WINTRUST FINANCIAL CORPORATION
1997 ANNUAL REPORT
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
(dollars in thousands, except per share data)
SELECTED FINANCIAL CONDITION DATA
(AT END OF PERIOD):
<S> <C> <C> <C> <C> <C>
Total assets $1,053,400 $ 706,037 $ 470,890 $ 354,158 $ 188,590
Total deposits 917,701 618,029 405,658 221,985 98,264
Total loans 712,631 492,548 258,231 193,982 109,276
Notes payable 20,402 22,057 10,758 6,905 4,837
Total shareholders' equity 68,790 42,620 40,487 25,366 17,227
- --------------------------------------------------------------------------------------------------------------------------
SELECTED STATEMENT OF OPERATIONS DATA:
Net interest income $ 26,772 $ 14,882 $ 9,700 $ 7,873 $ 4,355
Net income (loss)(1) 4,846 (973) 1,497 (2,236) (3,339)
Net income (loss) per common share-basic (1) 0.62 (0.16) 0.27 (0.56) (1.14)
Net income (loss) per common share-diluted (1) 0.60 (0.16) 0.24 (0.56) (1.14)
- --------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
Performance Ratios:
Net interest margin 3.41% 2.91% 2.96% 3.35% 3.83%
Net interest spread 2.92% 2.40% 2.41% 3.07% 3.30%
Non-interest income to average assets 0.58% 1.34% 2.36% 0.57% 0.89%
Non-interest expense to average assets(1) 3.18% 4.05% 4.37% 4.14% 5.84%
Net overhead ratio(1) 2.60% 2.71% 2.01% 3.57% 4.95%
Return on average assets(1) 0.56% (0.17)% 0.40% (0.88)% (2.60)%
Return on average equity(1) 7.88% (2.33)% 4.66% (12.20)% (25.40)%
Loan-to-deposit ratio 77.7% 79.7% 63.7% 87.4% 111.2%
Average interest-earning assets to
average interest-bearing liabilities 109.93% 110.73% 111.37% 106.61% 115.42%
Asset Quality Ratios:
Non-performing loans to total loans 0.59% 0.36% 0.74% 0.01% 0.00%
Non-performing assets to total assets 0.40% 0.25% 0.41% 0.01% 0.00%
Allowance for possible loan losses to:
Total loans 0.72% 0.74% 1.07% 0.88% 1.24%
Non-performing loans 121.64% 204.15% 143.91% N/M N/M
Other Data at end of period:
Number of:
Bank subsidiaries 6 5 4 3 2
Banking offices 17 14 11 5 3
==========================================================================================================================
<FN>
(1) For the year ended December 31, 1996, the Company recorded nonrecurring
merger-related expenses of $891,000.
</FN>
</TABLE>
- 1 -
<PAGE>
TO THE SHAREHOLDERS OF WINTRUST
Welcome to your copy of Wintrust's second annual report.
This is the only time in our history when we'll ever be able to say we're
twice as old as we were last year. And while we didn't double in size, this
report will show you that we did grow rather impressively since we became a
publicly traded company less than two years ago.
We continued to build shareholder value by creating de novo bank franchises,
and we move closer to our goal of becoming a high performing financial
institution.
**** Asset Growth Bar Chart OMITTED ****
1997'S FINANCIAL HIGHLIGHTS.
You can see the details in the accompanying charts and financial
statements, but the headlines are especially impressive when you view them
together. We did a lot of growing in 1997.
o Net income grew to $4.8 million from a loss of $973,000 in 1996.
o Earnings per share increased to $.60 per share in 1997 from ($.16) per
share in 1996.
o Assets grew 49% to $1.1 billion from $706 million.
o Total loans increased from $493 million to $713 million, a gain of $220
million or 45%.
o Deposits grew from $618 million to $918 million, or 49%.
o The number of deposit accounts grew by about 50%.
o Even including our new banks, non-interest expenses as a percent of assets
declined from 4.0% in 1996 to 3.2% in 1997, which is lower than peer group
at 3.3%.
o A public offering of 1.4 million Wintrust common shares was completed (and
oversubscribed), raising a net $20.4 million of new capital.
o Wintrust was listed on the Nasdaq National Market System (WTFC).
o A new employee stock purchase plan and stock incentive plan were approved
by shareholders.
o Three new banking facilities were opened, bringing the total to 17.
o First Insurance Funding Corp. volume grew 26% over 1996.
**** Hinsdale Bank & Trust Main Bank Facility OMITTED ****
A REMINDER OF WHO WE ARE, WHAT WE ARE AND WHERE WE ARE GOING.
By the end of 1997, Wintrust operated six de novo (start up) community
banks in 17 locations in some of the most affluent suburban markets in the
Chicago area, including Lake Forest, Lake Bluff, Hinsdale, Clarendon Hills,
Western Springs, Wilmette, Winnetka, Glencoe, Libertyville, Barrington and
Crystal Lake. The banks average less than three years of age, with the average
age of all facilities being only 24 months. By year end, total assets exceeded
$1 billion, making Wintrust one of the fastest growing de novo banking
operations ever in Illinois, if not in the US.
Each of the banks is controlled by a strong, hands-on, local board ranging
in number from 15 to 25 members. The make-up of these boards includes local
business, religious and community leaders, both men and women, with a wide range
of expertise and age.
Each bank is also managed locally by a team of talented professional
bankers who average more than 20 years experience in the banking business and
who are deeply involved in their communities. Their experience and knowledge are
key to their
- 2 -
<PAGE>
bank's success. But just as important, and what sets them apart from their
colleagues in other banks, is their enthusiasm for, and their belief in,
community banking.
The non-bank part of Wintrust Financial is First Insurance Funding
Corporation (formerly First Premium Services, Inc.), believed to be the eighth
largest commercial insurance premium financing company in the U.S. First
Insurance Funding Corp. shares unique synergies with our banks that allows it a
competitive cost of funding and the banks a controlled source of higher yielding
loan assets.
WHAT IS A COMMUNITY BANK?
Community banking begins with the customer, with their wants and needs. It
sounds simple, but most banks just don't get it.
People want a bank where they're known by name and made to feel welcome as
soon as they come in the door; where when somebody says, "Can I help you?" they
really want to help you; and
where no one ever has to pay a fee for using a teller.
People want the kind of bank that will service them for life--where parents
can take their kids to learn about banking and saving, and maybe meet the bank's
president; where older kids can get help all the way through college; where all
of a family's financial events from the household checking account to trust and
estate planning will be as important to the bank as they are to the family;
where older folks can find security and comfort in specially tailored senior
products and services.
People want to keep it local. A bank's management should live a local phone
call away, and be involved with community events. The bank should become an
important part of the community, help it solve its problems and plan for its
future.
A bank should be a good neighbor, friendly, helpful and generous.
1997 WAS A VERY BUSY YEAR FOR OUR BANKS.
In 1997 we served customers over 50,000 cups of coffee to wash down more
than 100,000 cookies and 25,000 donut holes. Our Junior Savers rode floats and
marched in holiday parades throughout the banking communities.
In the banks, we passed out pumpkins, potted plants, frisbees, mini
footballs, flowers for Mom's day, golf balls and pocket knives for Pop's day,
cool sunglasses, warm mittens, cuddly Beanie Babies, thousands of lollipops, and
bushels of dog biscuits. We had Bike Days, Sundaes on Saturdays, coloring
contests and visits from Santa and the Easter Bunny.
What all this activity means is that people came into our banks and spent
some time with us. And they brought the kids. It's what community banking is all
about.
By the way, our banks also sent hundreds of bags of food to local shelters
and helped many local charities and community organizations with donations and
in-kind service.
WHAT ARE OUR FINANCIAL AND OTHER GOALS?
In our 1996 Annual Report we communicated these long term financial goals:
o Net interest margin of 4 - 41/2% (interest income from loans and securities
less interest expense on deposits and borrowings, as a percent of average
earning assets)
o Net overhead ratio of 1 1/2 - 2% (non-interest expense less non-interest
income, as a percent of average assets)
o Return on assets of 1 1/2% (net income as a percent of average assets)
o Return on equity of 20 -25% (net income as a percent of average
shareholders' equity)
In 1997, Wintrust made significant improvements towards all of these goals,
despite having two banks in their first year of operation. If you look at
Wintrust's older, more mature banks, they are much closer to achieving these
goals.
The oldest bank, Lake Forest Bank & Trust, is getting very close to these
goals after its sixth year of operation. The other
- 3 -
<PAGE>
mature banks--Hinsdale Bank & Trust (4 years old, with the average facility age
of 23 months) and North Shore Community Bank & Trust (3 years old, with the
average facility age of 27 months)--are improving their margins and marching
along this same path towards higher profitability.
The younger banks, Libertyville Bank & Trust (2 years old), Barrington Bank
& Trust (1 year old), and Crystal Lake Bank & Trust (three months old) are still
in their aggressive build and invest stage.
In last year's Annual Report we also said that we wanted to:
o Identify additional asset niches and expand existing niches,
o Institute aggressive First Insurance Funding Corp. growth programs,
o Continue expansion to take advantage of under-served markets,
o Expand trust services to additional bank locations to generate additional
fee opportunities.
**** Net Overhead Ratio Trends Graph OMITTED ****
As you will see in the following pages, we have accomplished most all of
these goals in 1997 with the exception of trust. Progress here will be more
closely identified with 1998. This will be a good example of an investment of
shareholder funds that will pay off with significant incremental fee volume a
few years down the road.
OUR FIRST PUBLIC STOCK OFFERING.
In the first quarter of 1997, we successfully completed our "Subscription
and Community Offering". We added over 1,500 new shareholders, most of which
were current shareholders, bank customers and residents from the communities
served by our banks. Continuing our record, the stock offering was
over-subscribed, with approximately 1.4 million shares sold versus our 1.3
million share goal, raising $20.3 million in net capital.
We now have about 2,800 shareholders and 8.1 million shares of Wintrust
stock outstanding. It is worth noting that most of our shareholders live in the
communities in which we operate and most are customers.
**** Loan Growth Bar Chart OMITTED ****
BANK OPENINGS.
The Community Bank of Western Springs (a branch of Hinsdale Bank & Trust)
opened in late November in temporary quarters of only 2,600 square feet and
quickly reached almost $14 million in deposits by March, 1998. A new 15,000
square foot new main bank is under construction in downtown Western Springs.
We'll lease out 6,000 feet of it as retail space.
Crystal Lake Bank & Trust Company, N.A., the sixth de novo bank, also opened
in a temporary facility of 1,200 square feet (talk about humble beginnings),
three days before Christmas. Its assets now exceed $20 million. A main bank
building is under construction in the heart of downtown Crystal Lake, and we
also have options on land for a parking lot and a drive-in facility.
**** Barrington Bank & Trust Main Bank Facility OMITTED ***
BUILDING FOR THE FUTURE.
In the first quarter, Lake Forest Bank & Trust opened a new
drive-thru/walk-up at the west Metra train station. We also own the property on
the north side of the street of our main bank facility for future growth three
to five years from now. City approval has been received for a 18,000 square foot
addition to the main bank facility (we call it Market North).
In addition to launching its Western Springs branch, Hinsdale Bank & Trust
opened in August a 15,000 square foot addition to its main bank facility, and in
so doing reinvigorated an important part of the downtown area.
- 4 -
<PAGE>
**** Lake Forest Bank & Trust Main Bank Facility OMITTED ****
North Shore Community Bank & Trust expanded its main Glencoe office and
also began construction of a drive-thru/walk-up facility in downtown Glencoe
that just opened in March, 1998. And in Wilmette, NSCB&T converted that
village's historic "L" (elevated commuter rail) station at 4th and Linden into a
walk-in facility that will open in April.
Barrington Bank & Trust was opened in December, 1996 and grew to $71
million in assets in its first year. In December, 1997, we opened a new 13,000
square foot main facility that was constructed in just seven months. The bank is
now well on its way to $100 million in assets and as well as making a profit.
A FEW GOOD PEOPLE...
We added 36 more employees in 1997 than we had in 1996 (an increase of
16%), which is an amazingly low increase when you realize the 50% growth in the
number of deposit accounts and balances and figure in all of the new banks and
added facilities.
Our total salary and benefits in 1997 at our banking subsidiaries were only
1.28% of average assets, lower than most of our peer group members. That low
percentage is even more impressive when you consider the average income and
benefits per Wintrust employee was $54,000 compared to the peer group average of
$36,000. This provides evidence that fewer but more productive and efficient
employees is a sound strategy.
In management, we added two bank presidents and hired a new database
marketing officer. We also have ten new directors, four of which are women,
bringing our director (Wintrust and subsidiary bank directors) total up to 124.
And, importantly, we've entered into management contracts with all top
management officers.
**** First Insurance Funding Corp Logo OMITTED ****
FIRST INSURANCE FUNDING CORP. HAS A NEW NAME AND ADDITIONAL MOMENTUM.
In February of this year, First Premium Services changed its name to First
Insurance Funding Corp. This change was made to reflect the strategic business
and product focus of the company. Through improved technology and
operational processes, First Insurance was able to support increased loan volume
and customer service. It is a company poised for aggressive growth in 1998 and
1999 as distribution opportunities are expanded.
INNOVATIVE PRODUCTS, INNOVATIVE MARKETING.
In the past year, we have developed and executed may innovative and
different marketing products and promotions. Judging from sales results, from
the many compliments of our customers, and especially from a few unkind remarks
from our competitors, they are also effective. A few of the noteworthy marketing
programs that ran in 1997 included:
o Lake Forest Bank & Trust's "Community Bank Fight Song" (sung to the tune of
the Battle Hymn of the Republic)
o Hinsdale Bank & Trust's "It's a Wonderful Life" promotion
o North Shore Community Bank & Trust's "How to Rob a Bank" ad
o Libertyville Bank & Trust's innovative "Guaranteed Best Rate Mortgage"
o The value-added "American Airlines Flight Miles" home equity offer run by
Barrington Bank & Trust
o Crystal Lake Bank & Trust's diamond Founders promotion
We're also in the process of installing a new marketing and customer
information system that is going to figure prominently in the selling and
cross-selling of our products to customers and non-customers. This activity, and
how we use our technology, becomes more and more important as the number of our
new facilities levels off. Creative changes in marketing directions become
paramount to continue our growth.
- 5 -
<PAGE>
A SPECIAL THANKS TO THE FOLKS WHO HELPED MAKE IT POSSIBLE.
A yearly report to the stockholders would not be complete without a special
thanks to the people who have done a lot for community banking throughout our
country: The Megabanks.
When we started just a few years ago, most local banks had become owned and
operated by giant corporations with headquarters in other cities, other states,
even other countries. And in most communities, this is still true.
Branches of these big banks have to satisfy big investors, pay lots of
overhead and support long, expensive chains-of-command.
This means that these banks now charge fees for things that used to be
free. Major corporations and large preferred customers take priority over small
businesses and local folks. Policies are made for the good of the bank, not for
the good of its customers. Restrictions and rate structures are designed to
accommodate huge areas of the globe instead of being in tune with the unique
needs of a smaller community.
**** Deposit Growth Bar Chart OMITTED ****
Old-fashioned personal service has become more and more impersonal as it
has become more and more automated. The best employees keep getting promoted to
someplace else. Loan applications have a long way to travel for approvals.
People who work in those banks, more often than not, look like strangers.
And that's how customers feel when they go in to cash a check -- like strangers.
The big banks have even gone so far as to charge a fee for seeing a teller,
which they said was to encourage their customers to use their more profitable
cash machines. And then they begin charging extra fees for using those very same
cash machines!
The Megabanks have made the friendly local bank a thing of the past. And a
thing of the future. We thank them for giving us this opportunity.
SOME THINGS SHOULDN'T CHANGE, EVER.
We know the secret to our success.
That's why our community banks are still locally managed by local boards of
directors and their presidents still have the authority to make all decisions.
And it's why we won't centralize customer contacts at remote locations and we
won't focus on the short term to the expense of long term profitability and
customer satisfaction.
We work hard to keep that from changing, because that is the basic
difference between us and all other banks. We'll leave it to the other banks to
wrest control from their subsidiary banks and branches and to install a "profit
centers" philosophy to the detriment of customer satisfaction. We know that we
must keep our banks community focused and locally managed.
To that end, we've developed a list of six guiding principles. We did this
to assure that all of our present and future presidents, directors, management
teams and their staffs remember who we are and how we operate and continue to
provide their communities with the kind of banking they want.
*** North Shore Community Bank & Trust-Glencoe Drive-thru Facility OMITTED ***
THE WINTRUST PRINCIPLES OF COMMUNITY BANKING.
1. OUR PURPOSE.
We will provide families, individuals and businesses of each of our
communities with a modern, full-service bank that's unique because it's run by
local people who are meeting the area's need for friendly, neighborly, well-run
community banking.
- 7 -
<PAGE>
2. OUR CUSTOMER.
Every customer will be treated as an important depositor, a shareholder and
a good neighbor. They must receive the best customer service around, bar none.
3. OUR PRODUCT.
Our product is service. We help our customers save, spend, borrow and
invest their money safely and wisely. If we are to be successful at community
banking, we must put the welfare of our customers first. It's as simple as that.
4. OUR COMMUNITY.
Our banks cannot take money from their communities without giving something
back. We must be good citizens of our villages and encourage all of our
employees to become involved with local events. And we must endeavor to hire
employees, contract for services and buy products from our communities.
