 254,269 11% $ 198,319 11% $ 154,034 11%
NOW accounts 286,860 13 180,898 10 130,625 9
Savings and money market deposits 468,395 20 370,231 20 325,201 22
Time deposits 1,305,112 56 1,077,128 59 853,762 58
------------------------- --------------------------------- --------------------------
Total deposits $ 2,314,636 100% $ 1,826,576 100% $ 1,463,622 100%
------------------------------------------------------------------------------------------------------------------------------
Additionally, growth in the deposit base continues to be generated by each of
the Banks. The following table presents deposit balances by the Banks and the
relative percentage of total deposits held by each Bank at December 31 for the
past three years (dollars in thousands):
------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------- --------------------------------- --------------------------
Ending Percent Ending Percent Endig Percent
Balance of Total Balance of Total Balance of Total
------------------------- --------------------------------- --------------------------
Lake Forest Bank $ 584,493 25% $ 482,119 26% $ 416,642 29%
Hinsdale Bank 425,322 19 350,407 19 296,127 20
North Shore Bank 482,333 21 410,205 23 327,130 22
Libertyville Bank 296,056 13 245,119 13 191,085 13
Barrington Bank 284,316 12 215,456 12 156,859 11
Crystal Lake Bank 165,456 7 107,555 6 75,779 5
Northbrook Bank 76,660 3 15,715 1 - -
------------------------- --------------------------------- --------------------------
Total deposits $ 2,314,636 100% $ 1,826,576 100% $ 1,463,622 100%
------------------------- --------------------------------- --------------------------
Percentage increase from
prior year-end 26 7% 24 8% 19 1%
------------------------------------------------------------------------------------------------------------------------------
Other Funding Sources. Although deposits are the Company's primary source of
funding its interest-earning assets, the Company's ability to manage the types
and terms of deposits is somewhat limited by customer preferences and market
competition. As a result, in addition to deposits, the Company uses several
other funding sources to support its growth. These other sources include
short-term borrowings, notes payable, FHLB advances, trust preferred securities
and the issuance of equity securities as well as the retention of earnings. The
Company evaluates the terms and unique characteristics of each source, as well
as its asset-liability management position, in determining the use of such
funding sources.
Short-term borrowings. Short-term borrowings include securities sold under
repurchase agreements and federal funds purchased and totaled $28.1 million and
$43.6 million at December 31, 2001 and 2000, respectively. This funding category
fluctuates based on daily liquidity needs of the Banks, FIFC and Tricom.
Notes payable. The notes payable balances of $46.6 million at December 31, 2001
and $27.6 million at December 31, 2000, represent the balances on a revolving
credit agreement with an unaffiliated bank. This revolving credit line is
available for corporate purposes such as to provide capital to fund continued
growth at existing bank subsidiaries, expansion of WAMC, possible future
acquisitions and for other general corporate matters. See Note 10 to the
Consolidated Financial Statements for further discussion of the terms of this
revolving credit line.
FHLB Advances. In 2001, the Banks began to use FHLB advances as a source of
funding. These advances provide the Banks with access to fixed rate funds which
are useful in mitigating interest rate risk and achieving an acceptable interest
rate spread on fixed rate loans or securities. FHLB advances to the Banks
totaled $90 million at December 31, 2001. See Note 11 to the Consolidated
Financial Statements for further discussion of the terms of these advances.
- 54 -
Long-term debt - trust preferred securities. The Company has $51.1 million of
trust preferred securities outstanding which were sold in two public offerings.
In October 1998, the Company sold $31.05 million of 9.00% trust preferred
securities and in June 2000, sold $20.0 million at 10.50%. The trust preferred
securities offerings increased the Company's regulatory capital, and provided
for the continued growth of its banking and trust franchise. The ability to
treat these trust preferred securities as regulatory capital under Federal
Reserve Bank guidelines and to deduct the related interest expense for Federal
income taxes, provides the Company with a cost-effective form of capital. See
Note 12 to the Consolidated Financial Statements for further discussion of these
trust preferred securities.
Total assets and earning assets. The Company's total assets were $2.71 billion
at December 31, 2001, an increase of $602.6 million, or 28.7%, when compared to
$2.10 billion at December 31, 2000, which increased $423.4 million, or 25.2%,
over the December 31, 1999 total of $1.68 billion. Earning assets totaled $2.50
billion at December 31, 2001, an increase of $583.4 million, or 30.5%, from the
balance of $1.92 billion a year earlier. Earning assets as a percentage of total
assets were 92.4% and 91.1% as of December 31, 2001 and 2000, respectively. The
increases in total assets and earning assets since December 31, 2000 were
primarily attributable to the $488.1 million increase in deposits, which mainly
resulted from continued market share growth.
Loans. Total loans, net of unearned income, totaled $2.06 billion at December
31, 2001, and continued on a solid growth track during 2001 increasing $503.4
million, or 32.3%, over the December 31, 2000 balance of $1.56 billion. In 2000,
total loans increased $279.8 million, or 21.9%, compared to the balance at the
end of 1999. Growth has occurred in all core categories and the premium finance
receivables portfolio. Decreases in the indirect auto loan portfolio were the
result of management's decision to slow the volume of originations of indirect
auto loans due to the current economic and competitive environment surrounding
this portfolio. Total loans, net of unearned income, comprised 82.5% of total
earning assets at December 31, 2001 as compared to 81.3% at December 31, 2000.
Total loans were 89.1% of total deposits at December 31, 2001 as compared to
85.3% at December 31, 2000. These loan-to-deposit ratios fall within
management's desired range of 85%-90%. Deploying the deposits in higher yieldin
earning assets is consistent with management's objective of being an
asset-driven organization whereby excess loan originations can be sold to third
parties and new deposit growth can be immediately invested in higher yielding
assets. The following table presents loan balances, net of unearned income, by
category as of December 31, 2001, 2000 and 1999 (dollars in thousands):
-------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- ---------------------------- ----------------------------
PERCENT Percent Percent
BALANCE OF TOTAL Balance of Total Balance of Total
--------------------------- ---------------------------- ----------------------------
Core loans:
Commercial and
commercial real estate $ 1,007,580 49% $ 647,947 42% $ 485,776 38%
Home equity 261,049 12 179,168 12 139,194 11
Residential real estate 182,945 9 141,919 9 111,026 9
Other loans 59,157 3 51,995 3 49,925 4
--------------------------- ---------------------------- ----------------------------
Total core loans 1,510,731 73 1,021,029 66 785,921 62
--------------------------- ---------------------------- ----------------------------
Niche loans:
Premium finance receivables 348,163 17 313,065 20 219,341 17
Indirect auto loans 184,209 9 203,572 13 255,410 20
Tricom finance receivables 18,280 1 20,354 1 17,577 1
--------------------------- ---------------------------- ----------------------------
Total niche loans 550,652 27 536,991 34 492,328 38
--------------------------- ---------------------------- ----------------------------
Total loans, net of unearned income $ 2,061,383 100% $ 1,558,020 100% $ 1,278,249 100%
-------------------------------------------------------------------------------------------------------------------------------
Niche Loan Categories. In order to minimize the time lag typically experienced
by de novo banks in redeploying deposits into higher yielding earning assets,
the Company has developed lending programs focused on specialized earning asset
niches that generally have large volumes of homogeneous assets that can be
acquired for the Banks' portfolios and possibly sold in the secondary market to
generate fee income. These specialty niches also diversify the Banks' loan
portfolios and add higher yielding earning assets that help to improve the
- 55 -
net interest margin. Currently, the Company's three specialty loan areas that
are considered separate operating segments consist of the premium finance,
indirect auto and Tricom segments. Other specialty loan programs include medical
and municipal equipment leases through a division of Lake Forest Bank, mortgage
broker warehouse lending through Hinsdale Bank, the Community Advantage program
at Barrington Bank, which provides lending, deposit and cash management services
to condominium, homeowner and community associations and the small aircraft
lending program at Crystal Lake Bank. Management continues to evaluate other
specialized types of earning assets to assist with the deployment of deposit
funds and to diversify the earning asset portfolio.
Premium finance receivables. The Company originates commercial premium finance
receivables through FIFC. All premium finance receivables originated by FIFC are
subject to the Company's stringent credit standards, and substantially all such
loans are made to commercial customers. The Company rarely finances consumer
insurance premiums. At December 31, 2001, premium finance receivables totaled
$348.2 million and accounted for 17% of the Company's total loan portfolio. The
balance reflects an increase of $35.1 million, or 11.2%, from the $313.1 million
balance a year earlier. The majority of the receivables originated by FIFC are
sold to the Banks and retained in their loan portfolios. However, premium
finance receivables originated in excess of the capacity to retain such
receivables within the Banks' loan portfolios are sold to an unrelated third
party. In 2001, FIFC sold approximately $245 million, or 19%, of the $1.3
billion of receivables originated in 2001, to an unrelated third party and
recognized gains of approximately $4.6 million from such sales. Total loan
originations in 2001 increased approximately $223.6 million, or 21%, over the
$1.1 billion of originations in 2000. This increase in origination volume is due
in part to market increases in insurance premiums. With continued growth
expectations in 2002, it is probable that the Company will continue selling a
portion of these new receivables to unrelated third parties. See Consolidated
Results of Operations for further information on these loan sales.
Indirect auto loans. The Company finances fixed rate automobile loans sourced
indirectly through an established network of unaffiliated automobile dealers
located throughout the Chicago metropolitan area. These indirect auto loans are
secured by new and used automobiles and generally have an original maturity of
36 to 60 months with the average actual maturity estimated to be approximately
35 to 40 months. The risk associated with this portfolio is diversified among
many individual borrowers. The Company utilizes credit underwriting standards
that management believes results in a high quality portfolio. The Company does
not currently originate any significant level of sub-prime loans, which are made
to individuals with impaired credit histories at generally higher rates, and
accordingly, with higher levels of credit risk. Management continually monitors
the dealer relationships and the Banks are not dependent on any one dealer as a
source of such loans. In response to economic conditions and the competitive
environment for this product, the Company has been reducing the level of new
indirect auto loans originated. However, the Company continues to maintain its
relationships with the dealers and may increase its volume of originations when
market conditions indicate it is prudent to do so. As of December 31, 2001, net
indirect auto loans totaled $184.2 million, a decrease of $19.3 million, or
9.5%, from the previous year-end balance
Tricom finance receivables. These receivables consist of high-yielding
short-term accounts receivable financing to Tricom's clients in the temporary
staffing industry located throughout the United States. Typically, Tricom also
provides value-added out-sourced administrative services to many of these
clients, such as data processing of payrolls, billing and cash management
services, which generates additional fee income. As of December 31, 2001,
Tricom's finance receivables totaled $18.3 million, a decrease of $2.1 million,
or 10.2%, from the previous year-end balance, resulting from the general
slowdown in the economy and the reduction in the placement of temporary staffing
individuals by Tricom's customers.
Core Loan Categories. Core loans include commercial and commercial real estate
loans, home equity loans, residential real estate loans and consumer loans. Core
loans totaled $1.5 billion at December 31, 2001, and represented 73% of the
Company's total loan portfolio. Core loans increased $489.7 million, or 48.0%,
over the prior year amount of $1.0 billion.
Commercial and commercial real estate loans, the largest loan category, totaled
$1.0 billion at December 31, 2001 and increased $359.6 million, or 55.5%, over
the December 31, 2000 balance of $647.9 million. This category comprised 49% of
the loan portfolio at the end of 2001 and the increase over the prior year-end
balance was mainly due to the combination of increased business development
efforts, a low interest rate environment and a continued healthy local economy.
Home equity loans totaled $261.0 million as of December 31, 2001 and increased
$81.9 million, or 45.7%, when compared to the December 31, 2000 balance of
$179.2 million. This increase was mainly the result of increased
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line of credit usage and special marketing programs. Unused commitments on home
equity lines of credit have increased approximately $79.7 million, or 35.4%,
over the balance at December 31, 2000 and totaled $304.6 million at December 31,
2001.
Residential real estate loans totaled $182.9 million at December 31, 2001, and
increased $41.0 million, or 28.9%, over the prior year-end balance. Mortgage
loans held for sale are included in this category and totaled $42.9 million and
$10.4 million at December 31, 2001 and 2000, respectively. The Company collects
a fee on the sale of these loans into the secondary market to avoid the
interest-rate risk associated with these loans, as they are predominantly
long-term fixed rate loans. The increase in the amount of mortgage loans held
for sale reflects the significant increase in mortgage loan activity at the end
of 2001 resulting from the low interest rate environment. The remaining loans in
this category are maintained within the Banks' loan portfolios and comprise
mostly adjustable rate mortgage loans and shorter-term fixed rate mortgage
loans.
