<TABLE>
<CAPTION>
SELECTED FINANCIAL HIGHTLIGHTS
Years Ended December 31,
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1998 1997 1996 1995 1994
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(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
(at end of period):
Total assets $ 1,348,048 $ 1,053,400 $ 706,037 $ 470,890 $ 354,158
Total deposits 1,229,154 917,701 618,029 405,658 221,985
Total net loans 992,062 712,631 492,548 258,231 193,982
Long-term debt and notes payable 31,050 20,402 22,057 10,758 6,905
Total shareholders' equity 75,205 68,790 42,620 40,487 25,366
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Selected Statements of Operations Data:
Net interest income $ 36,764 $ 26,772 $ 14,882 $ 9,700 $ 7,873
Total net revenues 44,839 31,716 22,414 18,244 9,359
Income (loss) before income taxes (1) (2) 4,709 1,058 (2,283) 1,002 (2,000)
Net income (loss) (1) (2) 6,245 4,846 (973) 1,497 (2,236)
Net income (loss) per common share-basic (1) (2) 0.77 0.62 (0.16) 0.27 (0.56)
Net income (loss) per common share-diluted (1) (2) 0.74 0.60 (0.16) 0.24 (0.56)
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Selected Financial Ratios and Other Data:
Performance Ratios:
Net interest margin 3.43% 3.41% 2.91% 2.96% 3.35%
Net interest spread 3.00% 2.92% 2.40% 2.41% 3.07%
Non-interest income to average assets 0.69% 0.58% 1.34% 2.36% 0.57%
Non-interest expense to average assets (1) (2) 3.04% 3.18% 4.05% 4.37% 4.14%
Net overhead ratio (1) (2) 2.36% 2.60% 2.71% 2.01% 3.57%
Return on average assets (1) (2) 0.53% 0.56% (0.17)% 0.40% (0.88)%
Return on average equity (1) (2) 8.68% 7.88% (2.33)% 4.66% (12.20)%
Average total assets $ 1,177,745 $ 858,084 $ 562,244 $ 362,125 $ 259,404
Average shareholders' equity 71,906 61,504 41,728 31,173 18,633
Ending loan-to-deposit ratio 80.7% 77.7% 79.7% 63.7% 87.4%
Average loan-to-average deposit ratio 80.1% 80.1% 69.8% 61.3% 100.0%
Average interest-earning assets to
average interest-bearing liabilities 108.92% 109.93% 110.73% 111.37% 106.61%
Asset Quality Ratios:
Non-performing loans to total loans 0.55% 0.59% 0.36% 0.74% 0.01%
Non-performing assets to total assets 0.45% 0.40% 0.25% 0.41% 0.01%
Allowance for possible loan losses to:
Total loans 0.71% 0.72% 0.74% 1.07% 0.88%
Non-performing loans 129.66% 121.64% 204.15% 143.91% N/M
Common Share Data at end of period:
Market price per common share $ 19.63 $ 17.00 $ 14.75 N/A N/A
Book value per common share 9.23 8.47 6.45 $ 6.94 $ 5.35
Other Data at end of period:
Number of:
Bank subsidiaries 6 6 5 4 3
Banking offices 21 17 14 11 5
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<FN>
(1) For the year ended December 31, 1998, the Company recorded a non-recurring
$1.0 million pre-tax charge related to severance amounts due to the
Company's former Chairman and Chief Executive Officer and certain related
legal fees.
(2) For the year ended December 31, 1996, the Company recorded non-recurring
merger-related expenses of $891,000.
</FN>
</TABLE>
<PAGE>
HERE'S OUR STORY. WE THINK YOU'LL FIND IT QUITE REMARKABLE
When we meet with investors, we are usually asked the same question--what's so
special about Wintrust? When we explain the Wintrust "story", they tell us it is
quite intriguing and that our Company really does appear to be without peer in
the industry.
Here's our unique story. Wintrust is a very young company that is focusing on
building value from two different perspectives. The first is "franchise value"
which is based on building long-term shareholder value by creating de novo
community bank franchises, growing them rapidly to achieve critical mass market
share and then improving profitability as they mature and growth slows. This
franchise value will very likely be supplemented by strategic acquisitions of
other financial institutions in the future.
The second type of value we strive for is "earnings value" which is the standard
way a company is measured by the investment community. Our earnings value has
been diluted by the investments we have made in our early years in building the
company. However, we believe Wintrust has hidden "potential energy" (stored
earnings potential) due to the earnings burden of our start-up banks. As each of
our new locations matures, they should begin producing profitability levels
consistent with our more mature banks.
WINTRUST BANKS ARE VERY YOUNG.
Wintrust is unique in the banking industry for a number of reasons.
First, we are a very young organization. In a world where banks typically grow
---------------------------------
by buying other banks, Wintrust has grown to date only by creating de novo
community banks. The first of these (Lake Forest Bank & Trust) was opened in
December 1991, the most recent one (Crystal Lake Bank & Trust) was opened in
December 1997, and the average age of our six community banks is only a little
more that 3 1/2 years. But given our asset size of $1.35 billion, most
individuals assume that Wintrust could only be a mature company. Once our story
is learned, the investment community tends to evaluate us on our growth and
future earnings potential. We agree.
WINTRUST BANKS ARE ALL HOME GROWN.
Second, as explained above, we have started all these de novo banking franchises
--------------------------------------------
ourselves, from scratch, using our own unique recipe. A significant investment
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in people, facilities, operations and marketing is necessary to get each of
these banks off to a good start and to reach critical mass market share. This
investment means that each new bank generally takes about 13-24 months to become
profitable. That de novo burden reduces the Company's earnings and return on
equity in its early years. However, in our short life, we have been able to
reach the number two market share in all of our mature banks' primary markets
and these banks are beginning to generate good profitability. This strategy
quickly grows our customer base and deters other community banks from entering
our markets.
As our young bank group continues to mature, the Company's earnings should
increase markedly. As an example, our pre-tax earnings increased almost
five-fold in 1998 over the prior year. The steady progression of each bank up
the earnings curve is impressive and is according to our plan. That's part of
the "potential energy" we talked about earlier.
WINTRUST BANKS OPERATE VERY EFFICIENTLY.
Third, we are structured to operate efficiently. This is a result of a number of
-------------------
factors: 1) we currently operate banks in affluent suburban markets where we
receive greater impact per dollar spent in marketing and operations; 2) we
operate "lean and mean", hiring fewer but more experienced and competent
managers; and, 3) our employees are motivated to perform through programs that
are designed to align employee's interests with those of the shareholders. We
recently instituted an Employee Stock Purchase Plan to make it easy and
financially attractive for our employees to own stock in the Company. Also, top
management at Wintrust and all of our subsidiaries have significant stock
ownership and stock options. These strategies are already paying dividends at
our mature banks. Our four oldest banks, for example, already have overhead
ratios that are better than their peer groups. All of our banks should
experience gains in efficiency as they mature and grow into the overhead
- 2 -
<PAGE>
associated with the personnel and facilities infrastructure investment.
HAVE REAL ADVANTAGES OVER THE OTHER BANKS IN OUR MARKETS.
Fourth, we have a real advantage over the big banks and other community banks
-------------------------------------------------------------
that we compete against. We know what consumers want (don't tell the big
banks--it's personal, friendly service from a bank that is locally run!) and
have aligned our community bank operations to give customers what they want. As
community bankers, we care most about our customers, and it shows. Big banks
only seem to care about their profitability, and it shows, with more fees and
less personal service. Our decentralized approach and locally run operations
gives us significant service and speed advantages over the centralized branch
banking operations of our competitors.
As a locally run bank, we can also customize products and services to meet the
needs of the community. A good example of this is our Clarendon Hills Community
Account, a package of banking products and services for Clarendon Hills
residents that has the added bonus of providing customers additional discounts
at participating merchants. And since over three-quarters of Clarendon Hills
merchants are participating, this represents a real extra benefit for our
customers. Imagine a big bank that is centrally controlled with lots of branches
trying to do something like this for one of its communities. Not a chance.
We have a real advantage over most community bank groups. Wintrust has the
infrastructure to grow and expand, much more efficiently and more successfully
than the typical community bank organization. While we operate each of our
community banks as separate and distinct organizations--with its own name, its
own management and decision making, its own operations, and its own product mix
and pricing--we have put in place a number of functions at the Wintrust level
which create operational efficiency. While each bank has its own marketing
campaign, we have centralized the marketing function and have brought in
expertise that the typical community bank cannot afford. The same can be said
for technology, investments, and financial/capital planning, all of which are
provided for at the Wintrust level. This will enable us without much difficulty
to add additional community banks in the future.
**** New Bank Facilities and Timing Bar Chart OMITTED ****
CREATING ASSET NICHES IS OUR KEY TO PROFITABILITY.
Fifth, we have a unique earning asset philosophy and have created a number of
-------------------------------------------
asset niches (e.g. premium finance, indirect auto, leasing, homeowner and
condominium association lending, etc.) that allow our community banks to
maximize their loan-to-deposit ratio, and therefore, earnings potential. We
believe most community banks can only secure local loans to cover about one-half
of their capacity without compromising credit quality. Our goal is to fill the
rest of our loan capacity with niche loans, and as such, maximize our earning
potential in a way that most community banks cannot.
IT'S A STORY ABOUT A UNIQUE COMPANY WITH LOTS OF HIDDEN "POTENTIAL ENERGY"
(STORED EARNINGS POTENTIAL).
So you see, Wintrust does have a unique story. We have real advantages over the
big banks and most community banks as well. Our short-term earnings are held
back due to our young age, our de novo start-up strategy and our drive to reach
critical mass market share. But we have proven growth and earnings strategies
and lots of earnings potential. These will blossom and bear real fruit in the
future as our young banks march towards maturity. We have created (and continue
to create) strong franchise value--value that will pay out in the long term for
our shareholders. Management and directors of Wintrust and its subsidiaries have
meaningful ownership of Wintrust common stock so our needs are clearly aligned
with those of our shareholders. We believe in our unique recipe for developing
long term shareholder value and wholeheartedly expect to be judged by our
ability to achieve these goals.
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<PAGE>
TO OUR FELLOW SHAREHOLDERS
Welcome to our third annual report. 1998 was a good year for Wintrust Financial
Corporation. In our second full year of operations, we continue to exhibit
strong core growth and earnings improvement.
1998 marked a very successful and very eventful year for our young corporation.
Our unique strategy of building long-term shareholder value by creating de novo
community bank franchises in affluent markets has moved us closer to our goal of
becoming a high performing financial institution.
1998 HIGHLIGHTS
Here are a few of the highlights for the year ended December 31, 1998:
o Net income grew to $6.2 million, compared to $4.8 million in 1997,
resulting in a healthy earnings growth of 29%.
o Pre-tax income increased 4.5 times over a year ago, evidencing the
vitality of Wintrust's core earnings.
**** Net Income and Pre-Tax Income Growth Bar Chart OMITTED ****
o On a per share basis, net income reached $0.74 per diluted common
share versus $0.60 a year ago.
o Total assets continue to grow, increasing to $1.35 billion, a $295
million or 28% increase over a year ago.
**** Net Income and Pre-tax Income Growth Bar Chart OMITTED ****
**** Asset Growth Bar Chart OMITTED ****
o Total deposits rose to $1.23 billion, up 34% from last year and all
due to our internal de novo growth.
o Net loans showed solid growth, increasing 39% to $992 million.
o Loan volume for our First Insurance Funding subsidiary was up 43% to
about $500 million, making this the fifth largest commercial insurance
premium finance company in the country.
o We purchased Medical and Municipal Funding, a leasing operation which
is expected to produce a lease portfolio of approximately $60 million
over the next few years.
o Core and total loan delinquencies were well below peer group averages
as were net charge-offs.
o We successfully raised $31 million in core capital through the
issuance of Trust Preferred securities.
o We launched Wintrust Asset Management, our newest subsidiary, which is
now providing trust and investment services to the valued clients of
our communities.
o We opened six new community banking facilities (two of which replaced
temporary facilities), bringing our total to 21.
o For the year, the Company's net overhead ratio (a measure of
operational efficiency) was reduced 0.24% of total assets to 2.36%--a
result of our efforts to control costs and our younger banks growing
into their overhead.
o We opened our wintrust.com investor relations web site for
shareholders and interested investors and began publishing an investor
relations newsletter.
o We also opened web sites for some of our more mature community banks
(lakeforestbank.com and hinsdalebank.com).
o We signed a contract to offer our customers fully functional internet
banking capabilities. This will become the portal for many future high
tech products and services.
o Our stock price increased 16% during a year when our peer group's
stock price averaged a 14% decline.
- 4 -
<PAGE>
WHAT IF?
We believe in being very straightforward with our shareholders, telling you the
good news and the bad news. While earnings increased to $6.2 million (versus
$4.8 million in 1997), a respectable 29% growth rate, three one-time events
occurred in 1998 that reduced pre-tax earnings by $2.4 million. These were
related to the second quarter departure of the Company's previous Chairman & CEO
($1.0M), an additional provision for loan losses during the first half of 1998
to provide for the write-off of non-performing loans at one of our subsidiary
banks ($0.8M) and a fourth quarter write-off of an operational loss ($0.6M).
These issues are now behind us. The operational controls and systems of all our
subsidiary banks have been strengthened and additional controls and procedures
have been put into place to minimize the chance of these problems reoccurring.
We have also expanded the independent loan review function. Finally, we have
also added a "best practices" officer whose responsibility it is to review and
assess controls and procedures at all of our subsidiaries. Without these
one-time events:
o earnings would have increased to $7.7 million, up 59%
o return on assets would have been 0.66%
o return on equity for the year would have been 10.7%.
PERFORMANCE VERSUS GOALS.
At last year's Annual Meeting, we reiterated our goals for Wintrust. Reaching
these goals over the next few years will make us a high performing bank relative
to our peers:
o Net Interest Margin of 4 - 4 1/2 %
o Net Overhead Ratio of 1 1/2 - 2 %
o Return on Assets of 1 1/2 %
o Return on Equity of 20 - 25 %
In 1998, we have made meaningful strides towards achieving most of these "high
performing bank" goals. We want to be held accountable to these goals.
NET INTEREST MARGIN (GOAL: 4 - 4 1/2 %)
In the latter half of 1998 we began focusing on the dual objective, especially
at our mature banks, of controlling our cost of funds while still growing
assets. We were able to accomplish this objective and maintain an aggressive
growth rate. As a result, our net interest margin increased slightly to 3.43%,
up from 3.41% a year ago. The net interest margin, excluding the cost of the
Trust Preferred Securities, was 3.45% in 1998.
**** Net Interest Margin Bar Chart OMITTED ****
**** Deposit Growth Bar Chart OMITTED ****
While moving closer to goal, this margin is still below the industry, due in
part to these factors: 1) our banks are located in affluent suburban Chicago
markets which have higher than average deposit rates due to the increased
competition caused by a high per capita number of banks; 2) our newer de novo
banks typically use more aggressive deposit rates to grow market share to a
critical mass; and, 3) our newer de novo banks also typically have lower
loan-to-deposit ratios than the more established banks as core loan growth is
slower to develop in new markets than deposit growth.
We expect to continue to show improvement in our core net interest margin as we
grow additional earning asset niches and control our deposit pricing in
communities where we have already achieved significant market share.
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<PAGE>
NET OVERHEAD RATIO (GOAL: 1 1/2 - 2 %)
Notwithstanding the non-recurring charges mentioned earlier, our consolidated
net overhead ratio for the year was 2.36%, a meaningful decrease from the year
ago level of 2.60%. This is a result of the continuing improvement in the run
rate of this key efficiency ratio as our banks fill the capacity of the
personnel and facilities infrastructure we create when opening new banks. Given
the average age of our six de novo banks is only 31/2 years, as our young banks
continue to grow into their overhead we should soon begin to approach the top
end of our consolidated goal. At our four oldest banks, our run rate is already
at or ahead of this goal.
**** Net Overhead Ratio Bar Chart OMITTED ****
RETURN ON ASSETS (GOAL: 1 1/2 %) AND RETURN ON EQUITY (GOAL: 20 - 25 %)
Our returns on average assets and average equity for 1998 were relatively
consistent with 1997. As a result of the three events discussed earlier that
negatively impacted earnings, net income as a percentage of average assets
declined slightly to 0.53%, versus 0.56% for a year ago; however, our return on
average equity increased slightly to 8.68%, up from 7.88% for the prior year.
Improvement in these ratios should occur in 1999 as our Banks mature. However,
they will continue to lag industry standards due to the investment made during
1998 in our newest trust and investment subsidiary, Wintrust Asset Management
Company, and the impact of our other recent de novo banks.
**** Return on Average Equity Bar Chart OMITTED ****
Although the returns on assets and equity were relatively flat from 1997 to
1998, it is important to note that the pre-tax earnings level was up by 345%
evidencing the significant growth and vitality of the Company's core earnings.
Recognition of income tax benefits in 1997 and 1998 for prior operating losses
makes for an unusual comparison of net income amounts. Management looks to the
pre-tax amounts as a better barometer of the health of the Company's earnings
growth.
ASSET QUALITY
While not one of the goals set out in last year's Annual Meeting, asset quality
is clearly an important area to manage. At year-end, our non-performing asset
levels were relatively low and very manageable. Non-performing loans as a
percentage of total loans declined to 0.55% at year-end 1998 from 0.59% at the
end of 1997. Management is pleased with the improvement in the non-performing
loan ratio during 1998 and will strive to keep a high quality loan portfolio.
During the year, we increased our allowance for possible loan losses to $7.0
million from $5.1 million at the end of 1997. We believe this level is adequate.
However, our allowance for possible loan losses as a percent of total loans
remained at about 0.71% of total loans. As a young and growing institution, we
must continue to build up this allowance toward the level of the more mature
banks that comprise our peer group with which we are often compared.
STRATEGIES FOR FUTURE GROWTH.
In our mid-year shareholder letter, we stated our intention to pursue accretive
growth, not just growth for growth's sake. We clearly understand that we need to
balance the growth in assets with growth in earnings. The good news is that
opportunities for this kind of growth are still strong. 1998 was also another
year filled with big bank mergers and consolidation, resulting in less service
and more fees for many customers. Bank One's merger with First Chicago/NBD, and
- 6 -
<PAGE>
that institution's absorption of American National Bank, National City Bank's
purchase of First of America, and Harris' continuing centralization should
generate incremental business and share growth for our community banks.
**** Graphic Advertisement OMITTED ****
NEW DE NOVO BANKS AND POSSIBLE ACQUISITIONS.
We have identified new markets for additional de novo banks and continue to open
new facilities so that we might serve a broader market and establish our kind of
community banking before competitors do.
We have also made some initial contacts with other Chicagoland community banks
that are already in attractive local markets, who may not have adequate
resources to continue their growth, and who may have shareholders who would like
to have a publicly traded investment. Merging or being acquired by Wintrust
might be attractive to their bank management and shareholders because they could
continue to operate under their current name and significantly improve
shareholder liquidity and future growth potential. This acquisition strategy,
along with our historically successful de novo bank and branch expansion,
represent sizable future growth opportunities for Wintrust. As such, over the
long-term, acquisitions represent another part of our arsenal for growth.
WINTRUST ASSET MANAGEMENT.
EXPANDING OUR TRUST AND INVESTMENT SERVICES.
With the creation of Wintrust Asset Management and the hiring of a number of
experienced trust and investment professionals, we are now positioned to take
advantage of the huge potential that our affluent markets have to offer. We
believe our market areas represent some of the highest potential trust and
investment markets, not just in Chicagoland, but the entire Midwest.
In September 1998, we received regulatory approval for this new trust
subsidiary. In the fourth quarter we introduced trust and investment services to
Hinsdale Bank & Trust, North Shore Community Bank & Trust, and Barrington Bank &
Trust, while continuing to service Lake Forest Bank & Trust. Wintrust Asset
Management will act as the trust department for each of these banks, providing
integrated trust and investment products and services for consumers and
businesses in our markets. We will roll out these services to our remaining
banks in the next year or so. While this new "trust department" is the most
efficient way to provide outstanding trust and investment services to each of
our banks, the upfront cost of personnel and marketing does represent a sizable
investment that, like a new de novo bank, takes a few years to pay out. In many
respects, Wintrust Asset Management was our de novo institution launch for 1998.