5. OUR EMPLOYEES.
We must work hard to attract the brightest and nicest employees possible
and let them know how critical they are to our success. The best way to attract
the kind of employees we want is to offer good pay, job security, generous
benefits, advancement potential, a pleasant working environment and the
opportunity to be part of the team. We should encourage our employees to
purchase stock so that they can become owners of the bank and share in the
profits they help generate.
6. OUR STOCKHOLDERS.
Clearly, our stockholders are extremely important. Most of them are also
customers. They have invested their trust and their beliefs, as well as their
money, into the idea and future of community banks. The management, directors
and staff should always work to justify that investment.
IN CLOSING, IT IS IMPORTANT FOR EACH OF YOU TO KNOW THAT WE FOCUS ON CREATING
SHAREHOLDER VALUE. IT IS TOP PRIORITY FOR THE MANAGEMENT TEAM.
**** Picture of Libertyville Bank & Trust Main Bank Facility OMITTED ****
To that end, we are in the process of developing and implementing an
investor relations campaign that will include more frequent communication with
shareholders and key analysts regarding the performance of Wintrust. It's also
worth noting that every senior officer of Wintrust and the banks has invested
significant amounts of their personal resources in the Company in addition to
having stock options. You, like them, have demonstrated your faith by being
investors. Now it is our obligation to create long term value for you.
We can best do that by adhering to a philosophy, coupled with a strategic
direction and plan, that balances shareholder returns with growth, new markets
and products, management and employee compensation, and community obligations.
**** Shareholder Equity Growth Bar Chart OMITTED ****
Thank you for being a shareholder.
Sincerely,
/S/ Howard D. Adams
Howard D. Adams
Chairman
/S/ Edward J. Wehmer
Edward J. Wehmer
President
- 8 -
<PAGE>
HOW WE CREATE LONG TERM VALUE.
In an article in the January 8, 1998 edition of American Banker entitled
"Bank's True Value May Be Off the Balance Sheet", the author indicated that
traditional accounting models are "woefully inadequate" and are "snapshots of
what a bank was, not what it will be . . . they cover less than 40% of . . . a
banks true value." The article goes on to say that "there can be a more complete
framework for establishing long-term strategic value based on a bank's dynamic,
but hidden and unmeasured, characteristics."
The framework for establishing long-term strategic value is ultimately
based not only on earnings, but on such other factors as:
High employee productivity and loyalty.
o Many employees have been with us since day one when they opened their de
novo community bank, and as a result, feel a special pride and ownership
towards their bank.
o Local decision-making authority motivates bank management to do whatever it
takes to succeed.
o All senior management have meaningful personal holdings of Wintrust stock
and options. Productivity and results are measured on a team basis as well
as an individual basis.
High customer loyalty and profitability.
o We elicit strong consumer loyalty with a high level of our personal service
is high and low fees. But just as important are products tailored to meet
local needs, and cover a lifetime, from Junior Savers to trust and estate
planning.
o Because we only have banking facilities in affluent suburban areas, our
customers have a much higher than average household income and accumulated
wealth. Banks operating in areas of high concentration of deposits can
eventually become more efficient in operations and marketing.
Technology, the great equalizer.
Large competitors think technology gives them the advantage. We know
differently. Technology gives community banks the power to compete on an equal
basis with anybody, no matter how big.
o Our banks were some of the first in their market areas to introduce PC Home
Banking, and we recently rolled out a similar product for commercial
customers.
o We capitalize on the advanced technology of our data provider, M & I Data
Services, a nationally recognized bank-owned supplier of data processing
services.
o Our internal systems (wide area network, digital entry and scanning,
optical storage, e-mail and fax, etc.) are more advanced than the typical
community bank.
o We are about to launch a Wintrust Investor Relations web site and home
pages for each of our banks.
o We have state approval to market a cyber bank (Wintrust Bank) which will
allow us new telephone and mail marketing opportunities.
o Our new marketing customer information system which will allow us to market
in entirely new ways.
o And in case you were wondering, our internal data and customer systems are
well on the way to being "Year 2000 Compliant".
Lean, mean and quick.
o Our lack of bureaucracy and our decentralized management philosophy allows
us the ability to make decisions quickly and to act on them quickly.
o Our combined size allows us to employ a select number of highly experienced
experts in the fields of technology, finance and marketing, expertise the
average community bank can't afford.
At Wintrust, the ultimate goal is long term growth in shareholder value.
Long-term sustainable growth is preferred to immediate returns. In other words,
current stock price is indeed highly important, but not paramount in our minds.
Our stock price should reflect the franchise values being created as well as
increased earnings per share over time. At the heart of this philosophy is our
belief that long term growth of our de novo franchises, coupled with building a
strong management team, is the best way to optimize long term shareholder value
and become a high performing financial institution.
Our growth is like a simultaneous mathematical equation to be solved over a
changing time period. We accomplish this by locking up the best and most
affluent retail markets, paying top dollar to attract and to retain experienced
top management teams, building appropriate brick and mortar facilities, and
investing in aggressive deposit rates and marketing to grow our franchises to a
leadership share position. We invest heavily in new banks to generate the
critical market share mass required to sustain long term profitability.
All this aggressive investment will obviously reduce immediate returns as
measured conventionally by earnings per share. Long term growth in shareholder
value is being attained by integrating our community bank business strategies,
which are proven in the market place, to create long term value for
shareholders. We believe this is the best road to take to become a high
performing financial institution.
- 8 -
<PAGE>
**** MAP OMITTED ****
This page has a fair and accurate representation of the locations of the
company's locations as presented on a map of the Chicago area.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
DECEMBER 31,
--------------------------------------
1997 1996
--------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks-noninterest bearing $ 32,158 36,581
Federal funds sold 60,836 38,835
Interest-bearing deposits with banks 85,100 18,732
Available-for-Sale securities, at fair value 101,934 69,387
Held-to-Maturity securities, at amortized cost, fair value of $4,964
and $4,913 in 1997 and 1996, respectively. 5,001 5,001
Loans, net of unearned income 712,631 492,548
Less: Allowance for possible loan losses 5,116 3,636
- --------------------------------------------------------------------------------------------------------------------------
Net loans 707,515 488,912
Premises and equipment, net 44,206 30,277
Accrued interest receivable and other assets 14,894 16,426
Goodwill and organizational costs 1,756 1,886
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,053,400 706,037
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 92,840 67,164
Interest bearing 824,861 550,865
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 917,701 618,029
Short-term borrowings 35,493 7,058
Notes payable 20,402 22,057
Accrued interest payable and other liabilities 11,014 16,273
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 984,610 663,417
==========================================================================================================================
Shareholders' equity
Preferred stock, 20,000,000 shares authorized; no shares
issued and outstanding at December 31, 1997 and 1996 - -
Common stock, no par value; $1.00 stated value; 30,000,000 shares authorized;
8,118,523 and 6,603,436 issued and outstanding at December 31,
1997 and 1996, respectively 8,118 6,603
Surplus 72,646 52,871
Common stock warrants 100 100
Retained deficit (12,117) (16,963)
Net unrealized gains on Available-for-Sale
securities, net of tax 43 9
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 68,790 42,620
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,053,400 706,037
==========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
-------------------------------------------
INTEREST INCOME
<S> <C> <C> <C>
Interest and fees on loans $ 56,066 30,631 17,028
Interest-bearing deposits with banks 1,764 1,588 3,194
Federal funds sold 3,493 2,491 2,048
Securities 3,788 4,327 3,202
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 65,111 39,037 25,472
- --------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 37,375 22,760 14,090
Interest on short-term borrowings and notes payable 964 1,395 1,682
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 38,339 24,155 15,772
- --------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 26,772 14,882 9,700
Provision for possible loan losses 3,404 1,935 1,430
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 23,368 12,947 8,270
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Gain on sale of premium finance loans - 3,078 4,421
Loan servicing fees 248 1,442 1,101
Fees on mortgage loans sold 2,341 1,393 850
Trust fees 626 522 399
Service charges on deposit accounts 724 468 196
Securities gains, net 111 18 -
Gain on settlement of contingencies - - 735
Other 894 611 842
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 4,944 7,532 8,544
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 14,204 11,551 8,011
Occupancy, net 1,896 1,649 951
Data processing 1,337 1,014 624
Marketing 1,309 1,102 682
Amortization of deferred financing fees 248 542 768
Merger related expenses - 891 -
Other 8,260 6,013 4,776
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 27,254 22,762 15,812
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before
income taxes 1,058 (2,283) 1,002
Income tax benefit (3,788) (1,310) (512)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 4,846 (973) 1,514
Loss from operations of discontinued subsidiaries - - (17)
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 4,846 (973) 1,497
==========================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.62 (0.16) 0.27
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.60 (0.16) 0.24
==========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
- 11 -
<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
NET
UNREALIZED
GAIN (LOSS)
COMMON RETAINED ON SECURITIES TOTAL
PREFERRED COMMON STOCK EARNINGS AVAILABLE SHAREHOLDERS'
STOCK STOCK SURPLUS WARRANTS (DEFICIT) FOR SALE EQUITY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 503 4,745 38,621 75 (18,442) (136) 25,366
Common stock issuance - 1,086 12,432 - - - 13,518
Dividends on preferred stock - - - - (45) - (45)
Allocation of undivided profit - - (1,000) - 1,000 - -
Net income - - - - 1,497 - 1,497
Change in unrealized loss on securities
available-for-sale, net of tax effect - - - - - 151 151
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 503 5,831 50,053 75 (15,990) 15 40,487
Common stock issuance - 567 1,298 - - - 1,865
Conversion of preferred stock (503) 122 381 - - - -
Repurchase of common stock - (4) (44) - - - (48)
Purchase of Wolfhoya Investments, Inc. - 87 1,190 25 - - 1,302
Net loss - - - - (973) - (973)
Cash payment of fractional shares - - (7) - - - (7)
Change in net unrealized gain on securities
available-for-sale, net of tax effect - - - - - (6) (6)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - 6,603 52,871 100 (16,963) 9 42,620
Common stock issuance due to
the exercise of stock options - 118 846 - - - 964
Common stock offering - 1,397 18,929 - - - 20,326
Net income - - - - 4,846 - 4,846
Change in net unrealized gain on securities
available-for-sale, net of tax effect - - - - - 34 34
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ - 8,118 72,646 100 (12,117) 43 68,790
==========================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
- 12 -
<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31 ,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 4,846 (973) 1,497
Adjustments to reconcile net income (loss) to net cash
used for, or provided by, operating activities:
Provision for possible loan losses 3,404 1,935 1,430
Depreciation and amortization 2,394 2,104 1,811
Deferred income tax benefit (3,788) (1,455) (331)
Gain on sale of investment securities, net (111) (18) -
Net accretion/amortization of investment securities (670) (1,924) (390)
Decrease in net assets of discontinued operations - - 1,875
Decrease (increase) in other assets, net 5,189 (5,273) (4,813)
(Decrease) increase in other liabilities, net (5,224) 2,285 1,907
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 6,040 (3,319) 2,986
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of Available-for-Sale securities 92,336 308,424 80,234
Proceeds from sales of Available-for-Sale securities 420 498 5,006
Proceeds from maturities of Held-to-Maturity securities - - 64,766
Purchases of securities (124,522) (318,497) (150,805)
Net decrease (increase) in interest bearing deposits (66,368) 31,868 (8,401)
Net increase in loans (222,007) (235,420) (62,649)
Purchase of Wolfhoya Investments, Inc., net of cash acquired - (318) -
Purchases of premises and equipment, net (16,063) (7,925) (11,409)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (336,204) (221,370) (83,258)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase in deposit accounts 299,672 212,371 183,673
Increase (decrease) in short-term borrowings, net 28,435 6,191 (4,849)
Commercial paper notes originated - - 310,040
Commercial paper notes principal repaid - - (393,020)
Proceeds from notes payable 16,200 22,057 5,822
Repayment of notes payable (17,855) (10,758) (1,998)
Other, net - - (257)
Repurchase of common stock - (48) -
Cash value of fractional shares upon exchange of shares - (7) -
Issuance of common stock, net of issuance costs 21,290 1,865 13,518
Cash dividends paid on preferred shares - - (45)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 347,742 231,671 112,884
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 17,578 6,982 32,612
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 75,416 68,434 35,822
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 92,994 75,416 68,434
============================================================================================================================
Supplemental disclosures of cash flow information-cash paid during the year for:
Interest paid $ 37,499 23,874 14,880
Income taxes paid $ - 138 -
============================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
- 13 -
<PAGE>
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Wintrust Financial Corporation ("Wintrust" or "Company") is a multi-bank holding
company currently engaged in the business of providing financial services
through its banking subsidiaries to customers in the Chicago metropolitan area
and financing the payment of insurance premiums, on a national basis, through
its subsidiary, First Insurance Funding Corporation ("FIFC"). FIFC is a wholly
owned subsidiary of Crabtree Capital Corporation ("Crabtree") which is a wholly
owned subsidiary of Wintrust. As of December 31, 1997, Wintrust owned six bank
subsidiaries ("Banks"), all of which started as de novo institutions, including
Lake Forest Bank & Trust Company ("Lake Forest"), Hinsdale Bank & Trust Company
("Hinsdale"), North Shore Community Bank & Trust Company ("North Shore"),
Libertyville Bank & Trust Company ("Libertyville"), Barrington Bank & Trust
Company ("Barrington") and Crystal Lake Bank & Trust Company ("Crystal Lake").
The consolidated Wintrust entity was formed on September 1, 1996 through a
merger transaction (the "Reorganization") whereby the holding companies of Lake
Forest, Hinsdale, Libertyville and FIFC were merged with newly formed
wholly-owned subsidiaries of North Shore Community Bancorp, Inc. (which changed
its name to Wintrust Financial Corporation concurrent with the merger). The
merger transaction was accounted for in accordance with the pooling-of-interests
method of accounting for a business combination. Accordingly, the consolidated
financial statements included herein reflect the combination of the historical
financial results of the five entities and the recorded assets and liabilities
have been carried forward to the consolidated Company at their historical cost.
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.
Principles of Consolidation
The consolidated financial statements of Wintrust have been prepared in
conformity with generally accepted accounting principles and prevailing
practices of the banking industry. Intercompany accounts and transactions have
been eliminated in the consolidated financial statements.
Securities
The Company classifies securities 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 securities in which the Company has the ability and
positive intent to hold the security until maturity. All other securities are
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 amortization of premium and accretion of discount using
methods that generally 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 excluded from
earnings and reported as a separate component of shareholders' equity until
realized.
Trading account securities are stated at fair value; however, the Company did
not maintain any trading account securities in 1997, 1996, or 1995.
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. Dividend
and interest income are recognized when earned. Realized gains and losses for
securities classified as available-for-sale and held-to-maturity are included in
noninterest income and are derived using the specific identification method for
determining the cost of securities sold.
Loans and Allowance for Possible Loan Losses
Loans are recorded at the principal amount outstanding. Interest income is
recognized when earned. The Company receives loan fees for loans originated, as
well as for loan referrals. Fees and certain costs associated with loans
originated by the Company are generally deferred and amortized over the life of
the loan as an adjustment of yield using the interest method. Loan fees for
referrals are recognized as income when received.
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.
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 nonaccrual 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
- 14 -
<PAGE>
adequate to provide for possible loan losses. In estimating possible losses, the
Company evaluates loans for impairment. 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
nonaccrual loans, restructured loans and 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 determining 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 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, and
sells the loans with servicing retained. The Company capitalizes the rights to
service originated mortgage loans at the time of sale. The capitalized cost 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. Impairment represents the excess of the
remaining capitalized cost of an individual mortgage servicing right over its
fair value, and, if necessary, is recognized through a valuation allowance.
Serviced Premium Finance Receivables
From February, 1995 to the fourth quarter of 1996, FIFC sold its premium finance
receivables to a wholly owned subsidiary, First Premium Financing Corporation
("FPFIN") which in turn sold the receivables to an independent third party who
issued commercial paper to fund the purchase ("Commercial Paper Issuer"). FPFIN
was a bankruptcy remote subsidiary established to facilitate the sale to the
independent third party. FIFC retained servicing rights in connection with the
sales of receivables. FIFC recognized the contractual servicing and management
fee income over the term of the receivables as it was earned. In addition, any
excess income earned by the Commercial Paper Issuer above that which was
required to fund interest on its outstanding commercial paper and provide for
normal servicing to FIFC was payable as additional servicing ("Excess
Servicing"). Excess Servicing income over the expected life of the receivables
sold was estimated by FIFC at the time of each sale and recorded as a sales gain
receivable on the financial statements of FIFC.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. For financial reporting purposes depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets ranging from three to ten years for equipment and the useful
lives or lives of the leases for premises and leasehold improvements. Additions
to premises are capitalized. Maintenance and repairs are charged to expense as
incurred.
Long-lived Assets and Long-lived Assets to be Disposed of
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of," which requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. The impairment is measured based on the present value of expected
future cash flows from the use of the asset and its eventual disposition. If the
expected future cash flows are less than the carrying amount of the asset, an
impairment loss is recognized based on current fair values. As the Company
regularly reviews its long-lived assets for impairment and adjusts the carrying
amounts as appropriate, the adoption of this statement did not have a material
impact on the consolidated financial statements of the Company.