Liquidity Management Assets. Funds that are not utilized for loan originations
are used to purchase investment securities and short-term money market
investments, to sell as federal funds and to maintain in interest-bearing
deposits with banks. The balances of these assets fluctuate frequently based on
deposit inflows and loan demand. As a result of anticipated significant loan
growth in the development of de novo banks and earning asset niches, it has been
Wintrust's policy to generally maintain its securities portfolio in short-term,
liquid, and diversified high credit quality securities at the Banks in order to
facilitate the funding of quality loan demand as it emerges and to keep the
Banks in a liquid condition in the event that deposit levels fluctuate. The
aggregate carrying value of these earning assets increased to $438.0 million at
December 31, 2001 from $357.9 million at December 31, 2000. Total liquidity
management assets as a percent of total earning assets was 17.5% at December 31,
2001 an 18.7% at December 31, 2000. A detail of the carrying value of the
individual categories of liquidity management assets as of December 31, 2001 and
2000 is set forth in the following table (in thousands):
--------------------------------------------------------------------
2001 2000
-----------------------
Federal funds sold and securities
purchased under resale agreements $ 51,955 164,641
Interest-bearing deposits with banks 692 182
Securities 385,350 193,105
-----------------------
Total liquidity management assets $ 437,997 357,928
--------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS
Overview of the Company's profitability characteristics. The following
discussion of Wintrust's results of operations requires an understanding that
the Company's bank subsidiaries have all been started as new banks since
December 1991 and have an average life of approximately six years. The Company's
premium finance company, FIFC, began limited operations in 1991 as a start-up
company. The Company's trust and investment company, WAMC, began operations in
September 1998. Previously, the Company's Lake Forest Bank operated a trust
department on a much smaller scale than WAMC. Tricom started operations as a new
company in 1989 and was acquired by the Company in 1999. Accordingly, Wintrust
is still a young company that has a strategy of continuing to build its customer
base and securing broad product penetration in each marketplace that it serves.
The Company has expanded its banking franchise from three banks with 5 offices
in 1994 to seven banks with 29 offices at the end of 2001. FIFC has matured from
its limited operations in 1991 to a company that generates, on a national basis,
over $1.0 billion in premium finance receivables annually. In addition, WAMC has
been building a team of experienced trust professionals who are located within
the banking offices of five of the seven subsidiary Banks. These expansion
activities have understandably suppressed faster, opportunistic earnings.
However, as the Company matures and existing banks become more profitable, the
start-up costs associated with future bank and branch openings and other new
financial services ventures will not have as significant an impact on earnings.
Additionally, the Company's more mature banks have several operating ratios that
are either comparable to or better than peer group data, suggesting that as the
Banks become more established, the overall earnings level will continue to
increase.
EARNINGS SUMMARY
Net income for the year ended December 31, 2001 totaled $18.4 million, or $1.27
per diluted common share, compared to $11.2 million, or $0.83 per diluted share,
in 2000, and $9.4 million, or $0.73 per diluted share in 1999. The results for
2000 include the impact of a non-recurring $4.3 pre-tax charge ($2.6 million
after tax), or $0.20 per diluted common share, related to a fraudulent loan
scheme perpetrated against the Company's premium finance subsidiary. Excluding
the effect of this non-recurring charge, net income increased 34.0% in 2001 and
46.0% in 2000 while earnings per diluted common share increased 23.3% in 2001
and 41.1% in 2000. Return on average equity was 15.24% in 2001, 14.20% in 2000
(excluding the non-recurring charge) and 11.58% in 1999.
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Earnings results for 2001 reflect an increase in net revenues of $23.5 million,
or 29.6%, fueled by increases in net interest income of $13.0 million, or 21.3%,
and non-interest income of $10.5 million, or 57.3%. For 2000, net revenues
increased $21.8 million, or 37.8%, resulting from increases in net interest
income of $13.3 million, or 27.8%, and non-interest income of $8.5 million, or
86.6%. The increases in net interest income during these periods was primarily a
result of increases in average earning assets, particularly increases in average
loans of 26.1% and 24.8%, in 2001 and 2000, respectively. The increase in
non-interest income in 2001 was due in large part to the positive effects of the
declining interest rate environment, particularly on mortgage refinancing
activity and management's ability to enhance returns in the securities portfolio
with covered call option contracts. For 2000, the increase in non-interest
income was mainly the result of increases in administrative service revenues
resulting from the October 1999 acquisition of Tricom and gains on the sales of
premium finance receivables. Excluding the 2000 non-recurring charge noted
above, non-interest expense increased $12.3 million, or 23.0%, in 2001 and $13.8
million, or 34.8% in 2000. The increases in non-interest expense were due
primarily to the growth and expansion realized by the Company during 2001 and
2000, including the recognition of a full year of Tricom's expenses in 2000,
compared to a three month period in 1999.
NET INTEREST INCOME
The primary source of the Company's revenue is net interest income. Net interest
income is the difference between interest income and fees on earning assets,
such as loans and securities, and interest expense on the liabilities to fund
those assets, including interest bearing deposits and other borrowings. The
amount of net interest income is affected by both changes in the level of
interest rates and the amount and composition of earning assets and interest
bearing liabilities. The table included in the previous section of this report
titled "Average Balance Sheets, Interest Income and Expense, and Interest Rate
Yields and Costs" presents the interest income and expense associated with the
major balance sheet categories, along with the related average balances and
yields, for the three years ending December 31, 2001. Also in that section of
this report is a table titled "Changes in Interest Income and Expense" which
presents the dollar amount of changes in interest income and expense, by major
balance sheet category, attributable to changes in the volume of the balance
sheet category and changes in the rate earned or paid with respect to that
category of assets or liabilities, for the years ending December 31, 2001 and
2000. In order to compare the tax-exempt asset yields to taxable yields,
interest income in the tables referred to above and in the following discussion
are adjusted to tax-equivalent yields based on the marginal corporate Federal
tax rate of 35%. The tax-equivalent adjustments to interest income for 2001,
2000 and 1999 were $858,000, $566,000 and $274,000, respectively.
Tax-equivalent net interest income in 2001 totaled $74.9 million, up from $61.6
million in 2000 and $48.0 million in 1999, representing increases of $13.3
million, or 21.6%, in 2001 and $13.6 million, or 28.2%, in 2000. These increases
were primarily attributable to increases in average earning assets of $467.0
million, or 27.8%, in 2001 and $322.9 million, or 23.8%, in 2000. Loans are the
most significant component of the earning asset base as they earn interest at a
higher rate than the other earning assets. Average loans increased $370.2
million, or 26.1%, in 2001 and $281.2 million, or 24.8%, in 2000. Total average
loans as a percentage of total average earning assets were 83.2%, 84.3% and
83.6% in 2001, 2000, and 1999, respectively. The average yield on loans was
8.39% in 2001, 9.28% in 2000 and 8.59% in 1999. The 89 basis point decrease in
the yield on loans in 2001 reflects the overall lower market rates in 2001 and
the 69 basis point increase in the yield in 2000, as compared to 1999, is
primarily a result of market rate increases throughout 2000. Similarly, the
average rate paid on interest bearing deposits, the largest component of the
Company's interest bearing liabilities, was 4.55% in 2001, 5.43% in 2000, and
4.73% in 1999, representing a decrease of 88 basis points in 2001 and an
increase of 70 basis points in 2000. Net interest margin, which reflects net
interest income as a percent of average earning assets, was 3.49% in 2001, 3.66%
in 2000 and 3.54% in 1999. The decrease in the net interest margin in 2001 was
due to continued decreases in short-term rates throughout 2001 causing
compression in the spread between the yields earned on interest earning assets
and the rates paid on interest bearing liabilities. During 2001, the Federal
Reserve Bank cut short-term interest rates eleven times, resulting in a decrease
in short-term rates totaling 475 basis points. Compression resulted when deposit
rates could not be reduced in the same magnitude as decreases in short term
market rates due to the low level of the rate paid on certain deposit accounts.
The 12 basis point increase in the net interest margin in 2000 was primarily the
result of solid growth in loans in 2000 and effective deposit pricing
strategies. The core net interest margin, which excludes the impact of the
Company's Trust Preferred Securities, was 3.73% in 2001, 3.91% in 2000 and 3.75%
in 1999.
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PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses totaled $7.9 million in 2001, $5.1
million in 2000 and $3.7 million in 1999. The increases in provisions in 2001
and 2000 were the result of solid loan growth in each of the core loan
categories, as well as the premium finance receivables portfolio, and higher
levels of charge-offs in the premium finance receivables portfolio. In 2001 and
2000, year end loan balances increased 32.3% and 21.9%, respectively. Net
charge-offs as a percentage of average loans were 0.26% in 2001, 0.24% in 2000
and 0.19% in 1999. While management believes the allowance for possible loan
losses is adequate to provide for losses inherent in the portfolio, there can be
no assurances that future losses will not exceed the amounts provided for,
thereby affecting future results of operations. The amount of future additions
to the allowance for possible loan losses will be dependent upon the economy,
changes in real estate values, interest rates, the regulatory environment, the
level of past-du and non-performing loans, and other factors. Please refer to
the "Asset Quality" section of this report for further discussion of the
Company's loan loss experience and non-performing assets.
NON-INTEREST INCOME
Non-interest income totaled $28.8 million in 2001, and increased $10.5 million,
or 57.3%, from the $18.3 million reported in 2000. In 2000, non-interest income
increased $8.5 million, or 86.6%, from the $9.8 million reported in 1999. The
increase in 2001 was primarily a result of increases in fees on mortgage loans
sold and income from covered call option transactions, and to a lesser extent
increases from service charges on deposits, gains on the sale of premium finance
receivables and net gains on the sale of securities.
Fees on mortgage loans sold include income from originating and selling
residential real estate loans into the secondary market. These fees totaled $7.8
million in 2001, an increase of $4.9 million, or 169%, over the $2.9 million
reported in 2000. The increase in 2001 was due to the lower interest rate
environment which resulted in significantly higher levels of refinancing
activity. Conversely, the rising interest rate environment in 2000 resulted in a
decrease of $295,000, or 9.2%, in fees on mortgage loans sold compared to the
1999 total. Management anticipates that the high levels of refinancing activity
experienced in 2001 will taper off in 2002, barring any further reductions in
mortgage interest rates.
Service charges on deposit accounts totaled $2.5 million in 2001, $1.9 million
in 2000 and $1.6 million in 1999. These increases of 29.3% in 2001 and 23.9% in
2000 were due mainly to increases in total deposits of 26.7% in 2001 and 24.8%
in 2000. The majority of deposit service charges relate to customary fees on
overdrawn accounts and returned items. The level of service charges received is
substantially below peer group levels as management believes in the philosophy
of providing high quality service without encumbering that service with numerous
activity charges.
Trust and asset management fees totaled $2.0 million for 2001 and 2000, and $1.2
million for 1999. These fees include fees earned on assets under management,
custody fees and other trust related fees. Trust and asset management fees have
been negatively impacted by the recent equity market declines and weaker
economic conditions. Lower valuations of the equity securities under management
affect the fees earned thereon. The increase in fees in 2000 as compared to 1999
was the result of new business development efforts generated by a larger staff
of experienced trust officers that were added in late 1998 with the formation of
WAMC. Wintrust is committed to growing the trust and investment business in
order to better service its customers and create a more diversified revenue
stream. In February 2002, Wintrust acquired the Wayne Hummer Companies, which
will augment and diversify the Company's revenue stream. The acquisition will
provide Wintrust with additional product offerings, including full service
brokerage capabilities, annuities and insurance, as well as increase the size of
its portfolio of managed investment accounts.
The Company sold approximately $245 million of premium finance receivables in
2001 and approximately $225 million in 2000, in each year amounting to
approximately 20% of FIFC's total originations. In 1999, the Company sold
approximately $69 million of premium finance receivables. Wintrust began selling
the receivables during the second quarter of 1999 as the level of originations
outpaced the Company's capacity to retain such loans within the Banks' loan
portfolios. Consistent with Wintrust's strategy to be asset-driven, it is
probable that sales of premium finance receivables will occur in the future,
depending on the level of new volume growth in relation to the capacity to
retain such loans within the Banks' loan portfolios. FIFC continues to service
the loans sold and recognizes its retained interest in the loans sold, which
consists of a servicing asset and interest only strip, net of a liability for
its guarantee obligation pursuant to the terms of the sale agreement. Since
these loans are short-term in nature, with terms of less than
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twelve months, the Company's exposure to prepayment and market value risk is
minimal. Any remaining balance of the Company's retained interest at the time of
its clean up call is recorded as an adjustment to the gain on sale of premium
finance receivables. This activity resulted in the recognition of net gains of
$4.6 million in 2001, $3.8 million in 2000, and $1.0 million in 1999. At
December 31, 2001, the Company was servicing approximately $108 million of loans
pursuant to these sales.