If any of our shareholders are getting tired of the "take a number" approach of
the big bank trust departments, you know who to call--us!
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<PAGE>
ASSET NICHES.
THE SECRET OF GREATER COMMUNITY BANK EARNINGS.
We also are aggressively expanding our asset niches which provide the additional
loan volume a community bank needs to optimize our loan-to-deposit ratio and
earnings capacity. In addition to premium finance lending and high-quality
indirect auto lending, we have recently added a couple of other asset
generators:
o In 1998, Lake Forest Bank & Trust purchased the leasing operations of
Medical and Municipal Funding, which should generate a lease portfolio
of approximately $60 million over the next few years.
o Barrington Bank & Trust recently hired the leading expert in Midwest
condo and community association lending. This is a potentially sizable
local (and possibly national) new business for us.
**** Loan Growth Bar Chart OMITTED ****
**** Graphic Advertisement OMITTED ****
HIGH TECH STUFF FROM THE OLD FASHIONED BANK!
While we have invested in the brick and mortar facilities that our traditional
("banking the way it used to be") community bank customers demand, we also
realize the importance of providing new, more convenient distribution systems
for our more technologically demanding customers. While our mature banks
currently operate informational web sites on the internet, we have signed a
contract and are about to introduce an integrated electronic banking system
which includes fully functional internet bank sites and improved PC banking and
tele-banking for each bank. This technology is state-of-the-art, with all of the
basics (access to account balances and transfer of funds) and advanced features
which include bill-pay (that integrates with leading bill pay processors) and
interfaces with popular personal finance management software.
In 1998 we purchased an MCIF (Marketing Customer Information File) system to
further improve our marketing by allowing us to effectively segment our customer
base for each product we are promoting. In 1999, we are now beginning to use
that system which will be beneficial in a number of ways:
o More efficient marketing spending via segmentation and mailing to most
likely candidates
o Better cross-selling of current customers
o Better acquisition of new customers
o Detailed analysis and reports for strategic planning and internal
management reporting
o Analysis of potential bank acquisitions
- 8 -
<PAGE>
BRING IT ON. WE'RE READY FOR Y2K.
Wintrust is ready for Y2K, perhaps more so than most banks in our markets.
That's because we have two Y2K advantages that most big banks don't have: 1)
being a relatively young organization means that we have more up to date
networks, servers and PCs than the older banks, and 2) given that all of our
banks are de novo organizations, we have not had to merge any computer systems.
Imagine the problems that some big banks are having trying to bring all of their
disparate computer systems into Y2K compliance. The banks and First Insurance
Funding have been getting ready for Y2K for some time now, have performed
extensive testing and we are confident that we will be ready for the year 2000.
**** Earnings for Share Growth Bar Chart OMITTED ****
NON-DILUTIVE CAPITAL GROWTH
. . . TRUST PREFERRED SECURITIES
In October of 1998, we completed our offering of $31.05 million of 9.00%
Cumulative Trust Preferred Securities. The capital treatment and tax-deductible
nature of the Trust Preferred Securities make this type of security a popular
capital instrument for bank holding companies.
This capital has an after-tax cost to the company of about 5.5% and, as such, is
financially accretive to our common shareholders versus having issued additional
common equity. Proceeds from the offering are being used to expand our banking
operations as discussed above and, in the short-term, retired outstanding debt.
Our Trust Preferred Securities trade on The Nasdaq Stock Market(R) under the
symbol "WTFCP".
PROTECTING OUR SHAREHOLDERS' INTERESTS.
In August, we communicated that the Board of Directors had adopted a Shareholder
Rights Plan to protect shareholder interests in case Wintrust Financial
Corporation is confronted with a third party acquisition proposal at an unfair
price. With this Rights Plan in place, the Board will have greater leverage in
the event we are required to negotiate on behalf of shareholders.
ALIGNING EMPLOYEE GOALS WITH THOSE OF SHAREHOLDERS.
In 1998, we put in place a number of programs to make sure that employee goals
were aligned with those of shareholders--continued growth and increased
earnings. An Employee Stock Purchase Plan was implemented that gave most
non-executive employees an opportunity to purchase common stock of the Company
at a slight discount to the market price. More than 100 employees enrolled in
the first offering of this program during the fourth quarter. We continue to
utilize the Stock Incentive Plan to motivate management to perform.
**** Total Shareholders' Equity Bar Chart OMITTED ****
DON'T HIDE THE LIGHT UNDER THE BUSHEL BASKET.
In 1998, we implemented a number of shareholder and investor relations programs
designed to better communicate our special story. Up until that time we had done
very little investor relations work. In 1998, we built an investor relations web
site on the internet which contains information about Wintrust, all press
releases and recent news for the Company, hot links to Nasdaq's web site for
current price quotes, and hot links to Wintrust's SEC filings. We also began
publishing a newsletter called Wintrust Update that contains
- 9 -
<PAGE>
news and information for our shareholders and investors. In addition, the
following three market makers have now published research reports on and are
actively following our Company:
o EVEREN Securities, Inc.
o U.S. Bancorp Piper Jaffray
o ABN AMRO Incorporated
We continue to communicate with these and other investment firms and expect
additional companies to initiate coverage of our Company's story during 1999.
CREATING SHAREHOLDER VALUE IS OUR TOP PRIORITY.
In closing, we thought it important to reiterate that your management team's
goals are aligned with shareholders. All the senior officers of Wintrust and our
subsidiaries have invested significant amounts of their personal resources in
the Company in addition to having stock options. In total, senior management and
the directors of the corporation and its subsidiaries own in excess of 25% of
the common shares outstanding. We are in this for the long haul, looking to
maximize long-term shareholder value.
We encourage all of you to maintain that same long-term outlook when reviewing
Wintrust as an investment. We are a very young company that is without peer in
the industry. We will continue to aggressively build shareholder value through
our dual strategy of continued growth and earnings improvement by moving the
company towards our stated goals and objectives.
Thank you for being a shareholder.
Sincerely,
John S. Lillard
Chairman
Edward J. Wehmer
President & CEO
**** Ed Wehmer and John Lillard Picture OMITTED ***
- 10 -
<PAGE>
1998 WAS QUITE A YEAR FOR OUR BANKS.
COMMUNITY BANKING--WINTRUST STYLE.
In 1998, we provided community banking service, Wintrust style, to over 100,000
customers in our markets. Our customers heartily consumed over 60,000 cups of
hot coffee and more than 200,000 not-so-low-calorie cookies, donuts and other
pastry treats. We also gave away over thousand of pounds of chocolate eggs,
chocolate hearts, chocolate Santa's, lollipops, and even dog biscuits for our
four legged children.
**** Community Event Picture OMITTED ****
As locally run community banks, we continue to market banking products and
services that are customized to meet local needs and designed to serve a
customer throughout their life. From Junior Savers Accounts for kids to
investment services for young growing families to specialized accounts like
PlatinumPreferred for seniors, we strive to provide products and services that
will meet the changing financial needs of our customers.
Our Junior Savers enjoyed marching in and riding on bank floats in our community
parades. For their enthusiastic savings and loyal support, we awarded them
bubble gum banks, Beanie Babies, basket balls, cool T-shirts, sunglasses, key
chains, yo-yo's, sleds, ice cream sundaes, pizza, snow cones, popcorn, glow
buttons for Halloween, and pictures with the Easter Bunny and Santa.
For the whole family and the community we conducted free community cookouts,
educational seminars, produced community calendars and hosted many community
gatherings in our meeting rooms and bank facilities. We even put on a full-blown
community carnival where thousands of friends and neighbors got to dunk the
banker, ride the rides, slurp the snow cones and have their face painted for
free. On Mother's Day we gave away flowers and potted plants. On Father's Day we
gave away golf balls and Swiss-Army knives. On Halloween we gave away pumpkins
and for the Holidays we gave away brass ornaments. Our seniors enjoyed bank
sponsored day trips to downtown Chicago to see terrific plays like Phantom of
the Opera and Forever Plaid. And yes, we gave away a lot of those invaluable
bank pens too.
WE DO COMMERCIAL BANKING TOO!
We also serve many, many businesses and organizations, disproving the
misconception that community banks only serve "retail" (consumer) banking
customers. With a legal lending limit in excess of $20 million, we are capable
of serving the credit needs of a wide variety of commercial customers. We also
provide a wide variety of highly competitive banking services to our commercial,
professional and merchant customers, including:
o Corporate Line of Credit
o Corporate Retail Lockbox Service
o Automated Cash Manager (Automatic "Sweep") Service
o Controlled Disbursement (if Automated "Sweep" is not used)
o Accounts Payable (automated check issuance) Service
o Account Reconciliation Services (Full Reconciliation and/or Positive
Pay)
o On-Line (PC) Banking which will provide Balance and Transaction
inquiries Electronic file transmission capabilities
o Visa/MasterCard Merchant Processing
o Custodial Services
Technology is a great equalizer in the world of banking. Our community banks can
provide all of the
- 11 -
<PAGE>
sophisticated services of a big bank, but with a lot more: 1) our banks are
locally controlled and managed, which means that decisions affecting your
business are made quickly by that bank's management, not by some downtown or
out-of-town committee that does not even know you; 2) our commercial bankers are
experienced professionals, not "trainees" as you may experience at the big
banks; and, 3) we strive for a level of personal service that far surpasses that
of any bank in town. That, after all, is the essence of our community banks.
**** Bank Facility Picture OMITTED ****
GROWING OUR DE NOVO FRANCHISES.
Consistent with our past record of expansion, Wintrust opened six new banking
facilities in 1998 (two of which replaced temporary facilities in Crystal Lake
and Western Springs):
o A drive-through/walk-up in Glencoe for North Shore Community Bank &
Trust
o A new branch for North Shore Community Bank & Trust located at the
historic "L" station in southern Wilmette
o A south Libertyville branch for Libertyville Bank & Trust Company
o A branch of Lake Forest Bank & Trust Company located in a newly
constructed, upscale senior housing development known as Lake Forest
Place
o A permanent main bank facility in downtown Crystal Lake for Crystal
Lake Bank & Trust Company
o A permanent main bank facility in downtown Western Springs for The
Community Bank of Western Springs
**** Bank Facility Picture OMITTED ****
We currently have two additional facilities that will be opened in the first
half of 1999: 1) Lake Forest Bank and Trust's new Market North addition which
creates much needed space for our oldest bank and for Wintrust's corporate
offices; and 2) a new drive-through/walk-up in downtown Crystal Lake for Crystal
Lake Bank & Trust. We now operate 21 banking offices in eleven high-income
Chicagoland suburban markets. In addition to these facilities, four to six new
branch facilities and one new bank opening are being evaluated for later this
year.
- 12 -
<PAGE>
NEW CONVERTS (EMPLOYEES) TO COMMUNITY BANKING, WINTRUST-STYLE.
Every bank has added staff as growth has accelerated the need for additional
service. We are very selective in who we hire to continue our special way of
doing business. Interestingly, a new trend is developing. We are seeing more and
more very experienced bankers, loan officers and trust/investment professionals
desiring to leave their big bank job and return to their entrepreneurial roots
and the fast pace of community banking, Wintrust-style. We have plucked a few of
these plums and have added them to our team.
WHAT'S HAPPENING AT THE BANKS.
As the eldest Wintrust bank, Lake Forest Bank & Trust celebrated its seventh
birthday in 1998. Total assets reached $441M, up 16% versus year ago. This
strengthens its position as the number two bank in the market, serving more than
half of all households. LFB&T now operates six facilities, including the new
walk-in facility at Lake Forest Place, an upscale senior housing community which
opened in the fourth quarter.
**** Bank Facility Picture OMITTED ****
1998 was an eventful year for Hinsdale Bank & Trust. Total assets increased
26% to $281 million. While HB&T enjoyed its fifth year of operation, its
Clarendon Hills branch (Clarendon Hills Bank) celebrated its second birthday and
its Western Springs branch (The Community Bank of Western Springs) turned one
year old. In total, the bank operates four facilities including a
drive-through/walk-up in downtown Hinsdale. In December, the Western Springs
facility moved out of its temporary location and into its beautiful new main
bank facility in the downtown area. The architecture of this impressive brick
and stone building fits in well with the historic Water Tower that is located
just to the east.
**** Bank Facility Picture OMITTED ****
North Shore Community Bank & Trust reached $294 million in total assets, up
10% from last year, while it celebrated its fourth birthday. The bank operates
six facilities in the affluent north shore markets of Wilmette, Winnetka and
Glencoe. Two new facilities were opened in 1998--a new drive-through/walk-up in
Glencoe and a walk-in facility in the
- 13 -
<PAGE>
newly refurbished historic 4th & Linden "L" station in southern Wilmette.
Glencoe's new drive-through is unique because it offers the ultimate in
convenience--the only gas station/convenience store in town is located adjacent
to the bank on the same property.
Libertyville Bank & Trust, our fourth community bank in its third year of
operation, increased its assets by 50% to $186 million. LB&T added its third
facility in October when it opened its new walk-in office in southern
Libertyville. This will serve the established southern section of Libertyville
and growing Cuneo Estate area of Libertyville and Vernon Hills.
Barrington Bank & Trust experienced terrific growth in only its second full year
of operation. Total assets reached $120 million, an increase of 67% versus a
year ago. The bank and its customers are enjoying the new main
bank/drive-through facility that was opened in December 1997.
**** Graphic Advertisment OMITTED ****
Crystal Lake Bank & Trust, our youngest bank which opened in a temporary
facility in December 1997, moved into its new main bank facility in downtown
Crystal Lake in September 1998. For a bank that operated almost the entire year
in a cramped 1,200 square foot facility, it is proud to announce that its assets
reached $53 million in 1998. Crystal Lake Bank continues with momentum in 1999
as it opened its drive-through facility in March and has acquired a facility in
the southern section of Crystal Lake that is anticipated to be ready to serve
customers in the second quarter of 1999.
FIRST INSURANCE FUNDING HAS A RECORD YEAR.
While not one of our banks, we wanted to give you an update on First Insurance
Funding. First Insurance Funding generated financing loans of $494 million in
1998, a 43% increase over the previous year. This came with very little increase
in overhead costs. This was made possible though a series of system enhancements
that allowed First Insurance Funding to do more business, more quickly and
efficiently.
First Insurance Funding should maintain it's growth in the coming years thanks
to continued investments in technology and aggressive sales and marketing
programs. It has a 1999 goal of attaining another year of record receivables
growth as it pursues alternative distribution channels and national
endorsements.
- 14 -
<PAGE>
**** Map of Company Locations OMITTED ****
- 15 -
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK
- 16 -
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share data)
============================================================================================================================
December 31,
--------------------------------------------
1998 1997
--------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks - non-interest bearing $ 33,924 32,158
Federal funds sold 18,539 60,836
Interest bearing deposits with banks 7,863 85,100
Available-for-Sale securities, at fair value 209,119 101,934
Held-to-Maturity securities, at amortized cost, fair value of $5,001
and $4,964 in 1998 and 1997, respectively 5,000 5,001
Loans, net of unearned income 992,062 712,631
Less: Allowance for possible loan losses 7,034 5,116
- ----------------------------------------------------------------------------------------------------------------------------
Net loans 985,028 707,515
Premises and equipment, net 56,964 44,206
Accrued interest receivable and other assets 30,082 14,894
Goodwill and organizational costs 1,529 1,756
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,348,048 1,053,400
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 131,309 92,840
Interest bearing 1,097,845 824,861
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 1,229,154 917,701
Short-term borrowings - 35,493
Notes payable - 20,402
Long-term debt - trust preferred securities 31,050 -
Accrued interest payable and other liabilities 12,639 11,014
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,272,843 984,610
============================================================================================================================
Shareholders' equity
Preferred stock, no par value; 20,000,000 shares authorized, of which 100,000
shares are designated as Junior Serial Preferred Stock A; no shares issued
and outstanding at December 31, 1998 and 1997 - -
Common stock, no par value; $1.00 stated value; 30,000,000 shares authorized;
8,149,946 and 8,118,523 issued and outstanding at December 31,
1998 and 1997, respectively 8,150 8,118
Surplus 72,878 72,646
Common stock warrants 100 100
Retained deficit (5,872) (12,117)
Accumulated other comprehensive income (loss) (51) 43
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 75,205 68,790
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,348,048 1,053,400
============================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
- 17 -
<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 75,369 56,066 30,631
Interest bearing deposits with banks 2,283 1,764 1,588
Federal funds sold 2,327 3,493 2,491
Securities 8,000 3,788 4,327
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 87,979 65,111 39,037
INTEREST EXPENSE
Interest on deposits 49,069 37,375 22,760
Interest on short-term borrowings and notes payable 1,399 964 1,395
Interest on long-term debt - trust preferred securities 747 - -
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 51,215 38,339 24,155
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 36,764 26,772 14,882
Provision for possible loan losses 4,297 3,404 1,935
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 32,467 23,368 12,947
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Fees on mortgage loans sold 5,569 2,341 1,393
Service charges on deposit accounts 1,065 724 468
Trust fees 788 626 522
Loan servicing fees - mortgage loans 163 101 114
Loan servicing fees - securitization facility - 147 1,328
Securities gains, net - 111 18
Gain on sale of premium finance receivables - - 3,078
Other 490 894 611
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 8,075 4,944 7,532
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 18,944 14,204 11,551
Occupancy, net 2,435 1,896 1,649
Equipment expense 2,221 1,713 1,313
Data processing expense 1,676 1,337 1,014
Professional fees 1,654 1,343 906
Advertising and marketing 1,612 1,309 1,102
Merger related expenses - - 891
Other 7,291 5,452 4,336
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 35,833 27,254 22,762
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 4,709 1,058 (2,283)
Income tax benefit (1,536) (3,788) (1,310)
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,245 4,846 (973)
============================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.77 0.62 (0.16)
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.74 0.60 (0.16)
============================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
- 18 -
<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
============================================================================================================================
Accumulated
Compre- other
hensive Common Retainedcomprehensive Total
income Preferred Common stock earnings income shareholders'
(loss) stock stock Surplus warrants (deficit) (loss) equity
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 503 5,831 50,053 75 (15,990) 15 40,487
Comprehensive Loss:
Net loss $ (973) - - - - (973) - (973)
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (6) - - - - - (6) (6)
---------
Comprehensive Loss (979)
Common stock issuance, net of fractional shares - 567 1,291 - - - 1,858
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
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - 6,603 52,871 100 (16,963) 9 42,620
Comprehensive Income:
Net income 4,846 - - - - 4,846 - 4,846
Other comprehensive income, net of tax:
Unrealized gains on securities, net of
reclassification adjustment 34 - - - - - 34 34
---------
Comprehensive Income 4,880
Common stock issued upon
exercise of stock options - 118 846 - - - 964
Common stock offering - 1,397 18,929 - - - 20,326
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 - 8,118 72,646 100 (12,117) 43 68,790
Comprehensive Income:
Net income 6,245 - - - - 6,245 - 6,245
Other comprehensive loss, net of tax:
Unrealized losses on securities, net of
reclassification adjustment (94) - - - - - (94) (94)
---------
Comprehensive Income 6,151
Common stock issued upon
exercise of stock options - 32 232 - - - 264
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ - 8,150 72,878 100 (5,872) (51) 75,205
============================================================================================================================
Years Ended December 31,
--------------------------------------------
Disclosure of reclassification amount and income tax impact: 1998 1997 1996
--------------------------------------------
Unrealized holding gains (losses) on securities arising during the year $ (153) 166 8
Less: Reclassification adjustment for gains included in net income - 111 18
Less: Income tax expense (benefit) (59) 21 (4)
- ----------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) $ (94) 34 (6)
============================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
============================================================================================================================
Years ended December 31,
--------------------------------------------
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 6,245 4,846 (973)
Adjustments to reconcile net income (loss) to net cash
used for, or provided by, operating activities:
Provision for possible loan losses 4,297 3,404 1,935
Depreciation and amortization 2,952 2,394 2,104
Deferred income tax benefit (1,961) (3,788) (1,455)
Gain on sale of Available-for-Sale securities - (111) (18)
Net accretion/amortization of securities (340) (670) (1,924)
Originations of mortgage loans held for sale (399,007) (171,960) (132,233)
Proceeds from sales of mortgage loans held for sale 390,528 171,192 123,818
(Increase) decrease in other assets, net (12,603) 5,189 (5,273)
Increase (decrease) in other liabilities, net 1,625 (5,224) 2,285
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (8,264) 5,272 (11,734)
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of Available-for-Sale securities 481,297 92,336 308,424
Proceeds from sales of Available-for-Sale securities - 420 498
Purchases of Available-for-Sale securities (588,296) (124,522) (318,497)
Net decrease (increase) in interest bearing deposits with banks 77,237 (66,368) 31,868
Net increase in loans (273,918) (221,239) (227,005)
Purchases of premises and equipment, net (15,459) (16,063) (7,925)
Purchase of Wolfhoya Investments, Inc., net of cash acquired - - (318)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (319,139) (335,436) (212,955)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase in deposit accounts 311,453 299,672 212,371
Increase (decrease) in short-term borrowings and notes payable, net (55,895) 26,780 17,490
Proceeds from trust preferred securities offering 31,050 - -
Issuance of common stock, net of issuance costs and fractional shares - 20,326 1,858
Common stock issued upon exercise of stock options 264 964 -
Repurchase of common stock - - (48)
- ----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 286,872 347,742 231,671
- ----------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (40,531) 17,578 6,982
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 92,994 75,416 68,434
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 52,463 92,994 75,416
============================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 51,158 37,499 23,874
Income taxes 787 - 138
Transfer to other real estate owned from loans 587 - -
============================================================================================================================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
- 20 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Wintrust Financial Corporation and
subsidiaries ("Wintrust" or "Company") conform to generally accepted accounting
principles. In the preparation of the consolidated financial statements,
management is required to make certain estimates and assumptions that affect the
reported amounts contained in the consolidated financial statements. Management
believes that the estimates made are reasonable; however, changes in estimates
may be required if economic or other conditions change beyond management's
expectations. Reclassifications of certain prior year amounts have been made to
conform with the current year presentation. The following is a summary of the
more significant accounting policies of the Company.