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 a period of 15
years.
Deferred organizational costs consist primarily of professional fees and other
start-up costs and are being amortized over 5 years.
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.
Income Taxes
Beginning September 1, 1996, Wintrust became eligible to file consolidated
Federal and state income tax returns. The subsidiaries provide for income taxes
on a separate return basis and remit to Wintrust amounts determined to be
currently payable.
Prior to the Reorganization on September 1, 1996, Lake Forest, Hinsdale,
Libertyville, North Shore, and FIFC and their respective holding companies each
filed separate consolidated Federal and state income tax returns. Tax benefits
attributable to losses are recognized and allocated to the extent that such
losses can be utilized in the consolidated return.
- 15 -
<PAGE>
Wintrust and subsidiaries record income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the 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 enacted tax rates
expected to apply to taxable income in 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.
Cash Equivalents
For purposes of the consolidated statement of cash flows, Wintrust considers all
cash on hand, cash items in the process of collection, amounts due from
correspondent banks and federal funds sold to be cash equivalents.
Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
SFAS No. 128 supersedes APB Opinion 15, "Earnings Per Share," and specifies the
computation, presentation and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS 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 the entity.
SFAS No. 128 was effective for financial statements for both interim and annual
periods ending after December 15, 1997. Accordingly, EPS amounts have been
presented in accordance with SFAS No. 128 for 1997 and prior periods have been
restated to conform to the requirements of such statement.
Discontinued Operations
The Company has presented as discontinued operations, the results of operations
and loss on sale of certain insurance operating subsidiaries. Information
regarding the results of operations are not presented as they are not deemed
material by management.
Stock Option Plans
As of December 31, 1996, the Company adopted the disclosure requirements of
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation." The Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. Accordingly, no
compensation cost has been recognized by the Company for its plans. Further
disclosures are presented in note 11.
(2) SECURITIES
The following tables present carrying amounts and gross unrealized gains and
losses for the securities held-to-maturity and available-for-sale at December
31, 1997 and 1996 (in thousands). These tables are by contractual maturity which
may differ from actual maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment penalties.
DECEMBER 31, 1997
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------
Held-to-maturity:
U.S. Treasury - due
in one to five years $ 5,001 - (37) 4,964
Available-for-sale:
U.S. Treasury - due in
one year or less 2,988 30 - 3,018
U.S. Treasury - due in
one to five years 1,001 9 - 1,010
Federal agencies - due in
one year or less 11,156 47 (2) 11,201
Corporate notes - due in
one year or less 78,707 - (1) 78,706
Corporate notes - due in
one to five years 4,046 17 (17) 4,046
Federal Reserve Bank
and Federal Home Loan
Bank stock 3,953 - - 3,953
----------------------------------------
Total securities
available-for-sale 101,851 103 (20) 101,934
----------------------------------------
Total securities $ 106,852 103 (57) 106,898
=======================================================================
- 16 -
<PAGE>
DECEMBER 31, 1996
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------
Held-to-maturity:
U.S. Treasury - due
in one to five years $ 5,001 - (88) 4,913
Available-for-sale:
U.S. Treasury - due in
one year or less 9,688 3 (2) 9,689
Federal agencies - due in
one year or less 19,642 4 (5) 19,641
Municipals - due in
one year or less 317 - - 317
Corporate notes - due in
one year or less 32,986 5 (2) 32,989
Corporate notes - due in
one to five years 5,216 19 (5) 5,230
Federal Reserve Bank stock 1,521 - - 1,521
----------------------------------------
Total securities
available-for-sale 69,370 31 (14) 69,387
----------------------------------------
Total securities $ 74,371 31 (102) 74,300
=======================================================================
In 1997, 1996 and 1995, Wintrust had gross realized gains on sales of
available-for-sale securities of $111,000, $18,000 and $200, respectively.
Wintrust had no realized losses on sales of securities in 1997, 1996 and 1995.
Proceeds from sales of available-for-sale securities during 1997, 1996 and 1995
were $420,000, $498,000 and $5,006,000, respectively. At December 31, 1997 and
1996, securities having a carrying value of $77,983,000 and $52,658,000,
respectively, were pledged as collateral for public deposits and trust deposits.
(3) LOANS
A summary of the loan portfolio by category at December 31, 1997 and 1996 is as
follows (in thousands):
1997 1996
------------------------
Commercial and commercial real estate $ 235,483 182,403
Home equity 116,147 87,303
Residential 61,611 51,673
Premium finance 131,952 59,240
Indirect auto 139,296 91,211
Installment 32,153 23,717
------------------------
716,642 495,547
Less: Unearned income 4,011 2,999
------------------------
Total loans $ 712,631 492,548
===================================================================
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 totaling $9,213,000 and $9,992,000 at December 31, 1997 and
1996, respectively, were made at substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other borrowers.
(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the allowance for possible loan losses for years ending December
31, 1997, 1996 and 1995 is as follows (in thousands):
1997 1996 1995
----------------------------
Allowance at beginning of period $ 3,636 2,763 1,702
Provision 3,404 1,935 1,430
Charge-offs-continuing operations (1,874) (520) (290)
Charge-offs-discontinued operations (241) (583) (109)
Recoveries 191 41 30
----------------------------
Allowance at end of period $ 5,116 3,636 2,763
====================================================================
The provision for possible loan losses is charged to operations, and recognized
loan losses (recoveries) are charged (credited) to the allowance. At December
31, 1997, 1996 and 1995, non-accrual loans had a carrying value of $2,440,000,
$1,686,000 and $1,778,000, respectively.
- 17 -
<PAGE>
At December 31, 1997, 1996, and 1995 loans that were considered to be impaired
totaled $1,139,000, $1,444,000 and $1,736,000, respectively, for which no
specific allowance for loan losses was required as of and for the years then
ended. The average balance of impaired loans during 1997, 1996 and 1995 was
approximately $990,000, $1,322,000 and $930,000, respectively. All of the
impaired loans are included in the nonaccrual loan amount listed above.
Management evaluated the value of the loans primarily by using the fair value of
the collateral. Interest income foregone on these loans during 1997, 1996 and
1995 was not material.
(5) SERVICED RECEIVABLES AND SECURITIZATION FACILITY
Receivables sold and serviced by FIFC were $52,070,000 at December 31, 1996. The
receivables were sold pursuant to a securitization facility established February
2, 1995. Unamortized deferred costs associated with this facility amounted to
approximately $80,000 at December 31, 1996. During 1997, this securitization
facility was discontinued and all remaining deferred costs associated with the
facility were expensed. Accordingly, the Company had no loans serviced for
others by FIFC at December 31, 1997.
The securitization facility was an independent vehicle into which $200 million
of receivables could be sold and funded by the Commercial Paper Issuer, subject
to certain terms and conditions. In connection with this facility, FIFC formed a
wholly owned, bankruptcy remote subsidiary, FPFIN, to purchase the receivables
from FIFC and simultaneously sell the receivables to the Commercial Paper
Issuer. All the receivable sales were without recourse. The sale of loans to the
Commercial Paper Issuer were accounted for as sales and, accordingly, the loans
were not included in the consolidated financial position of the Company. FPFIN
recognized a gain at the time of each sale based on its estimate of excess
servicing, as defined in Note 1, to be earned over the life of the receivables
sold. All of FPFIN's accounts were maintained by FIFC and consolidated in the
financial statements.
FIFC was required to maintain facility collateral at an amount equal to 105.5%
of commercial paper outstanding. The amount of this overcollateralization is
recorded as loans on the Company's consolidated financial statements and was
$4,854,000 at December 31, 1996.
Subsequent to the Reorganization on September 1, 1996, the premium finance loan
originations have generally been sold to the Banks and consequently remain as an
asset of the Company.
(6) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at December 31, 1997 and 1996 is as follows
(in thousands):
1997 1996
------------------------
Land $ 8,751 4,426
Buildings and improvements 30,354 22,024
Furniture and equipment 10,306 7,263
------------------------
49,411 33,713
Less accumulated depreciation
and amortization 5,205 3,436
------------------------
Premises and equipment, net $ 44,206 30,277
===========================================================
(7) TIME DEPOSITS
Certificates of deposit in amounts of $100,000 or more approximated $233,590,000
and $159,668,000, respectively, at December 31, 1997 and 1996. Interest expense
related to these deposits approximated $10,954,000, $4,270,000 and $2,769,000
for the periods ended December 31, 1997, 1996 and 1995, respectively.
- 18 -
<PAGE>
(8) NOTES AND LOANS PAYABLE
The note payable balance of $20.4 million and $22.1 million at December 31, 1997
and 1996, respectively, represents the balance on secured loans obtained from an
unaffiliated lender. Effective September 1, 1996, the Company entered into a $25
million revolving credit line, which charged interest at a floating rate equal
to, at the Company's option, either the lender's prime rate or the London
Inter-Bank Offered Rate (LIBOR) plus 1.50%. Effective September 1, 1997, this
revolving credit line was increased to $30 million and the maturity date was
extended to September 1, 1998. Additionally, effective September 1, 1997, the
interest rate associated with the revolving line of credit was reduced to bear
interest at a floating rate equal to, at the Company's option, either the
lender's prime rate or LIBOR plus 1.25%. The note is secured by the stock of the
subsidiary banks. On March 18, 1997, the Company reduced the outstanding debt to
approximately $2.5 million by utilizing the proceeds from the common stock
offering. The Company then increased the outstanding loan balance by utilizing
the line of credit to provide capital to fund the growth of its subsidiary banks
and to capitalize its newest de novo bank, Crystal Lake Bank.
(9) LEASE EXPENSE AND OBLIGATIONS
Gross rental expense for all operating leases was $798,000, $659,000 and
$554,000, in 1997, 1996 and 1995, respectively. Lease commitments are primarily
for office space. Minimum gross rental commitments and minimum gross rental
income as of December 31, 1997 for all noncancelable leases are as follows (in
thousands):
MINIMUM MINIMUM
GROSS GROSS
RENTAL RENTAL
EXPENSE INCOME
-----------------------
1998 $ 766 230
1999 789 230
2000 678 230
2001 564 230
2002 404 200
2003 and thereafter 771 192
-----------------------
Total minimum future rentals $ 3,972 1,312
===========================================================
(10) INCOME TAXES
Wintrust had no current Federal or state income tax expense in each of the years
in the three-year period ended December 31, 1997. In 1997, 1996 and 1995, the
Company recorded net deferred Federal tax benefits of $2.9 million, $524,000 and
$331,000, respectively, and net deferred state tax benefits of $890,000,
$786,000 and $181,000, respectively. During 1997, such amounts excluded
approximately $316,000 and $67,000 of Federal and state tax benefits,
respectively, that are recorded directly to shareholder's equity related to the
exercise of certain stock options.
Income taxes for 1997, 1996 and 1995 differ from the expected tax expense for
those years (computed by applying the applicable statutory U.S. Federal income
tax rate of 34% to income before income taxes) as follows (in thousands):
YEAR ENDED DECEMBER 31,
1997 1996 1995
----------------------------
Computed "expected" income
tax expense (benefit) $ 360 (776) 341
Increase (decrease) in tax resulting from:
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets (4,204) (853) (698)
Merger costs - 305 -
Other, net 56 14 (155)
----------------------------
Income tax benefit $(3,788) (1,310) (512)
===========================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1997 and 1996 are
presented below (in thousands):
1997 1996
----------------------
Deferred tax assets:
Allowance for possible loan losses $ 1,475 791
Startup costs 133 291
Federal net operating loss carryforward 9,072 9,535
State net operating loss carryforward 1,867 1,897
Deferred compensation 89 263
Other, net 162 146
----------------------
Total gross deferred tax assets 12,798 12,923
Valuation allowance 4,163 8,367
----------------------
Total net deferred tax assets 8,635 4,556
- -------------------------------------------------------------------
Deferred tax liabilities:
Premises and equipment, due to
differences in depreciation 483 186
Accrual to cash adjustment 1,023 1,232
Unrealized gain on available-for-sale
securities 17 8
Other, net 1,254 1,434
----------------------
Total gross deferred tax liabilities 2,777 2,860
----------------------
Net deferred tax assets $ 5,858 1,696
===================================================================
During 1995, 1996 and 1997, management determined that a valuation allowance
should be established for a portion of the deferred tax asset based on
management's assessment reguarding realization of such deferred tax assets
considering the
- 19 -
<PAGE>
profitability attained by the Company and its operating subsidiaries during each
of the years and future earnings estimates. Management believes that
realizations of the recorded net deferred tax asset is more likely than not.
At December 31, 1997, Wintrust and its subsidiaries had Federal net operating
losses of approximately $26.7 million and state net operating losses of
approximately $26.0 million. Such amounts are available for carryforward to
offset future taxable income and expire in 2000-2010. Utilization of the net
operating losses are subject to certain statutory limitations. Additionally, the
federal net operating losses of the predecessor companies prior to the
Reorganization are only available to be utilized by the respective companies
that generated the losses.
(11) EMPLOYEE BENEFIT AND STOCK PLANS
Prior to May 22, 1997, Wintrust, Lake Forest Bancorp, Inc., Hinsdale Bancorp,
Inc., Libertyville Bancorp, Inc., Crabtree Capital Corporation and FIFC
maintained various stock option and rights plans (Predecessor Plans) which
provided 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 Predecessor
Plans permitted the grant of incentive stock options, nonqualified stock
options, rights and restricted stock.
Collectively, the Predecessor Plans covered substantially all employees of
Wintrust.
Effective May 22, 1997, the Company's shareholders approved the Wintrust
Financial Corporation 1997 Stock Incentive Plan (Plan). The Plan amended,
restated, continued and combined all of the Predecessor Plans implemented
previously by the Company or its subsidiaries, including shares covered under
the Company's Stock Rights Plan. The Plan provides that the total number of
shares of Common Stock as to which awards may be granted may not exceed
1,937,359 shares, which number of shares includes 1,777,359 shares of Common
Stock which had already been reserved for issuance under the Predecessor Plans.
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 Plans for 1997, 1996 and 1995 is as
follows:
COMMON RANGE OF WEIGHTED AVERAGE
SHARES STRIKE PRICES STRIKE PRICE
-------------------------------------------
Outstanding at
December 31, 1994 752,004 $ 5.80-$21.13 $ 8.23
Granted 168,029 $ 9.30-$14.53 $ 11.56
Exercised 11,250 $7.75 $ 7.75
Forfeited or canceled 2,418 $ 7.75- $9.30 $ 8.37
-------------------------------------------
Outstanding at
December 31, 1995 906,365 $ 5.80-$21.13 $ 8.85
Granted 309,573 $11.37-$15.25 $ 13.75
Exercised 13,690 $ 6.31- $9.69 $ 8.27
Forfeited or canceled 52,924 $ 6.31-$21.13 $ 10.81
-------------------------------------------
Outstanding at
December 31, 1996 1,149,324 $ 5.80-$21.13 $ 10.10
Granted 350,671 $18.00 $ 18.00
Reclassification of stock
rights to stock options 103,236 $ 7.75-$11.62 $ 7.84
Exercised 117,575 $ 5.80-$16.23 $ 7.72
Forfeited or canceled 26,568 $ 5.80-$21.13 $ 15.85
-------------------------------------------
Outstanding at
December 31, 1997 1,459,088 $ 5.80-$21.13 $ 11.90
=======================================================================
At December 31, 1997 and 1996, the weighted-average remaining contractual life
of outstanding options was 7.4 years and 7.0 years, respectively. Additionally,
at December 31, 1997, 1996 and 1995, the number of options exercisable was
809,520, 659,627 and 489,928, respectively, and the weighted-average per share
exercise price of those options was $9.08, $8.62 and $8.08, respectively.
Expiration dates for the options range from December 20, 1998 to December 5,
2007.
The following table presents the certain information about the outstanding
options and the currently exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS CURRENTLY EXERCISABLE
- ------------------------------------------------------------ -----------------------------
WEIGHTED WEIGHTED
RANGE OF AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE REMAINING NUMBER EXERCISE
PRICES OF SHARES PRICE TERM OF SHARES PRICE
- ------------------------------------------------------------ -----------------------------
<S> <C> <C> <C> <C> <C>
$ 5.80-$6.31 227,170 $6.20 3.77 years 227,170 $6.20
$ 7.24-$8.48 289,323 $7.90 6.25 years 272,038 $7.88
$ 9.30-$11.62 233,727 $10.12 7.14 years 140,463 $10.01
$12.42-$15.25 345,719 $13.66 8.31 years 157,121 $13.52
$18.00-$18.00 350,671 $18.00 9.93 years 250 $18.00
$19.86-$21.13 12,478 $21.11 2.45 years 12,478 $21.11
- -------------------------------------------------------------------------------------------------------
$ 5.80-$21.13 1,459,088 $11.90 7.35 years 809,520 $ 9.08
=======================================================================================================
</TABLE>
- 20 -
<PAGE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized for its stock
option plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the date of grant for awards under the
stock option plans consistent with the method of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(Statement No. 123), the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (dollars in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-----------------------------
Net income
As reported $ 4,846 (973) 1,497
Pro forma 4,261 (1,455) 1,456
Earnings per share-Basic
As reported $ 0.62 (0.16) 0.27
Pro forma 0.55 (0.24) 0.27
Earnings per share-Diluted
As reported $ 0.60 (0.16) 0.24
Pro forma 0.53 (0.24) 0.24
===========================================================
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions used for
grants during the years ended December 31, 1997, 1996 and 1995, respectively:
dividend yield of 0% for each period; expected volatility of 22.5% for 1997 and
20.0% for 1996 and 1995; risk free rate of return of of 6.4% for 1997 and 1996
and 6.6% for 1995; and, expected life of 8 years for 1997 and 10 years for 1996
and 1995.