Administrative services revenue generated by Tricom was $4.1 million in 2001,
$4.4 million in 2000 and $1.0 million in 1999. This revenue comprises income
from administrative services, such as data processing of payrolls, billing and
cash management services, to temporary staffing service clients located
throughout the United States. The revenue growth at Tricom has stagnated in
recent quarters due to the general slowdown in the economy and the reduction in
the placement of temporary staffing individuals by Tricom's customers. Wintrust
acquired Tricom in October 1999 and accounted for the acquisition using the
purchase method of accounting. As a result, Tricom's administrative revenues for
1999 are included in the Company's financial statements from the date of
acquisition.
Premium income from covered call option transactions totaled $4.3 million in
2001, $882,000 in 2000 and $441,000 in 1999. The call option transactions were
designed to increase the total return associated with holding certain investment
securities and do not qualify as hedges pursuant to SFAS 133. There were no
outstanding call options at December 31, 2001 or December 31, 2000.
Other non-interest income totaled $3.1 million in 2001, $2.4 million in 2000 and
$1.4 million in 1999. The increase in 2001 of $725,000 was primarily
attributable to an increase of $304,000 of rental income from equipment leases.
The $1.0 million increase in 2000 was due primarily to a $866,000 increase in
rental income from equipment leases.
NON-INTEREST EXPENSE
Non-interest expense totaled $65.8 million in 2001, $57.8 million in 2000 and
$39.7 million in 1999. The 2000 results include a non-recurring $4.3 million
charge as a result of the fraud perpetrated against the Company's premium
finance subsidiary. Excluding this non-recurring charge, non-interest expense
increased $12.3 million, or 23.0% in 2001, and $13.8 million, or 34.8%, in 2000.
These increases were predominantly caused by the continued growth and expansion
of the Banks, WAMC and FIFC. In addition, $4.2 million of the increase in 2000
was a result of 2000 reflecting a full year of operating expense related to the
October 1999 acquisition of Tricom. In 2001, the Company opened two new
full-service banking locations and closed a limited-service facility, and in
2000, added four new banking locations, including the opening of its seventh de
novo bank. In 2001, total deposits increased 26.7% and total loans increased
32.3%, and in 2000 total deposits increased 24.8% and total loan balances
increased 21.9%, requiring higher levels of staffing and other operating costs,
such as occupancy, equipment, advertising and data processing, to both attract
and service the larger customer base.
Despite the growth and the related increases in many of the non-interest expense
categories, Wintrust's net overhead ratio (non-interest expense, excluding the
non-recurring fraud charge, less non-interest income to total average assets)
improved to 1.59% in 2001, from 1.90% in 2000 and 2.00% in 1999. The Company is
operating in its previously stated performance goal range of 1.50% - 2.00%. This
is a key indicator of operating efficiency and the Company continues to compare
favorably with regard to this ratio to its peer group based on the most recent
peer group data.
Salaries and employee benefits is the largest component of non-interest expense,
accounting for 54.2% of the total in 2001. For the years ended December 31,
2001, 2000 and 1999, salaries and employee benefits totaled $35.6 million, $28.1
million and $20.8 million, respectively, reflecting increases of $7.5 million,
or 26.7%, in 2001 and $7.3 million, or 35.1%, in 2000. Approximately $2.1
million of the 2000 increase relates to the inclusion of Tricom's expenses for a
full year in 2000 compared to a three-month period in 1999. Increases in
salaries and benefits for 2001 and 2000 generally reflect the higher staffing
levels necessary to support the continued growth of the Company's balance sheet
and fee-based businesses. As previously noted, during 2001, deposits increased
26.7% and loans increased 32.3% and during 2000, deposits increased 24.8% and
loans increased 21.9%. In addition, the Company added two full-service banking
locations in 2001 and added four new banking locations, including the opening of
its seventh de novo bank, in 2000, all of which required additional staffing.
The Company also increased staff at FIFC to support the growth in the premium
finance business.
Equipment expense, which includes furniture, equipment and computer software
depreciation and repairs and maintenance costs, totaled $6.3 million in 2001,
$5.1 million in 2000 and $3.2 million in 1999. The 2001 increase of $1.2
million, or 23.4% was caused mainly by higher levels of depreciation expense
related to the opening of new facilities and the expansion of existing
facilities. The 2000 increase of $1.9 million, or 59.5%, reflects the
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impact of the acquisition of Tricom and other growth as discussed earlier.
Net occupancy expenses for the years ended December 31, 2001, 2000 and 1999,
were $4.8 million, $4.3 million and $3.0 million, respectively, reflecting
increases of 13.4% in 2001 and 42.2% in 2000. The 2001 increase was due mainly
to the opening of additional facilities in 2001 and throughout 2000. The 2000
increase was attributable to the opening of additional facilities and the
October 1999 acquisition of Tricom.
Data processing expenses totaled $3.4 million in 2001, $2.8 million in 2000 and
$2.2 million in 1999, resulting in increases of 19.6% for 2001 and 30.8% for
2000. These increases were due primarily to the additional transactional charges
related to the larger deposit and loan portfolios, as well as the impact of
Tricom's expenses for a full year in 2000. During 2001, average loan balances
increased 26.1% and average deposits increased 26.4%, while during 2000, average
loan balances increased 24.8% and average deposit balances increased 23.3%.
Advertising and marketing expenses totaled $1.6 million for 2001, $1.3 million
for 2000 and $1.4 million for 1999. Marketing costs are necessary to attract
loans and deposits at the newly chartered banks, to announce new branch
openings, as well as the expansion of trust and investment services through
WAMC, and to continue to promote community-based products at the more
established locations. The level of marketing expenditures depends on the type
of marketing programs utilized which are determined based on the market area,
targeted audience, competition and various other factors. Management has begun
to more effectively utilize targeted marketing programs in the more mature
market areas.
Professional fees, which includes legal, audit and tax fees, external loan
review costs and normal regulatory exam assessments, totaled $2.1 million in
2001, $1.7 million in 2000 and $1.2 million in 1999. These increases are
attributable to the general growth in the Company's total assets and fee-based
businesses.
Amortization of intangibles expense totaled $685,000 in 2001, $713,000 in 2000
and $251,000 in 1999. The goodwill and other intangibles primarily relate to the
October 1999 Tricom acquisition and the mid-1998 acquisition of the MMF leasing
division at Lake Forest Bank. The increase in 2000 reflects the inclusion of a
full year of amortization for the Tricom acquisition. Effective January 1, 2002,
pursuant to the provisions of SFAS 142, these intangible assets will no longer
be amortized, but will be tested at least annually for impairment. See Note 2 to
the Consolidated Financial Statements for further discussion.
In 2000, the Company recorded a pre-tax charge of $4.3 million as a result of a
fraud perpetrated against the Company's premium finance subsidiary. This charge
includes approximately $300,000 of professional fees associated with the
Company's pursuit of recovery of the loss as well as a partial recovery of
$200,000. The Company continues to pursue legal action against the parties
involved and is optimistic that it will receive additional recoveries of the
loss. However, the amount and timing of such recoveries, if any, are not known
at this time.
Other non-interest expenses were $11.3 million in 2001, $9.5 million in 2000 and
$7.7 million in 1999, reflecting increases of 19.3% in 2001 and 23.7% in 2000.
This category includes loan expenses, correspondent bank service charges,
insurance, postage, stationery and supplies, telephone, directors fees, and
other sundry expenses. These increases were generally caused by the Company's
expansion activities, including increased costs from the origination and
servicing of a larger base of deposit and loan accounts, and in 2000, the Tricom
acquisition, as discussed earlier.
INCOME TAXES
The Company recorded income tax expense of $10.4 million in 2001, $5.3 million
in 2000 and $4.7 million in 1999. The effective tax rates were 35.8%, 32.2% and
33.4% in 2001, 2000 and 1999, respectively. The lower effective rates in 2000
and 1999, as compared to 2001, were due to decreases in tax expense in 2000 and
1999 resulting from reductions in the valuation allowance previously established
regarding the Company's deferred tax assets. Please refer to Note 14 to the
Consolidated Financial Statements for further discussion and analysis of the
Company's tax position.
OPERATING SEGMENT RESULTS
As described in Note 21 to the Consolidated Financial Statements, the Company's
operations consist of five primary segments: banking, premium finance, indirect
auto, Tricom and trust and asset management. The Company's profitability is
primarily dependent on the net interest income, provision for possible loan
losses, non-interest income and operating expenses of its banking segment. The
net interest income of the banking segment includes income and related interest
costs from portfolio loans that were purchased from the premium finance and
indirect auto segments. For purposes of internal segment profitability analysis,
management reviews the results of its premium finance and indirect auto segments
as if all loans originated and sold to the banking segment were retained within
that segment's operations.
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The banking segment's net interest income for the year ended December 31, 2001
totaled $69.9 million as compared to $57.2 million for the same period in 2000,
an increase of $12.7 million, or 22.2%. The increase in net interest income for
2000 when compared to the total of $44.3 million in 1999 was $12.9 million, or
29.2%. These increases were the primarily the result of continued growth in the
loan portfolio. Average total loans increased 26% in 2001 and 25% in 2000. The
banking segment's non-interest income totaled $18.5 million in 2001, an increase
of $9.9 million, or 114.7%, when compared to the 2000 total of $8.6 million.
This increase was primarily due to an increase of $4.9 million in fees on
mortgage loans sold, reflecting heavy origination volumes driven by the low
interest rate environment and a strong local housing market, a $3.5 million
increase in fees from covered call option transactions which were entered into
to enhance the overall return on the investment portfolio and a $568,000
increase in service charges on deposits. In 2000, noninterest income for the
banking segment increased $1.5 million, or 20.8%, compared to the prior year
amount of $7.1 million. This increase was due primarily to increases in
equipment rental income of $866,000, call option premium income of $441,000 and
service charges on deposits of $374,000 and was offset partially by a decrease
of $295,000 in fees on mortgage loans sold. The reduction in fees on mortgage
loans sold in 2000 reflected low origination and refinancing activity due to
increasing mortgage interest rates. The banking segment's net income for the
year ended December 31, 2001 totaled $20.8 million, an increase of $6.1 million,
or 41.1%, as compared to the 2000 total of $14.8 million. The total segment
profit in 2000 increased $4.5 million, or 43.6%, over the $10.3 million that was
recorded in 1999. These after-tax segment profit increases were primarily the
result of higher levels of net interest income and non-interest income, as noted
above, and the general continued maturation and related profitability
improvements of the more established de novo bank subsidiaries.
Net interest income for the premium finance segment totaled $26.9 million for
the year ended December 31, 2001 and increased $12.1 million, or 81.5%, over the
$14.8 million in 2000. This increase resulted from higher levels of premium
finance receivables and lower funding costs in 2001 compared to 2000. In 2000,
net interest income for the premium finance segment increased $2.2 million, or
17.3%, over the 1999 total of $12.6 million. This increase resulted from higher
levels of premium finance receivables produced from various business development
efforts and other new product offerings. The premium finance segment's
non-interest income totaled $4.5 million, $3.8 million and $1.0 million for the
years ended December 31, 2001, 2000 and 1999, respectively. Noninterest income
for this segment reflects the gains from the sale of premium finance receivables
to an unrelated third party, as more fully discussed in the Consolidated Results
of Operations section. The Company began selling premium finance receivables to
an unrelated third party in the second quarter of 1999. Net after-tax profit of
the premium finance segment totaled $10.6 million, $2.6 million and $4.3 million
for the years ended December 31, 2001, 2000 and 1999, respectively. Net income
for 2000 was negatively impacted by a $4.3 million ($2.6 million after tax)
non-recurring charge related to a fraud perpetrated by one independent insurance
agent. Excluding this one-time charge, the premium finance segment profit
increased $5.4 million, or 103.5%, in 2001 compared to 2000, and increased
$922,000, or 21.6%, in 2000 compared to the segment's profit in 1999. The
improvements in profitability during both 2001 and 2000 (excluding the one-time
charge) were due mainly to the combination of higher volumes, lower funding
costs and the sales of excess originations to third parties.