DESCRIPTION OF THE BUSINESS
Wintrust is a financial services holding company currently engaged in the
business of providing community banking services through its banking
subsidiaries to customers in the Chicago metropolitan area and financing for the
payment of commercial insurance premiums ("premium finance receivables"), on a
national basis, through its subsidiary, First Insurance Funding Corporation
("FIFC") (formally known as First Premium Services, Inc.). As of December 31,
1998, Wintrust had six wholly-owned bank subsidiaries (collectively, "Banks"),
all of which started as de novo institutions, including Lake Forest Bank & Trust
Company ("Lake Forest Bank"), Hinsdale Bank & Trust Company ("Hinsdale Bank"),
North Shore Community Bank & Trust Company ("North Shore Bank"), Libertyville
Bank & Trust Company ("Libertyville Bank"), Barrington Bank & Trust Company,
N.A. ("Barrington Bank") and Crystal Lake Bank & Trust Company, N.A. ("Crystal
Lake Bank"). FIFC is a wholly-owned subsidiary of Crabtree Capital Corporation
("Crabtree") which is a wholly-owned subsidiary of Lake Forest Bank. On
September 30, 1998, Wintrust began operating a new trust subsidiary, Wintrust
Asset Management Company, N.A. ("WAMC"). This new wholly-owned subsidiary will
provide trust and investment services at each of the Wintrust banks. Previously,
the Company provided trust services through the trust department of Lake Forest
Bank.
The consolidated Wintrust entity was formed on September 1, 1996 through a
merger transaction (the "Reorganization") whereby the holding companies of Lake
Forest Bank, Hinsdale Bank, Libertyville Bank 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.
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 premium amortization and discount accretion using methods that
approximate the effective interest method. Available-for-sale securities are
stated at fair value. Unrealized gains and losses on available-for-sale
securities, net of related taxes, are excluded from earnings until realized,
however, included as other comprehensive income and reported as a separate
component of shareholders' equity.
Trading account securities are stated at fair value; however, the Company did
not maintain any trading account securities in 1998, 1997, or 1996.
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
non-interest income and are derived using the specific identification method for
determining the cost of securities sold.
- 21 -
<PAGE>
LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans, which include lease financing and premium finance receivables, are
recorded at the principal amount outstanding. Interest income is recognized when
earned. Loan origination fees and certain direct origination costs associated
with loans retained in the portfolio are deferred and amortized over the
expected life of the loan as an adjustment of yield using methods that
approximate the effective interest method. Finance charges on premium finance
receivables are earned over the term of the loan based on actual funds
outstanding, beginning with the funding date, using a method which approximates
the effective yield method.
Mortgage loans held for sale are carried at the lower of aggregate cost or
market, after consideration of related loan sale commitments, if any. Fees
received from the sale of these loans into the secondary market are included in
non-interest income.
Interest income is not accrued on loans where management has determined that the
borrowers may be unable to meet contractual principal and/or interest
obligations, or where interest or principal is 90 days or more past due, unless
the loans are adequately secured and in the process of collection. Cash receipts
on non-accrual loans are generally applied to the principal balance until the
remaining balance is considered collectible, at which time interest income may
be recognized when received.
The allowance for possible loan losses is maintained at a level 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 non-accrual 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 estimating the fair value of the loan based on the present value of
expected cash flows, the market price of the loan, or the fair value of the
underlying collateral. If the estimated fair value of the loan is less than the
recorded book value, a valuation allowance is established as a component of the
allowance for possible loan losses.
MORTGAGE SERVICING RIGHTS
The Company originates mortgage loans for sale to the secondary market, the
majority of which are sold without retaining servicing rights. There are certain
loans, however, that are originated and sold to a governmental agency, with
servicing rights retained. The Company capitalizes the rights to service these
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. For purposes of measuring impairment, the
servicing rights are stratified into pools based on one or more predominant risk
characteristics of the underlying loans including loan type, interest rate, term
and geographic location, if applicable. Impairment represents the excess of the
remaining capitalized cost of a stratified pool over its fair value, and is
recorded through a valuation allowance. The fair value of each servicing rights
pool is evaluated based on the present value of estimated future cash flows
using a discount rate commensurate with the risk associated with that pool,
given current market conditions. Estimates of fair value include assumptions
about prepayment speeds, interest rates and other factors which are subject to
change over time. Changes in these underlying assumptions could cause the fair
value of mortgage servicing rights, and the related valuation allowance, if any,
to change significantly in the future.
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
- 22 -
<PAGE>
three to ten years for equipment, forty to fifty years for premises, and the
related lease terms for leasehold improvements. Additions to premises are
capitalized. Maintenance and repairs are charged to expense as incurred.
In 1998, the Company made a change in its accounting estimate for the estimated
useful lives of certain premises by increasing these lives from forty years to
either forty-five or fifty years. This change in estimate was made as a result
of management's assessment of the actual lives of similar structures in and
around the communities served by the Banks. The effect of this change in
estimate for the year ended December 31, 1998 was an increase in income before
income taxes and net income of approximately $155,000 and $95,000, respectively.
The effect of this change in estimate on both basic and diluted earnings per
share for the same period was an increase of approximately $0.01 per share.
OTHER REAL ESTATE OWNED
Other real estate owned is comprised of real estate acquired in partial or full
satisfaction of loans and is included in other assets at the lower of cost or
fair market value less estimated selling costs. When the property is acquired
through foreclosure, any excess of the related loan balance over the adjusted
fair market value less expected selling costs, is charged against the allowance
for possible loan losses. Subsequent write-downs or gains and losses upon sale,
if any, are charged to other non-interest expense.
INTANGIBLE ASSETS
Goodwill, representing the cost in excess of the fair value of net assets
acquired, is primarily amortized on a straight-line basis over a period of
fifteen years. The Company periodically evaluates the carrying value and
remaining amortization period of intangible assets and other long-lived assets
for impairment, and adjusts the carrying amounts, as appropriate. Deferred
organizational costs consist primarily of professional fees and other start-up
costs and are being amortized over five years.
TRUST PREFERRED SECURITIES OFFERING COSTS
In connection with the Company's offering of 9.00% Cumulative Trust Preferred
Securities ("Trust Preferred Securities"), approximately $1.4 million of
offering costs were incurred, including underwriting fees, legal and
professional fees, and other costs. These costs are included in other assets and
are being amortized over a ten year period as an adjustment of interest expense
using a method that approximates the effective interest method. See Note 10 for
further information about the Trust Preferred Securities.
TRUST ASSETS
Assets held in fiduciary or agency capacity for customers are not included in
the consolidated financial statements as they are not assets of Wintrust or its
subsidiaries. Fee income is recognized on an accrual basis for financial
reporting purposes.
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 Bank, Hinsdale
Bank, Libertyville Bank, North Shore Bank, 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.
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 statements of cash flows, Wintrust considers
all cash on hand, cash items in the process of collection, non-interest bearing
amounts due from correspondent banks and federal funds sold to be cash
equivalents.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") 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 shareholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects
- 23 -
<PAGE>
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of this entity.
STOCK OPTION PLANS
The Company follows the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), rather than the recognition
provisions of SFAS No. 123, as allowed by the statement. The Company will
continue to follow APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized by the
Company for its stock option plans. Further disclosures are presented in Note
13.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", to
address concerns over the practice of reporting elements of comprehensive income
directly in equity. 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 a company to 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 and comparative
financial statements for earlier periods must be reclassified to reflect the
provisions of this statement. The Company is disclosing comprehensive income in
the Consolidated Statements of Changes in Shareholders' Equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 was issued in response to
requests from financial statement users for additional and improved 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 better
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 1998, the initial
year of application, comparable information for earlier years will 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. See Note 21 for segment information disclosures.
In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP requires companies to
capitalize certain costs incurred in connection with internal-use software
projects. The SOP is effective for fiscal years beginning after December 15,
1998, with early adoption permitted. The Company elected early adoption of this
new SOP as of January 1, 1998 and capitalized certain salary costs related to
the configuration and installation of new software and the modification of
existing software that provided additional functionality. These costs will be
amortized over a three year period.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-up
Activities", which requires that the unamortized portion of previously
capitalized start-up costs be written-off as a cumulative effect of a change in
accounting principle. Subsequent to adoption of SOP 98-5, start-up and
organization costs must be expensed as incurred. In the first quarter of 1999,
in accordance with SOP 98-5, the Company will expense the remaining unamortized
portion of previously capitalized deferred organizational costs, which totaled
$199,000 as of December 31, 1998, and expense future start-up costs as incurred.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes, for the first
time, comprehensive accounting and reporting standards for derivative
instruments and hedging activities. This new standard requires that all
derivative instruments be recorded in the statement of condition at fair value.
The recording of the gain or loss due to changes in fair value could either be
reported in earnings or as other comprehensive income in the statement of
shareholders' equity, depending on the type of instrument and whether or not it
is considered a hedge. This standard is effective for the Company as of January
1, 2000. The Company has not yet determined the impact this new statement may
have on its future financial condition, its results of operations, or its
liquidity.
- 24 -
<PAGE>
(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, 1998 and 1997 (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, 1998
--------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------
Held-to-maturity:
U.S. Treasury - due
in one year or less $ 5,000 1 - 5,001
--------------------------------------
Available-for-sale:
U.S. Treasury - due in
one year or less 5,650 14 - 5,664
Federal agencies - due
in one year or less 48,375 3 (9) 48,369
Federal agencies - due
in five to ten years 6,321 - - 6,321
Municipal securities -
due in one year or less 309 - - 309
Municipal securities -
due in one to five years 195 - - 195
Corporate notes and other -
due in one year or less 135,667 1 (33) 135,635
Corporate notes and other -
due in one to five years 6,498 8 (39) 6,467
Federal Reserve Bank
and Federal Home Loan
Bank stock 6,159 - - 6,159
--------------------------------------
Total securities
available-for-sale 209,174 26 (81) 209,119
--------------------------------------
Total securities $ 214,174 27 (81) 214,120
======================================================================
======================================================================
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
======================================================================
During 1998, there were no sales of available-for-sale securities. In 1997 and
1996, Wintrust had gross realized gains on sales of available-for-sale
securities of $111,000 and $18,000, respectively. Wintrust had no realized
losses on sales of securities in 1997 or 1996. Proceeds from sales of
available-for-sale securities during 1997 and 1996 were $420,000 and $498,000,
respectively. At December 31, 1998 and 1997, securities having a carrying value
of $104,874,000 and $77,983,000, respectively, were pledged as collateral for
public deposits and trust deposits.
- 25 -
<PAGE>
(3) LOANS
A summary of the loan portfolio, including commercial lease financing
receivables, at December 31, 1998 and 1997 is as follows (in thousands):
1998 1997
------------------------
Commercial and commercial real estate $ 366,229 235,483
Premium finance 183,165 131,952
Indirect auto 210,137 139,296
Home equity 111,537 116,147
Residential real estate 91,525 61,611
Installment and other 34,650 32,153
------------------------
Total loans 997,243 716,642
Less: Unearned income 5,181 4,011
------------------------
Total loans, net of unearned income $ 992,062 712,631
================================================================
Residential mortgage loans held for sale totaled $18,031,000 and $9,552,000 at
December 31, 1998 and 1997, respectively.
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 $19,791,000 and $9,213,000 at December 31, 1998 and
1997, 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, 1998, 1997 and 1996 is as follows (in thousands):
================================================================
1998 1997 1996
----------------------------
Allowance at beginning of year $ 5,116 3,636 2,763
Provision 4,297 3,404 1,935
Charge-offs-continuing operations (2,737) (1,874) (520)
Charge-offs-discontinued operations - (241) (583)
Recoveries 358 191 41
----------------------------
Allowance at end of year $ 7,034 5,116 3,636
================================================================
The provision for possible loan losses is charged to operations, and recognized
loan losses (recoveries) are charged (credited) to the allowance. At December
31, 1998, 1997 and 1996, non-accrual loans totaled $3,137,000, $2,440,000 and
$1,686,000, respectively.
At December 31, 1998, 1997, and 1996 loans that were considered to be impaired
totaled $1,714,000, $1,139,000 and $1,444,000, respectively. At December 31,
1998, one impaired loan totaling $285,000 had an allocated specific allowance
for loan losses of approximately $125,000. There was no specific allowance for
loan losses allocated for impaired loans as of December 31, 1997 or 1996. The
average balance of impaired loans during 1998, 1997 and 1996 was approximately
$4,167,000, $990,000 and $1,322,000, respectively. During 1998, interest income
recognized on impaired loans totaled approximately $155,000. In 1997 and 1996,
this amount was insignificant. Management evaluated the value of the impaired
loans primarily by using the fair value of the collateral. During 1998, the
effect of non-performiing loans reduced interest income by approximately
$197,000. During 1997 and 1996, this effect was insignificant.
(5) MORTGAGE SERVICING RIGHTS
The remaining principal balance of mortgage loans serviced for others, which are
not included in the Consolidated Statements of Condition, totaled $82.1 million
and $53.2 million at December 31, 1998 and 1997, respectively. The following is
a summary of the changes in mortgage servicing rights (in thousands):
=============================================================
Year ended December 31,
----------------------------
1998 1997
----------------------------
Balance at beginning of year $ 313 123
Servicing rights capitalized 577 226
Amortization of servicing rights (175) (36)
Valuation allowance - -
----------------------------
Balance at end of year $ 715 313
=============================================================
(6) SERVICED RECEIVABLES AND SECURITIZATION FACILITY
Prior to the Reorganization on September 1, 1996, FIFC premium finance loan
originations were sold and serviced pursuant to a securitization facility
established in February 1995. 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, 1998 or 1997. Subsequent to the Reorganization, FIFC loan
originations began to be sold to the Banks and consequently remain as an asset
of the Company.
- 26 -
<PAGE>
(7) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at December 31, 1998 and 1997 is as follows
(in thousands):
=============================================================
1998 1997
----------------------------
Land $ 9,607 8,751
Buildings and improvements 35,251 25,570
Furniture and equipment 12,802 10,306
Equipment under leasing contracts 473 -
Construction in progress 6,638 4,784
----------------------------
64,771 49,411
Less accumulated depreciation
and amortization 7,807 5,205
----------------------------
Premises and equipment, net $ 56,964 44,206
=============================================================
(8) TIME DEPOSITS
Certificates of deposit in amounts of $100,000 or more approximated $346,046,000
and $233,590,000, respectively, at December 31, 1998 and 1997. Interest expense
related to these deposits approximated $13,999,000, $10,954,000 and $4,270,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
(9) NOTES PAYABLE
The notes payable balance of $20.4 million at December 31, 1997 represented the
balance on a revolving credit line agreement ("Agreement") with an unaffiliated
bank. Effective September 1, 1996, the Company entered into the $25 million
Agreement, 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 Agreement 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
Agreement 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%. Effective
September 1, 1998, this Agreement was increased to $40 million and the maturity
date was extended to September 1, 1999. In October 1998, the Company paid-off
the remaining outstanding balance with proceeds from the $31.05 million Trust
Preferred Securities offering, as more fully explained in Note 10. The Agreement
is secured by the stock of all Banks, except Crystal Lake Bank, and contains
several restrictive covenants, including the maintenance of various capital
adequacy levels, asset quality and profitability ratios, and certain
restrictions on dividends and other indebtedness. This Agreement may be
utilized, as needed, to provide capital to fund continued growth at its existing
bank subsidiaries, expansion of its trust and investment activities, possible
acquisitions of other financial institutions and other general corporate
matters.
(10) LONG-TERM DEBT - TRUST PREFERRED SECURITIES
In 1998, the Company raised $31.05 million of Trust Preferred Securities. These
proceeds were used mainly to pay-off the remaining revolving credit line
balance, as discussed in Note 9. The Trust Preferred Securities offering has
increased the Company's regulatory capital under Federal Reserve guidelines.
Interest expense on the Trust Preferred Securities is also deductible for income
tax purposes.
Wintrust Capital Trust I ("WCT"), a statutory business trust and wholly-owned
subsidiary of the Company that was formed solely for the purpose of the above
mentioned offering, issued a total of 1,242,000 Trust Preferred Securities,
including the over-allotment, at a price of $25 per security, which totaled
$31,050,000. These securities represent preferred undivided beneficial interests
in the assets of WCT. WCT has also issued $960,000 of common securities, all of
which are owned by the Company. The assets of WCT consist solely of 9.00%
Subordinated Debentures issued by the Company to WCT in the aggregate principal
amount of $32,010,000. Holders of the Trust Preferred Securities are entitled to
receive preferential cumulative cash distributions at the annual rate of 9.00%,
accumulating from September 29, 1998, and payable quarterly in arrears on the
last day of each quarter, the first payment of which occured on December 31,
1998. Subject to certain limitations, the Company has the right to defer payment
of interest at any time, or from time to time, for a period not to exceed 20
consecutive quarters. The Trust Preferred Securities are subject to mandatory
redemption, in whole or in part, upon repayment of the Subordinated Debentures
at maturity or their earlier redemption. The Subordinated Debentures mature on
September 30, 2028, which may be shortened at the discretion of the Company to a
date not earlier than September 30, 2003, or extended to a date not later than
September 30, 2047, in each case if certain conditions are met, and only after
the Company has obtained Federal Reserve approval, if then required under
applicable guidelines or regulations.
The Company has guaranteed the payment of distributions and payments upon
liquidation or redemption of the Trust Preferred Securities, in each case to the
extent of funds held by WCT. The Company and WCT believe that,
- 27 -
<PAGE>
taken together, the obligations of the Company under the guarantee, the
subordinated debentures, and other related agreements provide, in the aggregate,
a full, irrevocable and unconditional guarantee, on a subordinated basis, of all
of the obligations of WCT under the Trust Preferred Securities.
(11) LEASE EXPENSE AND OBLIGATIONS
Gross rental expense for all operating leases was $922,000, $798,000 and
$659,000, in 1998, 1997 and 1996, respectively. Gross rental income related to
the Company's buildings totaled $390,000, $289,000 and $244,000 in 1998, 1997
and 1996. In 1998, the Company also recorded equipment lease income of
approximately $55,000. Minimum gross rental commitments, primarily for office
space, and future minimum gross rental income and equipment lease income as of
December 31, 1998 for all noncancelable leases are as follows (in thousands):
=============================================================
FUTURE FUTURE FUTURE
MINIMUM MINIMUM MINIMUM
GROSS GROSS EQUIPMENT
RENTAL RENTAL LEASE
COMMITMENTS INCOME INCOME
-------------------------------
1999 $ 740 125 102
2000 627 71 102
2001 511 29 102
2002 518 26 103
2003 455 18 52
2004 and thereafter 3,447 54 -
-------------------------------
Total minimum future amounts $ 6,298 323 461
=============================================================
(12) INCOME TAXES
For the year ended December 31, 1998, Wintrust had $571,000 of current Federal
income tax expense and no current state income tax. For the years ended December
31, 1997 and 1996, Wintrust had no current Federal or state income tax expense.