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 $9,500 annually. 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 $41,300, $37,500 and $32,700 in 1997, 1996
and 1995, respectively.
Effective May 22, 1997, the Company's shareholders approved the Wintrust
Financial Corporation Employee Stock Purchase Plan (SPP). The 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. The
Company has reserved 250,000 shares of its authorized Common Stock for the SPP.
All shares offered under the SPP will be newly issued shares of the Company, and
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 purchase date for the offering.
The Company does not currently offer other postretirement benefits such as
health care or other pension plans.
(12) 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. No cash dividends were paid to Wintrust by the Banks during the years
ended December 31, 1997, 1996 and 1995.
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, 1997 and 1996, reserve balances of approximately
$5,765,000 and $2,512,000, 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). Management believes, as of
December 31, 1997 and 1996, that the Company and the Banks met all capital
adequacy requirements to which they are subject.
As of December 31, 1997 the most recent notification from the Banks' primary
federal regulator categorized the Banks as either well capitalized or adequately
capitalized under the
- 21 -
<PAGE>
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Banks must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table. The Company's
and the Banks' actual capital amounts and ratios as of December 31, 1997 and
1996 are presented in the following tables (dollars in thousands).
TO BE ADEQUATELY
CAPITALIZED BY
ACTUAL REGULATORY DEFINITION
-------------------------------------------
AMOUNT RATIO AMOUNT RATIO
-------------------------------------------
December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $72,107 9.4% $61,336 8.0%
Lake Forest 23,098 8.9 20,821 8.0
Hinsdale 16,082 8.2 15,711 8.0
North Shore 20,902 10.3 16,114 8.0
Libertyville 11,668 11.6 8,075 8.0
Barrington 6,587 12.5 4,207 8.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $66,991 8.7% $30,668 4.0%
Lake Forest 21,378 8.2 10,411 4.0
Hinsdale 14,784 7.5 7,856 4.0
North Shore 19,822 9.8 8,057 4.0
Libertyville 11,078 11.0 4,038 4.0
Barrington 6,258 11.9 2,104 4.0
Tier 1 Capital (to Average Quarterly Assets):
Consolidated $66,991 6.6% $40,354 4.0%
Lake Forest 21,378 6.2 13,861 4.0
Hinsdale 14,785 6.9 8,585 4.0
North Shore 19,822 7.7 10,287 4.0
Libertyville 11,078 9.3 4,783 4.0
Barrington 6,258 10.0 2,515 4.0
December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $44,361 8.0% $44,338 8.0%
Lake Forest 17,303 8.7 15,995 8.0
Hinsdale 13,343 9.6 11,062 8.0
North Shore 14,983 11.7 10,288 8.0
Libertyville 8,606 13.6 5,047 8.0
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $40,725 7.3% $22,169 4.0%
Lake Forest 16,022 8.0 7,997 4.0
Hinsdale 12,463 9.0 5,531 4.0
North Shore 14,184 11.0 5,144 4.0
Libertyville 8,256 13.1 2,523 4.0
Tier 1 Capital (to Average Quarterly Assets):
Consolidated $40,725 6.4% $25,421 4.0%
Lake Forest 16,022 6.2 10,281 4.0
Hinsdale 12,463 8.2 6,063 4.0
North Shore 14,184 9.1 6,249 4.0
Libertyville 8,256 11.7 2,827 4.0
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 Capital-to-Average
Quarterly Assets ratios, respectively.
Crystal Lake Bank, which is "well capitalized" in all capital categories, is not
presented above. That Bank's ratios are not meaningful because it opened during
the last few weeks of 1997.
(13) COMMITMENTS AND CONTINGENCIES
In connection with a purchase agreement for a subsidiary of Crabtree, a
provision was made for additional contingent consideration pending the outcome
of certain tax litigation and other contingencies of that subsidiary. If such
contingencies were favorably resolved, Crabtree would have been required to
contribute up to $3,450,000 to the subsidiary. This additional capital
contribution was fully reserved for in Crabtree's financial statements in 1987.
In early 1995, the last remaining contingency under the purchase agreement was
satisfied and in March, 1995, the subsidiary made a formal request of Crabtree
for the maximum amount of the contribution. Crabtree disputed the amounts owed
and in September, 1995, Crabtree reached a settlement with the subsidiary. Under
the terms of the settlement agreement, Crabtree effectively bought out the
minority shareholders of the subsidiary by having the subsidiary repurchase all
of its stock held by the minority shareholders. A purchase price was negotiated
which included a deemed capital contribution by Crabtree of $1.7 million. As a
result of this settlement, a gain of $735,000 was recorded in 1995.
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, 1997 and 1996 were $239.1 million and $182.4 million,
respectively. Standby letters of credit amounts were $5.3 million and $2.9
million at December 31, 1997 and 1996, respectively.
In the ordinary course of business, there are various other legal proceedings
pending against the Company. 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.
- 22 -
<PAGE>
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 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 Wintrust's financial instruments at
December 31, 1997 and 1996 (in thousands).
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------------------------------------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and demand balances from banks $ 32,158 32,158 36,581 36,581
Federal funds sold 60,836 60,836 38,835 38,835
Interest-bearing deposits at banks 85,100 85,100 18,732 18,732
Held-to-maturity securities 5,001 4,964 5,001 4,913
Available-for-sale securities 101,934 101,934 69,387 69,387
Loans, gross 712,631 718,079 492,548 492,741
Accrued interest receivable 4,792 4,792 4,034 4,034
Financial liabilities:
Non-maturity deposits 392,478 392,478 293,630 293,630
Deposits with stated maturities 525,222 527,263 324,399 325,380
Notes payable 20,402 20,402 22,057 22,057
Short-term borrowings 35,493 35,493 7,058 7,058
Accrued interest payable 1,770 1,770 930 930
</TABLE>
Cash and demand balances from banks and Federal funds sold: The carrying value
of cash and demand balances from banks approximates fair value due to the short
maturity of those instruments.
Interest-bearing deposits at 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 real estate 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 the 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.
Notes payable and short-term borrowings: The carrying value of notes payable and
short-term borrowings approximate fair value due to the relatively short period
of time to maturity or repricing.
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. Because most of
Wintrust's commitment agreements were recently entered into and/or contain
variable interest rates, the carrying value of Wintrust's commitments to extend
credit approximates fair value. The fair value of letters of credit is based on
fees currently charged for similar arrangements.
- 23 -
<PAGE>
(15) WARRANTS TO ACQUIRE COMMON STOCK
The Company has issued warrants to acquire common stock. The warrants entitle
the holder to purchase one share of the Company's common stock at purchase
prices ranging from $14.85 to $15.00 per share. There were 155,430 outstanding
warrants to acquire common stock at December 31, 1997 and 1996 with expirations
dates ranging from December, 2002 through November, 2005.
(16) BUSINESS COMBINATION
On September 1, 1996, Wintrust Financial Corporation (formerly known as North
Shore Community Bancorp, Inc.) issued approximately 5.3 million shares of common
stock and approximately 122,000 warrants to acquire common stock in exchange for
all outstanding common stock and warrants, if applicable, of Lake Forest
Bancorp, Inc., Hinsdale Bancorp, Inc., Libertyville Bancorp, Inc. and Crabtree
Capital Corporation based upon exchange ratios approved by shareholders of each
of the companies.
The combination was accounted for under the pooling of interests method.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying consolidated financial
statements are summarized below (in thousands).
EIGHT MO. ENDED YEAR ENDED
AUG. 31, 1996 DEC. 31, 1995
------------------------------
Net interest income:
Lake Forest Bancorp, Inc. $ 3,648 4,431
Hinsdale Bancorp, Inc. 2,380 2,067
North Shore Comm. Bancorp, Inc. 2,140 1,746
Libertyville Bancorp, Inc. 875 157
Crabtree Capital Corporation 366 1,299
------------------------------
Consolidated $ 9,409 9,700
- ------------------------------------------------------------
Other noninterest income:
Lake Forest Bancorp, Inc. $ 726 1,115
Hinsdale Bancorp, Inc. 507 572
North Shore Comm. Bancorp, Inc. 429 264
Libertyville Bancorp, Inc. 132 21
Crabtree Capital Corporation 3,352 6,572
------------------------------
Consolidated $ 5,146 8,544
- ------------------------------------------------------------
Net income (loss):
Lake Forest Bancorp, Inc. $ 545 1,015
Hinsdale Bancorp, Inc. 29 420
North Shore Comm. Bancorp, Inc. (901) (862)
Libertyville Bancorp, Inc. (862) (958)
Crabtree Capital Corporation (727) 1,882
------------------------------
Consolidated $ (1,916) 1,497
============================================================
(17) ACQUISITION
On October 24, 1996, the Board of Directors approved the acquisition of Wolfhoya
Investments, Inc. ("Wolfhoya"), a company organized prior to the reorganization
of the Company (see note 18) by certain directors and executive officers of the
Company for purposes of organizing a de novo bank in Barrington, Illinois. Also,
on October 24, 1996, an Agreement and Plan of Merger by and between Wintrust
Financial Corporation and Wolfhoya Investments, Inc. was executed. The Company
issued an aggregate of 87,556 shares of Common Stock to complete the acquisition
which was accounted for under the purchase method and, accordingly, the results
of operations are included in the Consolidated Statements of Operations from the
date of acquisition. In addition, there were outstanding common stock warrants
and stock options of Wolfhoya that, as a result of the transaction, converted by
their terms into Warrants to purchase 16,838 shares and Options to purchase
68,534 shares of Common Stock of the Company, all at the adjusted exercise price
of $14.85 per share. As part of the transaction, the Company assumed
approximately $502,000 of Wolfhoya's outstanding debt which amount was
refinanced under the Company's revolving line of credit. Barrington Bank and
Trust Company, the de novo bank which Wolfhoya began organizing, opened for
business on December 19, 1996.
- 24 -
<PAGE>
(18) WINTRUST FINANCIAL CORPORATION
(Parent Company Only)
The Company's condensed balance sheets as of December 31, 1997 and 1996, and the
related condensed statements of operations and cash flows for the three years
ended December 31, 1997 are as follows (in thousands, except per share data):
Wintrust Financial Corporation (Parent Company Only) Balance Sheet Data
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
------------------------
ASSETS
Cash $ 854 63
Investment in subsidiaries 85,235 62,262
Due from subsidiary - 785
Other assets 3,259 1,834
------------------------
Total assets $ 89,348 64,944
=====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 156 267
Notes payable 20,402 22,057
Shareholders' equity 68,790 42,620
------------------------
Total liabilities and shareholders' equity $ 89,348 64,944
=====================================================================
Wintrust Financial Corporation (Parent Company Only) Statements of Operation
Data
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-----------------------------
INCOME
Interest income $ - 3 -
Other income - - -
-----------------------------
Total income - 3 -
EXPENSES
Interest expense 953 383 -
Salaries and employee benefits 333 107 -
Merger - 173 -
Other 477 213 56
Goodwill and organizational cost
amortization 138 26 14
-----------------------------
Total expenses 1,901 902 70
-----------------------------
Loss before income taxes and equity
in undistributed net income (loss)
of subsidiaries (1,901) (899) (70)
Income tax benefit (914) (257) -
-----------------------------
Loss before equity in undistributed
net income (loss) of subsidiaries (987) (642) (70)
Equity in undistributed net income
(loss) of subsidiaries 5,833 (331) 1,567
-----------------------------
Net income (loss) $ 4,846 (973) 1,497
====================================================================
Wintrust Financial Corporation (Parent Company Only)
Statements of Cash Flows
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-----------------------------
Operating activities:
Net income (loss) $ 4,846 (973) 1,497
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of goodwill and
organizational costs 138 26 14
Deferred income tax benefit (914) (257) -
Decrease in other assets 95 64 92
(Decrease) increase in other liabilities (111) 267 -
Equity in undistributed net (income)
loss of subsidiaries (5,833) 331 (1,567)
-----------------------------
Net cash (used for) provided by
operating activities (1,779) (1,204) 36
-----------------------------
Investing activities:
Capital infusions to subsidiaries (17,850) (23,272) (13,423)
Purchase of Wolfhoya Investments,
Inc., net of cash acquired - (318) -
-----------------------------
Net cash used for investing activities (17,850) (23,590) (13,423)
-----------------------------
Financing activities:
Common stock issuance, net 21,290 1,858 13,518
Dividends on preferred stock - - (45)
Repurchase of common stock - (48) -
Increase in notes payable 16,200 22,057 -
Repayment of notes payable (17,855) - -
Advances from (to) subsidiaries 785 (785) -
-----------------------------
Net cash provided by financing
activities 20,420 23,082 13,473
-----------------------------
Net increase (decrease) in cash 791 (1,050) 86
Cash at beginning of year 63 1,113 1,027
-----------------------------
Cash at end of year $ 854 63 1,113
=========================================================================
- 25 -
<PAGE>
(19) NET INCOME (LOSS) PER AVERAGE COMMON SHARE
The following table sets forth the number of shares and the net income used to
determine net income per common share for 1997, 1996, and 1995 (in thousands,
except per share data):
1997 1996 1995
Net income (loss) available for
common shareholders (A) $ 4,846 (973) 1,452
---------------------------------
Average common shares outstanding (B) 7,755 6,134 5,315
Average common share equivalents 331 - 838
---------------------------------
Weighted average common shares
and common share equivalents (C) 8,086 6,134 6,153
---------------------------------
Net income (loss) per average
common share - Basic (A/B) $ 0.62 (0.16) 0.27
Net income (loss) per average
common share - Diluted (A/C) $ 0.60 (0.16) 0.24
=======================================================================
Common share equivalents result from stock options and stock warrants being
treated as if they had been exercised and are computed by application of the
treasury stock method. No common share equivalents were assumed to be
outstanding for the year ended December 31, 1996 because accounting standards
require that the computation of earnings per share shall not give effect to
common stock equivalents for any period in which their inclusion would have the
effect of decreasing the loss per share amount otherwise computed.
(20) QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
The following is a summary in thousands of dollars, except for per common share
data, of quarterly financial information for the years ended December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 QUARTERS 1996 QUARTERS
--------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $13,078 15,381 17,746 18,906 8,287 8,936 10,174 11,640
Interest expense 7,826 8,592 10,406 11,515 5,207 5,571 6,232 7,145
--------------------------------------------------------------------------------
Net interest income 5,252 6,789 7,340 7,391 3,080 3,365 3,942 4,495
Provision for possible loan losses 679 875 958 892 410 483 451 591
--------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 4,573 5,914 6,382 6,499 2,670 2,882 3,491 3,904
Noninterest income, excluding
securities gains, net 1,592 928 1,102 1,211 1,996 1,934 1,970 1,614
Securities gains, net - - - 111 18 - - -
Noninterest expense 6,354 6,424 6,946 7,530 4,958 6,219 5,339 6,246
--------------------------------------------------------------------------------
Income before income taxes (189) 418 538 291 (274) (1,403) 122 (728)
Income tax (benefit) expense (918) (708) (773) (1,389) 82 63 (179) (1,276)
--------------------------------------------------------------------------------
Net income (loss) $729 1,126 1,311 1,680 (356) (1,466) 301 548
--------------------------------------------------------------------------------
Net income (loss) per common
share - Basic $0.11 0.14 0.16 0.21 (0.06) (0.25) 0.05 0.08
Net income (loss) per common
share - Diluted $0.10 0.13 0.15 0.20 (0.06) (0.25) 0.04 0.08
================================================================================
</TABLE>
- 26 -
<PAGE>
Independent Auditors' Report
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, 1997 and 1996, and the related consolidated statements of operations,
changes in shareholders' equity, and cash flows for each of the years in the
three year period ended December 31, 1997. 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. Separate financial statements of Crabtree
Capital Corporation and subsidiaries included the consolidated statements of
operations, changes in shareholders' equity, and cash flows for the year ended
December 31, 1995, were audited by other auditors whose report dated May 20,
1996, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. 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, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Wintrust Financial Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/S/ KPMG PEAT MARWICK LLP
Chicago, Illinois
March 17, 1998
- 27 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected Financial
Highlights" and the Company's Consolidated Financial Statements and Notes
thereto. In addition to historical information, the following "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ significantly from those anticipated in
these forward-looking statements.