Net interest income for the indirect auto segment totaled $6.8 million in 2001,
compared to the $6.5 million reported for 2000. The slight increase in net
interest income was due to lower funding cost in 2001 compared to 2000, offset
significantly by lower outstanding indirect auto loans. Net interest income
decreased $1.7 million, or 20.9%, in 2000 compared to 1999, due primarily to
higher funding costs in 2000 coupled with a slightly lower level of average
outstanding loans and slightly lower yields on such loans. Due to the impact of
the current economic and competitive environment surrounding indirect auto
lending, management has been reducing the level of new indirect automobile loans
originations. Indirect automobile loans were $184 million, $204 million, and
$255 million at December 31, 2001, 2000 and 1999, respectively. The indirect
auto segment after-tax profit totaled $2.2 million for the year ended December
31, 2001, an increase of $620,000, from the 2000 total of $1.6 million. This
segment' profitability in 2001 was negatively affected by a lower level of
outstanding balances, but was offset by lower funding costs as well as a lower
credit loss provision allocated to his portfolio due to a lower level of
charge-offs experienced in 2001. (See the "Credit Risk and Asset Quality"
section of this report.) In 2000, the after-tax segment profit decreased $1.1
million, or 40.4%, from the 1999 total of $2.7 million due primarily to the
decrease in net interest income noted above.
The Tricom segment data reflects the business associated with short-term
accounts receivable financing and value-added out-sourced administrative
services, such as data processing of payrolls, billing and cash manage-
- 62 -
ment services, that Tricom provides to its clients in the temporary staffing
industry. The segment's net interest income was $3.9 million in 2001, reflecting
an increase of $296,000, or 8.1%, compared to the $3.6 million reported for
2000. Non-interest income for 2001 was $4.1 million, decreasing $392,000, or
8.8%, from the $4.5 million reported in 2000. The segment's net income was $1.2
million in 2001, a decrease of $381,000, or 23.4%, compared to 2000. The
decrease in the segment's net income is attributable to the decrease in
non-interest income as well as an increase of $455,000, 8.5%, in operating
expenses. The revenue growth at Tricom has stagnated in recent quarters due to
the general slowdown in the economy and the reduction in the placement of
temporary staffing individuals by Tricom's customers. The segment's results for
1999, as reflected in Note 21 to the Consolidated Financial Statements, reflect
the operations of Tricom from October 1, 1999, the effective date of the
Company's acquisition of Tricom, through December 31, 1999.
The trust and asset management segment reflects the operations of WAMC, a trust
and investment subsidiary that began operations as a separate subsidiary in late
1998. Net interest income attributable to the trust segment totaled $755,000 for
2001, as compared to $508,000 in 2000 and $469,000 in 1999. The net interest
income reported by the trust segment is due to the trust company's earning
assets as well as the net interest allocated to the trust company from trust
account balances on deposit at Lake Forest Bank. Trust fee income totaled $2.0
million in 2001 and 2000, and $1.2 million in 1999. Trust fees include fees
earned on assets under management, custody fees and other trust related fees.
Trust fees have been negatively impacted by equity market declines and weaker
economic conditions. Lower valuations of the equity securities under management
affect the fees earned thereon. The trust segment after-tax loss totaled
$413,000 in 2001 and 2000, and $559,000 in 1999. The losses in each of these
years were also due to the fact that they represent the start-up years of WAMC.
As expected during the start-up years, operating expenses, primarily the
salaries and benefit costs of experienced trust professionals have exceeded
trust fees generated. With the acquisition of the Wayne Hummer Companies in
2002, management expects that the trust and asset management segment will begin
to reflect profitability in 2002.
ASSET-LIABILITY MANAGEMENT
As a continuing part of its financial strategy, the Company attempts to manage
the impact of fluctuations in market interest rates on 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
policies are established and monitored by management in conjunction with the
boards of directors of the Banks, subject to general oversight by the Company's
Board of Directors. The policy establishes guidelines for acceptable limits on
the sensitivity of the market value of assets and liabilities to changes in
interest rates.
Interest rate risk arises when the maturity or repricing periods and interest
rate indices of the interest earning assets, interest bearing liabilities, and
derivative financial instruments are different. The Company continuously
monitors not only the organization's current net interest margin, but also the
historical trends of these margins. In addition, management attempts to identify
potential adverse swings in net interest income in future years, as a result of
interest rate movements, by performing simulation analysis of potential interest
rate environments. If a potential adverse swing in net interest margin and/or
net income is identified, management then would take appropriate actions with
its asset-liability structure to counter these potentially adverse situations.
Please refer to earlier sections of this discussion and analysis for further
discussion of the net interest margin.
Since the Company's primary source of interest bearing liabilities is customer
deposits, the Company's ability to manage the types and terms of such deposits
may be somewhat limited by customer preferences and local competition in the
market areas in which the Company operates. The rates, terms and interest rate
indices of the Company's interest earning assets result primarily from the
Company's strategy of investing in loans and short-term securities that permit
the Company to limit its exposure to interest rate risk, together with credit
risk, while at the same time achieving an acceptable interest rate spread.
One method utilized by financial institutions to manage interest rate risk is to
enter into derivative financial instruments. A derivative financial instrument
includes interest rate swaps, interest rate caps and floors, futures, forwards,
option contracts and other financial instruments with similar characteristics.
As of December 31, 2001, the Company had $255 million notional principal amount
of interest rate cap contracts outstanding that mature between March 2002 and
February 2003. These contracts were purchased to mitigate the effect of rising
rates on certain floating rate deposit products. Additionally, during 2001, the
Company entered into a $25 million notional principal amount interest rate swap
contract that matures in February 2004. This contract effectively con-
- 63 -
verts a portion of the Company's floating-rate notes payable to a fixed-rate
basis, thus reducing the impact of rising interest rates on future interest
expense.
During 2001, the Company also entered into certain covered call option
transactions related to certain securities held by the Company. These
transactions are designed to increase the total return associated with holding
these securities as earning assets and are not used to manage exposure to
changing market interest rates. However, the Company's exposure to interest rate
risk may be affected by these transactions. To mitigate this risk, the Company
may acquire fixed rate term debt or use other financial derivative instruments.
The Company's exposure to interest rate risk is reviewed on a regular basis by
management and the boards of directors of the Banks and the Company. The
objective is to measure the effect on net income and to adjust balance sheet and
derivative financial instruments to minimize the inherent risk while at the same
time maximizing net interest income. Tools used by management include a standard
gap analysis and a rate simulation model whereby changes in net interest income
are measured in the event of various changes in interest rate indices. An
institution with more assets than liabilities repricing over a given time frame
is considered asset sensitive and will generally benefit from rising rates, and
conversely, a higher level of repricing liabilities versus assets would be
beneficial in a declining rate environment.
Standard gap analysis starts with contractual repricing information for assets,
liabilities and certain derivative financial instruments. These items are then
combined with repricing estimations for certain administered rate (NOW, savings
and money market accounts) and non-rate related products (demand deposit
accounts, other assets, other liabilities). The following table illustrates the
Company's estimated interest rate sensitivity and periodic and cumulative gap
positions as of December 31, 2001 (dollars in thousands):
---------------------------------------------------------------------------------------------------------------------------------
TIME TO MATURITY OR REPRICING
--------------------------------------------------------------------------
0-90 91-365 1-5 Over 5
Days Days Years Years Total
--------------------------------------------------------------------------
ASSETS:
Fed funds sold and securities purchased
under resale agreements $ 51,955 -- -- -- 51,955
Interest bearing deposits with banks 692 -- -- -- 692
Available-for-sale securities 127,946 38,366 83,538 135,500 385,350
Loans, net of unearned income 1,150,678 387,581 443,922 79,202 2,061,383
--------------------------------------------------------------------------
Total earning assets 1,331,271 425,947 527,460 214,702 2,499,380
Other assets -- -- -- 206,042 206,042
--------------------------------------------------------------------------
Total rate sensitive assets (RSA) $ 1,331,271 425,947 527,460 420,744 2,705,422
--------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits (1) $ 1,179,868 596,989 281,290 2,220 2,060,367
Short-term borrowings 28,074 -- -- -- 28,074
Federal Home Loan Bank advances -- -- 62,000 28,000 90,000
Notes payable 46,575 -- -- -- 46,575
Long-term debt - trust preferred securities -- -- -- 51,050 51,050
--------------------------------------------------------------------------
Total interest bearing liabilities 1,254,517 596,989 343,290 81,270 2,276,066
Demand deposits -- -- -- 254,269 254,269
Other liabilities -- -- -- 33,809 33,809
Shareholders' equity -- -- -- 141,278 141,278
EFFECT OF DERIVATIVE FINANCIAL INSTRUMENTS:
Interest rate swap (pay fixed, receive floating) (25,000) -- 25,000 -- --
--------------------------------------------------------------------------
Total rate sensitive liabilities and
shareholders' equity (RSL) $ 1,229,517 596,989 368,290 510,626 2,705,422
--------------------------------------------------------------------------
Repricing gap (RSA - RSL) $ 101,754 (171,042) 159,170 (89,882)
Cumulative repricing gap $ 101,754 (69,288) 89,882 --
Cumulative RSA/Cumulative RSL 108% 96% 104%
Cumulative RSA/Total assets 49% 65% 84%
Cumulative RSL/Total assets 45% 68% 81%
Cumulative GAP/Total assets 4% (3)% 3%
Cumulative GAP/Cumulative RSA 8% (4)% 4%
---------------------------------------------------------------------------------------------------------------------------------
(1) Non-contractual interest-bearing deposits are subject to immediate
withdrawal and therefore, included in 0-90 days.
- 64 -
While the gap position and related ratios illustrated in the table are useful
tools that management can use to assess the general positioning of the Company's
and its subsidiaries' balance sheets, it is only as of a point in time.
Additionally the gap position does not reflect the impact of the interest rate
cap contracts that may mitigate the effect of rising rates on certain floating
rate deposit products.
Management uses an additional measurement tool to evaluate its asset-liability
sensitivity that determines exposure to changes in interest rates by measuring
the percentage change in net interest income due to changes in interest rates
over a two-year time horizon. Management measures its exposure to changes in
interest rates using many different interest rate scenarios. One interest rate
scenario utilized is to measure the percentage change in net interest income
assuming an instantaneous permanent parallel shift in the yield curve of 200
basis points, both upward and downward. This analysis includes the impact of the
interest rate cap and swap agreements mentioned above. Utilizing this
measurement concept, the interest rate risk of the Company, expressed as a
percentage change in net interest income over a two-year time horizon due to
changes in interest rates, at December 31, 2001 and December 31, 2000, is as
follows:
---------------------------------------------------------------------------
+200 Basis -200 Basis
Points Points
---------------------------
Percentage change in net interest
income due to an immediate 200
basis point shift in the yield curve: (1)
December 31, 2001 7.2% (11.4)%
December 31, 2000 5.0% (1.6)%
---------------------------------------------------------------------------
(1) The December 31, 2001, 200 basis point instantaneous permanent parallel
shift downward in the yield curve impacted a majority of rate sensitive
assets by the entire 200 basis points, while certain interest-bearing
deposits may already be at their floor, or reprice significantly less than
200 basis points. This causes the results for 2001, in a 200 basis point
downward shift, to reflect a significantly larger decrease in net interest
income than shown for 2000.
These results are based solely on a permanent parallel shift in the yield curve
and do not reflect the net interest income sensitivity that may arise from other
factors, such as changes in the shape of the yield curve or the change in spread
between key market rates. The above results are conservative estimates due to
the fact that no management action to mitigate potential changes in net interest
income are included in this simulation process. These management actions could
include, but would not be limited to, delaying a change in deposit rates,
extending the maturities of liabilities, the use of derivative financial
instruments, changing the pricing characteristics of loans or modifying the
growth rate of certain types of assets or liabilities.
As previously noted in the "Net Interest Income" section of this report, the
Federal Reserve Bank cut short-term interest rates eleven times during 2001,
totaling 475 basis points and resulting in the lowest interest rate environment
in recent history. As reflected in the previous table, the Company believes its
balance sheet is well positioned to benefit in the event rates begin to rise in
2002, as is expected.
LIQUIDITY AND CAPITAL RESOURCES
Federal banking regulatory agencies established capital adequacy rules which
take into account risk attributable to balance sheet assets and off-balance
sheet activities. All bank holding companies must meet a minimum total
risk-based capital ratio of 8.0%. Of the 8.0% required, at least half must be
comprised of core capital elements defined as Tier 1 capital. The federal
agencies also have adopted leverage capital (Tier 1 capital as a percent of
average quarterly assets) guidelines which banking organizations must meet.
Under these guidelines, the most highly rated banking organizations must meet a
minimum leverage ratio of at least 3%, while lower rated banking organizations
must maintain a minimum leverage ratio of at least 4% to 5%. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Consolidated Financial Statements.