In 1998, 1997 and 1996, the Company recorded net deferred Federal tax benefits
of approximately $2.3 million, $2.9 million, and $524,000, respectively, and net
deferred state tax (expense) benefits of approximately ($271,000), $890,000 and
$786,000, respectively. During 1998 and 1997, such amounts exclude approximately
$78,000 and $316,000 of Federal tax benefits and $17,000 and $67,000 of state
tax benefits, respectively, that were recorded directly to shareholder's equity
related to the exercise of certain common stock options.
Income taxes for 1998, 1997 and 1996 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,
-------------------------------
1998 1997 1996
-------------------------------
Computed "expected" income
tax expense (benefit) $ 1,601 360 (776)
Increase (decrease) in tax resulting from:
Change in the beginning-of-the-year
balance of the valuation allowance
for deferred tax assets (3,357) (4,204) (853)
Merger costs - - 305
Other, net 220 56 14
-------------------------------
Income tax benefit $(1,536) (3,788) (1,310)
===========================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1998 and 1997 are
presented below (in thousands):
===========================================================================
1998 1997
-------------------------------
Deferred tax assets:
Allowance for possible loan losses$ $ 2,405 1,475
Start-up costs 65 133
Federal net operating loss carryforward 6,985 9,072
State net operating loss carryforward 1,390 1,867
Deferred compensation 170 89
Other, net 169 162
-------------------------------
Total gross deferred tax assets 11,184 12,798
Valuation allowance 806 4,163
-------------------------------
Total deferred tax assets 10,378 8,635
- ---------------------------------------------------------------------------
Deferred tax liabilities:
Premises and equipment, due to
differences in depreciation 125 483
Deferred loan fees 1,034 189
Accrual to cash adjustment 711 1,023
Other, net 640 1,082
-------------------------------
Total gross deferred tax liabilities 2,510 2,777
-------------------------------
Net deferred tax assets $ 7,868 5,858
===========================================================================
During 1996, 1997 and 1998, management determined that a valuation allowance
should be established for a portion of the deferred tax asset based on
management's assessment regarding realization of such deferred tax assets
considering the profitability attained by the Company and its operating
subsidiaries during each of the years and future earnings estimates. Management
believes that realization of the recorded net deferred tax asset is more likely
than not.
- 28 -
<PAGE>
At December 31, 1998, Wintrust and its subsidiaries had Federal net operating
losses of approximately $20.5 million and state net operating losses of
approximately $19.4 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.
(13) EMPLOYEE BENEFIT AND STOCK PLANS
Prior to May 22, 1997, Wintrust and the holding companies of Lake Forest Bank,
Hinsdale Bank, Libertyville Bank 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 1998, 1997 and 1996 is as
follows:
=====================================================================
Common Range of Weighted Average
Shares Strike Prices Strike Price
-----------------------------------------
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
Granted 150,400 $ 17.88-$21.75 $ 18.71
Exercised 31,423 $ 5.80-$14.53 $ 8.30
Forfeited or canceled 53,081 $ 9.30-$19.86 $ 16.25
-----------------------------------------
Outstanding at
December 31, 1998 1,524,984 $ 5.80-$21.75 $ 12.49
=====================================================================
At December 31, 1998, 1997 and 1996, the weighted-average remaining contractual
life of outstanding options was 6.6 years, 7.4 years and 7.0 years,
respectively. Additionally, at December 31, 1998, 1997 and 1996, the number of
options exercisable was 887,514, 809,520 and 659,627, respectively, and the
weighted-average per share exercise price of those options was $9.38, $9.08 and
$8.62, respectively. Expiration dates for the options range from June 19, 2000
to October 29, 2008.
The following table presents certain information about the outstanding options
and the currently exercisable options as of December 31, 1998:
<TABLE>
<CAPTION>
===================================================================== ================================
Options Outstanding Options Currently Exercisable
- --------------------------------------------------------------------- --------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Exercise Remaining Number Exercise
Prices of Shares Price Term of Shares Price
- --------------------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.80-$ 6.31 213,944 $ 6.22 2.73 years 213,944 $ 6.22
$ 7.24-$ 8.48 280,595 $ 7.91 5.29 years 280,595 $ 7.91
$ 9.30-$12.42 306,905 $10.73 6.38 years 234,624 $10.54
$ 12.43-$17.88 264,939 $14.37 7.59 years 142,224 $13.87
$ 18.00-$18.00 364,124 $18.00 8.94 years 3,850 $18.00
$ 18.44-$21.75 94,477 $19.57 8.39 years 12,277 $21.13
- --------------------------------------------------------------------- --------------------------------
$ 5.80-$21.75 1,524,984 $12.49 6.61 years 887,514 $ 9.38
=======================================================================================================
</TABLE>
- 29 -
<PAGE>
The Company applies APB No. 25, 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 SFAS 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,
----------------------------
1998 1997 1996
----------------------------
Net income (loss)
As reported $ 6,245 4,846 (973)
Pro forma 5,295 4,261 (1,455)
Earnings (loss) per share-Basic
As reported $ 0.77 0.62 (0.16)
Pro forma 0.65 0.55 (0.24)
Earnings (loss) per share-Diluted
As reported $ 0.74 0.60 (0.16)
Pro forma 0.62 0.53 (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, 1998, 1997 and 1996, respectively:
dividend yield of 0% for each period; expected volatility of 24.2% for 1998,
22.5% for 1997 and 20.0% for 1996; risk free rate of return of 5.3% for 1998,
6.4% for 1997 and 1996; and, expected life of 7.5 years for 1998, 8 years for
1997 and 10 years for 1996. The per share weighted average fair value of stock
options granted during 1998, 1997 and 1996 was $7.54, $8.10 and $7.02,
respectively.
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 $10,000 in 1998 and $9,500 in earlier
years. 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 $52,000,
$41,000 and $38,000 in 1998, 1997 and 1996, 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,
in accordance with the SPP, the purchase price of the shares of Common Stock may
not be lower than the lessor of 85% of the fair market value per share of the
Common Stock on the first day of the offering period or 85% of the fair market
value per share of the Common Stock on the last date for the offering period.
For the first offering period, which began during the fourth quarter of 1998,
the Company's Board of Directors authorized a purchase price calculation at 90%
of fair market value. The first offering period will conclude on March 31, 1999
and, accordingly, no shares were issued to participant accounts during 1998. The
Company plans to continue to periodically offer Common Stock through this SPP
subsequent to March 31, 1999.
The Company does not currently offer other postretirement benefits such as
health care or other pension plans.
(14) REGULATORY MATTERS
Banking laws place restrictions upon the amount of dividends which can be paid
to Wintrust by the Banks. Based on these laws, the Banks could, subject to
minimum capital requirements, declare dividends to Wintrust without obtaining
regulatory approval in an amount not exceeding (a) undivided profits, and (b)
the amount of net income reduced by dividends paid for the current and prior two
years. During 1998, Lake Forest Bank paid cash dividends of $8.25 million to
Wintrust. No cash dividends were paid to Wintrust by the Banks during the years
ended December 31, 1997 and 1996. As of January 1, 1999, the Banks had
approximately $3.9 million available to be paid as dividends to Wintrust,
subject to certain capital limitations.
The Banks are also required by the Federal Reserve Act to maintain reserves
against deposits. Reserves are held either in the form of vault cash or balances
maintained with the Federal Reserve Bank and are based on the average daily
deposit balances and statutory reserve ratios prescribed by the type of deposit
account. At December 31, 1998 and 1997, reserve balances of approximately
$8,171,000 and $5,765,000, respectively, were required.
- 30 -
<PAGE>
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Banks must meet specific capital guidelines that involve
quantitative measures of the Company's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's and the Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier 1 leverage capital
(as defined) to average quarterly assets (as defined). Management believes, as
of December 31, 1998 and 1997, that the Company and the Banks met all minimum
capital adequacy requirements.
As of December 31, 1998 and 1997, the most recent notification from the Banks'
primary federal regulators categorized the Banks as either well capitalized or
adequately capitalized under the 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. There are no conditions or events since the most recent
notification that management believes would materially affect the Banks'
regulatory capital categories. The Company's and the Banks' actual capital
amounts and ratios as of December 31, 1998 and 1997 are presented in the
following tables (dollars in thousands).
==========================================================
To Be Adequately
Capitalized by
Actual Regulatory Definition
------------------------------------------
Amount Ratio Amount Ratio
------------------------------------------
DECEMBER 31, 1998:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $111,811 9.7% $92,390 8.0%
Lake Forest 30,347 8.8 27,575 8.0
Hinsdale 21,163 8.3 20,469 8.0
North Shore 23,760 9.1 20,937 8.0
Libertyville 14,691 8.8 13,295 8.0
Barrington 11,328 10.9 8,343 8.0
Crystal Lake 6,028 12.4 3,882 8.0
- ----------------------------------------------------------
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Consolidated $ 98,303 8.5% $46,195 4.0%
Lake Forest 28,404 8.2 13,788 4.0
Hinsdale 19,546 7.6 10,234 4.0
North Shore 22,148 8.5 10,469 4.0
Libertyville 13,775 8.3 6,648 4.0
Barrington 10,734 10.3 4,171 4.0
Crystal Lake 5,677 11.7 1,941 4.0
- ----------------------------------------------------------
TIER 1 CAPITAL (TO AVERAGE QUARTERLY ASSETS):
Consolidated $ 98,303 7.5% $52,344 4.0%
Lake Forest 28,404 7.0 16,331 4.0
Hinsdale 19,546 7.2 10,878 4.0
North Shore 22,148 7.6 11,578 4.0
Libertyville 13,775 7.5 7,363 4.0
Barrington 10,734 9.5 4,527 4.0
Crystal Lake 5,677 12.0 1,888 4.0
==========================================================
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
==========================================================
- 31 -
<PAGE>
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 was "well capitalized" in all capital categories, is
not presented above as of December 31, 1997 as that Bank's ratios on that date
were not meaningful, as it opened during the last few weeks of 1997.
(15) COMMITMENTS AND CONTINGENCIES The Company has outstanding, at any time, a
number of commitments to extend credit to its customers. These commitments
include revolving home line and other credit agreements, term loan commitments
and standby letters of credit. These commitments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the Consolidated Statements of Condition. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company uses the same credit
policies in making commitments as it does for on-balance sheet instruments.
Commitments to extend credit at December 31, 1998 and 1997 were $334.9 million
and $239.1 million, respectively. Standby letters of credit amounts were $10.0
million and $5.3 million at December 31, 1998 and 1997, respectively.
In the ordinary course of business, there are legal proceedings pending against
the Company and its subsidiaries. Management considers that the aggregate
liabilities, if any, resulting from such actions would not have a material
adverse effect on the financial position of the Company.
(16) DERIVATIVE FINANCIAL INSTRUMENT
In August 1998, the Company entered into a $100 million notional amount interest
rate cap agreement that matures on December 3, 1999. As part of the Company's
management of interest rate risk, the cap was purchased to hedge the risk of
rising interest rates on certain of the Company's floating rate deposit products
and fixed rate loan products. This cap provides for the receipt of payments when
the 91 day Treasury bill rate exceeds 5.25%, and is determined on a monthly
basis. The purchase price of the cap totaled $220,000 and is being amortized
over the term of the agreement as an adjustment to net interest income.
(17) 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, 1998 and 1997 (in thousands).
<TABLE>
<CAPTION>
==========================================================================================================================
At December 31, 1998 At December 31, 1997
--------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and demand balances from banks $ 33,924 33,924 32,158 32,158
Federal funds sold 18,539 18,539 60,836 60,836
Interest-bearing deposits with banks 7,863 7,863 85,100 85,100
Held-to-Maturity securities 5,000 5,001 5,001 4,964
Available-for-Sale securities 209,119 209,119 101,934 101,934
Loans, net of unearned income 992,062 999,312 712,631 718,079
Accrued interest receivable 6,989 6,989 4,792 4,792
Financial liabilities:
Non-maturity deposits 543,524 543,524 392,478 392,478
Deposits with stated maturities 685,630 691,850 525,223 527,263
Short-term borrowings and notes payable - - 55,895 55,895
Long-term borrowings-trust preferred securities 31,050 32,059 - -
Accrued interest payable 1,827 1,827 1,770 1,770
Off-balance sheet derivative contract:
Interest rate cap agreement-positive value 151 20 - -
==========================================================================================================================
</TABLE>
- 32 -
<PAGE>
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 with banks and securities: Fair values of these
instruments are based on quoted market prices, when available. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable assets.
Loans: Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are analyzed by type such as commercial, residential real
estate, etc. Each category is further segmented into fixed and variable interest
rate terms.
For variable-rate loans that reprice frequently, estimated fair values are based
on carrying values. The fair value of residential 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.
Short-term borrowings: The carrying value of short-term borrowings approximate
fair value due to the relatively short period of time to maturity or repricing.
Long-term borrowings: The fair value of long-term borrowings, which consists
entirely of Trust Preferred Securities, was determined based on the quoted
market price as of the last business day of the year.
Interest rate cap agreement: The carrying value of the interest rate cap
agreement represents the remaining unamortized cost of the contract. The fair
value is based on the quoted market price as of the last business day of the
year.
Commitments to extend credit and standby letters of credit: The fair value of
commitments to extend credit is based on fees currently charged to enter into
similar arrangements, the remaining term of the agreement, the present
creditworthiness of the counterparty, and the difference between current
interest rates and committed interest rates on the commitments. 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.
(18) 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 155,433 outstanding
warrants to acquire common stock at December 31, 1998 and 1997, respectively,
with expiration dates ranging from December 2002 through November 2005.
(19) 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.
- 33 -
<PAGE>
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
Aug. 31, 1996
---------------
Net interest income:
Lake Forest Bancorp, Inc. $ 3,648
Hinsdale Bancorp, Inc. 2,380
North Shore Comm. Bancorp, Inc. 2,140
Libertyville Bancorp, Inc. 875
Crabtree Capital Corporation 366
---------------
Consolidated $ 9,409
- ----------------------------------------------------------
Other non-interest income:
Lake Forest Bancorp, Inc. $ 726
Hinsdale Bancorp, Inc. 507
North Shore Comm. Bancorp, Inc. 429
Libertyville Bancorp, Inc. 132
Crabtree Capital Corporation 3,352
---------------
Consolidated $ 5,146
- ----------------------------------------------------------
Net income (loss):
Lake Forest Bancorp, Inc. $ 545
Hinsdale Bancorp, Inc. 29
North Shore Comm. Bancorp, Inc. (901)
Libertyville Bancorp, Inc. (862)
Crabtree Capital Corporation (727)
---------------
Consolidated $ (1,916)
=========================================================
(20) 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 19) 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, the de novo bank which Wolfhoya began organizing,
opened for business on December 19, 1996.
(21) SEGMENT INFORMATION
The Company's operations consist of four primary segments: banking, premium
finance, indirect auto, and trust. Through its six bank subsidiaries located in
several affluent suburban Chicago communities, the Company provides traditional
community banking products and services to individuals and businesses such as
accepting deposits, advancing loans, administering ATMs, maintaining safe
deposit boxes, and providing other related services. The premium finance
operations consist of financing the payment of commercial insurance premiums, on
a national basis, through FIFC. All loans originated by FIFC are currently being
sold to the Company's bank subsidiaries and are retained in each of their loan
portfolios. The indirect auto segment is operated from one of the Company's bank
subsidiaries and is in the business of providing high quality new and used auto
loans through a large network of auto dealerships within the Chicago
metropolitan area. All loans originated by this segment are currently retained
within the Company's bank subsidiary loan portfolios. The trust segment is
operated through the Company's newest subsidiary, WAMC, which was formed in
September 1998 to offer trust and investment management services at each of the
Company's banks. In addition to offering these services to existing customers of
the banks, WAMC will be targeting newly affluent individuals and small to
mid-size businesses whose needs command personalized attention by experienced
trust professionals. Prior to the formation of WAMC, trust services were
provided through a department of the Lake Forest Bank.
Each of the four reportable segments are strategic business units that are
separately managed as they offer different products and services and have
different marketing strategies. In addition, each segment's customer base has
varying characteristics. The banking and indirect auto segments also have a
different regulatory environment than the premium finance and trust segments.
While the Company's chief decision makers monitor each of the six bank
subsidiaries' operations and profitability separately, these subsidiaries have
been aggregated into one reportable operating segment due to the similarities in
products and services, customer base, operations, profitability measures, and
economic characteristics.
- 34 -
<PAGE>
The segment financial information provided in the following tables has been
derived from the internal profitability reporting system used by management and
the chief decision makers to monitor and manage the financial performance of the
Company. The accounting policies of the segments are generally the same as those
described in the Summary of Significant Accounting Policies in Note 1 to the
Consolidated Financial Statements. The Company evaluates segment performance
based on after-tax profit or loss and other appropriate profitability measures
common to each segment. Certain indirect expenses have been allocated based on
actual volume measurements and other criteria, as appropriate. Intersegment
revenue and transfers are generally accounted for at current market prices. The
other category reflects parent company information.
The following is a summary of certain operating information for reportable
segments (in thousands):
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-----------------------------
NET INTEREST INCOME:
Banking $ 34,245 25,537 14,611
Premium finance 9,714 7,359 554
Indirect auto 5,595 3,610 2,279
Trust 359 182 134
Intersegment eliminations (11,168) (8,963) (2,316)
Other (1,981) (953) (380)
-----------------------------
Total $ 36,764 26,772 14,882
- ----------------------------------------------------------
NON-INTEREST INCOME:
Banking $ 7,700 3,745 2,400
Premium finance - 147 4,406
Indirect auto 2 1 2
Trust 788 626 522
Intersegment eliminations (418) 425 202
Other 3 - -
-----------------------------
Total $ 8,075 4,944 7,532
- ----------------------------------------------------------
PROVISION FOR POSSIBLE LOAN LOSSES (NON-CASH ITEM):
Banking $ 4,403 2,474 1,693
Premium finance 401 1,058 142
Indirect auto 855 446 220
Trust - - -
Intersegment eliminations (1,362) (574) (120)
-----------------------------
Total $ 4,297 3,404 1,935
- ----------------------------------------------------------
DEPRECIATION AND AMORTIZATION (NON-CASH ITEM):
Banking $ 2,457 1,968 1,799
Premium finance 284 288 279
Indirect auto 30 23 18
Trust 48 22 20
Intersegment eliminations (62) (45) (38)
Other 195 138 26
-----------------------------
Total $ 2,952 2,394 2,104
- ----------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT):
Banking $ 3,046 880 (417)
Premium finance 1,276 236 (210)
Indirect auto 1,168 773 481
Trust (114) 149 110
Intersegment eliminations (5,424) (4,912) (1,017)
Other (1,488) (914) (257)
-----------------------------
Total $ (1,536) (3,788) (1,310)
- ----------------------------------------------------------
SEGMENT PROFIT (LOSS):
Banking $ 5,131 4,112 (917)
Premium finance 2,022 373 (332)
Indirect auto 1,850 1,225 762
Trust (189) 237 175
Intersegment eliminations (99) (114) (19)
Other (2,470) (987) (642)
-----------------------------
Total $ 6,245 4,846 (973)
- ----------------------------------------------------------
EXPENDITURES FOR ADDITIONS TO PREMISES AND EQUIPMENT:
Banking $ 14,644 12,827 7,351
Premium finance 500 3,221 574
Indirect auto 33 28 68
Trust 72 12 80
Intersegment eliminations (33) (40) (148)
Other 243 15 -
-----------------------------
Total $ 15,459 16,063 7,925
- ----------------------------------------------------------
At December 31,
-----------------------------
1998 1997
-----------------------------
Segment Assets:
Banking $ 1,377,641 1,067,966
Premium finance 234,779 168,986
Indirect auto 219,232 144,265
Trust 2,886 385
Intersegment eliminations (491,795) (332,316)
Other 5,305 4,114
-----------------------------
Total $ 1,348,048 1,053,400
- ------------------------------------------------------------
The premium finance and indirect auto segment information shown in the above
tables was derived from their internal profitability reports, which assumes that
all loans originated and sold to the Banking segment are retained within the
segment that originated the loans. All related loan interest income, allocations
for interest expense, provisions for possible loan losses and allocations for
other expenses are included in the premium finance and indirect auto segments.