GENERAL
The profitability of the Company's operations depends primarily 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 investment portfolios and its cost of
funds, which consists of interest paid on deposits and borrowings. The provision
for possible loan losses reflects the cost of credit risk in the Company's loan
portfolio. Non-interest income consists of gains on sales of loans, loan
servicing fees, fees on loans sold, trust fees, and miscellaneous fees and
income. Non-interest expense includes salaries and employee benefits as well as
occupancy, data processing, marketing, other expenses and, in 1996, certain
non-recurring merger-related 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 procedures in coping with such changes. 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, as well as economic and market factors. Gain on sale of loans and
loan servicing fees relate principally to the Company's past practice of selling
insurance premium finance loans originated into the secondary market through a
securitization facility. The Company's current practice is to retain premium
finance loans in the Banks' loan portfolios resulting in higher net interest
income, reduced gains on sale of insurance premium finance loans and diminished
loan servicing fee income. Fees on 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 mortgages in the
Banks' portfolios. These fees are highly dependent on the volume of real estate
transactions and mortgage refinancing activity. The Company earns trust fees for
managing and administering investment funds for individuals and small
businesses. Miscellaneous fees and income include service charges on deposit
accounts and for ancillary banking services. Non-interest expenses are heavily
influenced by the growth of operations, with additional employees necessary to
staff new banks and to open new branch facilities and marketing expenses
necessary to promote them. Growth in the number of account relationships
directly affects such expenses as data processing costs, supplies, postage and
other miscellaneous expenses.
CHARACTERISTICS OF THE COMPANY'S PROFITABILITY
Wintrust is a relatively young company with the average life of its subsidiary
banks being less than three 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 Banks and FIFC has been
affected by the high costs associated with growing market share in deposits and
loans, opening new branches and banking facilities, making investments in
certain new products and services requiring a long-term outlook, and building an
experienced management team. However, management and directors of the Company
currently believe that shareholder value is enhanced by investing in start-up
banks and branches (rather than purchasing banks at current market premiums) and
allowing experienced management to grow the initial franchise to profitability
over a period that generally takes 13-24 months.
The nature of the Company's de novo bank strategy has led to, and will likely
continue to lead to, differences in earnings patterns as compared to other
established community banking organizations. The Company's net interest margin,
which has ranged from 2.91% to 3.41% over the last three years, is low compared
to industry standards for a variety of reasons. Upon entering new markets, the
Company has aggressively pursued business through competitive rates in order to
garner market share. The Company has been cautious in its loan origination
activities, focusing on strong borrowers who often command favorable loan rates.
Finally, the Company has maintained a relatively shorter term, and therefore
lower-yielding, investment portfolio, in order to facilitate loan demand as it
emerges, maintain excess liquidity in the event deposit levels fluctuate and
because the recent interest rate environment has provided little incentive to
invest funds in longer term investments.
Similarly, as the Company has been growing its balance sheet at relatively high
rates over the past five years, the Company has experienced high overhead levels
in relation to its assets, reflecting the necessary start-up investment in human
resources and facilities to organize additional de novo banks and open new
branch facilities. From 1996 to 1997, the net overhead ratio has remained
relatively stable at 2.60% in 1997
- 28 -
<PAGE>
as compared to 2.71% in 1996, and to 2.55% in
1996 excluding the non-recurring merger expenses. The Company's objective is to
ultimately reduce the net overhead ratio to a range of 1.5% to 2.0% of average
assets. To that end, it is important to note that the Company's more mature
banks have met the overhead goals established by the Company with net overhead
ratios by bank subsidiaries as follows:
NET
OVERHEAD
BANK ESTABLISHED RATIO
- ------------------------------------------------------
Lake Forest Bank 12/91 1.54%
Hinsdale Bank 10/93 1.85%
North Shore Bank 9/94 2.27%
Libertyville Bank 10/95 2.18%
Barrington Bank 12/96 4.77%
======================================================
North Shore Bank's net overhead ratio is higher than would be expected of a bank
of its age; however, significant branch expansion into Glencoe in late 1995 and
Winnetka in early 1996 has resulted in that ratio remaining above 2%. The
Company expects that as its existing Banks continue to mature, the
organizational and start-up expenses associated with future de novo banks and
new banking offices will not have as significant an impact on the Company's
overhead ratio.
DE NOVO BANK FORMATION AND BRANCH OPENING ACTIVITY
The following table illustrates the progression of Bank and branch openings that
have impacted the Company's results of operations over the past five years.
<TABLE>
<CAPTION>
MONTH YEAR BANK LOCATION TYPE OF FACILITY
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------
<FN>
(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.
</FN>
===========================================================================================================================
</TABLE>
REORGANIZATION
Effective September 1, 1996, pursuant to the terms of a reorganization agreement
dated as of May 28, 1996, which was approved by shareholders of all of the
parties, the Company completed a reorganization transaction to combine the
separate activities of the holding companies of each of the Company's then
existing operating subsidiaries. As a result of the transaction, the Company
(formerly known as North Shore Community Bancorp, Inc., the name of which was
changed to Wintrust Financial Corporation in connection with the reorganization)
became the parent holding company of each of the separate businesses, and the
shareholders and warrant holders of each of the separate holding companies
exchanged their shares for Common Stock and their warrants for a combination of
shares of Common Stock and Warrants of the Company (the "Reorganization"). The
Reorganization was accounted for as a pooling-of-interests transaction and,
accordingly, the Company's financial statements have been restated on a combined
and consolidated basis to give retroactive effect to the combined operations
throughout the reported historical periods.
- 29 -
<PAGE>
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, 1997, 1996, and 1995. The yields and costs include fees which are
considered adjustments to yields. Interest income on non-accruing loans is
reflected in the year that it is collected. 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. This table should be referred to in conjunction with this
analysis and discussion of the financial condition and results of operations
(dollars in thousands).
<TABLE>
<CAPTION>
1997 1996 1995
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST COST BALANCE(1) INTEREST COST BALANCE(1) INTEREST COST
------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing deposits with banks $ 32,319 $ 1,764 5.46% $ 28,382 $ 1,588 5.60% $ 51,159 $3,194 6.24%
Federal funds sold 63,889 3,493 5.47 47,199 2,491 5.28 35,172 2,048 5.82
Investment securities (2) 69,887 3,793 5.43 88,762 4,327 4.87 58,015 3,202 5.52
Loans, net of unearned discount(2) 620,801 56,134 9.04 347,076 30,631 8.83 183,614 17,028 9.27
------------------------------------------------------------------------------------------
Total earning assets 786,896 65,184 8.28 511,419 39,037 7.63 327,960 25,472 7.77
------------------------------------------------------------------------------------------
Cash and due from
banks - non-interest bearing 17,966 13,911 8,031
Allowance for possible loan losses (4,522) (3,247) (2,038)
Premises and equipment, net 35,634 26,586 17,687
Other assets 22,110 13,575 10,485
------------------------------------------------------------------------------------------
Total assets $ 858,084 $562,244 $362,125
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits-interest bearing:
NOW accounts $ 66,221 $ 2,535 3.83% $ 45,144 $ 1,713 3.79% $ 23,214 $ 844 3.64%
Savings and money market deposits 191,317 8,220 4.30 139,150 5,659 4.07 106,247 4,541 4.27
Time deposits 444,587 26,620 5.99 261,502 15,388 5.88 140,724 8,705 6.19
------------------------------------------------------------------------------------------
Total interest-bearing deposits 702,125 37,375 5.32 445,796 22,760 5.11 270,185 14,090 5.21
------------------------------------------------------------------------------------------
Short-term borrowings 375 13 3.47 809 34 4.20 10,238 474 4.63
Notes payable 13,319 951 7.14 15,242 1,361 8.93 14,044 1,208 8.60
------------------------------------------------------------------------------------------
Total interest-bearing liabilities 715,819 38,339 5.36 461,847 24,155 5.23 294,467 15,772 5.36
------------------------------------------------------------------------------------------
Non-interest bearing deposits 73,280 51,249 29,304
Other liabilities 7,481 7,420 7,181
Shareholders' equity 61,504 41,728 31,173
------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 858,084 $562,244 $362,125
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income/spread $ 26,845 2.92% $ 14,882 2.40% $ 9,700 2.41%
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.41% 2.91% 2.96%
==================================================================================================================================
<FN>
(1) Average balances were generally computed using daily balances.
(2) Includes tax equivalent income adjustment of approximately $5,000 and
$68,000 for investment securities and loans, respectively, in 1997.
</FN>
</TABLE>
- 30 -
<PAGE>
CHANGES IN INTEREST INCOME AND EXPENSE
The following table shows the dollar amount of changes in interest income 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------------------------------------------------------
CHANGE CHANGE CHANGE CHANGE
DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL
RATE VOLUME CHANGE RATE VOLUME CHANGE
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest bearing deposits with banks $ (40) 216 176 (304) (1,302) (1,606)
Federal funds sold 92 910 1,002 (206) 649 443
Investment securities 454 (988) (534) (410) 1,535 1,125
Loans, net of unearned discount 771 24,732 25,503 (861) 14,464 13,603
-------------------------------------------------------------------------
Total interest income 1,277 24,870 26,147 (1,781) 15,346 13,565
-------------------------------------------------------------------------
NOW accounts 16 806 822 39 830 869
Savings and money market deposits 336 2,225 2,561 (229) 1,347 1,118
Time deposits 275 10,957 11,232 (444) 7,127 6,683
Short-term borrowings (7) (14) (21) (40) (400) (440)
Notes payable (252) (158) (410) 47 106 153
-------------------------------------------------------------------------
Total interest expense 368 13,816 14,184 (627) 9,010 8,383
-------------------------------------------------------------------------
Net interest income $ 909 11,054 11,963 (1,154) 6,336 5,182
===========================================================================================================================
</TABLE>
The changes in net interest income are complicated to assess and require
significant analysis to fully understand. 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 is generally dependent upon the
ability of management to attract additional deposit accounts to fund the growth
of the institution. This is the current situation at the Company as it is a
group of relatively new institutions which are still diligently attempting to
establish themselves as the bank of choice in a significant amount of households
and businesses in the communities they serve. Accordingly, the discussion of the
financial condition of the Company will focus first on the sources of funds
received through the liability side of the balance sheet which is predominantly
deposit growth. After it is understood how the Company was funded during the
periods under discussion, the latter section of this "Analysis of Financial
Condition" discussion will focus on the asset categories where the Company
invested the funds.
Deposits; The Company has experienced significant growth in the number of
accounts and the balance of deposits over the past three years primarily as a
result of de novo bank formations, new branch openings and strong marketing
efforts. Total deposit balances increased 48.5% to $917.7 million at December
31, 1997 compared to $618.0 million at December 31, 1996, and the number of
accounts increased by approximately 48% from year-end 1996 to year-end 1997.
The following table presents deposit balances by the Banks and the relative
percentage of total deposits held by each Bank at December 31 during the past
three years (dollars in thousands):
- 31 -
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------
DEPOSIT PERCENT DEPOSIT PERCENT DEPOSIT PERCENT
BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lake Forest $ 287,765 31% $ 251,906 40% $ 181,186 45%
Hinsdale 206,197 22 140,873 23 104,402 26
North Shore 245,184 27 153,878 25 93,657 23
Libertyville 112,658 12 67,490 11 26,413 6
Barrington 64,803 7 3,882 1 - -
Crystal Lake 1,094 1 - - - -
-----------------------------------------------------------------------------------
Total Deposits $ 917,701 100% $ 618,029 100% $ 405,658 100%
-----------------------------------------------------------------------------------
Percentage increase from
prior year-end 48.5% 52.4% 82.7%
===========================================================================================================================
</TABLE>
Short-term borrowings: Short-term borrowings fluctuate based on daily liquidity
needs of the Banks and FIFC. At December 31, 1997 and 1996, short-term
borrowings consisted of Federal Funds purchased, short-term repurchase
agreements and treasury, tax and loan note option accounts. The increase in this
category is attributable to an increase in short-term repurchase agreements
negotiated with several corporate clients at year-end 1997.
Notes payable: As of December 31, 1997, the balance of notes payable represented
the amount due under a $30 million revolving line of credit. Interest charged
under the terms of the line of credit is at a floating rate equal to, at the
Company's option, either the lender's prime rate or the London Inter-Bank
Offered Rate (LIBOR) plus a spread. The spread was reduced from 1.5% over LIBOR
to 1.25% over LIBOR effective September 1, 1997. This revolving credit line is
secured by the stock of the subsidiary Banks. The balance outstanding decreased
to $20.4 million at December 31, 1997 from $22.1 million at December 31, 1996.
The slight decline was a result of (1) reducing the outstanding debt to
approximately $2.5 million in March, 1997, by utilizing the proceeds from the
common stock offering; and (2) offsetting the reduction by utilizing additional
borrowings under the line to fund the growth of the Company's banking
subsidiaries and to partially capitalize Crystal Lake Bank in December, 1997.
Total assets and earning assets. The Company's total assets and earning assets
were $1.1 billion and $965.5 million, respectively, at December 31, 1997
compared to $706.0 million and $624.5 million, respectively, at December 31,
1996. These asset increases during 1997 follow increases in 1996 from year-end
1995 levels of $470.9 million and $427.5 million, respectively. The increase in
total assets and earning assets is attributable to the 48.5% increase and the
52.4% increase in the Banks' core deposit balances during 1997 and 1996,
respectively. Continued marketing efforts and a full year of operations of the
three banking offices opened in 1996, combined with opening of three additional
banking facilities during 1997, contributed to the strong growth. The Company
had 17 total banking facilities at the end of 1997 compared to 14 at the end of
1996 and 11 at the end of 1995.
Loans: The composition of earning assets has shifted slightly as the growth in
the level of deposit funds accelerated at a quicker pace than loan production.
Accordingly, the additional funding received from the deposit generation process
in excess of the net loan origination was invested into shorter-term money
market investments. Loans comprised 73.8% and 78.9% of total earning assets at
December 31, 1997 and December 31, 1996, respectively. Total loans, net of
unearned discount, increased 44.7%, from $492.5 million in 1996 to $712.6
million in 1997. The following table presents loan balances by category at
December 31, 1997 and 1996 (dollars in thousands).
PERCENT PERCENT
1997 OF TOTAL 1996 OF TOTAL
-------------------------------------
Commercial and
commercial real estate $235,483 33% $182,403 37%
Indirect auto 138,784 19 89,999 18
Premium finance 128,453 18 57,453 12
Home equity 116,147 16 87,303 18
Residential real estate 61,611 9 51,673 10
Other loans 32,153 5 23,717 5
-------------------------------------
Total loans $712,631 100% $492,548 100%
===================================================================
Growth in the loan portfolio has occurred in each major loan category. The
growth in the Company's commercial and commercial real estate, home equity, and
residential real estate portfolios is due primarily to the growth in the number
of bank and branch locations of the Company and the maturation of the existing
banks.
- 32 -
<PAGE>
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 having
large volumes of homogeneous assets that can be acquired for the Banks'
portfolios and possibly sold in the secondary market to generate fee income.
Currently, the Company's two largest loan niches are premium finance loans
generated by FIFC and indirect auto loans. Management continues to evaluate
additional specialized types of earning assets to assist in the deployment of
deposit funds and to diversify the earning asset portfolio.
Premium finance loans. The Company originates commercial premium finance loans
at FIFC which currently sells them to the Banks; however, the loans could be
funded through an asset securitization facilities. All premium finance loans,
however financed, are subject to the Company's stringent credit standards, and
substantially all such loans are made to commercial customers. Currently, the
Company rarely finances consumer insurance premiums. At December 31, 1995,
substantially all of the premium finance loans were sold through an asset
securitization facility; however, subsequent to the September 1, 1996 merger
transaction, premium finance loan originations have generally been sold to the
Banks and consequently remain as an asset of the Company. For that reason and
because the securitization facility was eliminated during 1997, the balance
increased from $57.5 million at the end of 1996 to $128.5 million as of December
31, 1997.
Indirect auto loans. The Company finances fixed rate automobile loans sourced
indirectly through unaffiliated automobile dealers. Indirect automobile loans
are secured by new and used automobiles and are generated by a network of
automobile dealers located in the Chicago area with which the Company has
established relationships. These credits 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 amongst
many individual borrowers. The Company utilizes credit underwriting standards
that result in a high quality portfolio. The Company does not currently
originate any significant level of loans to low credit worthy (i.e. sub-prime)
borrowers. Management continually monitors the dealer relationships and the
Banks are not dependent on any one dealer as a source of such loans. The Company
began to originate these loans in mid-1995 and has consistently increased the
level of outstanding loans.
Money Market Investments and Investment Securities. The Company's objective in
managing its securities portfolio is to balance liquidity risk, interest rate
risk and credit quality such that the earnings of the Company are maximized.
Management has maintained the funds that were not invested in loans in
short-term investment securities and money market investments. The aggregate
carrying value of such investments increased to $252.9 million at December 31,
1997 from $132.0 million at December 31, 1996 primarily as a result of the
deposit growth increasing at a more rapid pace than loan production during the
year. A detail of the carrying value of the individual categories as of December
31 is set forth in the table below (in thousands).
1997 1996
------------------------
Federal funds sold $ 60,836 38,835
Interest bearing deposits with banks 85,100 18,732
Investment securities 106,935 74,388
Total money market investments
------------------------
and investment securities $ 252,871 131,955
================================================================
Federal funds sold and interest bearing deposits with banks are very short-term
investments. The balances in these accounts fluctuate based upon deposit inflows
and loan demand. These accounts are extremely liquid and provide management with
the ability to meet liquidity needs for supplying loan demand or for other
reasons.