The following table reflects the capital guidelines established by the Federal
Reserve Bank for a bank holding company:
----------------------------------------------------------------------------
MINIMUM
CAPITAL ADEQUATELY WELL
REQUIREMENTS CAPITALIZED CAPITALIZED
----------------------------------------
Leverage ratio 3.0% 4.0% 5.0%
Tier 1 risk-based capital ratio 4.0% 4.0% 6.0%
Total risk-based capital ratio 8.0% 8.0% 10.0%
----------------------------------------------------------------------------
The Company's consolidated leverage ratio (Tier 1 capital/total fourth quarter
average assets less intangibles) and Tier 1 risk-based capital ratio were 7.1%
and 7.7%, respectively, at December 31, 2001, which are in excess of the "well
capitalized" regulatory levels. The Company's consolidated total risk-based
capital ratio was 8.5% at December 31, 2001, categorizing the Company as
"adequately capitalized". In January 2002, the Company became designated as a
Financial Holding Company, thereby requiring its depository institutions to
maintain their capital ratios in the "well capitalized" categories at all
- 65 -
times. Refer to Note 16 of the Consolidated Financial Statements for further
information on the capital positions of the Company's subsidiary banks. The
following table reflects various measures of the Company's capital at December
31, 2001 and 2000.
-----------------------------------------------------------------
2001 2000
----------------------
Average equity-to-average asset ratio 5.2% 5.2%
Leverage ratio 7.1 6.3
Tier 1 risk-based capital ratio 7.7 6.9
Total risk-based capital ratio 8.5 8.4
Dividend payout ratio 7.4 8.0
-----------------------------------------------------------------
The Company's principal source of funds at the holding company level are from
dividends from its subsidiaries, borrowings on its revolving credit line with an
unaffiliated bank, proceeds from trust preferred securities offerings and
additional equity offerings. Refer to Notes 10, 12 and 20 of the Consolidated
Financial Statements for further information on the Company's notes payable,
Trust Preferred Securities offerings and shareholders' equity, respectively. The
table below provides a summary of the funds raised through common stock public
offerings and Trust Preferred Securities public offerings over the last four
years: (dollars in millions)
---------------------------------------------------------------------
% of
Net increase in
Date of Type of proceeds regulatory
offering offering received capital
---------------------------------------------------------------------
October 1998 Trust preferred securities $31.1 78%
November 1999 Common Stock 6.0 78(1)
June 2000 Trust preferred securities 20.0 67
June 2001 Common Stock 22.2 49
---------------------------------------------------------------------
(1) Excludes $4.0 million in capital generated from issuanc of common stock in
connection with the acquisition of Tricom.
Over the last three years, as shown in the table above, proceeds from public
offerings of Trust Preferred Securities and the Company's common stock have
accounted for a decreasing portion of the increase in the Company's total
regulatory capital. While these funding and capital generation sources will
continue to be reviewed, the Company's reliance on internally generated capital
is expected to continue to grow.
Banking laws impose restrictions upon the amount of dividends which can be paid
to the holding company by the Banks. Based on these laws, the Banks could,
subject to minimum capital requirements, declare dividends to the Company
without obtaining regulatory approval in an amount not exceeding (a) undivided
profits, and (b) the amount of net income reduced by dividends paid for the
current and prior two years. In addition, the payment of dividends may be
restricted under certain financial covenants in the Company's revolving credit
line agreement. At January 1, 2002, subject to minimum capital requirements at
the Banks, approximately $10.1 million was available as dividends from the Banks
without prior regulatory approval. During 2001 and 2000, dividends paid by the
subsidiaries to Wintrust totaled $13.5 million and $16.0 million, respectively.
There were no dividends paid by the subsidiaries to Wintrust in 1999.
The Company declared its first semi-annual cash dividend on its common stock in
2000. A summary of the Company's cash dividends on common stock is as follows:
-------------------------------------------------------------------
Record Payable Per share amount
Date Date of cash dividend
-------------------------------------------------------------------
February 10, 2000 February 24, 2000 $0.0333
August 10, 2000 August 24, 2000 $0.0333
February 8, 2001 February 22, 2001 $0.0467
August 9, 2001 August 23, 2001 $0.0467
February 5, 2002 February 19, 2002 $0.0600
-------------------------------------------------------------------
The Company continues to target an earnings retention ratio of approximately 90%
to support continued growth. The dividends paid in 2001 represented a 40%
increase over the dividends paid in 2000. Along those same lines, the
semi-annual dividend declared on January 24, 2002 represents (on an annualized
basis) a 29% increase over 2001.
In January 2000, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to 450,000 shares of common stock, from time to
time, in open market or privately negotiated transactions. Through December 31,
2000, the Company repurchased a total of 363,450 shares at an average price of
$10.63 per share. The shares repurchased pursuant to this buyback program were
reissued with the Company's common stock offering in June 2001. No additional
shares were repurchased during 2001.
Liquidity management at the Banks involves planning to meet anticipated funding
needs at a reasonable cost. Liquidity management is guided by policies,
formulated and monitored by the Company's senior management and each Bank's
asset/liability committee, which take into account the marketability of assets,
the sources and stability of funding and the level of unfunded commitments. The
Banks' principal sources of funds are deposits, short-term borrowings and
capital contributions from the holding company. In addition, the Banks are
eligible to borrow under Federal Home Loan Bank advances, another source of
short-term liquidity.
- 66 -
Core deposits are the most stable source of liquidity for community banks due to
the nature of long-term relationships generally established with depositors and
the security of deposit insurance provided by the FDIC. Core deposits are
generally defined in the industry as total deposits less time deposits with
balances greater than $100,000. At December 31, 2001, approximately 61% of the
Company's total assets were funded by core deposits, as compared to
approximately 60% at the end of 2000. The remaining assets were funded by other
funding sources such as time deposits with balances in excess of $100,000,
borrowed funds, and the capital of the Banks. Due to the Company's strategy of
targeting high net worth individuals, the Company believes that many of its time
deposits with balances in excess of $100,000 are also a stable source of funds.
Liquid assets refer to money market assets such as Federal funds sold and
interest bearing deposits with banks, as well as available-for-sale debt
securities. Net liquid assets represent the sum of the liquid asset categories
less the amount of assets pledged to secure public funds. At December 31, 2001,
net liquid assets totaled approximately $174.6 million, compared to
approximately $164.0 million at December 31, 2000.
The Banks routinely accept deposits from a variety of municipal entities.
Typically, these municipal entities require that banks pledge marketable
securities to collateralize these public deposits. At December 31, 2001 and
2000, the Banks had approximately $116.0 million and $116.8 million,
respectively, of securities collateralizing such public deposits and other
short-term borrowings. Deposits requiring pledged assets are not considered to
be core deposits, and the assets that are pledged as collateral for these
deposits are not deemed to be liquid assets.
The Company is not aware of any known trends, commitments, events, regulatory
recommendations or uncertainties that would have any adverse effect on the
Company's capital resources, operations or liquidity.
CREDIT RISK AND ASSET QUALITY
Management believes that the loan portfolio is well diversified and well
secured, without undue concentration in any specific risk area. Control of loan
quality is continually monitored by management and is reviewed by the Banks'
Board of Directors and their Credit Committees on a monthly basis. Independent
external reviews of the loan portfolio are provided by the examinations
conducted by regulatory authorities and an independent entity engaged by the
Board of Directors. The allowance for possible loan losses is maintained at a
level deemed adequate to provide for losses inherent in the loan porfolio based
on management's assessment of a variety of factors, including actual charge-offs
during the year, historical loss experience, delinquent and other potential
problem loans, and an evaluation of economic conditions in the market area.
The allowance for possible loan losses consists of an allocated component and an
unallocated component. The allocated component of the allowance for possible
loan losses reflects expected losses resulting from analysis developed through
specific credit allocations for individual loans and reserve percentages for
each loan category. The specific credit allocations are based on a regular
analysis of all loans where the internal credit rating is at or above a
predetermined classification. The reserve percentages for each loan category are
based on historical credit losses, trends in delinquencies and local and
national economic trends. The allocated component also includes consideration of
the amounts necessary for concentrations and changes in portfolio mix and
volume. The unallocated portion of the allowance for possible loan losses
reflects management's estimate of probable inherent but undetected losses within
the portfolio due to uncertainties in economic conditions, delays in obtaining
information, including unfavorable information about a borrower's financial
condition, the difficulty in identifying triggering events that correlate
perfectly to subsequent loss rates, and risk factors that have not yet
manifested themselves in the loss allocation factors. Management believes the
unallocated portion of the allowance for possible loan losses is necessary due
to the imprecision inherent in estimating expected future credit losses.
- 67 -
Summary of Loan Loss Experience. The following table summarizes the changes in
the allowance for possible loan losses for the periods shown (dollars in
thousands:
----------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------
Balance at beginning of year $ 10,433 8,783 7,034 5,116 3,636
Provision for possible loan losses 7,900 5,055 3,713 4,297 3,404
Allowance acquired in business combination -- -- 175 -- --
Charge-offs:
Commercial and
commercial real estate 984 897 691 1,327 573
Home equity 25 -- -- 27 13
Residential real estate 34 50 14 84 --
Other 34 103 132 198 103
-----------------------------------------------------
Total core loan charge-offs 1,077 1,050 837 1,636 689
Premium finance receivables 3,062 1,294 456 455 1,126
Indirect auto loans 1,080 1,339 1,156 646 300
Tricom finance receivables 103 73 -- -- --
-----------------------------------------------------
Total charge-offs 5,322 3,756 2,449 2,737 2,115
-----------------------------------------------------
Recoveries:
Commercial and
commercial real estate 163 53 35 100 17
Home equity 72 -- -- 13 62
Residential real estate -- -- -- -- --
Other 1 5 6 76 9
-----------------------------------------------------
Total core loan recoveries 236 58 41 189 88
Premium finance receivables 245 129 167 127 77
Indirect auto loans 194 164 102 42 26
Tricom finance receivables -- -- -- -- --
-----------------------------------------------------
Total recoveries 675 351 310 358 191
-----------------------------------------------------
Net charge-offs 4,647 3,405 2,139 2,379 1,924
-----------------------------------------------------
Balance at end of year $ $ 13,686 10,433 8,783 7,034 5,116
-----------------------------------------------------
Year-end total loans, net of unearned income $ 2,061,383 1,558,020 1,278,249 992,062 712,631
Average total loans, net of unearned income 1,786,596 1,416,419 1,135,200 848,344 620,801
Allowance as percent of year-end total loans 0.66% 0.67% 0.69% 0.71% 0.72%
Net charge-offs to average total loans 0.26% 0.24% 0.19% 0.28% 0.31%
Net charge-offs to the provision for
possible loan losses 58.82% 67.36% 57.61% 55.36% 56.52%
----------------------------------------------------------------------------------------------------
Net charge-offs of core banking loans for the year ended December 31, 2001
totaled $841,000 as compared to a total of $992,000 for 2000. Net charge-offs of
core banking loans as a percentage of average core banking loans decreased in
2001 to 0.07%, compared to 0.11% in 2000.
Premium finance receivable net charge-offs for the year ended December 31, 2001
totaled $2.8 million as compared to $1.2 million in 2000. Net charge-offs were
0.79% of average premium finance receivables in 2001 versus 0.43% in 2000. The
increase in net charge-offs in 2001 was attributable, in part, to accounts with
smaller balances and higher delinquencies and charge-offs than the Company's
traditional premium finance portfolio. As a result, the Company eliminated more
than 1,300 relationships with insurance agencies that were referring business to
FIFC that had relatively smaller balances. The business associated with those
terminated relationships is becoming a less significant percentage of the
premium finance receivables portfolio.
Indirect auto loan net charge-offs decreased to $886,000 in 2001, compared to
$1.2 million in 2000. Net charge-offs as a percentage of average indirect auto
loans were 0.46% in 2001 and 0.50% in 2000.
- 68 -
The allowance for possible loan losses as a percentage of total net loans at
December 31, 2001 and 2000 was 0.66% and 0.67%, respectively. As a percent of
average total loans, total net charge-offs for 2001 and 2000 were 0.26% and
0.24%, respectively. While management believes that the allowance for possible
loan losses is adequate to provide for losses inherent in the portfolio, there
can be no assurances that future losses will not exceed the amounts provided
for, thereby affecting future earnings. Future additions to the allowance, which
are charged to earnings through the provision for possible loan losses, may be
necessary due to changes in economic conditions, including changes in real
estate values and interest rates, the level of delinquencies or charge-offs,
changes in the regulatory environment and other unforeseen factors.
