-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KyT+lJnkhMxsH2dgty/qxtR5eNvigzBU0bLDsDIB8kBD2VVfqfh89FiZU2Yzhs2K Fb1djwd2WpHjMFGZD5pLcg== 0000948572-00-000021.txt : 20000331 0000948572-00-000021.hdr.sgml : 20000331 ACCESSION NUMBER: 0000948572-00-000021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WINTRUST FINANCIAL CORP CENTRAL INDEX KEY: 0001015328 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363873352 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21923 FILM NUMBER: 587834 BUSINESS ADDRESS: STREET 1: 727 N BANK LANE CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 8476154096 MAIL ADDRESS: STREET 1: 727 N BANK LN CITY: LAKE FOREST STATE: IL ZIP: 60045 10-K 1 WINTRUST FINANCIAL CORPORATION 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 WINTRUST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) 0-21923 Commission File Number ILLINOIS 36-3873352 (State of incorporation or organization) (I.R.S. Employer Identification No.) 727 NORTH BANK LANE LAKE FOREST, ILLINOIS 60045 (Address of principal executive offices) (847) 615-4096 (Registrant's telephone number, including area code) COMMON STOCK, NO PAR VALUE Securities registered pursuant to Section 12(g) of the Act Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $110,190,000 as of March 23, 2000. As of March 23, 2000, the registrant had outstanding 8,752,643 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1999, which is included as Exhibit 13.1 to this Form 10-K, are incorporated by reference into Parts I and II hereof and portions of the Proxy Statement for the Company's Annual Meeting of Shareholders to be held on May 25, 2000 are incorporated by reference into Part III. TABLE OF CONTENTS PART I Page ---- ITEM 1. Business....................................................... 3 ITEM 2. Properties..................................................... 16 ITEM 3. Legal Proceedings.............................................. 18 ITEM 4. Submission of Matters to a Vote of Security Holders............ 18 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 18 ITEM 6. Selected Financial Data........................................ 19 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 20 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risks.... 20 ITEM 8. Financial Statements and Supplementary Data.................... 20 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 27 PART III ITEM 10. Directors and Executive Officers of the Registrant............. 27 ITEM 11. Executive Compensation......................................... 27 ITEM 12. Security Ownership of Certain Beneficial Owners and Management. 27 ITEM 13. Certain Relationships and Related Transactions................. 27 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 28 Signatures...................................................... 33 - 2 - PART I ITEM 1. BUSINESS Wintrust Financial Corporation, an Illinois corporation (the "Company"), is a bank holding company based in Lake Forest, Illinois, with total assets of approximately $1.7 billion at December 31, 1999. The Company is currently engaged in the business of providing community banking services, trust and investment services, commercial insurance premium financing, short-term accounts receivable financing, and certain administrative services, such as data processing of payrolls, billing and cash management services. The Company provides community-oriented, personal and commercial banking services to customers located predominantly in affluent suburbs of Chicago, Illinois through its six wholly-owned banking subsidiaries (collectively, "Banks"), all of which started as de novo (i.e., started new) institutions, including Lake Forest Bank and Trust Company ("Lake Forest Bank"), Hinsdale Bank and Trust Company ("Hinsdale Bank"), North Shore Community Bank and Trust Company ("North Shore Bank"), Libertyville Bank and Trust Company ("Libertyville Bank"), Barrington Bank and Trust Company, N.A. ("Barrington Bank") and Crystal Lake Bank & Trust Company, N.A. ("Crystal Lake Bank"). Through Hinsdale Bank, the Company operates its indirect auto segment, which is in the business of providing new and used automobile loans through a large network of auto dealerships within the Chicago metropolitan area. All indirect auto loans originated are currently being retained within each of the Banks' loan portfolios. On September 30, 1998, the Company began providing trust and investment services at each of its Banks through its wholly-owned subsidiary, Wintrust Asset Management Company, N.A. ("WAMC"). Previously, the Company provided trust services through the trust department of Lake Forest Bank. The Company provides financing for the payment of commercial insurance premiums ("premium finance receivables"), on a national basis, through First Insurance Funding Corporation ("FIFC"), a wholly-owned subsidiary of Crabtree Capital Corporation ("Crabtree") which is a wholly-owned subsidiary of Lake Forest Bank. On October 26, 1999, Hinsdale Bank acquired Tricom, Inc. of Milwaukee ("Tricom"), a provider of short-term accounts receivable financing ("Tricom finance receivables") and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States. As a mid-size financial services company, management expects to benefit from greater access to financial and managerial resources while maintaining its commitment to localized decision-making and to its community banking philosophy. Management also believes the Company is positioned to compete more effectively with other larger and more diversified banks, bank holding companies and other financial services companies as it continues its growth strategy through additional branch openings and de novo bank formations, expansion of trust and investment activities, pursuit of specialized earning asset niches and potential acquisitions of banks or specialty finance companies. - 3 - Additional information regarding the Company's business and strategies is included in the 1999 Annual Report to Shareholders, which is filed as Exhibit 13.1 to this Form 10-K. Such information is incorporated herein by reference and constitutes a part of this report. BANKING - ------- The Company provides banking and financial services to individuals, small businesses, local governmental units and institutional clients residing primarily in the Banks' local service areas. These services include traditional demand, NOW, money market, savings and time deposit accounts, as well as a number of unique deposit products targeted to specific market segments. The Banks offer home equity, home mortgage, consumer, real estate and commercial loans, safe deposit facilities, ATMs, and other innovative and traditional services specially tailored to meet the needs of customers in their market areas. The Hinsdale Bank also operates the indirect auto segment which provides high quality new and used auto loans through a large network of auto dealerships within the Chicago metropolitan area. All indirect auto loans are currently being purchased by the Banks and retained within their loan portfolios. Each of the Banks was founded as a de novo banking organization within the last nine years. The organizational efforts began in 1991, when a group of experienced bankers and local business people identified an unfilled niche in the Chicago metropolitan area retail banking market. As large banks acquired smaller ones and personal service was subjected to consolidation strategies, the opportunity increased in affluent suburbs for locally owned and operated, highly personal service-oriented banks. As a result, Lake Forest Bank was founded in December 1991 to service the Lake Forest and Lake Bluff communities. A Lake Bluff branch of this bank was opened in 1994. In 1993, Hinsdale Bank was opened to service the communities of Hinsdale and Burr Ridge. Hinsdale Bank established branch facilities in Clarendon Hills and Western Springs in 1996 and 1997, respectively. In 1994, North Shore Bank was started in order to service Wilmette and Kenilworth. North Shore Bank opened branch facilities in Glencoe during 1995 and 1998, in Winnetka during 1996 to service Winnetka and Northfield, and in Skokie during 1999. In 1995, Libertyville Bank was opened to service Libertyville, Vernon Hills and Mundelein. Libertyville Bank opened a branch facility in south Libertyville during 1998 to service south Libertyville and Vernon Hills. In December 1996, Barrington Bank was opened to service the greater Barrington/Inverness areas. In December 1997, Crystal Lake Bank was opened to serve the Crystal Lake/Cary communities. In 1999, Crystal Lake Bank opened two new branch facilities in Crystal Lake. All Banks are insured by the Federal Deposit Insurance Company ("FDIC") and are subject to regulation, supervision and regular examination by the Illinois Office of Banks and Real Estate, the Federal Reserve Bank and/or the Office of the Comptroller of Currency ("OCC"). PREMIUM FINANCE - --------------- FIFC commenced operations nine years ago and is headquartered in Deerfield, Illinois. Based on limited industry data available in certain state regulatory filings and FIFC management's experience in and knowledge of the premium finance industry, management estimates that, ranked by origination volumes, FIFC is one of the top five premium finance companies operating in the United States. Premium finance receivables are originated by FIFC's own sales force, working with medium and large insurance agents and brokers throughout the United States. These receivables are retained - 4 - mainly within the Banks' loan portfolios and are also sold to an unaffiliated financial institution. Insurance premiums are financed primarily for commercial customers' purchase of property, casualty and liability insurance. Substantially all premium finance receivables are made to commercial accounts. FIFC is licensed or otherwise qualified to do business as an insurance premium finance company in all 50 states and the District of Columbia. TRUST ACTIVITIES - ---------------- With the formation of WAMC in September 1998, the Company intends to expand the trust and investment management services previously provided through a trust department of the Lake Forest Bank. As a separately chartered non-depository bank subsidiary, the Company is better able to offer trust and investment management services to all of the Banks' communities, 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, WAMC intends to target small to mid-size businesses and newly affluent individuals whose needs command the personalized attention that will be offered by WAMC and its experienced trust professionals. Services offered typically include traditional trust products and services, as well as investment management, financial planning and 401(k) management services. WAMC is subject to regulation, supervision and regular examination by the OCC. TRICOM - ------ On October 26, 1999 (effective as of October 1, 1999), Hinsdale Bank acquired 100% of the common stock of Tricom. This acquisition is another significant step in the Company's strategy to pursue specialized earning asset niches. Tricom is a Milwaukee-based company that has been in business for approximately ten years and specializes in providing, on a national basis, short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to clients in the temporary staffing industry. On an annual basis, Tricom currently finances and processes payrolls with associated billings in excess of $200 million and generates approximately $7 million in revenues. By virtue of the Company's funding resources, this acquisition will provide Tricom with additional capital necessary to expand its financing services in a national market. In addition to expanding the Company's earning asset niches, this acquisition will add to the level of fee-based income and augment its community-based banking revenues. COMPETITION - ----------- The Company competes in the commercial banking industry through the Banks in the communities each serves. The commercial banking industry is highly competitive, and