CONSOLIDATED RESULTS OF OPERATIONS
Comparison of Results of Operations for the Years Ended December 31, 1997 and
December 31, 1996
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 new since December, 1991
and have an average life of less than 3 years. The Company's premium finance
company began limited operations in 1991 and also began its operations as a
start-up company. Accordingly, Wintrust is still a young Company that has a
strategy of building its customer base and securing broad product penetration in
each market place that it serves. The Company has expanded its banking offices
from 5 in 1994 to 17 at the end of 1997, adding three new offices in each of the
last two years. These expansion activities have understandably suppressed
faster, opportunistic earnings. However, as the Company matures, the
organization and start-up costs associated with future bank and branch openings
will not have as significant an impact on earnings. Additionally, certain
operating ratios at the more mature banks are beginning to approach or are
better than peer group data suggesting that as the banks become more
established, the overall earnings level will accelerate.
- 33 -
<PAGE>
General. For the year ended December 31, 1997, the Company's net income
increased $5.8 million over the prior year. Specifically, the Company recorded
net income of $4.8 million in 1997 compared to a net loss of $973,000 for the
year ended December 31, 1996. The 1997 net income represents earnings per share
on a diluted basis of $0.60 for the year compared to a loss per share of $0.16
for 1996.
The three primary positive factors that added to the increase in earnings were
(1) a greater earning asset base coupled with an improved net interest margin
resulted in an increase in net interest income of $11.9 million; (2) the
increase in the realization of certain income tax net operating losses produced
net tax benefits of $2.5 million in excess of tax benefits recognized during
1996; and (3) the 1996 results of operations contained $891,000 of expenses from
the Company's September 1996 reorganization transaction where as 1997 contained
no such expenses. The negative factors affecting earnings were (1) an increased
provision for possible loan losses primarily due to the growth in the loan
portfolio; (2) a decrease in the level of noninterest income of approximately
$2.6 million as the Company discontinued the sale of premium finance loans
through a securitization facility in favor of maintaining the loans in its own
portfolio as a means to increase interest income; and (3) an increase of
approximately 25% in noninterest expenses, excluding the merger related costs,
to support the 49.2% increase in the asset size of the Company. These and other
factors will be discussed in greater detail in the following sections.
Net interest income. Net interest income increased to $26.8 million for the year
ended December 31, 1997, from $14.9 million for the comparable period of 1996.
This increase in net interest income of $11.9 million, or 79.9%, was primarily
attributable to a 53.9% increase in average earning assets in 1997 compared to
1996. The portion of the earning asset portfolio that exhibited the strongest
growth was in the loan portfolio where the average yield on such loans increased
to 9.04% in 1997 from 8.83% in 1996. Offsetting the beneficial impact of the
increased earning asset base was an increase in interest bearing liabilities and
the rate paid thereon from 5.23% in 1996 to 5.36% in 1997. The net impact of the
rate and volume changes was an increase in the net interest margin to 3.41% for
1997 from 2.91% in 1996. Please refer to the previous sections of this report
titled "Average Balance Sheets, Interest Income and Expense, and Interest Rate
Yields and Costs" and "Changes in Interest Income and Expense" for detailed
tables of information and further discussion of the components of net interest
income.
Provision for possible loan losses. The provision for possible loan losses
increased to $3.4 million in 1997, from $1.9 million in the prior year due to
the increases in the loan portfolio and to replenish the reserve for possible
loan losses for the $1.9 million of net loans charged-offs during 1997. At
December 31, 1997, the allowance for possible loan losses represented 0.72% of
loans outstanding compared to 0.74% of loans outstanding at December 31, 1996.
Management believes the reserve for possible loan losses is adequate to cover
potential losses in the portfolio. There can be no assurance 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 view of regulatory agencies toward adequate reserve levels,
and past due and non-performing loan levels.
Non-interest income. Total non-interest income decreased approximately $2.6
million, or 34.4%, to $4.9 million for the year ended December 31, 1997, as
compared to $7.5 million in the same period of 1996.
The Company recorded no gains on the sale of premium finance loans during 1997
compared to approximately $3.1 million for the year ended December 31, 1996. The
elimination of gains on the sale of premium finance loans occurred because all
insurance premium finance loans originated were retained by the Company during
1997; thereby eliminating any gain from sales to the previously maintained
securitization facility. By retaining all premium finance loans, the Company was
able to eliminate borrowing expense associated with the commercial paper issued
to fund the securitization facility and increase interest income by maintaining
the loans on the balance sheet of the Company. Thus, despite a $3.1 million
decline in this income category, the Company's net interest income improved
during 1997.
Loan servicing fees decreased from $1.4 million for the year ended December 31,
1996 to $0.2 million for the year ended December 31, 1997, primarily due to a
decrease in the amount of average managed insurance premium finance loans in the
1997 period. During the fourth quarter of 1996, subsequent to the merger of the
FIFC and the Banks, the majority of insurance premium finance loans originated
were retained by the Company; thereby eliminating any servicing revenue on newly
originated loans. Because the term of premium finance loans is usually less than
one year, the average managed insurance premium loans declined rapidly and
related servicing fees similarly declined. Early in the third quarter of 1997,
the Company no longer serviced premium finance loans for others; however, the
Company continues to service a small residential real estate portfolio for the
Federal National Mortgage Association.
Fees on mortgage loans sold relate to income derived by the Banks for services
rendered in originating and selling residential mortgages into the secondary
market. Such fees increased
- 34 -
<PAGE>
to $2.3 million in 1997 from $1.4 million in 1996 primarily due to new
facilities and increased volume. The increased volume was a result of a
favorable interest rate environment and effective product features, such as low
or no cost processing in certain circumstances, that allowed the banks to
differentiate themselves from the competition. Also contributing to the increase
was a full year of loan sales at Barrington Bank that opened during the last
month of 1996.
Service charges on deposit accounts increased 54.7% to $724,000 for the year
ended December 31, 1997, from $468,000 for the year ended December 31, 1996. The
increase is a direct result of the 48.5% increase in deposit balances from
December 31, 1996 to December 31, 1997. The majority of service charges on
deposit accounts relates to customary fees on accounts in overdraft positions
and for returned items on accounts.
Trust fees increased to $626,000 from $522,000 for the years ended December 31,
1997 and 1996, respectively, due primarily to increased trust business. The
general increase in the value of the equities market also contributed to the
increase in fees because certain assets under management are charged fees based
on a percentage of the market value of the accounts.
Non-interest expense. Total non-interest expense increased approximately $4.5
million, or 19.7%, to $27.3 million for the year ended December 31, 1997, as
compared to $22.8 million in the same period of 1996. Excluding the
merger-related costs of $891,000 in 1996, the increase in non-interest expenses
from 1996 to 1997 was approximately 24.6% despite the increase in total average
assets of 52.6% during the same time period. The following paragraphs will
discuss the change in non-interest expense in more detail.
Salaries and employee benefits increased 23.0% in 1997 to $14.2 million from
$11.6 million for the same period of the prior year. The increase of $2.6
million is principally due to (1) the increase in the number of banking
facilities to 17 at December 31, 1997, from 14 at December 31, 1996; (2) an
increase of approximately $1.1 million related to Barrington Bank, which only
opened and became fully staffed in December, 1996 but which had a fully
operational staff during 1997; (3) additional staffing levels at other existing
facilities to support the increased customer base; and (4) normal salary
increases. For the year ended December 31, 1997, salaries and employee benefits
as a percent of average assets was 1.66% which closely approximates the
Company's peer group ratio of 1.67%. It is important to note that salaries and
employee benefits as a percent of average assets is substantially better than
our peer group at the Company's more mature banks; however, the impact of
staffing de novo banks in the first few years of operations tends to bring the
Company's ratio up closer to the peer group average. As Wintrust banks continue
to mature, management is confident that our staffing costs as a percent of
average assets will be more favorable than our peer group. Wintrust has a
philosophy of paying a few number of highly effective individuals a salary that
is at a premium over market rates rather than staffing at higher peer group
levels. Management believes that this staffing philosophy is effective in
attracting talented individuals and achieving high levels of productivity. To
that end, as of December 31, 1997, Wintrust had approximately $4.0 million of
assets per employee compared to a peer group ratio of approximately $2.3 million
of assets per employee.
Occupancy expenses increased to $1.9 million for the year ended December 31,
1997, from $1.6 million for the year ended December 31, 1996, due primarily to
the addition of three additional facilities during the year and the inclusion of
occupancy costs for Barrington Bank for a full year.
For the year ended December 31, 1997, data processing expenses increased by
$323,000, or 31.9%, compared to the same period of 1996, as a result of the
increase of average outstanding deposit and loan balances of approximately 48.5%
and 44.7%, respectively.
Advertising and marketing expenses increased to $1.3 million for the year ended
December 31, 1997, compared to $1.1 million for the same period of 1996,
primarily due to increased marketing costs to promote the Company's additional
banking locations. Management anticipates that higher levels of marketing
expense are likely to be incurred in the future as the Company continues to
establish its base of customers, promotes its newly opened Crystal Lake Bank,
and opens additional banking facilities.
Nonrecurring merger-related expenses were $891,000 during 1996. The
Reorganization resulted in various legal expenses, accounting and tax related
expenses, printing, Securities and Exchange Commission filing expenses, and
other applicable expenses. No such expenses were incurred during 1997 because
the merger was consummated in 1996.
Other non-interest expenses increased by $2.2 million, or 37.4%, to $8.3 million
for the year ended December 31, 1997, from $6.0 million for the year ended
December 31, 1996, primarily due to the higher volume of accounts outstanding at
the Banks. Controlling overhead expenses is a basic philosophy of management and
is closely evaluated. Management is committed to continually evaluating its
operations to determine whether additional expense savings are possible without
impairing the goal of providing superior customer service.
Despite the increases in the various noninterest expense categories during 1997,
the Company was successful in reducing its ratio of noninterest expenses to
total average assets to 3.18%
- 35 -
<PAGE>
in 1997, compared to 3.89% in 1996 excluding non-recurring merger expenses.
Additionally, the Company's ratio of noninterest expenses to total average
assets of 3.18% compares favorably to its peer group that had a ratio of
noninterest expenses to total average assets of approximately 3.29%. Thus,
despite the initial high investment to establish de novo banks, the Company has
controlled its noninterest expenses in a fashion which is better than other bank
holding companies in its peer group.
Income taxes. The Company recorded an income tax benefit of $3.8 million during
1997, whereas an income tax benefit of approximately $1.3 million was recorded
in 1996. Prior to completion of the Reorganization on September 1, 1996, each of
the merging companies except Lake Forest Bank had net operating losses and,
based upon the start-up nature of the organization, there was not sufficient
evidence to justify the full realization of the net deferred tax assets
generated by those losses. Accordingly, a valuation allowance was established
against a portion of the deferred tax assets with the combined result being that
a minimal amount of Federal tax benefit was recorded. As the separate entities
have become profitable, the Company has recognized a portion of its tax loss
benefits to the extent it is more likely than not that such net operating losses
would be realizable. As of December 31, 1997, all net operating losses of the
subsidiary banks have been recognized in the consolidated statements of income.
However, a portion of Crabtree and FIFC net operating losses have not been
recognized in the financial statements due to the annual limitations imposed by
the Internal Revenue Code and the requirement that Crabtree and FIFC provide
sufficient taxable income on their own behalf to utilize the net operating
losses incurred by those separate entities prior to the merger.
CONSOLIDATED RESULTS OF OPERATIONS
Comparison of Results of Operations for the Years Ended December 31, 1996 and
December 31, 1995
General. The Company recorded a net loss of $973,000 for the year ended December
31, 1996, compared with net income of $1.5 million for the year ended December
31, 1995. The 1996 loss represents a loss per share of $0.16 for the year
compared to earnings per share of $0.24 for 1995. The year ended December 31,
1996, included $891,000 of merger-related expenses from the Company's September
1996 reorganization transaction and $312,000 in legal fees arising out of
collection efforts related to a significant non-performing asset. Excluding
these expenses, the pre-tax loss for 1996 would have been approximately $1.1
million, or approximately one half of the recorded pre-tax loss of $2.3 million.
In addition, the prior year included an initial gain of $763,000 on the sale of
premium finance loans into a securitization facility and a one-time gain on
settlement of contingencies of $735,000 from the repurchase of a minority
interest in a now discontinued subsidiary and the settlement of various related
contingencies. Excluding these gains, the year ended December 31, 1995, would
have posted a net pre-tax loss of approximately $513,000. The $567,000 increase
in pre-tax loss, as adjusted to exclude the effect of the 1996 merger-related
expenses and exceptional legal fees and the 1995 initial and one-time gains, was
primarily the result of higher non-interest expenses associated with openings
and start-up operations of banking facilities in 1996 than in 1995. While the
Company opened three new facilities in 1996 compared to six openings in 1995,
five of the 1995 openings occurred in the fourth quarter and associated start-up
expenses continued to impact 1996 results.
Net interest income. Net interest income increased to $14.9 million for the year
ended December 31, 1996, from $9.7 million for the comparable period of 1995.
This increase in net interest income of $5.2 million, or 53.4%, was attributable
to a 55.9% increase in average earning assets in 1996 compared to 1995.
Partially offsetting the changes due to volume was a slight decline in net
interest margin to 2.91% for 1996 from 2.96% in 1995, due to a decline in the
general interest rate environment during 1996. Because the Company's overall
earning asset portfolio repriced at a rate quicker than its liabilities, the
decline in interest rates had an unfavorable impact on the Company's net
interest margin.
Provision for possible loan losses. The provision for possible loan losses
increased to $1.9 million in 1996, from $1.4 million in the prior year due to
the increases in the loan portfolio. At December 31, 1996, the allowance for
possible loan losses represented 0.74% of loans outstanding which management
believed was adequate to cover potential losses in the portfolio.
Non-interest income. Total non-interest income decreased approximately $1.0
million, or 11.8%, to $7.5 million for the year ended December 31, 1996, as
compared to $8.5 million in the same period of 1995.
Gains on the sale of premium finance loans, which were dependent upon the total
loans originated and sold into a securitization facility, decreased to $3.1
million for the year ended December 31, 1996, from $4.4 million for the year of
1995. The decrease in total insurance premium finance loans originated and sold
during 1996 to $294.4 million from $301.3 million in 1995, and an initial gain
of $763,000 which was recorded in February 1995 when a significant portion of
the existing premium finance loan portfolio was sold to a newly structured
securitization facility contributed to the decrease. Additionally, subsequent to
the merger of the FIFC and the Banks on September 1, 1996, the majority of
insurance premium finance loans originated were retained by the Company; thereby
eliminating any gain from sales to the securitization facility. Absent the
initial gain recognition in 1995
- 36 -
<PAGE>
and the shift by the Company in late 1996 to retain the insurance premium
finance loans, the amount of gains recorded as a percent of loans originated was
relatively stable.
Loan servicing fees increased to $1.4 million for the year ended December 31,
1996 compared to $1.1 million for the same period of 1995, primarily due to an
increase in the amount of average managed insurance premium finance loans in the
1996 period. Due to the change in the structure of the securitization facility
in February 1995 whereby the loans sold into the securitization facility were
treated as sales and therefore qualified to receive a servicing fee, the
comparable 1995 period had only seven months of service fee income on average
managed insurance premium loans.
Fees on mortgage loans sold relate to income derived by the Banks for services
rendered in originating and selling residential mortgages into the secondary
market. Such fees increased to $1.4 million in 1996 from $850,000 in 1995
primarily due to increased volume. Approximately $499,000 of the increase was
generated from North Shore Bank which only began such activities during 1995 but
which had a full year of loan sales in 1996. Libertyville Bank also contributed
approximately $166,000 during 1996.
Service charges on deposit accounts increased to $468,000 for the year ended
December 31, 1996, from $196,000 for the year ended December 31, 1995. The
increase is a direct result of the 52.4% increase in deposit balances from
December 31, 1995 to December 31, 1996. The majority of service charges on
deposit accounts relates to customary fees on accounts in overdraft positions
and for returned items on accounts.
Trust fees increased to $522,000 from $399,000 for the years ended December 31,
1996 and 1995, respectively, due primarily to increased trust business.
Non-interest expense. Total non-interest expense increased approximately $7.0
million, or 44.0%, to $22.8 million for the twelve months of 1996, as compared
to $15.8 million in the same period of 1995. Despite the increases in various
non-interest expense categories in 1996 compared to 1995, the Company's ratio of
non-interest expenses, excluding the merger-related costs, to total average
assets declined to 3.89% in 1996 from 4.37% in 1995.
Salaries and employee benefits increased to $11.6 million for the year ended
December 31, 1996 as compared to $8.0 million for the same period of the prior
year, principally due to the increase in the number of banking facilities to 14
at December 31, 1996, from 11 at December 31, 1995. The increase of $3.6 million
reflects an increase of approximately $754,000 related to Libertyville Bank,
which only opened and became fully staffed in October, 1995 but which had a
fully operational staff during 1996, and an increase of $1.4 million at North
Shore Bank as a result of four banking locations being operational in 1996
compared to only one banking location during the first nine months of 1995 and
three banking locations during the fourth quarter of 1995. North Shore Bank
opened a full service banking facility in Glencoe, Illinois and a
drive-up/walk-up banking facility in Wilmette, Illinois during the fourth
quarter of 1995 and began organizing a full service banking facility in
Winnetka, Illinois during the first quarter of 1996. The Winnetka facility began
full operations during the second quarter of 1996. In addition to the increased
staffing to support the new banking facility, the growth in deposit and loan
accounts at the previously existing banking locations required additional
staffing to maintain the standard of customer service. Also contributing to the
increase in salaries were normal salary increases and the addition of certain
executive officers during mid-1995 and early 1996 to help manage the Company's
growth.