Past Due Loans and Non-performing Assets. The following table classifies the
Company's non-performing loans as of December 31 for each of last five years
(dollars in thousands):
----------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------
Past Due greater than 90 days and still accruing:
Core banking loans:
Residential real estate and home equity $ 168 - 385 459 -
Commercial, consumer and other 1,059 651 328 341 868
Premium finance receivables 2,402 4,306 1,523 1,214 887
Indirect auto loans 361 397 391 274 11
Tricom finance receivables - - - - -
--------------------------------------------------
Total 3,990 5,354 2,627 2,288 1,766
--------------------------------------------------
Non-accrual loans:
Core banking loans:
Residential real estate and home equity 1,385 153 - 99 390
Commercial, consumer and other 1,180 617 1,895 1,388 392
Premium finance receivables 5,802 3,338 2,145 1,455 1,629
Indirect auto loans 496 221 298 195 29
Tricom finance receivables 104 - - - -
--------------------------------------------------
Total non-accrual loans 8,967 4,329 4,338 3,137 2,440
--------------------------------------------------
Total non-performing loans:
Core banking loans:
Residential real estate and home equity 1,553 153 385 558 390
Commercial, consumer and other 2,239 1,268 2,223 1,729 1,260
Premium finance receivables 8,204 7,644 3,668 2,669 2,516
Indirect auto loans 857 618 689 469 40
Tricom finance receivables 104 - - - -
--------------------------------------------------
Total non-performing loans 12,957 9,683 6,965 5,425 4,206
--------------------------------------------------
Other real estate owned 100 - - 587 -
--------------------------------------------------
Total non-performing assets $ 13,057 9,683 6,965 6,012 4,206
--------------------------------------------------
Total non-performing loans by category
as a percent of its own respective category:
Core banking loans:
Residential real estate and home equity 0.35% 0.05% 0.15% 0.27% 0.22%
Commercial, consumer and other 0.21% 0.18% 0.41% 0.43% 0.47%
Premium finance receivables 2.36% 2.44% 1.67% 1.50% 1.96%
Indirect auto loans 0.47% 0.30% 0.27% 0.22% 0.03%
Tricom finance receivables 0.57% - - - -
--------------------------------------------------
Total non-performing loans 0.63% 0.62% 0.54% 0.55% 0.59%
Total non-performing assets to total assets 0.48% 0.46% 0.41% 0.45% 0.40%
Non-accrual loans to total loans 0.43% 0.28% 0.34% 0.32% 0.34%
Allowance for possible loan losses as a
percentage of non-performing loans 105.63% 107.75% 126.10% 129.66% 121.64%
----------------------------------------------------------------------------------------------------
- 69 -
NON-PERFORMING CORE BANKING LOANS AND OTHER REAL ESTATE OWNED
Total non-performing loans for the Company's core banking business were $3.8
million as of December 31, 2001 and were comprised of $1.6 million of
residential real estate and home equity loans and $2.2 million of commercial,
commercial real estate and consumer loans. The non-performing residential real
estate and home equity loans increased $1.4 million from the December 31, 2000
balance and represented 0.35% of such outstanding loans at December 31, 2001.
The non-performing commercial, commercial real estate and consumer loans
increased $971,000 from the December 31, 2000 balance and represented 0.21% of
such outstanding loans at December 31, 2001, compared to 0.18% as of December
31, 2000. Non-performing core banking loans consist primarily of a small number
of commercial and real estate loans, which management believes are well secured
and in the process of collection. The small number of such non-performing loans
allows management to monitor closely the status of these credits and work with
the borrowers to resolve these problems effectively. The Company had $100,000 of
other real estate owned as of December 31, 2001 and none as of December 31,
2000.
NON-PERFORMING PREMIUM FINANCE RECEIVABLES
The table below presents the level of non-performing premium finance receivables
as of December 31, 2001 and 2000, and the amount of net charge-offs for the
years then ended.
-----------------------------------------------------------------------
2001 2000
-------------------------------
Non-performing premium
finance receivables $ 8,204,000 7,644,000
- as a percent of premium
finance receivables 2.36% 2.44%
Net charge-offs of premium
finance receivables $ 2,817,000 1,156,000
- as a percent of average
premium finance receivables 0.79% 0.43%
-----------------------------------------------------------------------
The level of non-performing premium finance receivables, although higher than
the amount at December 31, 2000, has declined since the levels at March 31,
2001, June 30, 2001 and September 30, 2001. Additionally, non-performing premium
finance receivables as a percent of total premium finance receivables
outstanding declined to 2.36% at December 31, 2001, from 2.73% and 2.44% at
September 30, 2001 and December 31, 2000, respectively. As previously noted, the
Company eliminated more than 1,300 relationships with insurance agencies that
were referring business to our premium finance subsidiary that had relatively
small balances and higher than normal delinquency rates. The business associated
with those accounts is gradually becoming a less significant percent of the
entire portfolio. Management continues to see progress in this portfolio and
expects the relative level of non-performing loans related to this portfolio to
decline in 2002.
It is important to note that the net charge-off ratio for premium finance
receivables is substantially less than the non-performing asset ratio. The ratio
of non-performing premium finance receivables fluctuates throughout the year due
to the nature and timing of canceled account collections from insurance
carriers. Collateral for premium finance loans is essentially the unearned
portion of the premium related to the underlying policy. Due to the nature of
collateral for premium finance receivables, it customarily takes 60-150 days to
convert the collateral into cash collections. Accordingly, the level of
non-performing premium finance receivables is not necessarily indicative of the
loss inherent in the portfolio. In the event of default, the Company has the
ability to cancel the insurance policy and collect the unearned portion of the
premium from the insurance carrier. In the event of cancellation, the cash
returned in payment of the unearned premium by the insurer should generally be
sufficient to cover the receivable balance, the interest and other charges due.
Due to notification requirements and processing time by most insurance carriers,
many receivables will become delinquent beyond 90 days while the insurer is
processing the return of the unearned premium. Management continues to accrue
interest until maturity as the unearned premium is ordinarily sufficient to
pay-off the outstanding balance and contractual interest due.
NON-PERFORMING INDIRECT AUTO LOANS
Total non-performing indirect automobile loans were $857,000 at December 31,
2001 and $618,000 at December 31, 2000. The ratio of these non-performing loans
to total indirect automobile loans was 0.47% at December 31, 2001 and 0.30% at
December 31, 2000. As noted in the Allowance for Possible Loan Losses table, net
charge-offs as a percent of total indirect automobile loans decreased to 0.46%
in 2001 from 0.50% in 2000. Despite the increase in the level of net
non-performing loans, these ratios continue to be below standard industry ratios
for this type of lending. Due to the impact of the current economic and
competitive environment surrounding this type of lending, management has been
reducing the level of new indirect automobile loans originated. Indirect
automobile loans at December 31, 2001were $184 million, a decrease of $19
million, or 10%, from the balance at December 31, 2000.
- 70 -
Potential Problem Loans. In addition to those loans disclosed under "Past Due
Loans and Non-performing Assets," there are certain loans in the portfolio which
management has identified, through its problem loan identification system, which
exhibit a higher than normal credit risk. However, these loans are still
considered performing and, accordingly, are not included in non-performing
loans. Examples of these potential problem loans include certain loans that are
in a past-due status, loans with borrowers that have recent adverse operating
cash flow or balance sheet trends, or loans with general risk characteristics
that the loan officer feels might jeopardize the future timely collection of
principal and interest payments. Management's review of the total loan portfolio
to identify loans where there is concern that the borrower will not be able to
continue to satisfy present loan repayment terms includes factors such as review
of individual loans, recent loss experience and current economic conditions. The
principal balances of potential problem loans as of December 31, 2001 and 2000
were approximately $23.8 million and $11.9 million, respectively. The December
31, 2001 balance includes two loans totalling $10.1 million. Both loans are
within the local geographic footprint of Wintrust, represent long-term banking
relationships and are supported with collateral.
Loan Concentrations. Loan concentrations are considered to exist when there are
amounts loaned to a multiple number of borrowers engaged in similar activities
which would cause them to be similarly impacted by economic or other conditions.
The Company had no concentrations of loans exceeding 10% of total loans at
December 31, 2001, except for loans included in the premium finance operating
segment.
EFFECTS OF INFLATION
A banking organization's assets and liabilities are primarily monetary. Changes
in the rate of inflation do not have as great an impact on the financial
condition of a bank as do changes in interest rates. Moreover, interest rates do
not necessarily change at the same percentage as does inflation. Accordingly,
changes in inflation are not expected to have a material impact on the Company.
An analysis of the Company's asset and liability structure provides the best
indication of how the organization is positioned to respond to changing interest
rates.
FORWARD-LOOKING STATEMENTS
This document contains 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. The Company intends 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 is including this
statement for purposes of invoking these safe harbor provisions. Such
forward-looking statements may be deemed to include, among other things,
statements relating to the Company's projected growth, anticipated improvements
in earnings, earnings per share and other financial performance measures, and
management's long-term performance goals, as well as statements relating to the
anticipated effects on financial results of condition from expected development
or events, the Company's business and growth strategies, including anticipated
internal growth, plans to form additional de novo banks and to open new branch
offices, and to pursue additional potential development or acquisition of banks
or specialty finance businesses. Actual results could differ materially from
those addressed in the forward-looking statements as a result of numerous
factors, including the following:
o The level of reported net income, return on average assets and return on
average equity for the Company will in the near term continue to be
impacted by start-up costs associated with de novo bank formations, branch
openings, and expanded trust and investment operations. De novo banks
typically require 13 to 24 months of operations before becoming profitable,
due to the impact of organizational and overhead expenses, the start-up
phase of generating deposits and the time lag typically involved in
redeploying deposits into attractively priced loans and other higher
yielding earning assets.
o The Company's success to date has been and will continue to be strongly
influenced by its ability to attract and retain senior management
experienced in banking and financial services.
o Although management believes the allowance for possible loan losses is
adequate to provide for losses inherent in the existing portfolio of loans
and leases, there can be no assurance that the allowance will prove
sufficient to cover actual future loan or lease losses.
- 71 -
o If market interest rates should move contrary t the Company's gap position
on interest earning assets and interest bearing liabilities, the "gap" will
work against the Company and its net interest income may be negatively
affected.
o The financial services business is highly competitive which may affect the
pricing of the Company's loan and deposit products as well as its services.
o The Company's ability to adapt successfully to technological changes to
compete effectively in the marketplace.
o Unforeseen future events that may cause slower than anticipated development
and growth of the Tricom business or changes in the temporary staffing
industry.
o Changes in the economic environment, competition, or other factors, may
influence the anticipated growth rate of loans and deposits, the quality of
the loan portfolio and loan and deposit pricing and may affect the
Company's ability to successfully pursue acquisition and expansion
strategies.
o The Company's ability to recover on the loss resulting from the fraudulent
loan scheme perpetrated against the Company's premium finance subsidiary in
the third quarter of 2000.
o Unforeseen future events surrounding the brokerage and asset management
business, including competition and related pricing of brokerage and asset
management products and difficulties integrating the acquisition of the
Wayne Hummer Companies.
- 72 -
DIRECTORS & Officers
--------------------------------------------------------------------------------
Wintrust Financial Corporation
------------------------------
DIRECTORS
Joseph Alaimo
Peter D. Crist
Bruce K. Crowther
Maurice F. Dunne, Jr. (Emeritus)
Bert A. Getz, Jr.