the Banks face strong direct competition for deposits, loans, and other financial-related services. The Banks compete directly in Cook, DuPage, Lake and McHenry counties with other commercial banks, thrifts, credit unions, stockbrokers, and the finance divisions of automobile companies. Some of these competitors are local, while others are statewide or nationwide. The Banks have developed a community banking and marketing strategy. In keeping with this strategy, the Banks provide highly personalized and responsive service, a characteristic of locally-owned and managed institutions. As such, the Banks compete for deposits principally by offering depositors a variety of deposit programs, convenient office locations, hours and other services, and for loan originations primarily through the interest - 5 - rates and loan fees they charge, the efficiency and quality of services they provide to borrowers and the variety of their loan products. Some of the financial institutions and financial services organizations with which the Banks compete are not subject to the same degree of regulation as imposed on bank holding companies, Illinois banking corporations and national banking associations. In addition, the larger banking organizations have significantly greater resources than are available to the Banks. As a result, such competitors have advantages over the Banks in providing certain non-deposit services. FIFC encounters intense competition from numerous other firms, including a number of national commercial premium finance companies, companies affiliated with insurance carriers, independent insurance brokers who offer premium finance services, banks and other lending institutions. Some of FIFC's competitors are larger and have greater financial and other resources and are better known than FIFC. FIFC competes with these entities by emphasizing a high level of knowledge of the insurance industry, flexibility in structuring financing transactions, and the timely purchase of qualifying contracts. FIFC believes that its commitment to account service also distinguishes it from its competitors. It is FIFC's policy to notify the insurance agent when an insured is in default and to assist in collection, if requested by the agent. To the extent that affiliates of insurance carriers, banks, and other lending institutions add greater service and flexibility to their financing practices in the future, the Company's operations could be adversely affected. There can be no assurance that FIFC will be able to continue to compete successfully in its markets. WAMC's primary competition is with more established trust companies of other larger bank holding companies. WAMC is also in competition with other trust companies, brokerage and other financial service companies, stockbrokers and financial advisors. As a new company, it may be more difficult to successfully attract new customers than the more established Chicago area trust companies. However, the Company believes it can successfully compete for trust business by offering personalized attention and customer service to small to mid-size businesses and newly affluent individuals. The hiring of several experienced trust professionals from the more established Chicago area trust companies is also expected to help in attracting new customer relationships. There can be no assurances, however, that WAMC will be successful in establishing this new business as a preferred alternative to the larger trust companies, and as a profitable venture. Tricom competes with numerous other firms, including a small number of similar niche finance companies and payroll processing firms, as well as various finance companies, banks and other lending institutions. Tricom management believes that its commitment to service distinguishes itself from competitors. To the extent that other finance companies, financial institutions and payroll processing firms add greater programs and services to their existing businesses, Tricom's operations could be adversely affected. There can be no assurance that Tricom will be able to continue to compete successfully in its markets. EMPLOYEES - --------- At December 31, 1999, the Company and its subsidiaries employed a total of 412 full-time-equivalent employees. The Company provides its employees with comprehensive medical and dental benefit plans, life insurance plans, 401(k) plans and an employee stock purchase plan. The Company considers its relationship with its employees to be good. - 6 - FORWARD-LOOKING STATEMENTS - -------------------------- This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company's projected growth, anticipated improvements in earnings, earnings per share and other financial performance measures, and management's long-term performance goals, as well as statements relating to the anticipated effects on financial results of condition from expected development or events, the Company's business and growth strategies, including anticipated internal growth, plans to form additional de novo banks and to open new branch offices, and to pursue additional potential development or acquisition of banks or specialty finance businesses. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following: o The level of reported net income, return on average assets and return on average equity for the Company will in the near term continue to be impacted by start-up costs associated with de novo bank formations, branch openings, and expanded trust and investment operations. De novo banks 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 and investment services through the Company's newer trust subsidiary, WAMC, is expected to be in a start-up phase for 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. 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. - 7 - o The extent of the Company's preparedness efforts, 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 that have been developed. o Unforeseen future events that may cause slower than anticipated development and growth of the Tricom business, changes in the temporary staffing industry or difficulties integrating the Tricom acquisition. o Changes in the economic environment, competition, or other factors, may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio and loan and deposit pricing. SUPERVISION AND REGULATION - -------------------------- Bank holding companies and banks are extensively regulated under federal and state law. References under this heading to applicable statutes or regulations are brief summaries or portions thereof which do not purport to be complete and which are qualified in their entirety by reference to those statutes and regulations. Any change in applicable laws or regulations may have a material adverse effect on the business of commercial banks and bank holding companies, including the Company, the Banks, FIFC, WAMC and Tricom. However, management is not aware of any current recommendations by any regulatory authority which, if implemented, would have or would be reasonably likely to have a material effect on liquidity, capital resources, or operations of the Company, the Banks, FIFC, WAMC or Tricom. BANK HOLDING COMPANY REGULATION The Company is registered as a "bank holding company" with the Federal Reserve and, accordingly, is subject to supervision by the Federal Reserve under the Bank Holding Company Act (the Bank Holding Company Act and the regulations issued thereunder, are collectively the "BHC Act"). The Company is required to file with the Federal Reserve periodic reports and such additional information as the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve examines the Company and may examine the Banks, FIFC, WAMC or Tricom. The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than five percent of the voting shares or substantially all the assets of any bank or bank holding company, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the Federal Reserve has determined, by regulation or order, to be so closely related to banking or managing or controlling banks as to be a proper incident thereto, such as owning and operating the - 8 - premium finance business conducted by FIFC. Under the BHC Act and Federal Reserve regulations, the Company and the Banks are prohibited from engaging in certain tie-in arrangements in connection with an extension of credit, lease, sale of property, or furnishing of services. Any person, including associates and affiliates of and groups acting in concert with such person, who purchases or subscribes for five percent or more of the Company's Common Stock may be required to obtain prior approval of the Illinois Commissioner and the Federal Reserve. Under the Illinois Banking Act, any person who thereafter acquires stock of the Company such that its interest exceeds ten percent of the Company, may be required to obtain the prior approval of the Illinois Commissioner and under the Change in Bank Control Act, a person may be required to obtain the prior regulatory approval of the FDIC or OCC, in the case of Barrington Bank, Crystal Lake Bank, and WAMC, and the Federal Reserve before acquiring the power to directly or indirectly direct the management, operations or policies of the Company or the Banks or before acquiring control of 25 percent or more of any class of the Company's or Banks' outstanding voting stock. In addition, any Company, partnership, trust or organized group that acquires a controlling interest in the Company or the Banks may have to obtain approval of the Federal Reserve to become a bank holding company and thereafter be subject to regulation as such. It is the policy of the Federal Reserve that the Company is expected to act as a source of financial strength to the Banks and WAMC, and to commit resources to support the Banks and WAMC. The Federal Reserve takes the position that in implementing this policy, it may require the Company to provide such support when the Company otherwise would not consider itself able to do so. The Federal Reserve has risk-based capital requirements for assessing bank holding company capital adequacy. These standards define regulatory capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. Under the Federal Reserve's risk-based guidelines, capital is classified into two categories. For bank holding companies, Tier 1 or "core" capital consists of common shareholders' equity, perpetual preferred and trust preferred stock (subject to certain limitations) and minority interests in the common equity accounts of consolidated subsidiaries, and is reduced by goodwill, certain other intangible assets and certain investments in other companies ("Tier 1 Capital"). Tier 2 capital consists of the allowance for loan and lease losses (subject to certain conditions and limitations), perpetual preferred and trust preferred stock, "hybrid capital instruments," perpetual debt and mandatory convertible debt securities, and term subordinated debt and intermediate-term preferred stock. Under the Federal Reserve's capital guidelines, bank holding companies are required to maintain a minimum ratio of qualifying capital to risk-weighted assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 Capital. The Federal Reserve also requires a minimum leverage ratio of Tier 1 Capital to total assets of 3.0%, except that bank holding companies not rated in the highest category under the regulatory rating system are required to maintain a leverage ratio of 1.0% to 2.0% above such minimum. The 3.0% Tier 1 Capital to total assets ratio constitutes the minimum leverage standard for bank holding companies, and will be used in conjunction with the risk-based ratio in determining the overall capital adequacy of banking organizations. In addition, the Federal Reserve continues to consider the Tier 1 leverage ratio in evaluating proposals for expansion or new activities. - 9 - In its capital adequacy guidelines, the Federal Reserve emphasizes that the foregoing standards are supervisory minimums and that banking organizations generally are expected to operate well above the minimum ratios. These guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum levels. BANK REGULATION Under Illinois law, each of Lake Forest Bank, Hinsdale Bank, North Shore Bank, Libertyville Bank and their subsidiaries, are subject to supervision and examination by the Illinois Commissioner. As an affiliate of these Banks, the Company is also subject to examination by the Illinois Commissioner. Barrington Bank, Crystal Lake Bank and WAMC are subject to supervision and examination by the OCC pursuant to the National Bank Act and regulations promulgated thereunder. Each of the Banks and WAMC are members of the Federal Reserve Bank and, as such, is also subject to examination by the Federal Reserve. The deposits of the Banks are insured by the Bank Insurance Fund under the provisions of the Federal Deposit Insurance Act (the "FDIA"), and the Banks are, therefore, also subject to supervision and examination by the FDIC. The FDIC requires that the appropriate federal regulatory authority (the Federal Reserve Bank and/or the FDIC in the case of Lake Forest Bank, North Shore Bank, Hinsdale Bank and Libertyville Bank, or the OCC, in the case of Barrington Bank and Crystal Lake Bank) approve any merger and/or consolidation by or with an insured bank, as well as the establishment or relocation of any bank or branch office. The FDIC also supervises compliance with the provisions of federal law and regulations which place restrictions on loans by FDIC-insured banks to their directors, executive officers and other controlling persons. Furthermore, banks are affected by the credit policies of other monetary authorities, including the Federal Reserve, which regulate the national supply of bank credit. Such regulation influences overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans and paid on deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. FINANCIAL INSTITUTION REGULATION GENERALLY Transactions with Affiliates. Transactions between a bank and its holding company or other affiliates are subject to various restrictions imposed by state and federal regulatory agencies. Such transactions include loans and other extensions of credit, purchases of securities and other assets, and payments of fees or other distributions. In general, these restrictions limit the amount of transactions between an institution and an affiliate of such institution, as well as the aggregate amount of transactions between an institution and all of its affiliates, and require transactions with affiliates to be on terms comparable to those for transactions with unaffiliated entities. - 10 - Dividend Limitations. As a holding company, the Company is primarily dependent upon dividend distributions from its operating subsidiaries for its income. Federal and state statutes and regulations impose restrictions on the payment of dividends by the Company, the Banks and WAMC. See Part II, Item 5 for further discussion of dividend limitations. Federal Reserve policy provides that a bank holding company should not pay dividends unless (i) the bank holding company's net income over the prior year is sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries. Illinois law also places certain limitations on the ability of the Company to pay dividends. For example, the Company may not pay dividends to its shareholders if, after giving effect to the dividend, the Company would not be able to pay its debts as they become due. Since a major potential source of the Company's funding is dividends the Company expects to receive from the Banks, the Company's ability to pay dividends is likely to be dependent on the amount of dividends paid by the Banks. No assurance can be given that the Banks will, in any circumstances, pay dividends to the Company. As Illinois state-chartered banks, none of Lake Forest Bank, North Shore Bank, Hinsdale Bank nor Libertyville Bank may pay dividends in an amount greater than its current net profits after deducting losses and bad debts out of undivided profits provided that its surplus equals or exceeds its capital. For the purpose of determining the amount of dividends that an Illinois bank may pay, bad debts are defined as debts upon which interest is past due and unpaid for a period of six months or more unless such debts are well-secured and in the process of collection. Furthermore, federal regulations also prohibit any Federal Reserve member bank, including each of the Banks and WAMC, from declaring dividends in any calendar year in excess of its net profit for the year plus the retained net profits for the preceding two years. Similarly, as national associations, Barrington Bank, Crystal Lake Bank and WAMC may not declare dividends in any year in excess of its net profit for the year plus the retained net profits for the preceding two years. Furthermore, the OCC may, after notice and opportunity for hearing, prohibit the payment of a dividend by a national bank if it determines that such payment would constitute an unsafe or unsound practice. In addition to the foregoing, the ability of the Company, the Banks and WAMC to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under the Federal Deposit Insurance Company Improvements Act of 1991 ("FDICIA"), as described below. The right of the Company, its shareholders and its creditors to participate in any distribution of the assets or earnings of its subsidiaries is further subject to the prior claims of creditors of the respective subsidiaries. Standards for Safety and Soundness. The FDIA, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994 requires the Federal Reserve, together with the other federal bank regulatory agencies, to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation, and compensation. The Federal Reserve, the OCC and the federal bank regulatory agencies have adopted, effective August 9, 1995, a set of guidelines prescribing safety and soundness standards pursuant to FDICIA, as amended. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan - 11 - documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, each of the Federal Reserve and the OCC adopted regulations that authorize, but do not require, the Federal Reserve or the OCC, as the case may be, to order an institution that has been given notice by the Federal Reserve or the OCC, as the case may be, that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the Federal Reserve or the OCC, as the case may be, must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized association is subject under the "prompt corrective action" provisions of FDICIA. If an institution fails to comply with such an order, the Federal Reserve or the OCC, as the case may be, may seek to enforce such order in judicial proceedings and to impose civil money penalties. The Federal Reserve, the OCC and the other federal bank regulatory agencies also proposed guidelines for asset quality and earnings standards. A range of other provisions in FDICIA include requirements applicable to closure of branches; additional disclosures to depositors with respect to terms and interest rates applicable to deposit accounts; uniform regulations for extensions of credit secured by real estate; restrictions on activities of and investments by state-chartered banks; modification of accounting standards to conform to generally accepted accounting principles including the reporting of off-balance sheet items and supplemental disclosure of estimated fair market value of assets and liabilities in financial statements filed with the banking regulators; increased penalties in making or failing to file assessment reports with the FDIC; greater restrictions on extensions of credit to directors, officers and principal shareholders; and increased reporting requirements on agricultural loans and loans to small businesses. In August 1995, the Federal Reserve, OCC, FDIC and other federal banking agencies published a final rule modifying their existing risk-based capital standards to provide for consideration of interest rate risk when assessing the capital adequacy of a bank. Under the final rule, the Federal Reserve, the OCC and the FDIC must explicitly include a bank's exposure to declines in the economic value of its capital due to changes in interest rates as a factor in evaluating a bank's capital adequacy. The Federal Reserve, the FDIC, the OCC and other federal banking agencies also have adopted a joint agency policy statement providing guidance to banks for managing interest rate risk. The policy statement emphasizes the importance of adequate oversight by management and a sound risk management process. The assessment of interest rate risk management made by the banks' examiners will be incorporated into the banks' overall risk management rating and used to determine the effectiveness of management. Prompt Corrective Action. FDICIA requires the federal banking regulators, including the Federal Reserve, the OCC and the FDIC, to take prompt corrective action with respect to depository institutions that fall below certain capital standards and prohibits any depository institution from making any capital distribution that would cause it to be undercapitalized. Institutions that are not adequately capitalized may be subject to a variety of supervisory actions including, but not limited - 12 - to, restrictions on growth, investment activities, capital distributions and affiliate transactions and will be required to submit a capital restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company having control of the institution (such as the Company). In other respects, FDICIA provides for enhanced supervisory authority, including greater authority for the appointment of a conservator or receiver for under-capitalized institutions. The capital-based prompt corrective action provisions of FDICIA and their implementing regulations apply to FDIC-insured depository institutions. However, federal banking agencies have indicated that, in regulating bank holding companies, the agencies may take appropriate action at the holding company level based on their assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository institutions pursuant to the prompt corrective action provisions of FDICIA. Insurance of Deposit Accounts. Under FDICIA, as an FDIC-insured institution, each of the Banks is required to pay deposit insurance premiums based on the risk it poses to the insurance fund. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve certain designated reserve ratios in the insurance funds and to impose special additional assessments. Each depository institution is assigned to one of three capital groups: "well capitalized," "adequately capitalized" or "less than adequately capitalized." Within each capital group, institutions are assigned to one of three supervisory subgroups: "healthy," "supervisory concern" or "substantial supervisory concern." Accordingly, there are nine combinations of capital groups and supervisory subgroups to which varying assessment rates would be applicable. An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of each of the Banks does not know any practice, condition or violation that might lead to termination of deposit insurance. The Economic Growth and Regulatory Paperwork Reduction Act of 1996 enacted on September 30, 1996 provides that beginning with semi-annual periods after December 31, 1996, deposits insured by the Bank Insurance Fund ("BIF") will also be assessed to pay interest on the bonds (the "FICO Bonds") issued in the late 1980s by the Financing Company to recapitalize the now defunct Federal Savings & Loan Insurance Company. For purposes of the assessments to pay interest on the FICO Bonds, BIF deposits will be assessed at a rate of 20.0% of the assessment rate applicable to SAIF deposits until December 31, 1999. After the earlier of December 31, 1999 or the date on which the last savings association ceases to exist, full pro rata sharing of FICO assessments will begin. The payment of the assessment to pay interest on the FICO Bonds should not materially affect the Banks. Federal Reserve System. The Banks are subject to Federal Reserve regulations requiring depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve regulations generally require 3.0% reserves on the first $46.5 million of transaction accounts plus 10.0% on the remainder. The first $4.9 million of otherwise reservable balances (subject to adjustments by the Federal Reserve) are exempted from the reserve requirements. The Banks are in compliance with the foregoing requirements. - 13 - Community Reinvestment. Under the Community Reinvestment Act ("CRA"), a financial institution has a continuing and affirmative obligation, consistent with the safe and sound operation of such institution, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also requires that all institutions make public disclosure of their CRA ratings. Each of the Banks received "satisfactory" ratings from either the Federal Reserve or OCC on their most recent CRA performance evaluations. In April 1995, the Federal Reserve, the OCC and other federal banking agencies adopted amendments revising their CRA regulations. Among other things, the amended CRA regulations substitute for the prior process-based assessment factors a new evaluation system that rates an institution based on its actual performance in meeting community needs. In particular, the focus is on three tests: (i) a lending test, to evaluate the institution's record of making loans in its assessment areas; (ii) an investment test, to evaluate the institution's record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution's delivery of services through its branches, ATMs and other offices. The amended CRA regulations also clarify how an institution's CRA performance would be considered in the application process. Brokered Deposits. Well-capitalized institutions are not subject to limitations on brokered deposits, while an adequately capitalized institution is able to accept, renew or rollover brokered deposits only with a waiver from the FDIC and subject to certain restrictions on the yield paid on such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. Each of the Banks is eligible to accept brokered deposits (as a result of its capital levels or having received a waiver) and may use this funding source from time to time when management deems it appropriate from an asset/liability management perspective. Enforcement Actions. Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake enforcement action against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to receivership, conservatorship or the termination of deposit insurance. - 14 - Interstate Banking and Branching Legislation. On September 29, 1994, the Riegle-Neal Interstate Banking and Efficiency Act of 1994 (the "Interstate Banking Act") was enacted. Under the Interstate Banking Act, adequately capitalized and adequately managed bank holding companies will be allowed to acquire banks across state lines subject to certain limitations. In addition, under the Interstate Banking Act, effective June 1, 1997, banks are permitted to merge with one another across state lines and thereby create a main bank with branches in separate states. After establishing branches in a state through an interstate merger transaction, a bank can establish and acquire additional branches at any location in the state where any bank involved in the interstate merger could have established or acquired branches under applicable federal and state law. Recent Legislation. On November 12, 1999, the Gramm-Leach-Bliley Act ("GLB Act") was enacted. The GLB Act amended or repealed certain provisions of the Glass-Steagall Act and other legislation and, among other things, establishes a comprehensive framework to permit affiliations among commercial banks, securities firms and insurance companies. In addition, the GLB Act contains provisions intended to safeguard consumer financial information in the hands of financial service providers primarily by requiring such entities to disclose their privacy policies to their customers and allowing customers to "opt out" of having their financial services providers disclose their confidential financial information to third parties, subject to certain exceptions. The federal regulatory agencies have not as of this date issued final regulations under the GLB Act. The Company does not believe the GLB Act will have a material adverse affect upon its operations in the near term. However, to the extent the GLB Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Company currently offers and that can aggressively compete in the markets the Company currently serves. MONETARY POLICY AND ECONOMIC CONDITIONS The earnings of banks and bank holding companies are affected by general economic conditions and also by the fiscal and monetary policies of federal regulatory agencies, including the Federal Reserve. Through open market transactions, variations in the discount rate and the establishment of reserve requirements, the Federal Reserve exerts considerable influence over the cost and availability of funds obtainable for lending or investing. The above monetary and fiscal policies and resulting changes in interest rates have affected the operating results of all commercial banks in the past and are expected to do so in the future. The Banks and their respective holding companies cannot fully predict the nature or the extent of any effects which fiscal or monetary policies may have on their business and earnings. SUPPLEMENTAL STATISTICAL DATA Pages 3, 45 and 46 of the 1999 Annual Report to Shareholders and Item 8 of this Form 10-K contain supplemental statistical data as required by The Exchange Act Industry Guide 3 which is incorporated into Regulation S-K of the Securities and Exchange Acts. This data should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto, and Management's Discussion and Analysis which are contained in its 1999 Annual Report to Shareholders filed herewith as Exhibit 13.1 and incorporated herein by reference. - 15 - ITEM 2. PROPERTIES The Company's executive offices are located in the main bank facility of Lake Forest Bank. Lake Forest Bank has six physical banking locations. Lake Forest Bank's main bank facility is located at 727 N. Bank Lane, Lake Forest, Illinois, and is a three story, 37,000 square foot brick building that includes a 15,200 square foot addition that was completed in May 1999. The Company's executive offices and staff of the holding company, Lake Forest Bank and WAMC are located on the second and third floors of the addition with first floor retail space leased to unrelated third parties. Lake Forest Bank constructed a drive-in, walk-up banking facility on land leased from the City of Lake Forest on the corner of Bank Lane and Wisconsin Avenue in Lake Forest, approximately one block north of the main banking facility. Lake Forest Bank also leases a 1,200 square foot, a full service banking facility at 103 East Scranton Avenue in Lake Bluff, Illinois; a 2,100 square foot, a full service banking facility on the west side of Lake Forest, Illinois at 810 South Waukegan Road, and a drive-in and walk-up banking facility at 911 S. Telegraph Road in the West Lake Forest Train Station. Lake Forest Bank also maintains a small office facility at a retirement community known as Lake Forest Place at 1100 Pembridge Drive in Lake Forest. In early 2000, a temporary branch facility was opened in the Highwood-Fort Sheridan area with final construction of a permanent building expected to be completed later in 2000. Lake Forest Bank maintains ATMs at each of its locations except the 810 South Waukegan Road facility. Lake Forest Bank has no offsite ATMs. Hinsdale Bank currently has four physical banking locations, all of which are owned. The main bank facility is a two story brick building located at 25 East First Street in downtown Hinsdale, Illinois. The 1,000 square foot drive-in, walk-up banking facility at 130 West Chestnut is approximately two blocks west of the main banking facility. Hinsdale Bank also has full service branches in Clarendon Hills and Western Springs. The buildings in Clarendon Hills and Western Springs are partially used for bank purposes, with the remainder being leased to unrelated parties. Hinsdale Bank maintains one ATM machine at each location, with the exception of Clarendon Hills, which has two. Hinsdale Bank has no offsite ATMs. North Shore Bank currently has seven physical banking locations. North Shore Bank owns the main bank facility, a one story brick building that is located at 1145 Wilmette Avenue in downtown Wilmette, Illinois. North Shore Bank also owns a 9,600 square foot drive-in, walk-up banking facility at 720 12th Street, approximately one block west of the main banking facility. North Shore Bank also leases a full service banking facility at 362 Park Avenue in Glencoe, Illinois and a branch banking facility in Winnetka, Illinois where it leases approximately 4,000 square feet. In 1998, North Shore Bank opened a drive-up and ATM for the Glencoe branch and a small facility at 4th Street and Linden in Wilmette. In 1999, a full service leased facility was opened in Skokie, Illinois. North Shore Bank maintains ATMs at each of its locations, except Winnetka, and has no offsite ATMs. - 16 - Libertyville Bank currently has three physical banking locations. Libertyville Bank owns the main bank facility, which is a 13,000 square foot two story brick building located at 507 North Milwaukee Avenue in downtown Libertyville, Illinois. Libertyville Bank also owns a 2,500 square foot drive-in, walk-up banking facility at 201 Hurlburt Court, approximately five blocks southeast of the main banking facility. A leased branch facility located at 1167 South Milwaukee Avenue in south Libertyville was opened in October 1998. Libertyville Bank maintains ATMs at each of its banking locations and at one offsite location. Barrington Bank currently has one physical banking location at 201 South Hough Street in Barrington, Illinois which is a 12,700 square foot, two story frame construction building that has an attached drive-through facility. Barrington Bank has two ATMs, but no offsite ATMs. In September 1998, Crystal Lake Bank moved into its permanent two story, 12,000 square foot main bank facility located at 70 Williams Street in downtown Crystal Lake, Illinois. In March 1999, Crystal Lake Bank opened a drive-up facility that is located in the downtown area, near the main bank facility. In September 1999, Crystal Lake Bank opened a full service owned facility located at 1000 McHenry Avenue in south Crystal Lake. Crystal Lake Bank maintains an ATM at each location. FIFC's offices are located at 520 Lake Cook Road, Suite 300, Deerfield, Illinois. FIFC leases approximately 12,000 square feet of office space under a contract that expires in the year 2000. In mid-2000, FIFC will relocate to a facility in Northbrook that was purchased in late 1999. WAMC's executive and operations staff are based in office space leased from Lake Forest Bank. WAMC also leases office space for its trust professionals at Lake Forest Bank, Hinsdale Bank, North Shore Bank and Barrington Bank. Tricom leases approximately 10,700 square feet of office space in Milwaukee, Wisconsin at 11270 West Park Place, Suite 100. See Note 6 to the Consolidated Financial Statements contained in the 1999 Annual Report to Shareholders filed herewith as Exhibit 13.1 and incorporated herein by reference. - 17 - ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries, from time to time, are subject to pending and threatened legal action and proceedings arising in the ordinary course of business. Any such litigation currently pending is incidental to the Company's business and, based on information currently available to management, management believes the outcome of such actions or proceedings will not have a material adverse effect on the operations or financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on The Nasdaq Stock Market(R) under the symbol WTFC. The following table sets forth the high and low sales prices reported on Nasdaq for the Common Stock during 1999 and 1998.