Occupancy expenses increased to $1.7 million for the year ended December 31,
1996, from $1.0 million for the year ended December 31, 1995, primarily due to
the significant increase in the number of the Company's facilities to almost
double the number of physical locations at year-end 1996 compared to the end of
the third quarter of 1995.
For the year ended December 31, 1996, data processing expenses increased by
$390,000, or 62.5%, compared to the same period of 1995, as a result of the
increase of average outstanding deposit and loan balances of approximately 65.2%
and 89.3%, respectively.
Advertising and marketing expenses increased to $1.1 million for the year ended
December 31, 1996 compared to $682,000 for the same period of 1995, primarily
due to the addition of eight banking locations during the past fifteen month
period ended December 31, 1996.
Nonrecurring merger-related expenses were $891,000 during 1996. The
Reorganization resulted in various legal expenses, accounting and tax related
expenses, printing, Securities and Exchange Commission filing expenses, and
other applicable expenses.
Other non-interest expenses increased by $1.2 million, or 25.9%, to $6.0 million
for the year ended December 31, 1996 from $4.8 million for the year ended
December 31, 1995, primarily due to the higher volume of accounts outstanding at
the Banks. Also contributing to the increase was approximately $312,000 in legal
fees related to efforts to collect a significant nonperforming insurance premium
finance loan during 1996 compared to approximately $78,000 in the same period of
1995.
- 37 -
<PAGE>
Income taxes. The Company recorded an income tax benefit of $1.3 million during
1996, whereas an income tax benefit of approximately $512,000 was recorded in
1995. Prior to completion of the Reorganization on September 1, 1996, each of
the merging companies except Lake Forest Bank had net operating losses and,
based upon the start-up nature of the organization, there was not sufficient
evidence to justify the full realization of the net deferred tax assets
generated by those losses. Accordingly, a valuation allowance was established
against a portion of the deferred tax assets with the combined result being that
a minimal amount of Federal tax benefit was recorded.
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
off-balance sheet financial instruments are different, creating a risk that
changes in the level of market interest rates will result in disproportionate
changes in the value of, and the net earnings generated from, the Company's
interest-earning assets, interest-bearing liabilities and off-balance sheet
financial instruments. The Company's exposure to interest rate risk is managed
primarily through the Company's strategy of managing the selection of the types
and terms of interest-earning assets and interest-bearing liabilities which it
generates while limiting the potential negative effects of changes in market
interest rates. Because 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, term
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 a positive interest
rate spread.
Managing the Company's exposure to interest rate risk involves significant
assumptions about the relationship of various interest rate indices, loan
pre-payment assumptions, and other interest rate spread assumptions.
One method of assessing general risk to interest rate changes is to assess the
time to maturity or repricing of rate sensitive assets and liabilities. The
following table illustrates the Company's estimated periodic and cumulative gap
positions as calculated as of December 31, 1997. An institution with more
liabilities than assets repricing over a given time frame is considered
liability sensitive and will generally benefit from falling rates.
<TABLE>
<CAPTION>
TIME TO MATURITY OR REPRICING
----------------------------------------------------------------------
0-90 91-365 1-5 OVER 5
DAYS DAYS YEARS YEARS TOTAL
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rate sensitive assets (RSA) $ 564,098 199,041 178,913 111,348 1,053,400
Rate sensitive liabilities (RSL) $ 583,613 205,658 96,767 167,362 1,053,400
Cumulative gap (GAP = RSA - RSL) $ (19,515) (26,132) 56,014
Cumulative RSA/RSL 0.97 0.97 1.85
Cumulative RSA/Total assets 0.54 0.19 0.17
Cumulative RSL/Total assets 0.55 0.20 0.09
GAP/Total assets (2)% (2)% 5%
GAP/RSA (3)% (3)% 6%
==========================================================================================================================
</TABLE>
- 38 -
<PAGE>
The gap position illustrated above is but one tool that management utilizes to
assess the general positioning of the Company's and its subsidiaries' balance
sheets. However, the gap table has limitations due to its static nature.
Accordingly, management uses an additional measurement tool to evaluate its
asset/liability sensitivity which determines exposure to changes in interest
rates by measuring the percentage change in net income due to changes in 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 income assuming an
instantaneous permanent parallel shift in the yield curve of 200 basis points,
both upward and downward. Utilizing this measurement concept, the interest rate
risk of the Company, expressed as a percentage change in net income over a
two-year time horizon due to changes in interest rates, at December 31, 1997, is
as follows:
+200 BASIS -200 BASIS
POINTS POINTS
-----------------------
Percentage change in net income
due to an immediate 200 basis point
change in interest rates over a
two-year time horizon 21.8% (21.6)%
===============================================================
At December 31, 1997, the percentage changes in net income as noted above were
within the target range established by the Board of Directors.
Liquidity and Capital Resources
The following table reflects various measures of the Company's capital at
December 31, 1997 and 1996:
DECEMBER 31,
---------------------
1997 1996
---------------------
Average equity-to-average asset ratio 7.2% 7.4%
Leverage ratio 6.6 6.4
Tier 1 risk-based capital ratio 8.7 7.3
Total risk-based capital ratio 9.4 8.0
Dividend payout ratio 0.0 0.0
==========================================================
The Company's consolidated leverage ratio (Tier 1 capital/total assets less
intangibles) was 6.6% at December 31, 1997 which places the Company above the
"well capitalized" regulatory level. Consolidated Tier 1 and total risk-based
capital ratios were 8.7% and 9.4%, respectively. Based on guidelines established
by the Federal Reserve Bank, a bank holding company is required to maintain a
ratio of Tier 1 capital to risk-based assets of 4.0% and a ratio of total
capital to risk-based assets of 8.0% in order to be deemed adequately
capitalized.
The Company's principal funds at the holding company level are dividends from
its subsidiaries, and if necessary, borrowings or additional equity offerings.
Banking laws impose restrictions upon the amount of dividends which can be paid
to the 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 line of credit. At January 1,
1998, subject to minimum capital requirements at the Banks, $5.2 million was
available as dividends from the Banks without prior regulatory approval,
compared to $2.5 million at January 1, 1997, and $1.5 million at January 1,
1996. No cash dividends were paid to the Company by the Banks during the years
ended December 31, 1997, 1996 or 1995.
During the first half of 1997, the Company completed its direct subscription and
community offering of its Common Stock. The aggregate sale was 1,397,512 shares
of common stock at a price of $15.50 per share, including 420,000 shares which
were underwritten by EVEREN Securities, Inc. The net proceeds (gross proceeds
less issuance costs) from the sale of these shares were approximately $20.3
million.
Effective September 1, 1996, the Company entered into a $25 million revolving
credit line, which charged interest at a floating rate equal to, at the
Company's option, either the lender's prime rate or the London Inter-Bank
Offered Rate (LIBOR) plus 1.50%. Effective September 1, 1997, this revolving
credit line was increased to $30 million and the maturity date was extended to
September 1, 1998. Additionally, effective September 1, 1997, the interest rate
associated with the revolving line of credit was reduced to bear interest at a
floating rate equal to, at the Company's option, either the lender's prime rate
or LIBOR plus 1.25%. The note is secured by the stock of the subsidiary banks.
The Company had balances outstanding of $20.4 million and $22.1 million at
December 31, 1997 and 1996, respectively. On March 18, 1997, the Company reduced
the outstanding debt to approximately $2.5 million by utilizing the proceeds
from the common stock offering. However, the Company then increased the
outstanding loan balance by utilizing the line of credit to provide capital to
fund the growth of its subsidiary banks and to capitalize its newest de novo
bank, Crystal Lake Bank.
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 by the Company out of the proceeds of borrowings under the
revolving line. In addition, each of the Banks, except Barrington Bank and
Crystal Lake Bank, are eligible to
- 39 -
<PAGE>
borrow under Federal Home Loan Bank advances, an additional source of short-term
liquidity.
The Banks' core deposits, 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, are
available to provide long-term liquidity. At December 31, 1997, 61.6% of the
Company's total assets were funded by core deposits with balances less than
$100,000, while remaining assets were funded by other funding sources such as
core deposits with balances in excess of $100,000, public funds, purchased
funds, and the capital of the Banks. At December 31, 1996 and 1995, 64.9% and
66.3% of total assets were funded by core deposits, respectively.
Liquid assets refers to money market assets such as Federal funds sold and
interest bearing deposits with banks, as well as available-for-sale debt
securities and held-to-maturity securities with a remaining maturity less than
one year. Net liquid assets represent the sum of the liquid asset categories
less the amount of assets pledged to secure public funds. At December 31, 1997,
net liquid assets totaled approximately $169.9 million, compared to
approximately $74.3 million at December 31, 1996 and $129.1 million at December
31, 1995.
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, 1997,
December 31, 1996 and December 31, 1995, the Banks had approximately $78.0
million, $52.7 million and $35.2 million, respectively, of securities
collateralizing such public deposits. 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.
To finance its insurance premium loans, FIFC, in the past, has relied on
proceeds of loan sales to a securitization facility. Following the
Reorganization in September 1996, consistent with the Company's strategy of
augmenting the Banks' internal loan generation capabilities with special asset
niches, the Banks began purchasing premium finance loans originated by FIFC
using funds provided by deposits and other lower-cost funding sources.
Consequently, FIFC's activities under the existing securitization facility have
been curtailed. The Company is currently exploring the feasibility of
establishing a single-seller multi-purpose conduit facility that may be utilized
in the future to securitize a variety of different types of assets originated or
purchased by the Company, including premium finance loans, to the extent and at
such times as management determines asset securitizations to be desirable in
implementing overall asset/liability management strategies.
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
Summary of Loan Loss Experience. The following table summarizes average loan
balances, changes in the allowance for possible loan losses arising from
additions to the allowance which have been charged to earnings, and loans
charged-off and recoveries on loans previously charged-off for the periods shown
(dollars in thousands).
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 3,636 2,763 1,702 1,357 961
Total loans charged-off:
Core banking loans (448) (190) (43) (20) -
Premium finance (1,126) (207) (247) (40) (5)
Indirect auto (300) (123) - - -
Discontinued leasing operations (241) (583) (109) (205) (728)
-----------------------------------------------------------------------
Total loans charged-off (2,115) (1,103) (399) (265) (733)
Total recoveries 191 41 30 3 2
-----------------------------------------------------------------------
Net loans charged-off (1,924) (1,062) (369) (262) (731)
Provision for possible loan losses 3,404 1,935 1,430 607 1,127
-----------------------------------------------------------------------
Balance at end of year $ 5,116 3,636 2,763 1,702 1,357
-----------------------------------------------------------------------
Average total loans $ 620,801 347,076 183,614 148,209 79,052
-----------------------------------------------------------------------
Allowance as percent of year-end total loans 0.72% 0.74% 1.07% 0.88% 1.24%
Net loans charged-off to average total loans 0.31% 0.31% 0.20% 0.18% 0.92%
Net loans charged-off to the provision for
possible loan losses 56.52% 54.88% 25.80% 43.16% 64.86%
===========================================================================================================================
</TABLE>
- 40 -
<PAGE>
The amount of additions to the allowance for possible loan losses which are
charged to earnings through the provision for possible loan losses are
determined based on a variety of factors, including actual charge-offs during
the year, historical loss experience, delinquent loans, and an evaluation of
current and prospective economic conditions in the market area. Management
believes the allowance for possible loan losses is adequate to cover any
potential losses.
Nonaccrual, Past Due and Restructured Loans. The following table classifies the
Company's non-performing loans as of December 31 for each of last five years
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
Past Due greater than 90 days and still accruing:
<S> <C> <C> <C> <C>
Core banking loans $ 868 75 121 13 -
Indirect automobile loans 11 20 - - -
Premium finance loans 887 - 21 3 -
-----------------------------------------------------------------------
Total 1,766 95 142 16 -
-----------------------------------------------------------------------
Non-accrual loans:
Core banking loans 782 448 684 - -
Indirect automobile loans 29 - - - -
Premium finance loans 1,629 1,238 1,094 4 4
-----------------------------------------------------------------------
Total non-accrual loans 2,440 1,686 1,778 4 4
-----------------------------------------------------------------------
Total non-performing loans:
Core banking loans 1,650 523 805 13 -
Indirect automobile loans 40 20 - - -
Premium finance loans 2,516 1,238 1,115 7 4
-----------------------------------------------------------------------
Total non-performing loans 4,206 1,781 1,920 20 4
-----------------------------------------------------------------------
Other real estate owned - - - - -
Total non-performing assets $ 4,206 1,781 1,920 20 4
=======================================================================
Total non-performing loans by category as a percent of its own respective
category:
Core banking loans 0.37% 0.15% 0.39% 0.01% 0.00%
Indirect automobile loans 0.03% 0.02% 0.00% 0.00% 0.00%
Premium finance loans 1.96% 2.15% 7.22% 0.01% 0.01%
Total non-performing loans 0.59% 0.36% 0.74% 0.01% 0.00%
Total non-performing assets to total assets 0.40% 0.25% 0.41% 0.01% 0.00%
Nonaccrual loans to total loans 0.34% 0.34% 0.69% 0.00% 0.00%
===========================================================================================================================
</TABLE>
Non-performing Core Banking Loans:
Total non-performing loans for the Company's core banking business (all loans
other than indirect automobile loans and premium finance loans) totaled $1.65
million or 0.37% of the Company's core banking loans. The $1.65 million is
comprised of sixteen loans with relatively smaller balances and one loan with a
balance of approximately $805,000 that is well secured by commercial and
residential real estate and that was brought current during January of 1998. The
small number of borrowers allows management the opportunity to monitor closely
the status of these credits and work with the borrowers to resolve these
problems effectively. Management believes that each of these loans are well
secured and are actively being collected. As such, minimal, if any, losses are
currently anticipated on these loans.
Non-performing Premium Finance Loans
Due to the nature of the collateral, the more significant category of
non-performing loans at December 31, 1997 is premium finance loans. In the event
of default, these loans customarily require 60-150 days to convert collateral
into cash
- 41 -
<PAGE>
collections. Accordingly, it is important to note that the level of
non-performing premium finance loans is not necessarily indicative of the loss
inherent in the portfolio. In financing insurance premiums, the Company does not
assume the risk of loss normally borne by insurance carriers. Typically the
insured buys an insurance policy from an independent insurance agent or broker
who offers financing through FIFC. The insured makes a down payment of
approximately 15% to 25% of the total premium and signs a premium finance
agreement with FIFC for the balance due, which amount FIFC disburses directly to
the insurance carrier or its agents to satisfy the unpaid premium amount. As the
insurer earns the premium ratably over the life of the policy, the unearned
portion of the premium secures payment of the balance due to FIFC by the
insured. Under the terms of the Company's standard form of financing contract,
the Company has the power to cancel the insurance policy if there is a default
in the payment on the finance contract and to collect the unearned portion of
the premium from the insurance carrier. In the event of cancellation of a
policy, the cash returned in payment of the unearned premium by the insurer
should generally be sufficient to cover the loan balance, the interest and other
charges due as well. Due to the notification requirements and the time to
process the return of the unearned premium by most insurance carriers, many
loans will become delinquent beyond 90 days while the processing of the unearned
premium to the Company occurs. Management continues to accrue interest in the
event that the return of the unearned premium by the insurance carrier is
sufficient to pay-off the outstanding principal and contractual interest due.
Total non-performing premium finance loans as of December 31, 1997 were
approximately $2.5 million or 1.96% of the outstanding premium finance loan
balance. However, for the year ended December 31, 1997, management has recorded
net charge-offs of $1.0 million, or 0.98% of the average outstanding premium
finance loan balance. Management has recently implemented additional collection
procedures and systems to control the level of net charge-offs on premium
finance loans; however, the existing level of net charge-offs of premium finance
loans is acceptable based on an average gross yield from interest and late fees
in excess of 12%.
The amount of non-performing premium finance loans at and prior to December 31,
1996 were significantly less because, prior to October 1996, the Company had
sold its originated loans to a securitization facility. In October 1996, the
Company began retaining all originated loans, and the Company terminated the
securitization facility during the third quarter of 1997.
It is the policy of the Company to discontinue the accrual of interest income on
any loan for which there is a reasonable doubt as to the payment of interest or
principal. Nonaccrual loans are returned to an accrual status when the financial
position of the borrower indicates there is no longer any reasonable doubt as to
the payment of principal or interest.
Other than those loans reflected in the table above, the Company had no
significant loans (i) for which the terms had been renegotiated, or (ii) for
which there were serious doubts as to the ability of the borrower to comply with
repayment terms.
Potential Problem Loans. In addition to those loans disclosed under "Nonaccrual,
Past Due and Restructured Loans," 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 do not represent
non-performing loans to the Company. 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. Loans in this category include those with characteristics such as
those past maturity more than 45 days, those that have recent adverse operating
cash flow or balance sheet trends, or have general risk characteristics that the
loan officer believes might jeopardize the future timely collection of principal
and interest payments. The principal amount of loans in this category as of
December 31, 1997, and December 31, 1996 were approximately $7.2 million and
$1.1 million, respectively. Loans in this category generally include loans that
were classified for regulatory purposes. At December 31, 1997, there were no
significant loans which were classified by any bank regulatory agency that are
not included above as nonaccrual, past due or restructured.