The banking segment information also includes all amounts related to these
loans, as these loans are retained within the Banks' loan portfolios.
Accordingly, the intersegment eliminations shown in the above tables includes
adjustments necessary for each category to agree with the related consolidated
financial amounts. The intersegment eliminations amount reflected in the Income
Tax Expense (Benefit) category also includes the recognition of income tax
benefits from the realization of previously unvalued tax loss benefits.
- 35 -
<PAGE>
(22) CONDENSED PARENT COMPANY FINANCIAL
STATEMENTS
============================================================
Condensed Balance Sheet
(in thousands):
December 31,
-----------------------
1998 1997
-----------------------
ASSETS
Cash $ 2,312 854
Investment in subsidiaries 102,634 85,235
Other assets 2,993 3,259
-----------------------
Total assets $ 107,939 89,348
- ------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 724 156
Notes payable - 20,402
Long-term debt-trust preferred securities 32,010 -
Shareholders' equity 75,205 68,790
-----------------------
Total liabilities and shareholders' equity $ 107,939 89,348
- ------------------------------------------------------------------------
========================================================================
CONDENSED STATEMENTS OF OPERATIONS
(in thousands):
Years Ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
INCOME
Dividends from subsidiary $ 8,250 - -
Interest income - - 3
Other income 3 - -
--------------------------------
Total income 8,253 - 3
--------------------------------
EXPENSES
Interest expense 1,981 953 383
Salaries and employee benefits 1,095 333 107
Merger costs - - 173
Other expenses 724 477 213
Amortization of goodwill and
organizational costs 161 138 26
--------------------------------
Total expenses 3,961 1,901 902
--------------------------------
Income (loss) before income taxes
and equity in undistributed net
income (loss) of subsidiaries 4,292 (1,901) (899)
Income tax benefit (1,488) (914) (257)
--------------------------------
Income (loss) before equity in
undistributed net income
(loss) of subsidiaries 5,780 (987) (642)
Equity in undistributed net
income (loss) of subsidiaries 465 5,833 (331)
--------------------------------
Net income (loss) $ 6,245 4,846 (973)
========================================================================
========================================================================
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands):
Years Ended December 31,
--------------------------------
1998 1997 1996
--------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 6,245 4,846 (973)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Amortization of goodwill and
organizational costs 161 138 26
Deferred income taxes 519 (914) (257)
(Increase) decrease in other assets (416) 95 64
Increase (decrease) in other liabilities 568 (111) 267
Equity in undistributed net (income)
loss of subsidiaries (465) (5,833) 331
--------------------------------
Net cash provided by (used for)
operating activities 6,612 (1,779) (542)
--------------------------------
INVESTING ACTIVITIES:
Capital infusions to subsidiaries (17,026) (17,850) (23,272)
Purchase of Wolfhoya Investments,
Inc., net of cash acquired - - (318)
--------------------------------
Net cash used for investing activities (17,026) (17,850) (23,590)
--------------------------------
FINANCING ACTIVITIES:
Increase (decrease) in short-term
borrowings, net (20,402) (1,655) 22,057
Proceeds from long-term debt 32,010 - -
Common stock issuance, net - 20,326 1,858
Common stock issued upon
exercise of stock options 264 964 -
Repurchase of common stock - - (48)
Advances from (to) subsidiaries - 785 (785)
--------------------------------
Net cash provided by financing
activities 11,872 20,420 23,082
--------------------------------
Net increase (decrease) in cash 1,458 791 (1,050)
Cash at beginning of year 854 63 1,113
--------------------------------
Cash at end of year $ 2,312 854 63
========================================================================
- 36 -
<PAGE>
(23) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
common share for 1998, 1997, and 1996 (in thousands, except per share data):
===================================================================
1998 1997 1996
------------------------------
Net income (loss) (A)$6,245 4,846 (973)
------------------------------
Average common shares outstanding (B) 8,142 7,755 6,134
Effect of dilutive common shares 353 331 -
------------------------------
Weighted average common shares and
effect of dilutive common shares (C) 8,495 8,086 6,134
------------------------------
Net income (loss) per average
common share - Basic (A/B)$ 0.77 0.62 (0.16)
Net income (loss) per average
common share - Diluted (A/C)$ 0.74 0.60 (0.16)
===================================================================
The effect of dilutive common shares outstanding results 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 dilutive common shares were assumed
to be outstanding for the year ended December 31, 1996 as accounting standards
require that the computation of earnings per share shall not give effect to
dilutive common shares for any period in which their inclusion would have the
effect of decreasing the loss per share amount otherwise computed.
(24) 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, 1998
and 1997:
<TABLE>
<CAPTION>
===========================================================================================================================
1998 QUARTERS 1997 QUARTERS
--------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 19,900 21,447 22,941 23,691 13,078 15,381 17,746 18,906
Interest expense 11,896 12,537 13,068 13,714 7,826 8,592 10,406 11,515
--------------------------------------------------------------------------------------
Net interest income 8,004 8,910 9,873 9,977 5,252 6,789 7,340 7,391
Provision for possible loan losses 1,267 1,073 971 986 679 875 958 892
--------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 6,737 7,837 8,902 8,991 4,573 5,914 6,382 6,499
Non-interest income, excluding
securities gains, net 1,683 1,989 2,009 2,394 1,592 928 1,102 1,211
Securities gains, net - - - - - - - 111
Non-interest expense (1) 7,932 9,467 8,639 9,795 6,354 6,424 6,946 7,530
--------------------------------------------------------------------------------------
Income (loss) before income taxes 488 359 2,272 1,590 (189) 418 538 291
Income tax expense (benefit) (554) (604) 118 (496) (918) (708) (773) (1,389)
--------------------------------------------------------------------------------------
Net income $ 1,042 963 2,154 2,086 729 1,126 1,311 1,680
--------------------------------------------------------------------------------------
Net income per common
share - Basic $ 0.13 0.12 0.26 0.26 0.11 0.14 0.16 0.21
Net income per common
share - Diluted $ 0.12 0.11 0.25 0.25 0.10 0.13 0.15 0.20
===========================================================================================================================
<FN>
(1) During the second quarter of 1998, the Company recorded a non-recurring
$1.0 million pre-tax charge related to severance amounts due to the
Company's former Chairman and Chief Executive Officer and certain related
legal fees.
</FN>
</TABLE>
- 37 -
<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, 1998 and 1997, 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, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with 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, 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
March 19, 1999
- 38 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, and Selected
Financial Highlights appearing elsewhere within this report. This discussion
contains forward-looking statements that involve risks and uncertainties and, as
such, future results could differ significantly from management's current
expectations. See the last section of this discussion for further information on
forward-looking statements.
GENERAL
The Company's operating profitability depends on its net interest income,
provision for possible loan losses, non-interest income and non-interest
expense. Net interest income is the difference between the income the Company
receives on its loan and investment portfolios and its cost of funds, which
consists of interest paid on deposits, short-term borrowings, notes payable and
trust preferred securities. The provision for possible loan losses reflects the
cost of credit risk in the Company's loan portfolio. Non-interest income
consists of fees on mortgage loans sold, trust fees, service charges on deposit
accounts, loan servicing fees, gains on sales of premium finance receivables and
other miscellaneous fees and income. Non-interest expense includes salaries and
employee benefits as well as occupancy, equipment, data processing, advertising
and marketing, professional fees, 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 actions. The provision for loan losses is
dependent on increases in the loan portfolio, management's assessment of the
collectibility of the loan portfolio, net loans charged-off, as well as economic
and market factors. Fees on mortgage loans sold relate to the Company's practice
of originating long-term fixed-rate mortgage loans for sale into the secondary
market in order to satisfy customer demand for such loans while avoiding the
interest-rate risk associated with holding long-term fixed-rate mortgage loans
in the Banks' portfolios. These fees are highly dependent on the mortgage
interest rate environment and the volume of real estate transactions and
mortgage refinancing activity. The Company earns trust fees for managing and
administering trust and investment accounts for individuals and businesses.
Gains on sales of loans and loan servicing fees relate principally to FIFC's
past practice of selling its originated commercial insurance premium finance
loans into the secondary market through a securitization facility. Since the
fourth quarter of 1996, it has been the Company's practice 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. Miscellaneous fees and income include gains on the
sale of securities and income generated from other ancillary banking services.
Non-interest expenses are heavily influenced by the growth of operations, with
additional employees necessary to staff new banks, branch facilities and trust
expansion, higher levels of occupancy and equipment expense, as well as
advertising and marketing expenses necessary to promote the growth. The increase
in the number of account relationships directly affects such expenses as data
processing costs, supplies, postage and other miscellaneous expenses.
OVERVIEW AND STRATEGY Wintrust's operating subsidiaries were organized within
the last eight years, with an average life of its six subsidiary banks of less
than four 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
costs associated with growing market share in deposits and loans, establishing
new de novo banks, opening new branch facilities, and building an experienced
management team. The Company's financial performance over the past several years
generally reflects improving profitability of the Banks, as they mature, offset
by the significant costs of opening new banks and branch facilities. The
Company's experience has been that is generally takes 13-24 months for new
banking offices to first achieve operational profitability. Similarly,
management currently expects a start-up phase for WAMC of a few years before its
operations become profitable.
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
is low compared to industry standards for the following reasons. First, as de
novo banking institutions, Wintrust's subsidiary banks have been aggressive in
providing competitive loan and deposit interest rates to the communities that
they serve in order to develop
- 39 -
<PAGE>
significant market share. In addition, newer de novo banks typically have lower
loan-to-deposit ratios than more established banks, as core loan growth is
slower to develop in new markets than deposit growth. Finally, the Company has
maintained a relatively shorter term, and therefore lower-yielding, security
portfolio, in order to facilitate loan demand as it emerges, maintain excess
liquidity in the event deposit levels fluctuate and because the interest rate
environment has provided little incentive to invest funds in longer term
securities.
Similarly, as the Company has experienced rapid balance sheet growth over the
past several years, it has also experienced higher overhead levels in relation
to its average assets, when compared to peer industry levels, reflecting the
necessary start-up investment in human resources and facilities to organize
additional de novo banks and open new branch facilities. The net overhead ratio
has improved from 2.60% in 1997 to 2.36% in 1998. While the ratio shows an
improving trend, the Company's objective is to ultimately reduce the net
overhead ratio to a range of 1.50% to 2.00% of average assets. The Company's
more mature banks have met the overhead goals established by the Company. Net
overhead ratios by bank subsidiaries are as follows:
============================================================
NET
OVERHEAD
BANK ESTABLISHED RATIO
- ------------------------------------------------------------
Lake Forest Bank 12/91 1.24%
Hinsdale Bank 10/93 1.88%
North Shore Bank 9/94 1.79%
Libertyville Bank 10/95 1.78%
Barrington Bank 12/96 2.72%
Crystal Lake Bank 12/97 5.71%
============================================================
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 branch facilities will not have as significant an impact on the Company's
net overhead ratio.
While committed to a continuing growth strategy, management's current focus is
to balance further asset growth with earnings growth by seeking to more fully
leverage the existing capacity within each of the Banks and FIFC. One aspect of
this strategy is to continue to pursue specialized earning asset niches, and to
shift the mix of earning assets to higher-yielding loans. In addition to Lake
Forest Bank's July 1998 acquisition of a small business engaged in medical and
municipal equipment leasing, the Company may pursue acquisitions of other
specialty finance businesses that generate assets that are suitable for bank
investment and/or secondary market sales. To further balance growth with
increased earnings, management will continue to focus on less aggressive deposit
pricing at the more mature Banks that have more established customer bases.
With the formation of WAMC, the Company intends to expand the trust and
investment management services that have already been provided during the past
several years through the trust department of the Lake Forest Bank. With a
separately chartered trust subsidiary, the Company is now able to offer trust
and investment management services to all communities served by Wintrust banks,
which management believes are some of the best trust markets in Illinois. In
addition to offering these services to existing bank customers at each of the
Banks, the Company believes WAMC can successfully compete for trust business by
targeting small to mid-size businesses and newly affluent individuals whose
needs command the personalized attention that will be offered by WAMC's
experienced trust professionals. During the fourth quarter of 1998, WAMC added
experienced trust professionals at North Shore Bank, Hinsdale Bank and
Barrington Bank. As in the past, a full complement of trust professionals will
continue to operate from offices at the Lake Forest Bank. Services offered by
WAMC typically will include traditional trust products and services, as well as
investment management, financial planning and 401(k) management services.
Similar to starting a de novo bank, the introduction of expanded trust services
is expected to cause relatively high overhead levels when compared to initial
fee income generated by WAMC. The overhead will consist primarily of the
salaries and benefits of experienced trust professionals. Management anticipates
that WAMC will be successful in attracting trust business over the next few
years, to a level that trust fees absorb the overhead of WAMC at that time.
- 40 -
<PAGE>
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 growth and results of operations since inception.
<TABLE>
<CAPTION>
MONTH YEAR BANK LOCATION TYPE OF FACILITY
<S> <C> <C> <C> <C>
December 1998 Lake Forest Bank Lake Forest, Illinois Branch
October 1998 Libertyville Bank Libertyville, Illinois Branch
September 1998 Crystal Lake Bank Crystal Lake, Illinois New permanent facility
May 1998 North Shore Bank Glencoe, Illinois Drive-up/walk-up
April 1998 North Shore Bank Wilmette, Illinois Walk-up
December 1997 Crystal Lake Bank Crystal Lake, Illinois Bank
November 1997 Hinsdale Bank Western Springs, Illinois (2) Branch
February 1997 Lake Forest Bank Lake Forest, Illinois Drive-up/walk-up
December 1996 Barrington Bank Barrington, Illinois Bank
August 1996 Hinsdale Bank Clarendon Hills, Illinois (1) Branch
May 1996 North Shore Bank Winnetka, Illinois Branch
November 1995 North Shore Bank Wilmette, Illinois Drive-up/walk-up
October 1995 Hinsdale Bank Hinsdale, Illinois Drive-up/walk-up
October 1995 Libertyville Bank Libertyville, Illinois Bank
October 1995 Libertyville Bank Libertyville, Illinois Drive-up/walk-up
October 1995 North Shore Bank Glencoe, Illinois Branch
May 1995 Lake Forest Bank West Lake Forest, Illinois Branch
December 1994 Lake Forest Bank Lake Bluff, Illinois Branch
September 1994 North Shore Bank Wilmette, Illinois Bank
April 1994 Lake Forest Bank Lake Forest, Illinois New permanent facilities
October 1993 Hinsdale Bank Hinsdale, Illinois Bank
April 1993 Lake Forest Bank Lake Forest, Illinois Drive-up/walk-up
December 1991 Lake Forest Bank Lake Forest, Illinois Bank
- ------------------------
<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.
- 41 -
<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, 1998, 1997, and 1996. The yields and costs include loan origination
fees and certain direct origination costs which are considered adjustments to
yields. Interest income on non-accruing loans is reflected in the year that it
is collected, to the extent it is not applied to principal. Such amounts are not
material to net interest income or net change in net interest income in any
year. Non-accrual loans are included in the average balances and do not have a
material effect on the average yield. Net interest income and the related net
interest margin have been adjusted to reflect tax-exempt income, such as
interest on municipal securities and loans, on a taxable equivalent basis. This
table should be referred to in conjunction with this analysis and discussion of
the financial condition and results of operations (dollars in thousands).
<TABLE>
<CAPTION>
====================================================================================================================================
1998 1997 1996
-------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE(1) INTEREST COST BALANCE(1) INTEREST COST BALANCE(1) INTEREST COST
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest bearing deposits with banks $ 40,094 $ 2,283 5.69% $ 32,319 $ 1,764 5.46% $ 28,382 $ 1,588 5.60%
Federal funds sold 43,784 2,327 5.31 63,889 3,493 5.47 47,199 2,491 5.28
Securities (2) 142,770 8,000 5.60 69,887 3,793 5.43 88,762 4,327 4.87
Loans, net of unearned income (2) 848,344 75,464 8.90 620,801 56,134 9.04 347,076 30,631 8.83
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,074,992 88,074 8.19 786,896 65,184 8.28 511,419 39,037 7.63
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and due from
banks - non-interest bearing 26,585 17,966 13,911
Allowance for possible loan losses (5,983) (4,522) (3,247)
Premises and equipment, net 50,681 35,634 26,586
Other assets 31,470 22,110 13,575
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,177,745 $858,084 $562,244
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits - interest bearing:
NOW accounts $ 89,963 $ 2,849 3.17% $ 66,221 $ 2,535 3.83% $ 45,144 $ 1,713 3.79%
Savings and money market deposits 256,644 10,480 4.08 191,317 8,220 4.30 139,150 5,659 4.07
Time deposits 611,199 35,740 5.85 444,587 26,620 5.99 261,502 15,388 5.88
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 957,806 49,069 5.12 702,125 37,375 5.32 445,796 22,760 5.11
- ------------------------------------------------------------------------------------------------------------------------------------
Short-term borrowings and notes payable 21,249 1,399 6.58 13,694 964 7.04 16,051 1,395 8.69
Long-term debt-trust preferred securities (3) 7,915 747 9.44 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 986,970 51,215 5.19 715,819 38,339 5.36 461,847 24,155 5.23
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits 100,712 73,280 51,249
Other liabilities 18,157 7,481 7,420
Shareholders' equity 71,906 61,504 41,728
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 1,177,745 $858,084 $562,244
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income/spread $ 36,859 3.00% $ 26,845 2.92% $14,882 2.40%
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest margin 3.43% 3.41% 2.91%
====================================================================================================================================
<FN>
(1) Average balances were generally computed using daily balances.
(2) Interest income on tax advantaged securities and loans reflect a taxable
equivalent adjustment based on a marginal federal tax rate of 34%. The
total taxable equivalent adjustment reflected in the above table is $95 and
$73 in 1998 and 1997, respectively.
(3) This category relates to the $31.05 million 9.00% Cumulative Trust
Preferred Securities offering that was completed in October 1998. The rate
of 9.44% is higher than the coupon rate of 9.00% as it reflects the
amortization of offering costs, including underwriting fees, legal and
professional fees, and other related costs. See Note 10 to the Consolidated
Financial Statements for further information about the Trust Preferred
Securities.
</FN>
</TABLE>
- 42 -
<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,
----------------------------------------------------------------------------
1998 COMPARED TO 1997 1997 COMPARED TO 1996
----------------------------------------------------------------------------
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 INCOME:
Interest bearing deposits with banks $ 79 440 519 (40) 216 176
Federal funds sold (95) (1,071) (1,166) 92 910 1,002
Securities 127 4,080 4,207 454 (988) (534)
Loans (925) 20,255 19,330 771 24,732 25,503
----------------------------------------------------------------------------
Total interest income (814) 23,704 22,890 1,277 24,870 26,147
----------------------------------------------------------------------------
INTEREST EXPENSE:
NOW accounts (489) 803 314 16 806 822
Savings and money market deposits (426) 2,686 2,260 336 2,225 2,561
Time deposits (637) 9,757 9,120 275 10,957 11,232
Short-term borrowings and notes payable (66) 501 435 (259) (172) (431)
Long-term debt-trust preferred securities - 747 747 - - -
----------------------------------------------------------------------------
Total interest expense (1,618) 14,494 12,876 368 13,816 14,184
----------------------------------------------------------------------------
Net interest income $ 804 9,210 10,014 909 11,054 11,963
============================================================================================================================
</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. As several of the Company's banks are still less than four
years old, the generation of new deposit relationships to gain market share and
establish themselves in the community as the bank of choice is particularly
important. When determining a community to establish a de novo bank, the Company
generally will only enter a community where it believes the bank can gain the
number one or two position in deposit market share. This is usually accomplished
by initially paying higher deposit rates to gain the relationship and then by
introducing the customer to the Company's unique way of providing local banking
services.