William C. Graft
Kathleen R. Horne
Raymond L. Kratzer
John S. Lillard (Chairman)
James B. McCarthy
Marguerite Savard McKenna
Albin F. Moschner
Dorothy M. Mueller
Thomas J. Neis
Christopher J. Perry
Hollis W. Rademacher
J. Christopher Reyes
Peter P. Rusin
John N. Schaper
John J. Schornack
Ingrid S. Stafford
Katharine V. Sylvester
Lemuel H. Tate (Emeritus)
Edward J. Wehmer
Larry V. Wright
OFFICERS
Edward J. Wehmer
President & Chief Executive Officer
David A. Dykstra
Senior Executive Vice President,
Chief Operating Officer & Chief
Financial Officer
Lloyd M. Bowden
Executive Vice President/Technology
Robert F. Key
Executive Vice President/Marketing
Richard B. Murphy
Executive Vice President/Chief
Credit Officer
Barbara A. Kilian
Senior Vice President/Finance
David L. Stoehr
Senior Vice President/Finance
Michael A. Cherwin
Vice President/Human Resources
David J. Galvan
Vice President/Investments
Richard J. Pasminski
Vice President/Controller
Jay P. Ross
Vice President/Database Marketing
Jolanta K. Slusarski
Vice President/Compliance
Helene A. Torrenga
Assistant Vice President/Finance
Lake Forest Bank & Trust Company
--------------------------------
DIRECTORS
Maurice F. Dunne, Jr. (Emeritus)
Maxine P. Farrell
Francis Farwell (Emeritus)
Randolph M. Hibben
Eugene Hotchkiss
Moris T. Hoversten (Emeritus)
John S. Lillard
Frank Mariani
John J. Meierhoff
Albin F. Moschner
Joseph Pasquesi
Hollis W. Rademacher
J. Christopher Reyes
Ellen Stirling
Edward J. Wehmer
EXECUTIVE OFFICERS
Randolph M. Hibben
Chairman & CEO
Edward J. Wehmer
Vice Chairman
John J. Meierhoff
President
Rachele L. Wright
President/Bank of Highwood-Fort Sheridan
Mary Beth Jones
President-West Lake Forest
Sandra McCraren
President-Highland Park
LOANS
Kurt K. Prinz
Executive Vice President/Senior Credit Officer
Kathryn Walker-Eich
Executive Vice President/Commercial Lending
Steve L. Madden
Senior Vice President/Commercial Lending
Janice C. Nelson
Senior Vice President/Consumer Lending
Stephen Milota
Vice President/Commercial Lending
Lori Higgins
Vice President/Loan Administration
Mary Satherlie
Vice President-West Lake Forest
Pat McNeilly
Assistant Vice President-Highwood
Laura Cascarano
Assistant Vice President-Highwood
- 73 -
Todd K. Grubich
Commercial Loan Officer
Maria Santello
Mortgage Loan Officer-Highwood
Susan Potash
Loan Servicing Officer-Highwood
Jane Gibbs
Loan Administration Officer-Highwood
Christopher Baker
Commercial Banking Officer/Credit Analyst-
West Lake Forest
James C. Miller
Assistant Vice President/MMF Leasing Services
PERSONAL BANKING
Lynn Van Cleave
Senior Vice President
Judy Moloney
Assistant Vice President
Michelle Parnell
Personal Banking Officer
Piera Dallabattista
Assistant Vice President-Highwood
April Thompson
Personal Banking Officer-Highwood
Shilpa Patel
Personal Banking Officer-West Lake Forest
Thomas Groth
Personal Banking Officer-West Lake Forest
Twila D. Hungerford
Vice President/Manager-Lake Bluff
OPERATIONS/FINANCE/OTHER
Mary Ann Gannon
Senior Vice President
Richard J. Pasminski
Vice President/Controller
Margaret Zacher
Assistant Controller
Kathleen E. Bickmore
Assistant Vice President/Operations
Pamela Barker
Assistant Vice President/Operations
Andrea Levitt
Administration Officer
Carolyn P. Szymanski
Public Relations Officer
Jo Marie Loesch
Operations Officer
HINSDALE BANK & Trust Company
--------------------------------
DIRECTORS
Peter D. Crist
Diane Dean
Donald Gallagher
Elise Grimes
Robert D. Harnach
Dennis J. Jones
Douglas J. Lipke
James B. McCarthy
James P. McMillin
Mary Martha Mooney
Frank J. Murnane, Sr. (Emeritus)
Richard B. Murphy
Joel Nelson (Emeritus)
Margaret O'Brien Stock
Hollis W. Rademacher
Ralph J. Schindler
Katharine V. Sylvester
Robert Thompson
Edward J. Wehmer
Lorraine Wolfe
EXECUTIVE OFFICERS
Dennis J. Jones
Chairman & CEO
Richard B. Murphy
President
David LaBrash
President-Clarendon Hills Bank
Stephen C. Pleimling
President-The Community Bank of
Western Springs
Roberta Head
President--Riverside Bank
LOANS
Richard Stefanski
Senior Vice President/Indirect
Lending
Eric Westberg
Senior Vice President/Mortgages
Kay Olenec
Senior Vice President/Mortgages
Edward Farrel
Senior Vice President
Robert D. Meyrick
Vice President/Indirect Lending
Timothy S. Murphy
Vice President/Indirect Lending
Cora Mae Corley
Assistant Vice President
Pat Gray
Assistant Vice President
Kathy Oergel
Assistant Vice President
Phyllis Long
Assistant Vice President
Brad Hettich
Commercial Loan Officer
Jason Bledsoe
Commercial Loan Officer
Matthew Corley
Commercial Loan Officer
Maria Chialdikis
Loan Processing Officer
Cheryl Cummings
Loan Processing Officer
PERSONAL BANKING/OPERATIONS
Anne O'Neill
Vice President & Cashier
Michelle Kennedy
Vice President/Controller
Michelle Paetsch
Assistant Vice President
Amy Boburka
Assistant Vice President
Holly Bishop
Assistant Vice President
Carol Franzo
Assistant Vice President
Kim Fernandez
Operations Officer
Patricia Mayo
Operations Officer
Rhonda Sippel
Accounting Officer
- 74 -
NORTH SHORE COMMUNITY BANK & TRUST COMPANY
------------------------------------------
DIRECTORS
Gilbert W. Bowen
T. Tolbert Chisum
Thomas J. Dammrich
Maurice F. Dunne, Jr.
James Fox (Director Emeritus)
John W. Haben
Randolph M. Hibben
Gayle Inbinder
L. Hamilton Kerr, III
Donald F. Krueger
Thomas J. McCabe, Jr.
Marguerite Savard McKenna
Robert H. Meeder
Donald L. Olson
Christopher J. Perry
Hollis W. Rademacher
John J. Schornack
Ingrid S. Stafford
Lemuel H. Tate (Chairman Emeritus)
Elizabeth C. Warren
Edward J. Wehmer
Stanley R. Weinberger
Richard J. Witry
EXECUTIVE OFFICERS
L. Hamilton Kerr, III
Chairman & CEO
Robert H. Meeder
President
Donald F. Krueger
Executive Vice President/Operations
LOANS
James L. Sefton
Executive Vice President/Senior
Credit Officer
Lauretta Burke
Senior Vice President/Lending/
Manager -Skokie
Mark A. Stec
Senior Vice President/Mortgages
John P. Burk
Vice President/Lending
Robert Clausen
Vice President/Commercial Lending
Mary Carole Gavula
Vice President/Mortgages
Susan Mundy
Vice President/Mortgages
Gina Stec
Vice President/Lending/Manager-
Winnetka
Ann T. Tyler
Vice President/Loan Administration
Richard Chan
Assistant Vice President
Romelia Lemus
Assistant Vice President
Kelly Mishka
Loan Operations Officer
Steve Bailen
Loan Officer
Jaki Trigg
Loan Operations Officer
PERSONAL BANKING
Leslie A. Niemark
Vice President/Manager-Glencoe
James P. Waters
Vice President
Catherine W. Biggam
Assistant Vice President
Michael T. Donnelly
Assistant Vice President
Eric I. Jordan
Assistant Vice President
Maureen A. Nicholl
Assistant Vice President
Diane Schwartz
Assistant Vice President
Beatrice Borre
Personal Banking Officer
David Sweeney
Personal Banking Officer
Connie Berman
Personal Banking Officer
Ingrid Brewer
Personal Banking Officer
FINANCE/OPERATIONS
John A. Barnett
Vice President/Controller
Jennifer A. Kocour
Assistant Vice President/Human
Resources/Marketing
Angelica Escobar
Assistant Controller
Karin Jacobson
Assistant Teller Manager
LIBERTYVILLE BANK & TRUST COMPANY
---------------------------------
DIRECTORS
Neville Carr
Bert Carstens
David A. Dykstra
Bert A. Getz, Jr.
Donald Gossett
Jeffrey Harger
James Mahoney
Richard Nakon
William Newell
Hollis W. Rademacher
John Schaper
Jane Stein
Jack Stoneman
Edward J. Wehmer
Edward Werdell
EXECUTIVE OFFICERS
Bert Carstens
Chairman & CEO
Edward Werdell
President
Crystal McClure
President/Wauconda Community Bank
COMMERCIAL BANKING
Brian Mikaelian
Executive Vice President/Senior Credit Officer
William Westerman
Executive Vice President
Ronald Schroeder
Senior Vice-President/Wauconda
Michael Buchert
Vice President
Randolph Webster
Vice President
Betty Berg
Vice President/Commercial Banking Services
Barbra Meyer
Credit Administration Officer
RESIDENTIAL REAL ESTATE
Scott Johnson
Vice President
Michael Spies
Vice President
Thomas Eardley
Mortgage Representative
Dorthy Nemsick
Mortgage Representative
- 75 -
PERSONAL BANKING
Sharon Worlin
Senior Vice President
Ursula Schuebel
Vice President
Bobbie Callese
Assistant Vice President
Deborah Motzer
Assistant Vice President
Julie Rolfsen
Assistant Vice President
Karen Schmidt
Assistant Vice President
Colleen Turley
Assistant Vice President
Karen Bouas
Assistant Vice President
Rachel Vincent
Personal Banking
Cindy Tysland
Personal Banking Officer
OPERATIONS/FINANCE
Suzanne Chamberlain
Vice President/Operations
Lynn Wiacek
Vice President/Controller
Linda Terrian
Assistant Controller
Irene Huff
Teller Operations Officer
Dwayne Nicholson
Operations Officer/MIS
Deborah Wrigley
Operations Officer/Loan
Administraion
Joy Botsford
Operations Officer/Loan
Administration
BARRINGTON BANK & TRUST COMPANY, N.A.
--------------------------------------
DIRECTORS
James H. Bishop
Raynette Boshell
Edwin C. Bruning
Dr. Joel Cristol
Bruce K. Crowther
Scott A. Gaalaas
William C. Graft
Kathleen R. Horne
Peter Hyland
Sam Oliver
Mary F. Perot
Hollis W. Rademacher
Peter P. Rusin
George L. Schueppert
Dr. Richard Smith
Richard P. Spicuzza
W. Bradley Stetson
Charles VanFossan
Edward J. Wehmer
Tim Wickstrom
EXECUTIVE OFFICERS
James H. Bishop
Chairman & CEO
W. Bradley Stetson
President
Georgeanna Mehr
President, Hoffman Estates
Community Bank
LOANS
Linda J. Schiff
Senior Vice President
Jon C. Stickney
Senior Vice President
Barbara E. Tomasello
Vice President
John D. Haniotes
Vice President
Charlotte Neault
Vice President
Christopher P. Marrs
Assistant Vice President
Peter J. Santangelo
Assistant Vice President
Karen G. Smith
Loan Administration Officer
Kathy E. Zuniga
Loan Operaions Officer
PERSONAL BANKING/OPERATIONS
Paul R. Johnson
Vice President/Retail Banking
James Weiler
Vice President/Controller
Gloria B. Andersen
Assistant Vice President
Personal Banking
- 76 -
CRYSTAL LAKE BANK & TRUST
COMPANY, N.A.
-------------------------
DIRECTORS
Ronald Bykowski
Charles D. Collier
Henry L. Cowlin
Donald Franz
John W. Fuhler
Diana Kenney
Dorothy M. Mueller
Thomas J. Neis
Marshall Pedersen
Anthony Pintozzi Jr.
Ormel J. Prust
Hollis W. Rademacher
Candy Reedy
Nancy Riley
Robert Robinson
Robert C. Staley
James Thorpe
Edward J. Wehmer (Chairman)
EXECUTIVE OFFICERS
Charles D. Collier
President & CEO
James Thorpe
Executive Vice President/Loans
Pam Umbarger
Senior Vice President/Operations
Phil Oeffling
President-McHenry Bank & Trust
Ormel J. Prust
Executive Vice President-McHenry
Bank & Trust
LOANS
Monica Garver
Vice President, Manager/Residential Loans
Mark J. Peteler
Vice President/Construction Loans
Rosemarie Smith
Vice President-McHenry Bank & Trust
Joan Bassak
Vice President
PERSONAL BANKING/OPERATIONS
Pamela L. Bialas
Assistant Vice President
Peter Fidler
Controller
NORTHBROOK BANK & TRUST COMPANY
----------------------------------
DIRECTORS
Patrick J. Caruso
Daniel E. Craig
David A. Dykstra
Rockwood S. Edwards
Joel S. Garson
Amy C. Kurson
David P. Masters
Hollis W. Rademacher
Penelope J. Randel
Richard C. Rushkewicz
Jeffrey B. Steinback
Todd W. Stetson
Edward J. Wehmer (Chairman)
EXECUTIVE OFFICERS
Richard C. Rushkewicz
President and CEO
David P. Masters
Executive Vice President/Lending
LOANS
Kathryn A. Nellis
Assistant Vice President
PERSONAL BANKING
Kenneth E. Tremaine
Senior Vice President
Patricia A. Klingeman
Personal Banking Officer
Marla S. Giblichman
Personal Banking Officer
FINANCE/OPERATIONS
Edward W. Bettenhausen
Senior Vice President
Rosemarie D. Mann
Operations Officer
- 77 -
WINTRUST ASSET MANAGEMENT COMPANY
---------------------------------
DIRECTORS
Joseph Alaimo
James F. Duca II
David A. Dykstra
Bert A. Getz, Jr.