1999 1998 ---- ---- HIGH LOW HIGH LOW ---- --- ---- --- Fourth quarter $ 18.19 14.69 20.13 16.50 Third quarter 19.12 16.19 23.00 17.13 Second quarter 26.75 17.50 20.38 17.38 First quarter 20.25 15.50 18.50 16.50
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS - --------------------------------------------- As of February 29, 2000 there were 1,473 shareholders of record of the Company's common stock. - 18 - DIVIDENDS ON COMMON STOCK - ------------------------- In January 2000, the Company's Board of Directors approved the first semi-annual cash dividend on its common stock. The dividend in the amount of $0.05 per share was paid on February 24, 2000 to shareholders of record as of February 10, 2000. The declaration of dividends is at the discretion of the Company's Board of Directors and depends upon earnings, capital requirements, regulatory limitations, tax considerations, the operating and financial condition of the Company and other factors. Additionally, the payment of dividends may be restricted under certain terms of the Company's Trust Preferred Securities offering. Because the Company's consolidated net income consists largely of net income of the Banks, FIFC and Tricom, the Company's ability to pay dividends depends upon its receipt of dividends from these entities. The Banks' ability to pay dividends is regulated by banking statutes. See "Financial Institution Regulation Generally - Dividend Limitations" on page 10 of this Form 10-K. During 1998, Lake Forest Bank paid $8.25 million of dividends to the Company. There were no dividends paid by the Banks to the Company during either 1999 or 1997. In addition, Crystal Lake Bank is subject to additional restrictions prohibiting the payment of dividends by a de novo bank in its first three years of operations. The de novo period will end in December 2000 for Crystal Lake Bank. In addition, the payment of dividends may be restricted under certain financial covenants in the Company's revolving line of credit. Reference is made to Note 14 to the Consolidated Financial Statements contained in the 1999 Annual Report to Shareholders, attached hereto as Exhibit 13.1, which is incorporated herein by reference, for a description of the restrictions on the ability of certain subsidiaries to transfer funds to the Company in the form of dividends. RECENT SALES OF UNREGISTERED SECURITIES - --------------------------------------- In Hinsdale Bank's acquisition of 100% of the stock of Tricom, completed effective as of October 1, 1999, the Company issued 227,635 shares of Common Stock as part of the purchase price to the two individual selling shareholders. Such shares were issued and sold without registration in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933. On November 17, 1999, the Company sold 352,942 shares of Common Stock for $6 million in cash directly to two institutional investors in a private placement transaction exempt from registration pursuant to Section 4(2). ITEM 6. SELECTED FINANCIAL DATA Certain information required in response to this item is contained in the 1999 Annual Report to Shareholders under the caption "Selected Financial Highlights" and is incorporated herein by reference. The Company had no cash dividends declared during any period during the last five years. The Company had no Preferred Stock outstanding at December 31, 1999, 1998, 1997 or 1996. Predecessors of the Company did have $503,000 of Preferred Stock outstanding at December 31, 1995. - 19 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required in response to this item is contained in the 1999 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations". This discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto contained in the 1999 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Certain information required in response to this item is contained in the 1999 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset-Liability Management" and in Notes 15 and 16 to the Consolidated Financial Statements, which are incorporated herein by reference. This information should be read in conjunction with the complete Consolidated Financial Statements and notes thereto contained in the 1999 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required in response to this item is contained in the 1999 Annual Report to Shareholders under the caption "Consolidated Financial Statements," and is incorporated herein by reference. Also, refer to Item 14 of this Report for the Index to Financial Statements. SUPPLEMENTAL STATISTICAL DATA - ----------------------------- SECURITIES PORTFOLIO Tables presenting the carrying amounts and gross unrealized gains and losses for securities held-to-maturity and available-for-sale at December 31, 1999 and 1998 are included by reference to Note 2 to the Consolidated Financial Statements included in the 1999 Annual Report to Shareholders, which is incorporated herein by reference. Maturities of securities as of December 31, 1999 by maturity distribution are as follows (in thousands):
Mortgage- Federal Within From 1 From 5 to After backed Agency 1 Year to 5 years 10 years 10 years securities Bank stock Total -------- ---------- -------- -------- ---------- ---------- -------- U.S. Treasury obligations $ 1,242 37,929 - - - - 39,171 Federal agency obligations 40,711 24,597 4,876 - - - 70,184 Municipal securities 498 1,545 - 1,995 - - 4,038 Corporate notes and other 23,390 4,015 1,028 10,592 - - 39,025 Mortgage-backed securities (1) - - - - 46,124 - 46,124 Federal Agency Bank stock (2) - - - - - 7,253 7,253 -------- ---------- -------- -------- ---------- ---------- -------- Total $ 65,841 68,086 5,904 12,587 46,124 7,253 205,795 ======== ========== ======== ======== ========== ========== ========
- 20 - The weighted average yield for each range of maturities of securities, on a tax equivalent basis, is shown below as of December 31, 1999:
Mortgage- Federal Within From 1 From 5 to After backed Agency 1 Year to 5 years 10 years 10 years securities Bank stock Total -------- ---------- -------- -------- ---------- ---------- -------- U.S. Treasury obligations 5.13% 5.28% - - - - 5.28% Federal agency obligations 5.45% 6.06% 5.59% - - - 5.67% Municipal securities 5.80% 6.54% - 8.25% - - 7.29% Corporate notes and other 5.16% 7.03% 6.61% 7.21% - - 5.98% Mortgage-backed securities (1) - - - - 7.38% - 7.38% Federal Agency Bank stock (2) - - - - - 6.85% 6.85% -------- ---------- -------- -------- ---------- ---------- -------- Total 5.34% 5.69% 5.77% 7.37% 7.38% 6.85% 6.11% ======== ========== ======== ======== ========== ========== ======== (1) Mortgage-backed security maturities may differ from contractual maturities because the underlying mortgages may be called or prepaid without any penalties. Therefore, these securities are not included within the maturity categories above. (2) Includes stock of the Federal Reserve Bank and of the Federal Home Loan Bank.
LOAN PORTFOLIO The following table shows the Company's loan portfolio by category for the five previous fiscal years (in thousands):
At December 31 1999 1998 1997 1996 1995 - ----------- ---- ---- ---- ---- ---- Commercial/commercial real estate $ 485,776 366,229 235,483 182,403 101,271 Home equity 139,194 111,537 116,147 87,303 54,592 Residential real estate 111,026 91,525 61,611 51,673 37,074 Premium finance receivables 225,239 183,165 131,952 59,240 15,703 Indirect auto 255,434 210,137 139,296 91,211 37,323 Tricom finance receivables 17,577 - - - - Installment and other 49,925 34,650 32,153 23,717 14,032 ---------------- ------------ ----------- ------------ ------------ Total loans 1,284,171 997,243 716,642 495,547 259,995 Less: Unearned income 5,922 5,181 4,011 2,999 1,764 ---------------- ------------ ----------- ------------ ------------ Total loans, net of unearned income $1,278,249 992,062 712,631 492,548 258,231 ================ ============ =========== ============ ============
Commercial and commercial real estate loans. The commercial loan component is comprised primarily of commercial real estate loans, lines of credit for working capital purposes, and term loans for the acquisition of equipment. This category also includes certain commercial equipment leases. Commercial real estate is predominantly owner occupied and secured by a first mortgage lien and assignment of rents on the property. Equipment loans and leases are generally fully amortized over 24 to 60 months and secured by titles and/or U.C.C. filings. Working capital lines are generally renewable annually and supported by business assets, personal guarantees and, - 21 - oftentimes, additional collateral. Commercial business lending is generally considered to involve a higher degree of risk than traditional consumer bank lending. The vast majority of commercial loans are made within the Banks' immediate market areas. The increase in this loan category can be attributed to additional banking facilities, an emphasis on business development calling programs and superior servicing of existing commercial loan customers which has increased referrals. In addition to the home mortgages originated by the Banks, the Company participates in mortgage warehouse lending by providing interim funding to unaffiliated mortgage brokers to finance residential mortgages originated by such brokers for sale into the secondary market. The Company's loans to the mortgage brokers are secured by the business assets of the mortgage companies as well as the underlying mortgages, the majority of which are funded by the Company on a loan-by-loan basis after they have been pre-approved for purchase by third party end lenders who forward payment directly to the Company upon their acceptance of final loan documentation. In addition, the Company may also provide interim financing for packages of mortgage loans on a bulk basis in circumstances where the mortgage brokers desire to competitively bid a number of mortgages for sale as a package in the secondary market. Typically, the Company will serve as sole funding source for its mortgage warehouse lending customers under short-term revolving credit agreements. Amounts advanced with respect to any particular mortgages are usually required to be repaid within 15 days. The Company has developed strong relationships with a number of mortgage brokers and is seeking to expand its customer base for this specialty business. The following table classifies the commercial loan portfolio category at December 31, 1999 by date at which the loans mature:
FROM ONE ONE YEAR TO FIVE AFTER OR LESS YEARS FIVE YEARS TOTAL ------------ ------------ ------------ ------------ (IN THOUSANDS) Commercial loans and commercial real estate loans........................... $ 208,062 225,074 52,640 485,776 Premium finance receivables, net of unearned income........................ 219,341 - - 219,341 Tricom finance receivables............... 17,577 - - 17,577