Deposits. Over the past three years, the Company has experienced significant
growth in both the number of accounts and the balance of deposits primarily as a
result of de novo bank formations, new branch openings and strong marketing
efforts. Total deposit balances increased 33.9% to $1.23 billion at December 31,
1998 as compared to $917.7 million at December 31, 1997, which increased 48.5%
when compared to the balance of $618.0 million at December 31, 1996.
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):
- 43 -
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================================
1998 1997 1996
---------------------------------------------------------------------------------------
DEPOSIT PERCENT DEPOSIT PERCENT DEPOSIT PERCENT
BALANCES OF TOTAL BALANCES OF TOTAL BALANCES OF TOTAL
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lake Forest Bank $ 371,900 30% $ 287,765 31% $ 251,906 40%
Hinsdale Bank 259,333 21 206,197 22 140,873 23
North Shore Bank 270,030 22 245,184 27 153,878 25
Libertyville Bank 171,735 14 112,658 12 67,490 11
Barrington Bank 109,130 9 64,803 7 3,882 1
Crystal Lake Bank 47,026 4 1,094 1 - -
---------------------------------------------------------------------------------------
Total Deposits $ 1,229,154 100% $ 917,701 100% $ 618,029 100%
---------------------------------------------------------------------------------------
Percentage increase from
prior year-end 33.9% 48.5% 52.4%
============================================================================================================================
</TABLE>
Short-term borrowings and notes payable. Short-term borrowings fluctuate based
on daily liquidity needs of the Banks and FIFC. In addition, prior to the
October 1998 completion of the $31.05 million Trust Preferred Securities
offering, as discussed in the section below, this category included the
outstanding notes payable balance on a revolving credit line with an
unaffiliated bank. The proceeds from the Trust Preferred Securities offering
were used to pay-off the outstanding balance on this line. Accordingly, there
were no notes payable as of December 31, 1998. The Company continues to maintain
the $40 million revolving credit line, which is available for corporate purposes
such as to provide capital to fund continued growth at existing bank
subsidiaries, expansion of the new trust business, possible future acquisitions
and for other general corporate matters. See Note 9 to the Consolidated
Financial Statements for further discussion of the terms of this revolving
credit line. At December 31, 1997, notes payable totaled $20.4 million and
short-term borrowings totaled $35.5 million.
Trust preferred securities. As of December 31, 1998, this category totaled
$31.05 million of 9.00% Cumulative Trust Preferred Securities, which were
publicly sold in an offering that was completed on October 9, 1998. The proceeds
were used to pay-off the outstanding balance on the revolving credit line, as
mentioned above. The Trust Preferred Securities offering has increased the
Company's regulatory capital, and will provide for the continued growth of its
banking and trust franchise and for possible future acquisitions of other banks
or finance related companies. The ability to treat these Trust Preferred
Securities as regulatory capital under Federal Reserve guidelines, coupled with
the Federal income tax deductibility of the related interest expense, provides
the Company with a cost-effective form of capital. See Note 10 to the
Consolidated Financial Statements for further discussion of these Trust
Preferred Securities.
Total assets and earning assets. The Company's total assets were $1.35 billion
at December 31, 1998, an increase of $294.6 million, or 28.0%, when compared to
$1.05 billion a year earlier. Earning assets totaled $1.23 billion at December
31, 1998, an increase of $267.1 million, or 27.7%, from the balance of $965.5
million at December 31, 1997. Earning assets as a percentage of total assets
dropped slightly to 91.4% as of December 31, 1998 when compared to 91.7% as of
December 31, 1997. This small decline was mainly due to the unusually high prior
year-end level of federal funds sold, which were funded from the increase of
year-end customer repurchase agreements. The increases in total assets and
earning assets since December 31, 1997 were attributable to the 33.9% increase
in the Banks' deposit balances during 1998, and resulted primarily from
continued market share growth at the more established banks and higher balances
at the newer de novo banks. The Company had a total of 21 banking facilities at
the end of 1998 compared to 17 at the end of 1997.
Loans. Strong loan growth in 1998 and an unusually high level federal funds
purchased at the end of 1997, as noted earlier, resulted in loans comprising a
higher proportion of earning assets at December 31, 1998 when compared to the
end of 1997. Total loans, net of unearned income, comprised 80.5% of total
earning assets at December 31, 1998 as compared to 73.8% at December 31, 1997.
Loans, net of unearned income, totaled $992.1 million at December 31, 1998, an
increase of $279.4 million, or 39.2%, since the December 31, 1997 balance of
$712.6 million. The following table presents loan balances, net of unearned
income, by category as of December 31, 1998 and 1997 (dollars in thousands).
- 44 -
<PAGE>
==================================================================
Percent Percent
1998 of Total 1997 of Total
------------------------------------
Commercial and
commercial real estate $ 366,229 37% $ 235,483 33%
Indirect auto, net 209,983 21 138,784 19
Premium finance, net 178,138 18 128,453 18
Home equity 111,537 11 116,147 16
Residential real estate 91,525 9 61,611 9
Other loans 34,650 4 32,153 5
------------------------------------
Total loans, net $ 992,062 100% $ 712,631 100%
==================================================================
Specialty Loan Categories In order to minimize the time lag typically
experienced by de novo banks in redeploying deposits into higher yielding
earning assets, the Company has developed lending programs focused on
specialized earning asset niches 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
function as separate operating segments and consist of the indirect auto segment
and the premium finance segment. Also, in July 1998, Lake Forest Bank acquired a
small operation engaged in medical and municipal equipment leasing, which is
also expected to generate higher yielding assets to maintain within the bank's
loan portfolio. Management continues to evaluate other specialized types of
earning assets to assist in the deployment of deposit funds and to diversify the
earning asset portfolio.
Indirect auto loans. The Company finances fixed rate automobile loans sourced
indirectly through an established network of unaffiliated automobile dealers
located throughout the Chicago metropolitan area. These indirect auto loans are
secured by new and used automobiles and generally have an original maturity of
36 to 60 months with the average actual maturity estimated to be approximately
35 to 40 months. The risk associated with this portfolio is diversified amongst
many individual borrowers. The Company utilizes credit underwriting standards
that management believes results in a high quality portfolio. The Company does
not currently originate any significant level of sub-prime loans, which are made
to individuals with impaired credit histories at generally higher interest
rates, and accordingly, with higher levels of credit risk. Management
continually monitors the dealer relationships and the Banks are not dependent on
any one dealer as a source of such loans. The Company began to originate these
loans in mid-1995 and has consistently increased the level of outstanding loans.
As of December 31, 1998, net indirect auto loans were the second largest loan
category and totaled $210.0 million, an increase of $71.2 million, or 51.3%,
over the prior year-end balance. The mix increase to 21% as of December 31, 1998
as compared to 19% at the end of 1997, as well as the strong growth in balances,
were primarily the result of business development efforts that added new dealers
to the network of auto dealer relationships.
Premium finance receivables. The Company originates commercial premium finance
receivables through FIFC, who currently sell them to the Banks; however, these
receivables could be funded in the future through an asset securitization
facility. All premium finance receivables, however financed, are subject to the
Company's stringent credit standards, and substantially all such loans are made
to commercial customers. The Company rarely finances consumer insurance
premiums. Prior to the September 1, 1996 Reorganization, substantially all loans
were sold through an asset securitization facility. Subsequent to this date,
originated premium finance loans 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 net balance increased
from $57.5 million at the end of 1996 to $128.5 million as of December 31, 1997.
As of December 31, 1998, net premium finance loans totaled $178.1 million and
increased $49.7 million, or 38.7%, over the December 31, 1997 balance. This
increase was mainly due to increased market penetration from new product
offerings and targeted marketing programs.
Core Loan Categories
Commercial and commercial real estate loans, the largest loan category, totaled
$366.2 million at December 31, 1998 and increased $130.7 million, or 55.5%, from
the December 31, 1997 balance. This increase, and the higher mix to 37%,
resulted mainly from the low interest rate environment, healthy economy and the
hiring of additional experienced lending officers.
Total home equity loans declined slightly when comparing the December 31, 1998
balance of $111.5 million to the $116.1 million balance a year earlier, due to
the large volume of home equity loans that have been refinanced into first
mortgage loans over the past year as a result of low mortgage loan interest
rates. Unused commitments on home equity lines of credit, however, have
increased $48.3 million, or 40.2%, over the balance at December 31, 1997 and
totaled $168.3 million at December 31, 1998.
Residential real estate loans totaled $91.5 million at December 31, 1998, an
increase of $29.9 million, or
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48.6%, from the $61.6 million balance at the end of 1997. Mortgage loans held
for sale are included in this category and totaled $18.0 million and $9.6
million at December 31, 1998 and 1997, respectively. The Company collects a fee
on the sale of these loans into the secondary market to avoid the interest-rate
risk associated with these loans, as they are predominantly long-term fixed rate
loans. The $8.4 million increase in these loans was due mainly to the low
mortgage interest rate environment and the related high levels of refinancing
activity. The remaining $21.5 million increase in residential real estate loans
is also predominantly due the low interest rate environment and mostly comprises
adjustable rate mortgage loans and shorter-term fixed rate mortgage loans that
are retained within the Banks' loan portfolios.
Liquidity Management Assets. Funds that are not utilized for loan originations
are used to purchase short-term investment securities and money market
investments, to sell as federal funds and to maintain in interest bearing
deposits with banks. The balances of these assets fluctuate frequently based on
deposit inflows and loan demand. As a result of anticipated significant growth
in the development of de novo banks, it has been Wintrust's policy to maintain
its securities portfolio in short-term, liquid, and diversified high credit
quality securities at the Banks in order to facilitate the funding of quality
loan demand as it emerges and to keep the Banks in a liquid condition in the
event that deposit levels fluctuate. Furthermore, since short-term investment
yields are generally comparable to long-term investment yields in the current
interest rate environment, there is little incentive to invest in securities
with extended maturities. The aggregate carrying value of these investments
declined to $240.5 million at December 31, 1998 from $252.9 million at December
31, 1997, primarily due to the unusually high level of federal funds sold at the
end of 1997, as discussed earlier in the Total Assets and Earning Assets
section. A detail of the carrying value of the individual categories as of
December 31 is set forth in the table below (in thousands).
================================================================
1998 1997
--------------------------
Federal funds sold $ 18,539 60,836
Interest bearing deposits with banks 7,863 85,100
Securities 214,119 106,935
- ----------------------------------------------------------------
Total liquidity management assets $ 240,521 252,871
================================================================
CONSOLIDATED RESULTS OF OPERATIONS Comparison of Results of Operations for the
Years Ended December 31, 1998 and December 31, 1997 Overview of the Company's
profitability characteristics. The following discussion of Wintrust's results of
operations requires an understanding that the Company's bank subsidiaries have
all been started as new banks since December 1991 and have an average life of
less than four years. The Company's premium finance company, FIFC, began limited
operations in 1991 as a start-up company. The Company's new trust and investment
company, WAMC, began operations in September 1998. Previously, the Company's
Lake Forest Bank operated a trust department on a much smaller scale than what
is anticipated for WAMC. Accordingly, Wintrust is still a young Company that has
a strategy of continuing to build its customer base and securing broad product
penetration in each market place that it serves. The Company has expanded its
banking offices from 5 in 1994 to 21 at the end of 1998, adding four new offices
in 1998 and three new offices in 1997. In addition, WAMC has hired experienced
trust professionals in the last half of 1998, who are located within the banking
offices of four of the six subsidiary banks. These expansion activities have
understandably suppressed faster, opportunistic earnings. However, as the
Company matures and existing banks become more profitable, the start-up costs
associated with future bank and branch openings and other new financial services
ventures will not have as significant an impact on earnings. Additionally, the
Company's more mature banks have several operating ratios that are either
comparable or better than peer group data, suggesting that as the banks become
more established, the overall earnings level will accelerate.
Earnings summary. Net income for the year ended December 31, 1998 totaled $6.2
million and increased $1.4 million, or 28.9%, over the prior year. Net income
per basic common share totaled $0.77 in 1998 versus $0.62 in 1997, an increase
of $0.15 per share, or 24.2%. On a diluted basis, net income per common share
totaled $0.74 in 1998 as compared to $0.60 in 1997, an increase of $0.14 per
share, or 23.3%.
In the second quarter of 1998, net income was unfavorably impacted by the
previously reported non-recurring $1.0 million pre-tax charge related to
severance amounts due to the Company's former Chairman and Chief Executive
Officer and certain related legal fees. Excluding this charge, on an after-tax
basis, net income for the year ended December 31, 1998 would have been $6.9
million, or $0.81 per diluted common share, an increase of $2.0 million, or
41.5%, over 1997.
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Net income for 1998 was favorably impacted by a higher earning asset base and
resulted in net interest income increasing by $10.0 million over the 1997 total.
Fees recognized on mortgage loans sold into the secondary market, primarily on a
servicing released basis, also was a key factor for the earnings growth during
1998. These fees increased $3.2 million in 1998 when compared to the 1997 level
and were mainly the result of the low mortgage interest rate environment that
has created a high level of refinancing activity and fueled a healthy
residential real estate market. A $8.6 million increase in total non-interest
expense during 1998 as compared to 1997 offset a portion of this income growth,
and was due primarily to the growth and expansion experienced by the Company
during 1998, as noted earlier in this discussion.
Another significant factor that contributed to net income for both 1998 and 1997
was the recognition of income tax benefits from the realization of previously
unvalued tax loss benefits. For the year ended December 31, 1998 and 1997, the
Company recorded income tax benefits of $1.5 million and $3.8 million,
respectively. These income tax benefits reflect management's determination that
certain of the Company's subsidiaries' earnings histories and projected future
earnings were sufficient to make a judgment that the realization of a portion of
the net deferred tax assets not previously recognized was more likely than not
to occur. See the Income Taxes section later in this discussion for further
information.
Excluding the impact of income tax benefits and the second quarter 1998 $1.0
million non-recurring pre-tax charge, the Company recorded operating income of
$5.7 million and $1.1 million in 1998 and 1997, respectively. This significant
improvement in operating results was due to the enhanced performance of the
Company's more established subsidiaries.
Net interest income. Net interest income totaled $36.8 million for the year
ended December 31, 1998, an increase of $10.0, or 37.3%, when compared to 1997.
This increase was primarily attributable to a 36.6% increase in average earning
assets, including a 36.7% increase in average loans and a 36.5% increase in
average securities and other liquidity management assets. Total average loans as
a percentage of total average earning assets remained constant at 78.9% in both
1998 and 1997. The average loan to average deposit ratio also remained constant
at 80.1% for both 1998 and 1997. The net interest margin slightly increased
during 1998 to 3.43% as compared to 3.41% in 1997. The average earning asset
yield declined to 8.19% in 1998 as compared to 8.28% in 1997, due mostly to the
14 basis point decline in the average loan yield to 8.90% in 1998. This decline
was due primarily to the reductions in the prime lending rate during the last
half of 1998 in addition to competitive pressures on commercial loan rates. The
average prime rate during 1997 was 8.48% compared to 8.36% during 1998 and was
7.75% as of December 31, 1998. A 20 basis point decline in the cost of average
interest bearing deposits to 5.12% in 1998 helped to offset the lower loan
yield. This improvement was due to a general decline in rates and less
aggressive deposit pricing in the markets of the more mature banks that have
already established significant market share. Management's continued focus on
deposit pricing at the more mature banks may result in further improvements in
the net interest margin. Please refer to the previous sections of this
discussion entitled "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 and the impact of rate and volume changes.
Provision for possible loan losses. The provision for possible loan losses
increased by $893,000 in 1998 when compared to the prior year, and totaled $4.3
million. This increase was necessary to cover higher loan charge-offs and also
to maintain the allowance for possible loan losses at an appropriate level,
considering the growth experienced in the loan portfolio. Management believes
the allowance for possible loan losses is adequate to cover potential losses in
the portfolio. There can be no assurance, however, 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 increased $3.1 million, or 63.3%,
to $8.1 million for the year ended December 31, 1998, when compared to $4.9
million in 1997.
Fees on mortgage loans sold, the largest category of non-interest income,
includes income from originating and selling residential real estate loans into
the secondary market. For the year ended December 31, 1998, these fees rose $3.2
million, or 137.9%, in comparison to 1997, and totaled $5.6 million.
Historically low mortgage interest rates and the related high levels of
refinancing activity have been the major reasons for these significant revenue
increases. There can be no assurances a
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favorable mortgage rate environment will continue. Accordingly, future fee
income on mortgage loans sold may not be at the levels experienced during 1998.
Service charges on deposit accounts continued to increase throughout 1998 when
compared to the previous year, predominantly as a result of higher deposit
balances and a larger number of accounts. Service charges totaled $1.1 million
for the year ended December 31, 1998, an increase of $341,000, or 47.1%, over
1997. The majority of deposit service charges relate to customary fees on
overdrawn accounts and returned items. The level of service charges received is
substantially below peer group levels as management believes in the philosophy
of providing high quality service without encumbering that service with numerous
activity charges.
Trust fees totaled $788,000 for the year ended December 31, 1998, an increase of
$162,000, or 25.9%, over 1997 due primarily to new business development efforts.
With the September 30, 1998 start-up of WAMC, it is anticipated that additional
fee income will be generated in the future from the expansion of personalized
trust and investment services to each bank subsidiary. The introduction of
expanded trust and investment services, however, is expected to cause relatively
high overhead levels when compared to the initial fee income generated by WAMC.
This overhead will consist primarily of the salaries and benefits of experienced
trust professionals. It is anticipated that WAMC will be successful in
attracting new business such that trust fees will increase to a level sufficient
to absorb the overhead of WAMC within a few years.
Non-interest expense. For the year ended December 31, 1998, total non-interest
expense was $35.8 million and increased $8.6 million, or 31.5%, over 1997.
Excluding the non-recurring $1.0 million pre-tax charge recorded in the second
quarter of 1998, as discussed earlier, total non-interest expense would have
increased $7.6 million, or 27.8%, over 1997. The increases in non-interest
expense were predominantly caused by the continued growth of the Company, as
discussed in earlier sections of this analysis. For example, the late 1997
start-up of the Crystal Lake Bank added $1.7 million to total 1998 non-interest
expense, and the 1998 incremental increase of non-interest expense at Barrington
Bank, which began operating in December 1996, was $728,000. Since December 31,
1997, total deposits have grown 33.9% and total loan balances have risen 39.2%,
requiring higher levels of staffing and other operating costs, such as
occupancy, advertising and data processing, to both attract and service the
larger customer base.
Despite increases in many of the non-interest expense categories, Wintrust's
ratio of non-interest expense to total average assets declined from 3.18% in
1997 to 2.99% in 1998, exclusive of the previously mentioned second quarter
non-recurring charge, and is comparable to the Company's peer group ratio.
Salaries and employee benefits for the year ended December 31, 1998 totaled
$18.9 million, an increase of $4.7 million, or 33.4%, from the same period in
1997. Approximately $900,000 of the $1.0 million non-recurring charge mentioned
earlier relates to a severance accrual and, excluding this charge, the increase
over 1997 would have been $3.8 million, or 27.0%. The increase was directly
caused by higher staffing levels necessary to support the growth of the Company
including 1) the Crystal Lake Bank that was opened in December 1997, 2) a new
full-service facility located in Western Springs that opened in November 1997,
3) two branch facilities, in Wilmette and Glencoe, that began operations in
early 1998, 4) the formation of WAMC as a separate trust company, 5) the
addition of the new medical and municipal equipment leasing division in July
1998, 6) additional staffing to service the larger deposit and loan portfolios
and 7) normal salary increases. For the year ended December 31, 1998, salaries
and employee benefits, exclusive of the non-recurring charge, as a percent of
average assets was 1.53% versus 1.66% in 1997, ratios that are comparable to the
Company's peer group. This ratio is better than the relevant peer group for the
Company's more established banks.
Net occupancy expenses for the year ended December 31, 1998 increased $539,000,
or 28.4%, to $2.4 million as compared to $1.9 million for the prior year. This
increase was due primarily to the December 1997 start-up of the Crystal Lake
Bank and the opening of three additional facilities, as noted earlier, during
1998.
Equipment expense, which comprises depreciation and repairs and maintenance,
totaled $2.2 million for year ended December 31, 1998, a $508,000, or 29.7%,
increase over the 1997 amount. This increase was mainly due to higher levels of
depreciation expense related to the opening of additional facilities and other
growth as discussed earlier.