Control of the Company's loan quality is continually monitored by management and
is reviewed by the boards of directors and credit committees of the Banks on a
monthly basis, subject to the oversight by the Company's Board of Directors
through its members who serve on such credit committees. Independent external
review of the loan portfolio is provided by the examinations conducted by
regulatory authorities and an independent loan review performed by an entity
engaged by the Board of Directors.
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, 1997 or December 31, 1996, except for indirect auto and premium
finance loans.
- 42 -
<PAGE>
Other Real Estate Owned. The Company did not have any Other Real Estate Owned at
the end of any of the reporting periods.
EFFECTS OF INFLATION
The impact of inflation on a financial institution differs significantly from
that of an industrial company in that virtually all assets and liabilities of a
bank are monetary in nature. Monetary items, such as cash, loans, and deposits,
are those assets and liabilities that are or will be converted into a fixed
number of dollars regardless of prices. Management of the Company believes the
impact of inflation on financial results depends upon the Company's ability to
react to changes in interest rates. Interest rates do not necessarily move in
the same direction, or at the same magnitude, as the prices of other goods and
services. Management seeks to manage the relationship between interest-sensitive
assets and liabilities in order to protect against wide fluctuations in
earnings, including those resulting from interest rate changes and from
inflation.
YEAR 2000 COMPLIANCE
A critical issue has emerged in the banking industry and generally for all
industries that are heavily reliant upon computers regarding how existing
software application programs and operating systems can accommodate the date
value for the "Year 2000". The Year 2000 issue is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. As such, certain programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, the year 1999 (i.e. `99') could be the maximum date value these systems
will be able to accurately process. During 1997, management began the process of
working with its outside data processor and other software vendors to assure
that the Company is prepared for the year 2000. The financial impact to the
Company has not been and is not anticipated to be material to its financial
position or results of operations in any given year.
EFFECTS OF NEW ACCOUNTING PRINCIPLES
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130:
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 was issued to address concerns over the practice of
reporting elements of comprehensive income directly in equity. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS No. 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed in equal prominence with the other financial statements. The
statement does not require a specific format for that financial statement but
requires that a company display an amount representing total comprehensive
income for the period in that financial statement. SFAS No. 130 is effective for
both interim and annual financial statements for periods beginning after
December 15, 1997. Comparative financial statements provided for earlier periods
are required to be reclassified to reflect the provisions of this statement.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131:
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 was issued in
response to requests from financial statement users for additional and better
segment information. The statement requires a variety of disclosures to better
explain and reconcile segment data so that a user of the financial statements
can be better enabled to understand the information and its limitations within
the context of the consolidated financial statements. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated, unless it is impracticable to do so. SFAS No. 131 need not be applied
to interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
shall be reported in financial statements for interim periods in the second year
of application.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Such forward-looking statements may be
deemed to include, among other things, statements relating to anticipated
improvements in financial performance and management's long-term performance
goals, as well as statements relating to the Company's business and growth
strategies, including anticipated internal growth, plans to form additional de
novo banks and new branch offices, and to pursue additional potential
development or acquisition of specialty finance businesses. Actual results could
differ materially from those addressed in the forward-looking statements as a
result of the following factors:
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 and branching
operations. Management believes that de novo banks may typically require
13 months to two years of operations before becoming profitable, due
to the impact of organizational
- 43 -
<PAGE>
and overhead expenses, the startup 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 loan losses is adequate
to absorb losses on any existing loans that may become uncollectible,
there can be no assurance that the allowance will prove sufficient to
cover actual loan losses in the future.
o If market interest rates should move contrary to the Bank's position on
interest earning assets and interest bearing liabilities, the "gap" will
work against the Banks and their 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 The economic environment may influence growth in loans and deposits.
- 44 -
<PAGE>
WINTRUST FINANCIAL CORPORATION
- ------------------------------
DIRECTORS
Howard D. Adams
Alan W. Adams
Joseph Alaimo
Peter Crist
Maurice F. Dunne, Jr.
William C. Graft
Penny Horne
Eugene Hotchkiss III
John S. Lillard
James E. Mahoney
James B. McCarthy
Marguerite Savard McKenna
Albin F. Moschner
Hollis W. Rademacher
J. Christopher Reyes
Peter Rusin
John N. Schaper
John J. Schornack
Jane R. Stein
Katharine V. Sylvester
Lemuel H. Tate
Edward J. Wehmer
Larry V. Wright
OFFICERS
Howard D. Adams
Chairman & Chief Executive Officer
Edward J. Wehmer
President
David A. Dykstra
Executive Vice President &
Chief Financial Officer
Lloyd M. Bowden
Executive Vice President/Technology
Robert F. Key
Executive Vice President/Marketing
LAKE FOREST BANK & TRUST COMPANY
- --------------------------------
DIRECTORS
Howard D. Adams
Craig E. Arnesen
Maurice F. Dunne, Jr.
Maxine Farrell
Francis C. Farwell
Robert D. Harnach
John A. Hilton, Jr.
Eugene Hotchkiss III
Moris T. Hoversten
John S. Lillard
Albin F. Moschner
Genevieve M. Plamondon
Hollis W. Rademacher
J. Christopher Reyes
Babette Rosenthal
Ellen A. Stirling
Edward J. Wehmer
EXECUTIVE
Howard D. Adams
Chairman
Edward J. Wehmer
President
John J. Meierhoff
Executive Vice President/Lending
Randolph M. Hibben
Executive Vice President/Operations & Investments
LOANS
Alan W. Adams
Vice President/Commercial Lending
Kathryn Walker-Eich
Vice President/Commercial Lending
Mark R. Schubring
Vice President/Commercial Lending
Rachele L. Wright
Senior Vice President/Mortgages & West Lake Forest
Janice C. Nelson
Assistant Vice President/Loan Administration
Peggy Turchi
Loan Administration Officer
PERSONAL BANKING/OPERATIONS
Frank W. Strainis
Senior Vice President - Lake Bluff
Mary Ann Gannon
Vice President/Operations
Lynn Van Cleave
Vice President/Personal Banking
Twila D. Hungerford
Assistant Vice President/Personal Banking
Susan G. Mineo
Personal Banking Officer
Tamara Saucier
Teller Operations Officer
Kathleen E. Eichhorn
Assistant Cashier
TRUST
Joseph Alaimo
Director of Trust Investments
Sandra L. Shinsky
Assistant Vice President & Trust Officer
Anita E. Morris
Assistant Vice President & Trust Officer
Susan C. Gavinski
Trust Operations Officer
FINANCE/OTHER
Alan J. Lorr
Vice President/Controller
Jay P. Ross
Assistant Vice President/Marketing
Anne M. Adams
Marketing Officer
Andrea Eschenbaum
Administration Officer
Elizabeth K. Pringle
Accounting/Operations Officer
- 45 -
<PAGE>
HINSDALE BANK & TRUST COMPANY
- ------------------------------
DIRECTORS
Howard D. Adams
Peter 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.
Richard B. Murphy
Joel Nelson
Margaret O'Brien Stock
Hollis W. Rademacher
Ralph J. Schindler
Katharine V. Sylvester
Edward J. Wehmer
Lorraine Wolfe
EXECUTIVE
Dennis J. Jones
Chairman
Richard B. Murphy
President
David LaBrash
President - Clarendon Hills
J. Mark Berry
President - Western Springs
LOANS
Richard Stefanski
Senior Vice President/Indirect Lending
George Mitchel
Senior Vice President/Mortgage Warehouse Lending
Eric Westberg
Vice President/Mortgages
Kay Olenec
Vice President/Mortgages
Colleen Ryan
Vice President/Lending
Robert D. Meyrick
Vice President/Indirect Lending
Robert Crisp
Installment Loan Officer
Kathy Oergel
Commercial Lending Officer
Laura L. Williams
Mortgage Loan Officer
Cora Mae Corley
Loan Operations Officer
Kay Laux
Loan Operations Officer
PERSONAL BANKING/OPERATIONS
Heidi Sulaski
Assistant Vice President/Personal Banking
Natalie Brod
Personal Banking Officer
Margaret A. Madigan
Assistant Vice President/Controller
Anne O'neill
Assistant Vice President/Operations
Michelle Paetsch
Operations Officer
Kim Fernandez
Operations Officer
NORTH SHORE COMMUNITY BANK
& TRUST COMPANY
- --------------------------
DIRECTORS
Howard D. Adams
Craig E. Arnesen
Brian C. Baker
Gilbert W. Bowen
T. Tolbert Chisum
John W. Close
Joseph DeVivo
Maurice F. Dunne, Jr.
James Fox (Director Emeritus)
Gayle Inbinder
Thomas J. McCabe, Jr.
Marguerite Savard McKenna
Robert H. Meeder
Donald L. Olson
Hollis W. Rademacher
John J. Schornack
Ingrid S. Stafford
Curtis R. Tate
Lemuel H. Tate
Elizabeth C. Warren
Edward J. Wehmer
Stanley R. Weinberger
EXECUTIVE
Lemuel H. Tate
Chairman
John W. Close
President
Robert H. Meeder
Executive Vice President/Lending
Craig E. Arnesen
President - Glencoe
T. Tolbert Chisum
President - Winnetka
LOANS
James L. Sefton
Vice President/Lending
Henry L. Apfelbach
Vice President/Mortgages
Susan J. Weisbond
Vice President/Lending - Glencoe
- 46 -
<PAGE>
NORTH SHORE COMMUNITY BANK
& TRUST COMPANY
- --------------------------
Gina Inglese
Vice President/Lending - Winnetka
Romelia Brahim
Loan Officer
Patricia M. McNeilly
Mortgage Loan Officer
Mark A. Stec
Mortgage Loan Officer
Todd Finnelly
Loan Administration Officer - Glencoe
Ann T. Tyler
Loan Administration Officer - Winnetka
PERSONAL BANKING/OPERATIONS
Donald F. Krueger
Senior Vice President/Cashier
James A. Waters
Assistant Vice President/Personal Banking
Jennifer A. Waters
Assistant Cashier
John A. Barnett
Accounting Officer
Leslie A. Freid
Assistant Vice President/Personal
Banking - Glencoe
Cynthia L. Andrae
Personal Banking Officer - Glencoe
Catherine W. Biggam
Personal Banking Officer - Winnetka
LIBERTYVILLE BANK & TRUST COMPANY
- ---------------------------------
DIRECTORS
Howard D. Adams
J. Albert Carstens
David A. Dykstra
Robert Dunn
Bert Getz, Jr.
Scott Lucas
James E. Mahoney
Susan Milligan
William Newell
Hollis W. Rademacher
John N. Schaper
Jane R. Stein
Jack Stoneman
Edward J. Wehmer
Edward R. Werdell
EXECUTIVE
J. Albert Carstens
President
Edward R. Werdell
Executive Vice President
COMMERCIAL BANKING
Brian B. Mikaelian
Senior Vice President/Lending
Betty Berg
Vice President/Commercial Banking Services
Michael Spies
Vice President/Mortgage Loans
Rose Marie Garrison
Mortgage Loan Officer
PERSONAL BANKING
Sharon Worlin
Vice President
Ursula Schuebel
Second Vice President
Deborah Motzer
Personal Banking Officer
Julie Rolfsen
Personal Banking Officer
FINANCE/OPERATIONS
Jolanta Slusarski
Vice President/Operations
Patrice Lima
Vice President/Cashier & Controller
BARRINGTON BANK & TRUST COMPANY
- -------------------------------
DIRECTORS
Howard D. Adams
James H. Bishop
Raynette Boshell
Edwin C. Bruning
Dr. Joel Cristul
Bruce K. Crowther
Scott A. Gaalaas
William C. Graft
Penny Horne
Peter Hyland
Dr. Lawrence Kerns
Sam Oliver
Mary F. Perot
Betsy Petersen
Hollis W. Rademacher
Peter Rusin
George L. Schueppert
Dr. Richard Smith
Richard P. Spicuzza
W. Bradley Stetson
Dan T. Thomson
Charles VanFossan
Edward J. Wehmer
Tim Wickstrom
EXECUTIVE
James H. Bishop
President
W. Bradley Stetson
Executive Vice President/Lending
LOANS
Barbara E. Ringquist
Mortgage Loan Officer
Charlotte Neault
Consumer Loan Officer
PERSONAL BANKING/OPERATIONS
Ronald A. Branstrom
Vice President/Operations & Retail Banking
Helene A. Torrenga
Assistant Vice President/Controller
Jonathan E. Prell
Personal Banking Officer
- 47 -
<PAGE>
CRYSTAL LAKE BANK & TRUST COMPANY
- ---------------------------------
DIRECTORS
Howard D. Adams
Charles D. Collier
Henry L. Cowlin
Linda Decker
John W. Fuhler
Diana Kenney
Thomas Neis
Dr. Marshall E. Pedersen
Hollis Rademacher
Candy Reedy
Nancy Riley
Robert Robinson
Robert C. Staley
Edward J. Wehmer
EXECUTIVE
Charles D. Collier
President
LOANS
Jan Sowers
Vice President/Mortgage Loans
PERSONAL BANKING/OPERATIONS
Pam Umbarger
Senior Vice President/Operations
Peter Fidler
Controller
Pam Bialas
Assistant Vice President/Retail Banking
FIRST INSURANCE FUNDING CORP.
- -----------------------------
DIRECTORS
Howard D. Adams
Frank J. Burke
David A. Dykstra
Hollis W. Rademacher
Edward J. Wehmer
EXECUTIVE
Frank J. Burke
President
MARKETING/OPERATIONS/FINANCE
Joseph G. Shockey
Executive Vice President/Director of Operations
Michelle H. Perry
Vice President/Controller
Robert G. Lindeman
Vice President/Information Technology
- 48 -
<PAGE>
*** GRAPHICAL REPRESENTATION OF SAMPLE ADVERTISING OMITTED ***
- 49 -
<PAGE>
*** GRAPHICAL REPRESENTATIONS OF BANK FACILITIES UNDER CONSTRUCTION OMITTED ***
- 50 -
<PAGE>
*** GRAPHICAL REPRESENTATIONS OF BANK FACILITIES UNDER CONSTRUCTION OMITTED ***
- 51 -
<PAGE>
CORPORATE INFORMATION & LOCATIONS
- ---------------------------------
PUBLIC LISTING AND MARKET SYMBOL
The Company's Common Stock is traded on the Nasdaq National Market SM under the
symbol WTFC. The stock abbreviation appears as "WINTRSTFNL" in the Wall Street
Journal.
ANNUAL MEETING OF SHAREHOLDERS
May 28, 1998
Deer Path Inn
255 East Illinois Road
Lake Forest, Illinois
2:00 P.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
223 West Jackson Boulevard
Suite 1210
Chicago, Illinois 60606
Telephone: (312) 427-2953
Facsimile: (312) 427-2879
MARKET MAKERS FOR WINTRUST FINANCIAL CORPORATION COMMON STOCK
ABN AMRO Incorporated
Everen Securities, Inc.
Howe Barnes Investments, Inc.
PaineWebber, Inc.
William Blair & Co.
LOCATIONS
- ---------
WINTRUST FINANCIAL CORPORATION
727 North Bank Lane
Lake Forest, IL 60045
(847) 615-4096
LAKE FOREST BANK
& TRUST COMPANY
Lake Forest Locations
Main Bank
727 North Bank Lane
Lake Forest, IL 60045
(847) 234-2882
Drive-thru
780 North Bank Lane
Lake Forest, IL 60045
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) 615-4097
Lake Bluff Location
103 East Scranton Avenue
Lake Bluff, IL 60044
(847) 615-4060
HINSDALE BANK
& TRUST COMPANY
Hinsdale Locations
Main Bank
25 East First Street
Hinsdale, IL 60521
(630) 323-4404
Drive-thru
130 West Chestnut
Hinsdale, IL 60521
(630) 655-8025
Clarendon Hills Location
200 West Burlington Avenue
Clarendon Hills, IL 60514
(630) 323-1240
Western Springs Location
4471 Lawn Avenue
Western Springs, IL 60558
(630) 246-7100
NORTH SHORE COMMUNITY BANK
& TRUST COMPANY
Wilmette Locations
Main Bank
1145 Wilmette Avenue
Wilmette, IL 60091
(847) 853-1145
Drive-thru
720 12th Street
Wilmette, IL 60091
Glencoe Location
362 Park Avenue
Glencoe, IL 60022
(847) 835-1700
Drive-thru
633 Vernon Avenue
Glencoe, IL 60022
Winnetka Location
794 Oak Street
Winnetka, IL 60093
(847) 441-2265
LIBERTYVILLE BANK
& TRUST COMPANY
Main Bank
507 North Milwaukee Avenue
Libertyville, IL 60048
(847) 367-6800
Drive-thru
201 Hurlburt Court
Libertyville, IL 60048
(847) 247-4045
BARRINGTON BANK
& TRUST COMPANY
Main Bank
201 S. Hough Street
Barrington, IL 60010
(847) 842-4500
CRYSTAL LAKE BANK
& TRUST COMPANY
Main Bank
12 E. Crystal Lake Avenue
Crystal Lake, IL 60014
(815) 479-5200
FIRST INSURANCE FUNDING
CORPORATION
520 Lake Cook Road
Suite 300
Deerfield, IL 60015
(847) 374-3000
- 52 -