Of those loans maturing after one year, approximately $228.5 million have fixed rates. Home equity loans. The Company's home equity loan products are generally structured as lines of credit secured by first or second position mortgage liens on the underlying property with loan-to-value ratios not exceeding 80%, including prior liens, if any. The Banks' home equity loans feature competitive rate structures and fee arrangements. In addition, the Banks periodically offer promotional home equity loan products as part of their marketing strategy often featuring lower introductory rates. - 22 - Indirect auto loans. As part of its strategy to pursue specialized earning asset niches to augment loan generation within the Banks' target markets, the Company finances fixed rate automobile loans funded indirectly through unaffiliated automobile dealers. As of December 31, 1999, indirect auto loans comprised approximately 84% of the Company's consumer loan portfolio. Indirect automobile loans are secured by new and used automobiles and are generated by a large network of automobile dealers located in the Chicago area with which the Company has established relationships. These credits generally have an average initial balance of approximately $15,000 and have an original maturity of 36 to 60 months with the average actual maturity, as a result of prepayments, estimated to be approximately 35-40 months. 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. The risk associated with this portfolio is diversified among many individual borrowers. Management continually monitors the dealer relationships and the Banks are not dependent on any one dealer as a source of such loans. Like other consumer loans, the indirect auto loans are subject to the Banks' stringent credit standards. Residential real estate mortgages. The residential real estate category predominantly includes one-to-four family adjustable rate mortgages that have repricing terms generally from one to three years, construction loans to individuals, bridge financing loans for qualifying customers and mortgage loans held for sale into the secondary market. The adjustable rate mortgages are often non-agency conforming, may have terms based on differing indexes, and relate to properties located principally in the Chicago metropolitan area or vacation homes owned by local residents. Adjustable-rate mortgage loans decrease, but do not eliminate, the risks associated with changes in interest rates. Because periodic and lifetime caps limit the interest rate adjustments, the value of adjustable-rate mortgage loans fluctuates inversely with changes in interest rates. In addition, as interest rates increase, the required payments by the borrower increases, thus increasing the potential for default. The Company does not generally originate loans for its own portfolio with long-term fixed rates due to interest rate risk considerations, however, the Banks do accommodate customer requests for fixed rate loans by originating and selling these loans into the secondary market, in connection with which the Company receives fee income, or by selectively including certain of these loans within the Banks' own portfolios. A portion of the loans sold by the Banks into the secondary market is to the Federal National Mortgage Association ("FNMA") whereby the servicing of those loans is retained. The amount of loans serviced for FNMA as of December 31, 1999 and 1998 was $87.1 million and $82.1 million, respectively. All other mortgage loans held for sale are sold into the secondary market without the retention of servicing rights. Premium finance receivables. The Company originates premium finance receivables through FIFC, which, in turn, are mostly sold to the Banks and retained within their loan portfolios. In 1999, the Company began selling a portion of premium finance receivable originations to an unrelated financial institution, which resulted in the recognition of gains from the sales of these receivables. FIFC sold approximately $69 million of receivables to this third party in 1999 and recognized approximately $1.0 million in gains. As of December 31, 1999, the balance of these receivables that are being serviced by FIFC totaled approximately $46.2 million. All premium finance receivables 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. - 23 - FIFC generally offers financing of approximately 80% of an insurance premium primarily to commercial purchasers of property and casualty and liability insurance who desire to pay insurance premiums on an installment basis. FIFC markets its financial services primarily by establishing and maintaining relationships with medium and large insurance agents and brokers and by offering a high degree of service and innovative products. Senior management is significantly involved in FIFC's marketing efforts, currently focused almost exclusively on commercial accounts. Loans are originated by FIFC's own sales force by working with insurance agents and brokers throughout the United States. As of December 31, 1999, FIFC had the necessary licensing and other regulatory approvals to do business in all 50 states and the District of Columbia. 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 typically makes a down payment of approximately 15% to 25% of the total premium and signs a premium finance agreement for the balance due, which amount FIFC disburses directly to the insurance carrier or its agents to satisfy the unpaid premium amount. The average initial balance of premium finance loans is approximately $13,000 and the average term of the agreements is approximately 10 months. As the insurer earns the premium ratably over the life of the policy, the unearned portion of the premium secures payment of the balance due to FIFC by the insured. Under the terms of the Company's standard form of financing contract, the Company has the power to cancel the insurance policy if there is a default in the payment on the finance contract and to collect the unearned portion of the premium from the insurance carrier. In the event of cancellation of a policy, the cash returned in payment of the unearned premium by the insurer should be sufficient to cover the loan balance and generally the interest and other charges due as well. The major risks inherent in this type of lending are (1) the risk of fraud on the part of an insurance agent whereby the agent fraudulently fails to forward funds to the insurance carrier or to FIFC, as the case may be; (2) the risk that the insurance carrier becomes insolvent and is unable to return unearned premiums related to loans in default; (3) for policies that are subject to an audit by the insurance carrier (i.e. workers compensation policies where the insurance carrier can audit the insured actual payroll records), the risk that the initial underwriting of the policy was such that the premium paid by the insured are not sufficient to cover the a entire return premium in the event of default; and (4) that the borrower is unable to ultimately satisfy the debt in the event the returned unearned premium is insufficient to retire the loan. FIFC has established underwriting procedures to reduce the potential of loss associated with the aforementioned risks and has systems in place to continually monitor conditions that would indicate an increase in risk factors and to act on situations where the Company's collateral position is in jeopardy. Tricom finance receivables. The October 1999 acquisition of Tricom added this category, which consists of high-yielding short-term accounts receivable financing to clients in the temporary staffing industry located throughout the United States. The clients' working capital needs arise primarily from the timing differences between weekly payroll funding and monthly collections from customers. The primary security for Tricom's finance receivables are the accounts receivable of its clients and personal guarantees. Tricom generally advances 80-95% based on various factors including the client's financial condition, the length of client relationship and the nature of the client's customer business lines. Typically, Tricom will also provide value-added out-sourced administrative services to many of these clients, such as data processing of payrolls, billing and cash management services, which generates additional fee income. - 24 - Installment and Other. Included in the installment and other loan category is a wide variety of personal and consumer loans to individuals. The Banks have been originating consumer loans in recent years in order to provide a wider range of financial services to their customers. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans due to the type and nature of the collateral. The Company had no loans to businesses or governments of foreign countries at any time during the reporting periods. RISK ELEMENTS IN THE LOAN PORTFOLIO For analysis and review of the allowance for possible loan losses; non-accrual, past due and restructured loans; other real estate owned; potential problem loans; and loan concentrations, reference is made to the "Credit Risk and Asset Quality" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations of the 1999 Annual Report to Shareholders filed herewith as Exhibit 13.1, and incorporated herein by reference. An allocation of the allowance for possible loan losses by major loan type is presented below (dollars in thousands):
December 31, 1999 December 31, 1998 December 31, 1997 ------------------------------- ----------------------------- --------------------------------- % of loans % of loans % of loans in each in each in each category to category to category to Amount total loans Amount total loans Amount total loans ------------ ------------ ------------ ------------ ------------ ------------ Commercial and commercial real estate.......... $ 3,435 38% $ 2,480 37% $1,490 33% Home equity....................... 1,146 11 1,046 11 580 16 Residential real estate........... 126 9 81 9 43 9 Premium finance................... 721 17 919 18 702 18 Indirect auto..................... 1,947 20 1,205 21 679 19 Tricom finance receivables. 120 1 - - - - Installment and other............. 469 4 494 4 218 5 Unallocated....................... 819 - 809 - 1,404 - ------------ ------------ ------------ ------------ ------------ ------------ Total.............................. $ 8,783 100% $ 7,034 100% $5,116 100% ============ ============ ============ ============ ============ ============
The above allocation is made for analytical purposes. It is not anticipated that charge-offs during the year ending December 31, 2000 will exceed the amount allocated to any individual category of loan. For further review of the loan loss provision and the allowance for possible loan losses reference is made to the "Credit Risk and Asset Quality" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations of the 1999 Annual Report to Shareholders filed herewith as Exhibit 13.1, and incorporated herein by reference. - 25 - DEPOSITS The following table sets forth the scheduled maturities of time deposits in denominations of $100,000 or more at December 31, 1999 (in thousands): Maturing within 3 months ............................... $ 113,393 After 3 but within 6 months ............................ 84,991 After 6 but within 12 months ........................... 161,706 After 12 months ........................................ 72,892 --------------- Total ................................................ $ 432,982 =============== Return on Equity and Assets The following table presents certain ratios relating to the Company's equity and assets:
Year Ended December 31 1999 1998 1997 - ---------------------- ---- ---- ---- Return on average total assets ................................. 0.63% 0.53% 0.56% Return on average common shareholders' equity .................. 11.58% 8.68% 7.88% Dividend payout ratio .......................................... 0.00% 0.00% 0.00% Average equity to average total assets ......................... 5.4% 6.1% 7.2% Ending total risk based capital ratio .......................... 8.4% 9.7% 9.4% Leverage ratio ................................................. 7.1% 7.5% 6.6%