Data processing expenses totaled $1.7 million for the year ended December 31,
1998, an increase of $339,000, or 25.4%, when compared to the prior year period.
The increase was mainly due to the Crystal Lake Bank opening and additional
transactional charges related to the larger deposit and loan portfolios, which
increased, on an average basis, 36.5% and 36.7%, respectively, in 1998 when
compared to the prior year.
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Professional fees, which includes legal, audit and tax fees, external loan
review costs and normal regulatory exam assessments, totaled $1.7 million for
the year ended December 31, 1998, an increase of $311,000, or 23.2%, over 1997.
This increase was primarily due to growth in the Company, legal fees related to
certain non-performing loan work-outs, and approximately $100,000 in legal fees
related to the non-recurring severance charge mentioned earlier.
Advertising and marketing expenses totaled $1.6 million for the year ended
December 31, 1998, an increase of $303,000, or 23.1%, over 1997. Higher levels
of marketing costs were necessary during 1998 to attract loans and deposits at
the Crystal Lake Bank, Barrington Bank and other new branch facilities, to
introduce new loan promotions at FIFC, and to announce the expansion of trust
and investment services through WAMC. Management anticipates continued increases
in this expense category as the Company continues to expand its customer base
and market additional products and services.
Other non-interest expenses for the year ended December 31, 1998 totaled $7.3
million and increased $1.8 million, or 33.7%, over the prior year. This category
includes the amortization of organizational costs and other intangible assets,
loan expenses, correspondent bank service charges, insurance, postage,
stationery and supplies and other sundry expenses. Included in the increase was
a $600,000 operations loss at one subsidiary bank. The operational controls and
systems of this bank and all other Banks have been reviewed and additional
controls and procedures have been put into place, where considered necessary.
Management is aggressively pursuing the recovery of this loss, however, there
can be no assurances that any of this loss will be recovered. The remaining
increase in this category of expenses was generally caused by the Company's
expansion activities, as discussed earlier, including increased costs from the
origination and servicing of a larger base of deposit and loan accounts.
Total non-interest expense as a percent of total average assets was 3.04% in
1998, an improvement from 3.18% in 1997. Controlling overhead costs 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.
Income taxes. The Company recorded income tax benefits of $1.5 million and $3.8
million for the years ended December 31, 1998 and 1997, respectively. Prior to
the September 1, 1996 merger transaction that formed Wintrust, 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, during 1996, certain valuation allowances were
established against deferred tax assets with the combined result being that a
minimal amount of Federal tax expense or benefit was recorded. As the separate
entities become profitable, the recognition of previously unvalued tax loss
benefits become available, subject to certain limitations, to offset tax expense
generated from profitable operations. The income tax benefit recorded in 1998
and 1997 reflected management's determination that certain of the subsidiaries'
earnings history and projected future earnings were sufficient to make a
judgment that the realization of a portion of the net deferred tax assets not
previously valued was more likely than not to occur. Full recognition of the net
operating losses, for financial reporting purposes, was completed in 1998 and,
as such, the Company will be fully-taxable for Federal and state income tax
purposes in 1999. Please refer to Note 12 of the Consolidated Financial
Statements for further discussion and analysis of the Company's tax position.
CONSOLIDATED RESULTS OF OPERATIONS
Comparison of Results of Operations for the Years Ended December 31, 1997 and
December 31, 1996
Earnings Summary. 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 diluted earnings
per share 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 whereas 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 non-interest income of approximately
$2.6 million as the Company discontinued the sale of
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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 non-interest expenses, excluding the merger
related costs, to support the 49.2% increase in the asset size of the Company.
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 allowance for possible
loan losses for the $1.9 million of net loan charge-offs during 1997.
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 1996.
The Company recorded no gains on the sale of premium finance receivables 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 receivables
occurred because all receivables 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 receivables, 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 receivables 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 $248,000 for the year ended December 31, 1997, primarily due to a
decrease in the amount of average managed insurance premium finance receivables
in the 1997 period. During the fourth quarter of 1996, subsequent to the merger
of FIFC and the Banks, the majority of insurance premium finance receivables
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 receivables for
others; however, the Company continues to service a 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 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.
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.
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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.
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.
Net 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 1997 and the inclusion of
occupancy costs for Barrington Bank for a full year.
Equipment expense totaled $1.7 million for the year ended December 31, 1997, an
increase of $400,000, or 30.5%, as compared to the same period in 1996. This
increase was primarily due to higher levels of depreciation expense related to
the increased number of facilities and general growth of the Company.
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.
Professional fees totaled $1.3 million for the year ended December 31, 1997 as
compared to $906,000 in the prior year period, an increase of $437,000, or
48.2%. This increase was mainly due to a higher level of non-performing loans in
1997 and general growth of the Company.
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.
Non-recurring 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 $1.1 million, or 25.7%, to $5.5 million
for the year ended December 31, 1997, from $4.3 million for the year ended
December 31, 1996, primarily due to the higher volume of accounts outstanding at
the Banks. Despite the increases in the various non-interest expense categories
during 1997, the Company was successful in reducing its ratio of total
non-interest expenses to total average assets to 3.18% in 1997, compared to
3.89% in 1996, excluding the non-recurring merger-related expenses.
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
some Federal tax benefit was recorded.
OPERATING SEGMENT RESULTS
As described in Note 21 to the Consolidated Financial Statements, the Company's
operations consist of four primary segments: banking, premium finance, indirect
auto, and trust. The Company's profitability is primarily dependent on the net
interest income, provision for possible loan losses, non-interest income and
operating expenses of its banking segment. The net interest income of the
banking segment includes income and related interest costs from portfolio loans
that were purchased from the premium finance and indirect auto segments. For
purposes of internal segment profitability analysis, management reviews the
results of its premium finance and indirect auto segments as if all loans
originated and sold to the banking segment were retained within that segment's
operations.
The banking segment's net interest income for the year ended December 31, 1998
totaled $34.2 million as compared to $25.5 million for the same period in 1997,
an increase of $8.7 million, or 34.1%. The increase in net interest income for
1997 when compared to the total of $14.6 million in 1996 was $10.9 million, or
74.8%. These increases were the direct result of the growth in earning
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assets, as discussed in the Consolidated Results of Operations section. The
banking segment's non-interest income totaled $7.7 million in 1998, an increase
of $4.0 million, or 105.6%, over the total of $3.7 million in 1997, which
increased $1.3 million, or 56.0%, as compared to the total of $2.4 million in
1996. These increases were primarily the result of higher levels of fees from
the sale of residential mortgage loans and general growth of the Company, as
more fully explained in the Consolidated Results of Operations section of this
discussion. The banking segment's net after-tax profit totaled $5.1 million for
the year ended December 31, 1998, an increase of $1.0 million, or 24.8%, as
compared to the 1997 total of $4.1 million. The total segment profit in 1997
increased $5.0 million over the $917,000 segment loss that was recorded in 1996.
These after-tax segment profit increases were mainly the result of the continued
maturation and related profitability improvements of the more established de
novo bank subsidiaries.
Net interest income for the premium finance segment totaled $9.7 million for the
year ended December 31, 1998 and increased $2.4 million, or 32.0%, over the $7.4
million in 1997 due to higher levels of premium finance receivables as a result
of increased market penetration from new product offerings and targeted
marketing programs. For the year ended December 31, 1996, the premium finance
segment had only $554,000 of net interest income, as prior to September 30,
1996, all loan originations were sold into the secondary market through a
securitization facility, which resulted in non-interest income that totaled $4.4
million for the year. Net after-tax profit of the premium finance segment
totaled $2.0 million for the year ended December 31, 1998, as compared to
$373,000 in 1997 and a $332,000 segment loss in 1996. The improvement in
profitability during 1998 was due mainly to the combination of higher loan
volumes and the implementation of additional collection procedures and upgraded
systems.
Net interest income for the indirect auto segment totaled $5.6 million in 1998,
a $2.0 million, or 55.0%, increase over 1997 as a result of a 49.6% increase in
average outstanding loans. Total net interest income of $3.6 million in 1997
increased $1.3 million, or 58.4%, over the 1996 total of $2.3 million, due to
higher average outstanding loans. The indirect auto segment after-tax profit
totaled $1.8 million for the year ended December 31, 1998, an increase of
$625,000, or 51.0%, over the 1997 total of $1.2 million. In 1997, after-tax
segment profit increased $463,000, or 60.8%, over the 1996 total of $762,000.
These increases were due to growth in the Chicago area automobile dealer
network, which resulted in a higher level of average outstanding loans.
As mentioned earlier, the trust segment relates to the operations of WAMC, a
trust and investment subsidiary that began operations on September 30, 1998.
Trust segment results prior to WAMC relate to the operations of the trust
department of Lake Forest Bank and, accordingly, certain expenses of the bank
were allocated as indirect costs to the trust segment. In addition to trust and
investment management fees that are recorded as non-interest income, and in
connection with internal profitability analysis, the trust segment includes net
interest income related to certain trust account balances that are maintained
with the Lake Forest Bank. This net interest income totaled $359,000 for 1998 as
compared to $182,000 in 1997 and $134,000 in 1996. Trust fee income totaled
$788,000 in 1998 as compared to $626,000 in 1997, an increase of $162,000, or
25.9%, due mainly to new business development efforts. The increase in 1997 when
compared to the 1996 total of $522,000 was $104,000, or 19.9%. The trust segment
after-tax loss totaled $189,000 for the year ended December 31, 1998 as compared
to a profit of $237,000 and $175,000 for the same periods in 1997 and 1996,
respectively. The loss in 1998 was due to the start-up of WAMC and the related
salary and employee benefit costs of hiring experienced trust professionals. See
the Overview and Strategy section of this discussion for further explanation of
the trust segment expansion through WAMC.
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 continuously monitors not only the
organization's current net interest margin, but also the historical trends of
these margins. In addition, management attempts to identify potential
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<PAGE>
adverse swings in net interest income in future years, as a result of interest
rate movements, by performing computerized simulation analysis of potential
interest rate environments. If a potential adverse swing in net interest margin
and/or net income are identified, management then would take appropriate actions
with its asset-liability structure to counter these potential adverse
situations. Please refer to earlier sections of this discussion and analysis for
further discussion of the net interest margin.
As 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.
The Company's exposure to interest rate risk is reviewed on a regular basis by
management and the boards of directors of the individual subsidiaries and the
Company. The objective is to measure the effect on net income and to adjust
balance sheet and off-balance sheet instruments to minimize the inherent risk
while at the same time maximize income. Tools used by management include a
standard gap report and a rate simulation model whereby changes in net income
are measured in the event of various changes in interest rate indices. An
institution with more assets than liabilities repricing over a given time frame
is considered asset sensitive and will generally benefit from rising rates and
conversely, a higher level of repricing liabilities versus assets would be
beneficial in a declining rate environment. The following table illustrates the
Company's estimated interest rate sensitivity and periodic and cumulative gap
positions as of December 31, 1998 (dollars in thousands).
<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) $ 677,217 254,522 225,627 190,682 1,348,048
Rate sensitive liabilities (RSL) 749,271 247,634 89,251 261,892 1,348,048
Cumulative gap (GAP = RSA - RSL) (72,054) (65,166) 71,210
Cumulative RSA/RSL 0.90 0.93 1.07
Cumulative RSA/Total assets 0.50 0.19 0.17
Cumulative RSL/Total assets 0.56 0.18 0.07
GAP/Total assets (5)% (5)% 5%
GAP/Cumulative RSA (11)% (7)% 6%
============================================================================================================================
</TABLE>
While the gap position illustrated above is a useful tool that management can
access for general positioning of the Company's and its subsidiaries' balance
sheets, it is only as of a point in time and does not reflect the impact of a
$100 million notional principal amount interest rate cap that was purchased in
August 1998 to mitigate the effect of rising rates on certain floating rate
deposit products and fixed rate loan products. This interest rate cap agreement
reprices on a monthly basis and expires in December 1999.
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 interest rates over a
two-year time horizon. Management measures its exposure to changes in interest
rates using many different interest rate scenarios. One interest rate scenario
utilized is to measure the percentage change in net income assuming an
instantaneous permanent parallel shift in the yield curve of 200 basis points,
both upward and downward. This analysis includes the impact of the interest rate
cap agreement mentioned above. 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, 1998, 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 2.7% (2.2)%
======================================================================
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table reflects various measures of the Company's capital at
December 31, 1998 and 1997:
==========================================================
DECEMBER 31,
-------------------
1998 1997
-------------------
Average equity-to-average asset ratio 6.1% 7.2%
Leverage ratio 7.5 6.6
Tier 1 risk-based capital ratio 8.5 8.7
Total risk-based capital ratio 9.7 9.4
Dividend payout ratio 0.0 0.0
==========================================================
The Company's consolidated leverage ratio (Tier 1 capital/total fourth quarter
average assets less intangibles) was 7.5% at December 31, 1998, which is in
excess of the "well capitalized" regulatory level. Consolidated Tier 1 and total
risk-based capital ratios were 8.5% and 9.7%, 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, borrowings on its revolving credit line with an unaffiliated
bank, proceeds from the October 1998 Trust Preferred Securities offering, as
previously discussed, or additional equity offerings. Refer to Notes 9 and 10 of
the Consolidated Financial Statements for further information on the Company's
revolving credit line and Trust Preferred Securities offering, respectively.
Banking laws impose restrictions upon the amount of dividends which can be paid
to the holding company by the Banks. Based on these laws, the Banks could,
subject to minimum capital requirements, declare dividends to the Company
without obtaining regulatory approval in an amount not exceeding (a) undivided
profits, and (b) the amount of net income reduced by dividends paid for the
current and prior two years. In addition, the payment of dividends may be
restricted under certain financial covenants in the Company's revolving credit
line agreement. At January 1, 1999, subject to minimum capital requirements at
the Banks, approximately $3.9 million was available as dividends from the Banks
without prior regulatory approval. During 1998, Lake Forest Bank paid dividends
of $8.25 million to the holding company.
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 from the revolving
credit line and the Trust Preferred Securities offering. In addition, each of
the Banks, except Barrington Bank and Crystal Lake Bank, are eligible to 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, 1998, approximately
66% of the Company's total assets were funded by core deposits with balances
less than $100,000, as compared to approximately 62% at the end of 1997. The
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.
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, 1998,
net liquid assets totaled approximately $116.5 million, compared to
approximately $160.9 million at December 31, 1997. The decline in net liquid
assets was mainly due to the unusually high balance of federal funds sold as of
the end of 1997, as discussed earlier.
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, 1998 and
1997, the Banks had approximately $104.9 million and $78.0 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.
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.
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<PAGE>
CREDIT RISK AND ASSET QUALITY
Management believes that the loan portfolio is well diversified and well
secured, without undue concentration in any specific risk area. Control of loan
quality is continually monitored by management and is reviewed by the Banks'
Board of Directors and their Credit Committees on a monthly basis. Independent
external 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. 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 and
other potential problem loans, and an evaluation of economic conditions in the
market area.
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>
============================================================================================================================
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,116 3,636 2,763 1,702 1,357
Total loans charged-off:
Core banking loans (1,636) (448) (190) (43) (20)
Premium finance (455) (1,126) (207) (247) (40)
Indirect auto (646) (300) (123) - -
Discontinued leasing operations - (241) (583) (109) (205)
-------------------------------------------------------------------------
Total loans charged-off (2,737) (2,115) (1,103) (399) (265)
Total recoveries 358 191 41 30 3
-------------------------------------------------------------------------
Net loans charged-off (2,379) (1,924) (1,062) (369) (262)
Provision for possible loan losses 4,297 3,404 1,935 1,430 607
-------------------------------------------------------------------------
Balance at end of year $ 7,034 5,116 3,636 2,763 1,702
-------------------------------------------------------------------------
Average total loans $ 848,344 620,801 347,076 183,614 148,209
-------------------------------------------------------------------------
Allowance as percent of year-end total loans 0.71% 0.72% 0.74% 1.07% 0.88%
Net loans charged-off to average total loans 0.28% 0.31% 0.31% 0.20% 0.18%
Net loans charged-off to the provision for
possible loan losses 55.36% 56.52% 54.88% 25.80% 43.16%
============================================================================================================================
</TABLE>
Net charge-offs of core banking loans for the year ended December 31, 1998
totaled $1.4 million, of which approximately $815,000 was attributable to loans
originated at one banking office and reflect what management believes to be an
isolated problem that has been resolved through the dismissal of the lending
officer involved and a subsequent thorough review of all credits originated
under his authority. Company management continues to be actively involved with
each of the credits at this office and presently believes that all material
losses have been recorded. Core loan net charge-offs as a percentage of average
core loans were 0.29% in 1998 as compared to 0.15% in 1997, the increase due to
the issue noted above.
Premium finance receivable net charge-offs for the year ended December 31, 1998
totaled $328,000 as compared to $1.0 million recorded in 1997. Net charge-offs
were 0.18% of average premium finance receivables in 1998 versus 0.88% in 1997.
This improvement was the result of an enhanced management team and the
implementation of additional collection procedures and system upgrades.
Indirect auto loan net charge-offs totaled $604,000 for the year ended December
31, 1998 as compared to $274,000 in 1997. Net charge-offs as a percentage of
average indirect auto loans were 0.36% in 1998 in comparison to 0.24% in 1997.
Although net-charge-offs have increased over the prior year, the level of net
charge-offs continues to be lower than the normal industry experience levels for
these type of loans.
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<PAGE>
The allowance for possible loan losses as a percentage of total net loans at
December 31, 1998 and 1997 was 0.71% and 0.72%, respectively. Management
believes that the allowance for possible loan losses is adequate to provide for
any potential losses in the portfolio.
Past Due Loans and Non-performing Assets. The following table classifies the
Company's non-performing loans as of December 31 for each of last five years
(dollars in thousands):
<TABLE>
<CAPTION>
============================================================================================================================
1998 1997 1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Past Due greater than 90 days and still accruing:
Core banking loans $ 800 868 75 121 13
Indirect auto loans 274 11 20 - -
Premium finance receivables 1,214 887 - 21 3
------------------------------------------------------------------------
Total 2,288 1,766 95 142 16
------------------------------------------------------------------------
Non-accrual loans:
Core banking loans 1,487 782 448 684 -
Indirect auto loans 195 29 - - -
Premium finance receivables 1,455 1,629 1,238 1,094 4
------------------------------------------------------------------------
Total non-accrual loans 3,137 2,440 1,686 1,778 4
------------------------------------------------------------------------
Total non-performing loans:
Core banking loans 2,287 1,650 523 805 13
Indirect auto loans 469 40 20 - -
Premium finance receivables 2,669 2,516 1,238 1,115 7
------------------------------------------------------------------------
Total non-performing loans 5,425 4,206 1,781 1,920 20
------------------------------------------------------------------------
Other real estate owned 587 - - - -
------------------------------------------------------------------------
Total non-performing assets $ 6,012 4,206 1,781 1,920 20
------------------------------------------------------------------------
Total non-performing loans by
category as a percent of
its own respective category:
Core banking loans 0.38% 0.37% 0.15% 0.39% 0.01%
Indirect auto loans 0.22% 0.03% 0.02% 0.00% 0.00%
Premium finance receivables 1.50% 1.96% 2.15% 7.22% 0.01%
Total non-performing loans 0.55% 0.59% 0.36% 0.74% 0.01%
Total non-performing assets to total assets 0.45% 0.40% 0.25% 0.41% 0.01%
Non-accrual loans to total loans 0.32% 0.34% 0.34% 0.69% 0.00%
Allowance for possible loan losses as a
percentage of non-performing loans 129.66% 121.64% 204.15% 143.91% N/M
============================================================================================================================
</TABLE>
- 56 -
<PAGE>
Non-performing Core Banking Loans and Other Real Estate Owned Total
non-performing loans for the Company's core banking business (all loans other
than indirect auto loans and premium finance receivables) were $2.3 million as
of December 31, 1998, an increase from the $1.7 million as of December 31, 1997.
As a percentage of total core banking loans, however, non-performing core
banking loans remained relatively constant at 0.38% as of the end of 1998 versus
0.37% a year earlier. Non-performing core banking loans consist primarily of a
small number of commercial and real estate loans, which management believes are
well secured and in the process of collection. The small number of such
non-performing loans enables management the opportunity to monitor closely the
status of these credits and work with the borrowers to resolve these problems
effectively. The other real estate owned balance of $587,000 consists of one
local residential real estate property that is currently listed for sale.