Robert Harnach
Randolph M. Hibben
John S. Lillard
Hollis W. Rademacher
Richard P. Spicuzza
Robert C. Staley
Edward J. Wehmer
Stanley R. Weinberger
EXECUTIVE OFFICERS
Joseph Alaimo
Chairman
James F. Duca II
President & CEO
OFFICERS
Maria Bora
Trust Officer/Lake Forest
Susan Gavinski
Assistant Vice President/Lake Forest
Judith McAndrew
Trust Officer/Lake Forest
Anita E. Morris
Vice President/Lake Forest
Laura H. Olson
Vice President/Lake Forest
Virginia Rickmeier
Trust Officer/Lake Forest
Sandra L. Shinsky
Vice President/Lake Forest
Joseph Vanderbosch
Vice President/Lake Forest
Edward Edens
Vice President/Hinsdale
Gerard B. Leenheers
Vice President/Hinsdale
Kevin D. Mitzit
Vice President/Hinsdale
Kay Stevens
Vice President/Hinsdale
Ann Wiesbrock
Vice President/Hinsdale
T. Tolbert Chisum
Managing Director of
Marketing/North Shore
Jennifer Czerwinski
Vice President/North Shore
Elizabeth Karabatsos
Trust Officer/North Shore
Timothy J. Keefe
Vice President/Barrington
Kenneth H. Cooke
Vice President/Northbrook
WAYNE HUMMER INVESTMENTS L.L.C.
-------------------------------
DIRECTORS
Steven R. Becker
James F. Duca II
David A. Dykstra
Laura A. Kogut
Raymond L. Kratzer
John S. Lillard
Edward J. Wehmer
Richard Wholey
EXECUTIVE OFFICERS
Raymond L. Kratzer
Chief Executive Officer
George T. "Ted" Becker
Executive Vice President, Chief Financial Officer
Laura A. Kogut
Executive Vice President, Chief Operations
Officer
David P. Poitras
Executive Vice President & Director of Fixed
Income
FOCUSED INVESTMENTS L.L.C.
---------------------------
EXECUTIVE OFFICERS:
Laura A. Kogut
President & CEO
Jenny J. Charles
Chief Operations Officer
Daniel J. Marks
Chief Financial Officer & Relationship Manager
Thomas E. Stamborski, CFP
National Sales Manager & Director of Marketing
- 78 -
WAYNE HUMMER MANAGEMENT
COMPANY
---------------------------
DIRECTORS
Joseph Alaimo
Mark H. Dierkes
James F. Duca II
David A. Dykstra
Phillip W. Hummer
John S. Lillard
David P. Poitras
Thomas J. Rowland
Edward J. Wehmer
EXECUTIVE OFFICERS
Mark H. Dierkes, CFA
Managing Director, First Vice
President/Investments
Philip W. Hummer
Managing Director
David P. Poitras
Managing Director, First Vice
President
Thomas Rowland, CFA
Managing Director, First Vice
President/Investments
ADMINISTRATION
Amy B. Goeldner, CFA
Vice President, Portfolio
Manager
David D. Cox, CFA
Portfolio Manager
Damaris (Doni) E. Martinez
Vice President/Administration
Jean M. Maurice
Treasurer
FIRST INSURANCE FUNDING CORP.
-----------------------------
DIRECTORS
Frank J. Burke
David A. Dykstra
Hollis W. Rademacher
Edward J. Wehmer (Chairman)
EXECUTIVE OFFICERS
Frank J. Burke
President & CEO
Robert G. Lindeman
Executive Vice President/Information
Technology
Mark A. Steenberg
Executive Vice President/Operations
FINANCE/MARKETING/OPERATIONS
Michelle H. Perry
Senior Vice President/CFO
Matthew E. Doubleday
Senior Vice President/Marketing
Mark C. Lucas
Senior Vice President/Asset
Management
G. David Wiggins
Senior Vice President/Loan
Origination
Kimberly J. Malizia
Vice President/Cash Management
John W. Dixon
Vice President/General Counsel
Amy J. Evola
Vice President/Inside Sales
Mary Kay Francel
Assistant Vice President/
Cash Management
Russell L Goldstein
Assistant Vice President/Asset
Management
TRICOM, INC. OF MILWAUKEE
----------------------------
DIRECTORS
Julie Ann Blazei
David A. Dykstra
Dennis J. Jones
John Leopold
Mary Martha Mooney
Hollis W. Rademacher
Katharine V. Sylvester
Edward J. Wehmer (Chairman)
SENIOR STAFF
John Leopold
President
Julie Ann Blazei
Director of Operations and
Technology Officer
Mary Jo Heim
Accounting Manager
Linda Walsch
Payroll Services Manager
Laura Dykstra
Client Services Manager
Sandra Sell
Credit Manager/Account
Executive
- 79 -
WINTRUST INFORMATION TECHNOLOGY
SERVICES (WITS)
-----------------------------------
OFFICERS
Loyd Bowden
President
Sue Greffin
Internet Banking Manager
Tara Delaney-Grimes
Item Imaging Manager
Glenn Ritchie
Senior Systems Engineer
Dennis Brower
Senior Network Engineer
Ron Henriksen
Advanced Network Engineer
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CORPORATE LOCATIONS
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WINTRUST FINANCIAL CORPORATION
727 North Bank Lane
Lake Forest, IL 60045
847-615-4096
www.wintrust.com
LAKE FOREST BANK & Trust Company
Lake Forest Locations
Main Bank
727 North Bank Lane
Lake Forest, IL 60045
847-234-2882
www.lakeforestbank.com
Main Drive-thru
780 North Bank Lane
Lake Forest, IL 60045
847-615-4022
West Lake Forest
810 South Waukegan Avenue
Lake Forest, IL 60045
847-615-4080
West Lake Forest Drive-thru
911 Telegraph Road
Lake Forest, IL 60045
847-615-4098
Lake Bluff
103 East Scranton Avenue
Lake Bluff, IL 60044
847-615-4060
Bank of Highwood - Fort Sheridan
507 Sheridan Road
Highwood, IL 60040
847-266-7600
www.bankofhwfs.com
Highland Park Bank & Trust
600 Central Avenue
Port Clinton Square
Suite 142 (Facing First Street)
Highland Park, Illinois 60035
(opening soon)
MMF Leasing Services
810 S. Waukegan Road
Lake Forest, IL 60045
847-604-5060
HINSDALE BANK & TRUST COMPANY
Hinsdale Locations
Main Bank
25 East First Street
Hinsdale, IL 60521
630-323-4404
www.hinsdalebank.com
Drive-thru
130 West Chestnut
Hinsdale, IL 60521
630-655-8025
Clarendon Hills Bank
200 West Burlington Avenue
Clarendon Hills, IL 60514
630-323-1240
www.clarendonhillsbank.com
ATM Drive-thru
5 South Walker Ave
Clarendon Hills, IL 60514
The Community Bank of Western Springs
1000 Hillgrove Avenue
Western Springs, IL 60558
708-246-7100
www.communitybankws.com
Riverside Bank
17 E. Burlington
Riverside, IL 60546
708-447-3222
www.bankriverside.com
NORTH SHORE COMMUNITY BANK &
TRUST COMPANY
Wilmette Locations
Main Bank
1145 Wilmette Avenue
Wilmette, IL 60091
847-853-1145
www.nscbank.com
Drive-thru
720 12th Street
Wilmette, IL 60091
4th & Linden Walk-up
351 Linden Ave
Wilmette IL 60091
Glencoe Locations
362 Park Avenue
Glencoe, IL 60022
847-835-1700
Drive-thru
633 Vernon Avenue
Glencoe, IL 60022
Winnetka
576 Lincoln Ave
Winnetka, IL 60093
847-441-2265
Skokie
5049 Oakton Street
Skokie, IL 60077
847-933-1900
LIBERTYVILLE BANK & TRUST COMPANY
Libertyville Locations
Main Bank
507 North Milwaukee Avenue
Libertyville, IL 60048
847-367-6800
www.libertyvillebank.com
Drive-thru
201 Hurlburt Court
Libertyville, IL 60048
847-247-4045
South Libertyville
1167 South Milwaukee Avenue
Libertyville, IL 60048
847-367-6800
Wauconda Community Bank
Main Bank
495 West Liberty Street
Wauconda, IL 60084
847-487-2500
www.waucondabank.com
Drive-thru
1180 Dato Lane
Wauconda, IL 60084
847-487-3770
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BARRINGTON BANK & TRUST COMPANY
Barrington Locations
Main Bank
201 S. Hough Street
Barrington, IL 60010
847-842-4500
www.barringtonbank.com
Mortgage Department
202 S. Cook Street
Barrington, IL 60010
847-842-4674
Corporate Locations
Community Advantage
202 S. Cook Street
Barrington, IL 60010
847-842-7980
www.community-advantage.com
Hoffman Estates Community Bank
1375 Palatine Road
Hoffman Estates, IL 60195
847-963-9500
www.hecommunitybank.com
CRYSTAL LAKE BANK & TRUST COMPANY
Crystal Lake Locations
Main Bank
70 N. Williams Street
Crystal Lake, IL 60014
815-479-5200
www.crystallakebank.com
Drive-thru
27 N. Main Street
Crystal Lake, IL 60014
South Crystal Lake
1000 McHenry Avenue
Crystal Lake, IL 60014
815-479-5715
McHenry Bank & Trust
3322 West Elm Street
McHenry, IL 60050
815-344-6600
www.mchenrybank.com
NORTHBROOK BANK & TRUST COMPANY
Main Bank
1100 Waukegan Road
Northbrook, Illinois 60062
847-418-2800
www.northbrookbank.com
WINTRUST ASSET MANAGEMENT
COMPANY
727 North Bank Lane
Lake Forest, IL 60045
847-234-2882
25 East First Street
Hinsdale, IL 60521
630-323-4404
720 12th Street - 2nd Floor
Wilmette, IL 60091
847-853-2093
201 S. Hough Street
Barrington, IL 60010
847-842-4500
1100 Waukegan Road
Northbrook, IL 60062
847-418-2800
WAYNE HUMMER INVESTMENTS, L.L.C.
300 South Wacker
Suite 1500
Chicago, Illinois 60606
312-431-1700
www.whummer.com
200 East Washington St.
Appleton, WI 54911
920-734-1474
WAYNE HUMMER MANAGEMENT
COMPANY
300 South Wacker
Suite 1340
Chicago, IL 60606
312-431-1700
www.whmgmtco.com
FOCUSED INVESTMENTS L.L.C.
300 South Wacker
Suite 1680
Chicago, Illinois 60606
312-431-1700
www.focusedinvestments.com
FIRST INSURANCE FUNDING CORP.
450 Skokie Blvd., Suite 1000
Northbrook, IL 60062
847-374-3000
www.firstinsurancefunding.com
TRICOM, INC. OF MILWAUKEE
11270 West Park Place
Suite 100
Milwaukee, WI 53224
414-410-2200
www.tricom.com
WINTRUST IMFORMATION TECHNOLGY
SERVICES
851 North Villa Ave.
Villa Park. IL 60181
630-516-4060
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CORPORATE INFORMATION
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PUBLIC LISTING AND MARKET SYMBOL
The Company's Common Stock is
traded on The Nasdaq Stock Market(R)
under the symbol WTFC. The stock
abbreviation appears as "WintrstFnl" in
the Wall Street Journal.
WEBSITE LOCATION
The Company maintains a financial
relations internet website at the following
location: www.wintrust.com
ANNUAL MEETING OF SHAREHOLDERS
May 23, 2002
Hyatt Deerfield
1750 Lake Cook Road
Deerfield, Illinois
10:00 A.M.
FORM 10-K
The Form 10-K Annual Report to the
Securities and Exchange Commission
will be available to holders of record
upon written request to the Secretary
of the Company. The information is
also available on the Internet at the
Securities and Exchange Commission's
website. The address for the
web site is: http://www.sec.gov.
TRANSFER AGENT
Illinois Stock Transfer Company
209 West Jackson Boulevard
Suite 903
Chicago, Illinois 60606
Telephone: 312-427-2953
Facsimile: 312-427-2879
PRIMARY MARKET MAKERS FOR
WINTRUST FINANCIAL CORPORATION
COMMON STOCK
Advest, Inc.
First Union Securities, Inc.
Howe Barnes Investments, Inc.
RBC Dain Rauscher Capital Markets
Sandler O'Neill & Partners
Stifel, Nicolaus & Company, Inc.
U.S. Bancorp Piper Jaffray
William Blair & Co.
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