SHORT-TERM BORROWINGS The information required in connection with Short-Term Borrowings is contained in the "Analysis of Financial Condition - Short-Term Borrowings and Notes Payable" sections of the Management's Discussion and Analysis of Financial Condition and Results of Operations in the 1999 Annual Report to Shareholders filed herewith as Exhibit 13.1, and is incorporated herein by reference. During 1999, the Company entered into sales of securities under agreements to repurchase ("reverse repurchase agreements"). Fixed-coupon reverse repurchase agreements are treated a financings, and the obligations to repurchase securities sold are reflected as short-term borrowings in the Company's 1999 Annual Report to Shareholders under the caption "Consolidated Statements of Condition". The dollar amounts of securities underlying the agreements remain in the available-for-sale securities section of the Consolidated Statements of Condition. During 1999, the maximum month-end balance of reverse repurchase agreements was $82.4 million. At December 31, 1999, securities sold under agreements to repurchase consisted of U.S. government agency mortgage-backed securities. These securities underlying the agreements were delivered to the dealer who arranged the transactions. The agreements require the Company to repurchase the same securities. - 26 - ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE At its regular board meeting on April 29, 1999, the Company's Board of Directors voted to approve the Audit Committee's recommendation to engage the accounting firm of Ernst & Young LLP as independent accountants for the year ended December 31, 1999. The work of KPMG LLP was terminated on April 29, 1999, subsequent to the Form 10-K report for December 31, 1998, which was filed with the Securities and Exchange Commission on March 30, 1999. During the audits of the two fiscal years ended December 31, 1998 and the subsequent interim period through April 29, 1999, there were no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement, nor have there been any reportable events. The information required in response to this item is contained in the April 29, 1999 Form 8-K that was filed with the Commission on May 6, 1999, and is incorporated herein by reference. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required in response to this item will be contained in the Company's definitive Proxy Statement (the "Proxy Statement") for its Annual Meeting of Shareholders to be held May 25, 2000 under the caption "Management" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required in response to this item will be contained in the Company's Proxy Statement under the caption "Executive Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to security ownership of certain beneficial owners and management is incorporated by reference to the section "Principal Shareholders" in the Proxy Statement for the Annual Meeting of Shareholders to be held on May 25, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required in response to this item will be contained in the Proxy Statement under the caption "Certain Transactions," and is incorporated herein by reference. - 27 - PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Report: 1., 2. Financial Statements and Schedules ---------------------------------- The following financial statements of Wintrust Financial Corporation, incorporated herein by reference to the 1999 Annual Report to Shareholders filed as Exhibit 13.1, are filed as part of this document pursuant to Item 8. Financial Statements and Supplementary Data: - Consolidated Statements of Condition as of December 31, 1999 and 1998 - Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 - Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 - Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 - Notes to Consolidated Financial Statements - Independent Auditors' Reports No schedules are required to be filed with this report. 3. Exhibits (Exhibits marked with a "*" denote management contracts or -------- compensatory plans or arrangements) 2.1 Stock Purchase Agreement Among Wintrust Financial Corporation and John Leopold and Mark Kahn dated September 16, 1999 in relation to the acquisition of Tricom, Inc. of Milwaukee (incorporated by reference to Exhibit 2.1 of the Company's October 26, 1999 Form 8-K filed with the Securities and Exchange Commission on November 1, 1999). 2.2 Post-Closing Indemnification and Escrow Agreement in relation to the acquisition of Tricom, Inc. of Milwaukee (incorporated by reference to Exhibit 2.2 of the Company's October 26, 1999 Form 8-K filed with the Securities and Exchange Commission on November 1, 1999). 3.1 Amended and Restated Articles of Incorporation of Wintrust Financial Corporation (incorporated by reference to Exhibit 3.1 of the Company's Form S-1 Registration Statement (No 333-18699) filed with the Securities and Exchange Commission on December 24, 1996). 3.2 Statement of Resolution Establishing Series of Junior Serial Preferred Stock A of Wintrust Financial Corporation (incorporated by reference to Exhibit 3.2 of the Company's Form 10-K for the year ended December 31, 1998). - 28 - 3.3 Amended By-laws of Wintrust Financial Corporation (incorporated by reference to Exhibit 3(i) of the Company's Form 10-Q for the quarter ended June 30, 1998). 4.1 Rights Agreement between Wintrust Financial Corporation and Illinois Stock Transfer Company, as Rights Agent, dated July 28, 1998 (incorporated by reference to Exhibit 4.1 of the Company's Form 8-A Registration Statement (No. 000-21923) filed with the Securities and Exchange Commission on August 28, 1998). 4.2 Preferred Securities Guarantee Agreement by and between Wintrust Financial Corporation and Wilmington Trust Company dated September 29, 1998, relating to the 9.00% Cumulative Trust Preferred Securities of Wintrust Capital Trust I (incorporated by reference to Exhibit 4.2 of the Company's Form 10-K for the year ended December 31, 1998). 4.3 Indenture by and between Wintrust Financial Corporation and Wilmington Trust Company dated September 29, 1998, relating to the 9.00% Subordinated Debentures issued to Wintrust Capital Trust I (incorporated by reference to Exhibit 4.3 of the Company's Form 10-K for the year ended December 31, 1998). 4.4 Amended and Restated Trust Agreement by and among Wintrust Financial Corporation, Wilmington Trust Company and the Administrative Trustees named therein dated September 29, 1998, relating to the 9.00% Cumulative Trust Preferred Securities of Wintrust Capital Trust I (incorporated by reference to Exhibit 4.4 of the Company's Form 10-K for the year ended December 31, 1998). 4.5 Form of Preferred Security Certificate of Wintrust Capital Trust I (included as an exhibit to Exhibit 4.4). 4.6 Form of Subordinated Debenture (included as an exhibit to Exhibit 4.3). 10.1 $25 Million Revolving Loan Agreement between LaSalle National Bank and Wintrust Financial Corporation, dated September 1, 1996 (incorporated by reference to Exhibit 10.1 of the Company's Form S-1 Registration Statement (No. 333-18699) filed with the Securities and Exchange Commission on December 24, 1996). 10.2 First Amendment to Loan Agreement between Wintrust Financial Corporation and LaSalle National Bank, dated March 1, 1997 (incorporated by reference to Exhibit 10.29 to Registrant's Form 10-K for the year ended December 31, 1996, filed with the Securities and Exchange Commission on March 28, 1997). 10.3 Second Amendment to Loan Agreement between Wintrust Financial Corporation and LaSalle National Bank, dated March 1, 1997 (incorporated by reference to Exhibit 10.3 of the Company's Form 10-K for the year ended December 31, 1997, filed with the Securities and Exchange Commission on March 31, 1998). - 29 - 10.4 Third Amendment to Loan Agreement between Wintrust Financial Corporation and LaSalle National Bank, dated September 1, 1998 (incorporated by reference to Exhibit 10 of the Company's Form 10-Q for the quarter ended September 30, 1998, filed with the Securities and Exchange Commission on November 13, 1998). 10.5 Fourth Amendment to Loan Agreement between Wintrust Financial Corporation and LaSalle Bank National Association, dated September 1, 1999. 10.6 Form of Wintrust Financial Corporation Warrant Agreement (incorporated by reference to Exhibit 10.29 to Amendment No. 1 to Registrant's Form S-4 Registration Statement (No. 333-4645), filed with the Securities and Exchange Commission on July 22, 1996).* 10.7 Lake Forest Bank & Trust Company Lease for drive-up facility located at the corner of Bank Lane & Wisconsin Avenue, Lake Forest, Illinois, dated December 11, 1992 (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registrant's Form S-4 Registration Statement (No. 333-4645) filed with the Securities and Exchange Commission on July 22, 1996). 10.8 Lake Forest Bank & Trust Company Lease for banking facility located at 810 South Waukegan Road, Lake Forest, Illinois (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registrant's Form S-4 Registration Statement (No. 333-4645) filed with the Securities and Exchange Commission on July 22, 1996). 10.9 Lake Forest Bank & Trust Company Lease for banking facility located at 666 North Western Avenue, Lake Forest, Illinois, dated July 19, 1991 and Amendment (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registrant's Form S-4 Registration Statement (No. 333-4645) filed with the Securities and Exchange Commission on July 22, 1996). 10.10 Lake Forest Bank & Trust Company Lease for banking facility located at 103 East Scranton Avenue, Lake Bluff, Illinois, dated November 1, 1994 (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registrant's Form S-4 Registration Statement (No. 333-4645) filed with the Securities and Exchange Commission on July 22, 1996). 10.11 North Shore Bank & Trust Company Lease for banking facility located at 362 Park Avenue, Glencoe, Illinois, dated July 27, 1995 (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registrant's Form S-4 Registration Statement (No. 333-4645) filed with the Securities and Exchange Commission on July 22, 1996). - 30 - 10.12 North Shore Bank & Trust Company Lease for banking facility located at 794 Oak Street, Winnetka, Illinois, dated June 16, 1995 (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to Registrant's Form S-4 Registration Statement (No. 333-4645) filed with the Securities and Exchange Commission on July 22, 1996). 10.13 Barrington Bank and Trust Company Lease for property located at 202A South Cook Street, Barrington, Illinois, dated December 29, 1995 (incorporated by reference to Exhibit 10.24 of the Company's Form S-1 Registration Statement (No 333-18699) filed with the Securities and Exchange Commission on December 24, 1996). 10.14 Real Estate Contract by and between Wolfhoya Investments, Inc. and Amoco Oil Company, dated March 25, 1996, and amended as of __________, 1996, relating to the purchase of property located at 201 South Hough, Barrington, Illinois (incorporated by reference to Exhibit 10.25 of the Company's Form S-1 Registration Statement (No 333-18699) filed with the Securities and Exchange Commission on December 24, 1996). 10.15 Form of Employment Agreement entered into between the Company and Howard D. Adams, former Chairman and Chief Executive Officer (incorporated by reference to Exhibit 10.26 of the Company's Form S-1 Registration Statement (No. 333-18699) filed with the Securities and Exchange Commission on December 24, 1996). * 10.16 Form of Employment Agreement (entered into between the Company and Edward J. Wehmer, President and Chief Executive Officer). The Company entered into Employment Agreements with David A. Dykstra, Executive Vice President and Chief Financial Officer, Robert F. Key, Executive Vice President-Marketing, Lloyd M. Bowden, Executive Vice President-Technology and Randolph M. Hibben, Executive Vice President-Investments during 1998 in substantially identical form to this exhibit (incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 1998). * 10.17 First Premium Services, Inc. Lease, as amended, for corporate offices located at Lake Cook Road, Deerfield, Illinois (incorporated by reference to Exhibit 10.27 to Amendment No. 1 of the Company's Form S-1 Registration Statement (No. 333-18699) filed with the Securities and Exchange Commission on January 24, 1997). 10.18 Lake Forest Bank & Trust Company Lease for drive-up and walk-up facility located at 911 South Telegraph Road, Lake Forest, Illinois, dated November 7, 1996 (incorporated by reference to Exhibit 10.28 to Amendment No. 1 of the Company's Form S-1 Registration Statement (No. 333-18699) filed with the Securities and Exchange Commission on January 24, 1997). 10.19 Wintrust Financial Corporation 1997 Stock Incentive Plan (incorporated by reference to Appendix A of the Proxy Statement relating to the May ---------- 22, 1997 Annual Meeting of Shareholders of the Company). * - 31 - 10.20 Wintrust Financial Corporation Employee Stock Purchase Plan (incorporated by reference to Appendix B of the Proxy Statement relating ---------- to the May 22, 1997 Annual Meeting of Shareholders of the Company). * 13.1 1999 Annual Report to Shareholders. 