Management believes the Company is well secured and does not expect to incur a
loss on the property.
NON-PERFORMING PREMIUM FINANCE RECEIVABLES
Another significant category of non-performing loans is premium finance
receivables. Due to the nature of the collateral, it customarily takes 60-150
days to convert the collateral into cash collections. Accordingly, the level of
non-performing premium finance receivables is not necessarily indicative of the
loss inherent in the portfolio. In 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 FIFC's standard form of financing contract, FIFC has
the right 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. In the
event an insurer becomes insolvent and unable to pay claims to an insured or
refund unearned premiums upon cancellation of a policy to a finance company,
each state provides a state guaranty fund that will pay such a refund, less a
per claim deductible in certain states. FIFC diversifies its financing
activities among a wide range of brokers and insurers. 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 refund to the Company occurs. Management
continues to accrue interest until maturity as the unearned premium by the
insurance carrier is ordinarily sufficient to pay-off the outstanding principal
and contractual interest due.
Total non-performing premium finance receivables as of December 31, 1998 were
approximately $2.7 million or 1.50% of total outstanding net premium finance
receivables. This compares favorably with 1.96% as of December 31, 1997. The
decline since the end of 1997 was primarily the result of management's
implementation of additional collection procedures and upgraded systems. This
ratio fluctuates throughout the year due to the nature and timing of canceled
account collections from insurance carriers.
The amount of non-performing premium finance receivables at and prior to
December 31, 1996 were significantly less because, prior to October 1996, the
Company had sold its originated receivables to a securitization facility. In
October 1996, the Company began retaining all originated receivables, and the
Company terminated the securitization facility during the third quarter of 1997,
as discussed earlier.
NON-PERFORMING INDIRECT AUTO LOANS.
Total non-performing indirect automobile loans were $469,000 at December 31,
1998 as compared to $40,000 as of the end of 1997. Although the total has
increased, these loans as a percent of total net indirect automobile loans were
only 0.22% at December 31, 1998 as compared to 0.03% at December 31, 1997, well
below standard industry ratios for this type of loan category. These individual
loans comprise smaller dollar amounts and collection efforts are active.
Potential Problem Loans. In addition to those loans disclosed under "Past Due
Loans and Non-performing Assets," there are certain loans in the portfolio which
management has identified, through its problem loan identification system which
exhibit a higher than normal credit risk. However, these loans are still
considered performing and, accordingly, are not included in non-performing
loans. Examples of these potential problem loans include certain loans that are
in a past-due status, loans with borrowers that have recent adverse operating
cash flow or balance sheet trends, or loans with general
- 57 -
<PAGE>
risk characteristics that the loan officer feels might jeopardize the future
timely collection of principal and interest payments. Management's review of the
total loan portfolio to identify loans where there is concern that the borrower
will not be able to continue to satisfy present loan repayment terms includes
factors such as review of individual loans, recent loss experience and current
economic conditions. The principal amount of potential problem loans as of
December 31, 1998 and 1997 were approximately $5.1 million and $7.2 million,
respectively.
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, 1998 or December 31, 1997, except for loans included in the
indirect auto and premium finance operating segments.
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 ISSUE
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. Like most financial service providers, the
Company may be significantly affected by the Year 2000 problem due to the nature
of financial information. Furthermore, if computer systems are not adequately
changed to properly identify the Year 2000, many computer applications could
fail or generate erroneous reports.
During 1997, management began the process of working with its two outside data
processors and other software vendors to ensure that the Company is prepared for
the Year 2000. Management has been in frequent contact with the outside data
providers and has developed the Company's testing strategy and Year 2000 plan
with the knowledge and understanding of each of the data providers' plans and
timetables. Preliminary testing by the Company of its outside data providers'
Year 2000 compliance efforts has already taken place and final testwork is
anticipated to be completed in the second quarter of 1999. Additionally,
critical in-house hardware and related systems are being reviewed and upgraded,
if necessary, to be Year 2000 compliant. Testing of these critical hardware
systems, such as workstations, file servers, the wide area network and all local
area networks, is expected to be completed no later than June 30, 1999. The
completion of upgraded software installations, where previous software versions
were not Year 2000 compliant, is anticipated to be completed prior to June 30,
1999. The Company has also completed customer assessments to determine whether
any significant potential exposure exists.
The Company has not yet completed a contingency plan, however, a plan is in
development with applicable testing anticipated to be completed by June 30,
1999. The Company is regulated by the Federal Reserve Bank, the Office of the
Comptroller of the Currency and the State of Illinois bank regulatory agency,
all of which are active in monitoring preparedness planning for systems-related
Year 2000 issues. Total estimated Year 2000 compliance costs are not expected to
exceed $200,000 and, accordingly, are not expected to be material to the
Company's financial position or results of operations in either 1998 or 1999.
This cost does not include internal salary and employee benefit costs for
persons that have responsibilities, or are involved, with the Year 2000 project.
The above estimated dates and costs are based on management's best estimates and
include assumptions of future events, including availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that current estimates will be achieved, and actual results
could differ significantly from these plans. In the event the Company does
experience Year 2000 system failures or malfunctions and despite the testing
preparedness efforts, or if the outside data processors prove not to be Year
2000 compliant, the Company's operations would be disrupted until the systems
are restored, and the Company's ability to conduct its business may be adversely
impacted as it relates to processing customer transactions related to its
banking operations. Management anticipates, however, that the contingency plans
being developed would enable the Company to continue to conduct transactions on
a manual basis, if necessary, for a limited period of time until the Year 2000
problems are rectified. In addition, there can be no
- 58 -
<PAGE>
guarantee that the systems of the Company's outside data providers, of which the
Company relies upon, will be timely converted, or that failure to convert would
have a significant adverse impact to the Company.
EFFECTS OF NEW ACCOUNTING PRINCIPLES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes, for the first
time, comprehensive accounting and reporting standards for derivative
instruments and hedging activities. Previous accounting standards and
methodologies did not adequately address the many derivative and hedging
transactions in the current financial marketplace and, as such, the Securities
and Exchange Commission, and other organizations, urged the FASB to deal
expeditiously with the related accounting and reporting problems. The accounting
and reporting principles prescribed by this standard are complex and will
significantly change the way entities account for these activities. This new
standard requires that all derivative instruments be recorded in the statement
of condition at fair value. The recording of the gain or loss due to changes in
fair value could either be reported in earnings or as other comprehensive income
in the statements of shareholders' equity, depending on the type of instrument
and whether or not it is considered a hedge. This standard is effective for the
Company as of January 1, 2000. The Company has not yet determined the impact
this new statement may have on its future financial condition or its results of
operations.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company intends such forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of invoking these safe harbor provisions. Such
forward-looking statements may be deemed to include, among other things,
statements relating to anticipated improvements in financial performance and
management's long-term performance goals, as well as statements relating to the
anticipated effects on financial results of condition from expected development
or events, the Company's business and growth strategies, including anticipated
internal growth, plans to form additional de novo banks and to open new branch
offices, and to pursue additional potential development or acquisition of banks
or specialty finance businesses. Actual results could differ materially from
those addressed in the forward-looking statements as a result of numerous
factors, including the following:
o The level of reported net income, return on average assets and return on
average equity for the Company will in the near term continue to be
impacted by start-up costs associated with de novo bank formations, branch
openings, and expanded trust operations. De novo banks may typically
require 13 to 24 months of operations before becoming profitable, due to
the impact of organizational and overhead expenses, the start-up phase of
generating deposits and the time lag typically involved in redeploying
deposits into attractively priced loans and other higher yielding earning
assets. Similarly, the expansion of trust services through the Company's
new trust subsidiary, WAMC, is expected to be in a start-up phase for
approximately the next few years, before becoming profitable.
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.
- 59 -
<PAGE>
o Although management believes the allowance for possible loan losses is
adequate to absorb losses that may develop in the existing portfolio of
loans and leases, there can be no assurance that the allowance will prove
sufficient to cover actual future loan or lease losses.
o If market interest rates should move contrary to the Company's gap position
on interest earning assets and interest bearing liabilities, the "gap" will
work against the Company and its net interest income may be negatively
affected.
o The financial services business is highly competitive which may affect the
pricing of the Company's loan and deposit products as well as its services.
o The Company's ability to adapt successfully to technological changes to
compete effectively in the marketplace.
o The extent of the Company's success, and that of its outside data
processing providers, software vendors, and customers, in implementing and
testing Year 2000 compliant hardware, software and systems, and the
effectiveness of appropriate contingency plans being developed.
o Changes in the economic environment may influence the growth rate of loans
and deposits, the quality of the loan portfolio and loan and deposit
pricing.
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<PAGE>
DIRECTORS & OFFICERS
WINTRUST FINANCIAL CORPORATION
- ------------------------------
DIRECTORS
Joseph Alaimo
Peter Crist
Bruce K. Crowther
Maurice F. Dunne, Jr.
William C. Graft
Kathleen R. Horne
John S. Lillard
James E. Mahoney
James B. McCarthy
Marguerite Savard McKenna
Albin F. Moschner
Thomas J. Neis
Hollis W. Rademacher
J. Christopher Reyes
Peter Rusin
John N. Schaper
John J. Schornack
Ingrid S. Stafford
Jane R. Stein
Katharine V. Sylvester
Lemuel H. Tate
Edward J. Wehmer
Larry V. Wright
OFFICERS
John S. Lillard
Chairman
Edward J. Wehmer
President & Chief Executive Officer
David A. Dykstra
Executive Vice President &
Chief Financial Officer
Lloyd M. Bowden
Executive Vice President/
Technology
Randolph M. Hibben
Executive Vice President/
Investments
Robert F. Key
Executive Vice President/Marketing
Todd A. Gustafson
Vice President/Finance
Richard J. Pasminski
Vice President/Controller
Jay P. Ross
Assistant Vice President/
Database Marketing
LAKE FOREST BANK & TRUST COMPANY
- --------------------------------
DIRECTORS
Craig E. Arnesen
Maurice F. Dunne, Jr.
Maxine P. Farrell
Francis Farwell
Eugene. Hotchkiss
Moris T. Hoversten
John S. Lillard
John J. Meierhoff
Albin F. Moschner
Genevieve Plamondon
Hollis W. Rademacher
J. Christopher Reyes
Babette Rosenthal
Ellen Stirling
Edward J. Wehmer
EXECUTIVE OFFICERS
Edward J. Wehmer
Chairman
Craig E. Arnesen
President and CEO
Randolph M. Hibben
Executive Vice President/
Operations
John J. Meierhoff
Executive Vice President/Lending
LOANS
Frank W. Strainis
Senior Vice President
Rachele L. Wright
Senior Vice President/
Mortgage Loans
Kathryn Walker- Eich
Vice President/Commercial Loans
Mark R. Schubring
Vice President/Lending
Kurt K. Prinz
Vice President/Lending
Janice C. Nelson
Vice President/Loan Administration
Laura Cascarano
Loan Administration Officer
PERSONAL BANKING
Lynn Van Cleave
Vice President/Personal Banking
Twila D. Hungerford
Assistant Vice President/
Personal Banking
Susan G. Mineo
Personal Banking Officer
Piera Dallabattista
Personal Banking Officer
Kathleen E. Eichhorn
Assistant Cashier
FINANCE/OTHER
Mary Ann Gannon
Vice President/Operations
Richard J. Pasminski
Vice President/Controller
Elizabeth K. Pringle
Accounting/Operations Officer
Andrea Levitt
Administration Officer
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<PAGE>
HINSDALE BANK & TRUST COMPANY
- -----------------------------
DIRECTORS
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 OFFICERS
Dennis J. Jones
Chairman & CEO
Richard B. Murphy
President
David LaBrash
President - Clarendon Hills
J. Mark Berry
President - Western Springs
LOANS
Richard Stefanski
Senior Vice President/
Indirect 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
Cora Mae Corley
Loan Operations Officer
Pat Gray
Loan Collections Officer
Maria Chialdikis
Loan Processing Officer
PERSONAL BANKING/OPERATIONS
Anne O'Neill
Vice President & Cashier
Heidi Sulaski
Assistant Vice President/
Personal Banking
Natalie Brod
Personal Banking Officer
Margaret A. Madigan
Assistant Vice President/Controller
Michelle Paetsch
Operations Officer
Kim Fernandez
Operations Officer
Patricia Mayo
Operations Officer
NORTH SHORE COMMUNITY BANK & TRUST COMPANY
- ------------------------------------------
DIRECTORS
Brian C. Baker (non-voting)
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 (non-voting)
Lemuel H. Tate
Elizabeth C. Warren
Edward J. Wehmer
Stanley R. Weinberger
EXECUTIVE OFFICERS
Lemuel H. Tate
Chairman
John W. Close
President & CEO
Robert H. Meeder
Executive Vice President/Lending
LOANS
James L. Sefton
Vice President/Lending
Henry L. Apfelbach
Vice President/Mortgages
Susan J. Weisbond
Vice President/Lending/Manager - Glencoe
Gina Inglese
Vice President/Lending - Winnetka
Frank McCabe
Vice President/Lending - Glencoe
Romelia Brahim
Loan Officer
Patricia M. McNeilly
Mortgage Loan Officer
- 62 -
<PAGE>
NORTH SHORE COMMUNITY BANK & TRUST COMPANY
- ------------------------------------------
Mark A. Stec
Mortgage Loan Officer
Ann T. Tyler
Loan Administration Officer
PERSONAL BANKING/OPERATIONS
Donald F. Krueger
Senior Vice President/Cashier
James P. Waters
Assistant Vice President/Personal Banking
Jennifer A. Waters
Assistant Cashier
John A. Barnett
Accounting Officer
Leslie A. Neimark
Assistant Vice President/Personal Banking - Glencoe
Eric Jordan
Personal Banking Officer - Glencoe
Catherine W. Biggam
Personal Banking Officer
Debra Miller
Manager - Winnetka
LIBERTYVILLE BANK & TRUST COMPANY
- ---------------------------------
DIRECTORS
J. Albert Carstens
David A. Dykstra
Robert O. Dunn
Bert Getz, Jr.
Donald Gossett
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 OFFICERS
J. Albert Carstens
President & CEO
Edward R. Werdell
Executive Vice President
COMMERCIAL BANKING
Brian B. Mikaelian
Senior Vice President/Lending
Betty Berg
Vice President/Commercial
Banking Services
RESIDENTIAL REAL ESTATE
Michael Spies
Vice President/Residential Real Estate
David Luczak
Second Vice President/Residential Real Estate
Rose Marie Garrison
Mortgage Loan Officer
PERSONAL BANKING
Sharon Worlin
Vice President
Ursula Schuebel
Second Vice President
Julie Rolfsen
Personal Banking Officer
Deborah Motzer
Personal Banking Officer
Bobbie Callese
Personal Banking Officer
OPERATIONS/FINANCE
Jolanta Slusarski
Vice President/Operations
Patrice Lima
Vice President/Cashier & Controller
- 63 -
<PAGE>
BARRINGTON BANK & TRUST COMPANY
- -------------------------------
DIRECTORS
James H. Bishop
Raynette Boshell
Edwin C. Bruning
Dr. Joel Cristol
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 OFFICERS
James H. Bishop
President & CEO
W. Bradley Stetson
Executive Vice President/Lending
LOANS
Barbara E. Ringquist
Mortgage Loan Officer
Christopher P. Marrs
Commercial 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
Gloria B. Andersen
Personal Banking Officer
CRYSTAL LAKE BANK & TRUST COMPANY
- ---------------------------------
DIRECTORS
Charles D. Collier
Henry L. Cowlin
Linda Decker
John W. Fuhler
Diana Kenney
Dorothy Mueller
Thomas Neis
Marshall Pedersen
Hollis W. Rademacher
Candy Reedy
Nancy Riley
Robert Robinson
Robert Staley
Edward J. Wehmer
EXECUTIVE OFFICERS
Charles D. Collier
President & CEO
Pam Umberger
Senior Vice President/Operations
Kurt Parker
Senior Vice President/Loans
MORTGAGE LOANS
Jan Sowers
Vice President/Secondary Market
Mark J. Peteler
Vice President/Construction Loans
PERSONAL BANKING/OPERATIONS
Pamila L. Bialas
Assistant Vice President
Peter Fidler
Controller
WINTRUST ASSET MANAGEMENT COMPANY
- ---------------------------------
DIRECTORS
Joseph Alaimo
Robert Acri
Bert A. Getz, Jr.
Robert Harnach
Randolph M. Hibben
John S. Lillard
Richard P. Spicuzza
Robert Staley
Edward J. Wehmer
Stanley Weinberger
OFFICERS
Edward J. Wehmer
Chairman
Joseph Alaimo
President & CEO
Robert C. Acri
Executive Vice President
Jeanette E. Amstutz
Vice President/Lake Forest
Susan Gavinski
Assistant Vice President/
Trust Operations
Anita E. Morris
Vice President/Lake Forest
Laura H. Olson
Vice President/Lake Forest
Sandra L. Shinsky
Vice President/Lake Forest
T. Tolbert Chisum
Managing Director of Marketing
Mary Anne Martin
Vice President/North Shore
Laurie Danly
Vice President/Hinsdale
Edward Edens
Vice President/Hinsdale
Gerard Leenheers
Vice President/Hinsdale
Barbara Miller
Vice President/Barrington
Michael Peifer
Vice President/Barrington
- 64 -
<PAGE>
FIRST INSURANCE FUNDING CORP.
- -----------------------------
DIRECTORS
Frank J. Burke
David A. Dykstra
Hollis W. Rademacher
Edward J. Wehmer
EXECUTIVE OFFICERS
Frank J. Burke
President & CEO
Joseph G. Shockey
Executive Vice President
Robert G. Lindeman
Senior Vice President/Information Technology
FINANCE/MARKETING/OPERATIONS
Michelle H. Perry
Vice President/Controller
Matthew E. Doubleday
Vice President/Marketing
Luther J. Grafe
Vice President/Loan Operations
Mark C. Lucas
Vice President/Asset Management
G. David Wiggins
Vice President/Loan Origination
- 65 -
<PAGE>
**** Graphic Advertisement OMITTED ****
- 66 -
<PAGE>
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 Forest Place Facility
1100 Pembridge Drive
Lake Forest, IL 60045
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
1000 Hillgrove Avenue
Western Springs, IL 60558
(708) 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 Locations
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
South Libertyville Location
1167 South Milwaukee Avenue
Libertyville, IL 60048
BARRINGTON BANK & TRUST COMPANY
Main Bank
201 S. Hough Street
Barrington, IL 60010
(847) 842-4500
CRYSTAL LAKE BANK & TRUST COMPANY
Main Bank
70 N. Williams Street
Crystal Lake, IL 60014
(815) 479-5200
Drive-thru
27 N. Main Street
Crystal Lake, IL 60014
WINTRUST ASSET MANAGEMENT COMPANY
727 North Bank Lane
Lake Forest, IL 60045
(847) 234-2882
25 East First Street
Hinsdale, IL 60521
(630) 323-4404
1145 Wilmette Avenue
Wilmette, IL 60091
(847) 853-1145
794 Oak Street
Winnetka, IL 60093
(847) 441-2265
507 North Milwaukee Avenue
Libertyville, IL 60048
(847) 367-6800
201 S. Hough Street
Barrington, IL 60010
(847) 842-4500
FIRST INSURANCE FUNDING CORPORATION
520 Lake Cook Road, Suite 300
Deerfield, IL 60015
(847) 374-3000
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<PAGE>
CORPORATE INFORMATION
================================================================================
PUBLIC LISTING AND MARKET SYMBOL The Company's Common Stock is traded on The
Nasdaq Stock Market(R) under the symbol WTFC. The stock abbreviation appears as
"WintrstFnl" in the Wall Street Journal.
WEBSITE LOCATION
The Company's maintains an internet website at the following location:
www.wintrust.com
ANNUAL MEETING OF SHAREHOLDERS
May 27, 1999
Drake Oak Brook Hotel
2301 S. York Road
Oak Brook, Illinois
2:30 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
209 West Jackson Boulevard
Suite 903
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.
U.S. Bancorp Piper Jaffray
- 68 -
<PAGE>