21.1 Subsidiaries of the Registrant. 23.1 Consent of Independent Auditors. 27.1 Financial Data Schedule. (b) Reports on Form 8-K There were three Form 8-K reports filed with the Securities and Exchange Commission during the fourth quarter of 1999 as follows: October 19, 1999 - Form 8-K filed on October 28, 1999 to announce the Company's third quarter 1999 earnings. October 26, 1999 - Form 8-K filed on November 1, 1999 to announce the completion of the acquisition of Tricom, Inc. of Milwaukee. December 23, 1999 - Form 8-K/A filed on December 23, 1999 to include the required financial statements and pro forma financial information in relation to the acquisition of Tricom, Inc. of Milwaukee. - 32 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Wintrust Financial Corporation Edward J. Wehmer EDWARD J. WEHMER March 28, 2000 -------------------------- President and Chief Executive Officer David A. Dykstra DAVID A. DYKSTRA March 28, 2000 -------------------------- Executive Vice President & Chief Financial Officer (Principal Financial Officer) Todd A. Gustafson TODD A. GUSTAFSON March 28, 2000 -------------------------- Vice President - Finance (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. John S. Lillard JOHN S. LILLARD March 28, 2000 -------------------------- Chairman of the Board of Directors Edward J. Wehmer EDWARD J. WEHMER March 28, 2000 -------------------------- President and CEO and Director Joseph Alaimo JOSEPH ALAIMO March 28, 2000 -------------------------- Director Peter Crist PETER CRIST March 28, 2000 -------------------------- Director Bruce K. Crowther BRUCE K. CROWTHER March 28, 2000 -------------------------- Director Maurice F. Dunne, Jr. MAURICE F. DUNNE, JR. March 28, 2000 -------------------------- Director William C. Graft WILLIAM C. GRAFT March 28, 2000 -------------------------- Director Kathleen R. Horne KATHLEEN R. HORNE March 28, 2000 -------------------------- Director - 33 - John Leopold JOHN LEOPOLD March 28, 2000 -------------------------- Director James E. Mahoney JAMES E. MAHONEY March 28, 2000 -------------------------- Director James B. McCarthy JAMES B. MCCARTHY March 28, 2000 -------------------------- Director Marquerite Savard McKenna MARQUERITE SAVARD MCKENNA March 28, 2000 -------------------------- Director Albin F. Moschner ALBIN F. MOSCHNER March 28, 2000 -------------------------- Director Thomas J. Neis THOMAS J. NEIS March 28, 2000 -------------------------- Director Hollis W. Rademacher HOLLIS W. RADEMACHER March 28, 2000 -------------------------- Director J. Christopher Reyes J. CHRISTOPHER REYES March 28, 2000 -------------------------- Director Peter Rusin PETER RUSIN March 28, 2000 -------------------------- Director John N. Schaper JOHN N. SCHAPER March 28, 2000 -------------------------- Director John J. Schornack JOHN J. SCHORNACK March 28, 2000 -------------------------- Director Ingrid S. Stafford INGRID S. STAFFORD March 28, 2000 -------------------------- Director Jane R. Stein JANE R. STEIN March 28, 2000 -------------------------- Director Katharine V. Sylvester KATHARINE V. SYLVESTER March 28, 2000 -------------------------- Director Lemuel H. Tate, Jr. LEMUEL H. TATE, JR. March 28, 2000 -------------------------- Director Larry Wright LARRY WRIGHT March 28, 2000 -------------------------- Director - 34 - EX-10 2 FOURTH AMENDMENT TO LOAN AGREEMENT Exhibit 10.5 FOURTH AMENDMENT TO LOAN AGREEMENT THIS FOURTH AMENDMENT TO LOAN AGREEMENT dated as of September 1, 1999 (this "Amendment"), is between WINTRUST FINANCIAL CORPORATION, an Illinois corporation (the "Borrower"), and LASALLE BANK NATIONAL ASSOCIATION, formerly known as, LASALLE NATIONAL BANK, a national banking association (the "Bank"). RECITALS A. the Borrower and the Bank entered into a Loan Agreement dated as of September 1, 1996, as amended by a First Amendment thereto dated March 1, 1997, a Second Amendment thereto dated September 1,1997 and a Third Amendment dated September 1, 1998 (collectively, the "Agreement"); and B. the Borrower and the Bank desire to amend the Agreement as more fully described herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. All capitalized terms used herein without definition shall have the respective meanings set forth in the Agreement 2. AMENDMENTS TO THE AGREEMENT. 2.1 AMENDMENT TO SECTION 3(A) OF THE AGREEMENT. Section 3(a) ------------------------------------------- ------------ of the Agreement is amended by deleting the first paragraph of Section 3(a) in its entirety and inserting in lieu thereof the following: "(a) Interest accruing at the Prime Rate (hereinafter defined) on amounts outstanding under the Note shall be payable quarterly, in arrears, commencing on December 1, 1999 and continuing on the first day of each March, June, September and December thereafter. A final payment of all outstanding amounts due under the Note including, but not limited to principal, interest and any amounts owing under Subsection 10(m) of this Agreement, if not payable earlier, shall be due and payable on August 30, 2000 (the "Maturity Date"). Accrued and unpaid interest on the unpaid principal balance of all advances outstanding from time to time which are LIBOR (hereinafter defined) advances shall be payable on the last business day of each Interest Period (hereinafter defined), commencing on the first such date to occur after the date hereof, on the date of any principal repayment of a LIBOR advance and on the Maturity Date. The amounts outstanding under the Note from time to time shall bear interest calculated on the actual number of days elapsed on the basis of a 360 day year, at a rate equal, at the Borrower's - 1 - option to either (a) the London Inter-Bank Offered Rate ("LIBOR") plus 125 basis points, or (b) the Prime Rate (whichever rate is so selected, the "Interest Rate"). 2.2 AMENDMENT TO SECTION 3(A) OF THE AGREEMENT. SECTION 3(A) ------------------------------------------- ------------ of the Agreement is amended by inserting after the first sentence in the third paragraph of Section 3(a) the following sentence: "The LIBOR rate for all LIBOR advances made during an Interest Period shall be fixed at the LIBOR rate in effect for the initial LIBOR advance with respect to such Interest Period and interest on all such advances during the Interest Period shall be due and payable at the expiration of such Interest Period." 3. WARRANTIES. To induce the Bank to enter into this Amendment, the Borrower warrants that: 3.1 AUTHORIZATION. The Borrower is duly authorized to execute ------------- and deliver this Amendment and is and will continue to be duly authorized to borrow monies under the Agreement, as amended hereby, and to perform its obligations under the Agreement, as amended hereby. 3.2 NO CONFLICTS. The execution and delivery of this Amendment ------------ and the performance by the Borrower of its obligations under the Agreement, as amended hereby, do not and will not conflict with any provision of law or of the charter or by-laws of the Borrower or of any agreement binding upon the Borrower. 3.3 VALIDITY AND BINDING EFFECT. The Agreement, as amended ---------------------------- hereby, is a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or other similar laws of general application affecting the enforcement of creditors' rights or by general principles of equity limiting the availability of equitable remedies. 3.4 NO DEFAULT. As of the date hereof, no Event of Default ----------- under Section 9 of the Agreement, as amended by this Amendment, or event or --------- condition which, with the giving of notice or the passage of time, shall constitute an Event of Default, has occurred or is continuing. 3.5 WARRANTIES. As of the date hereof, the representations and ---------- warranties in Section 5 of the Agreement are true and correct as though made on --------- such date, except for such changes as are specifically permitted under the Agreement. 3.6 YEAR 2000. The Borrower and its Subsidiaries have reviewed --------- the areas within their business and operations which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the "Year 2000 Problem" (that is, the risk that computer applications used by the Borrower and its Subsidiaries may be unable to recognize - 2 - and perform properly date-sensitive functions involving certain dates prior to and any date after December 31, 1999), and have made related appropriate inquiry of material suppliers and vendors. Based on such review and program, the Borrower believes that the Year 2000 Problem will not have a material adverse effect on the Borrower. 4. CONDITIONS PRECEDENT. This Amendment shall become effective as of the date above first written after receipt by the Bank of the following documents: (a) This Amendment duly executed by the Borrower; (b) A Replacement Revolving Note in the form attached hereto as Exhibit A-4, duly executed by the Borrower; and ----------- (c) Such other documents and instruments as the Bank reasonably requests. 5. GENERAL 5.1 LAW. This Amendment shall be construed in accordance with --- and governed by the laws of the State of Illinois. 5.2 SUCCESSORS. This Amendment shall be binding upon the ---------- Borrower and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrower and the Bank and their respective successors and assigns. 5.3 CONFIRMATION OF THE AGREEMENT. Except as amended hereby, ----------------------------- the Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects LASALLE BANK NATIONAL ASSOCIATION WINTRUST FINANCIAL CORPORATION By: By: /s/ David A. Dykstra --------------------------------- ------------------------------- Its: Its:Executive VP & CFO --------------------------------- ------------------------------- - 3 - EXHIBIT A-4 ----------- REPLACEMENT REVOLVING NOTE $40,000,000 Dated: September 1, 1999 FOR VALUE RECEIVED, WINTRUST FINANCIAL CORPORATION, an Illinois corporation (the "Maker") promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION formerly known as, LASALLE NATIONAL BANK, a national banking association (the "Bank") the lesser of: the principal sum of FORTY MILLION DOLLARS ($40,000,000), or the aggregate unpaid principal amount outstanding under the Loan Agreement dated September 1, 1996 (as amended from time to time, the "Loan Agreement") between the Bank and the Maker at the maturity or maturities and in the amount or amounts as stated on the records of the Bank together with interest (computed on actual days elapsed on the basis of a 360 day year) on any and all principal amounts outstanding hereunder from time to time from the date hereof until maturity. Interest shall be payable at the rates of interest and the times set forth in the Loan Agreement. In no event shall any principal amount have a maturity later than August 30, 2000. This Note shall be available for direct advances. Principal and interest shall be paid to the Bank at its office at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the holder of this Note may designate in writing to the Maker. This Note may be prepaid in whole or in part as provided for in the Loan Agreement. This Note evidences indebtedness incurred under the Loan Agreement, to which reference is hereby made for a statement of the terms and conditions under which the due date of the Note or any payment thereon may be accelerated. The holder of this Note is entitled to all of the benefits provided for in the Loan Agreement. The Maker agrees that in action or proceeding instituted to collect or enforce collection of this Note, the amount on the Bank's records shall be conclusive and binding evidence, absent demonstrable error, of the unpaid principal balance of this Note. This Note is in replacement and substitution of, but not repayment for, a Revolving Note of the Borrower dated September 1, 1998 in the principal amount of $40,000,000 and is in no way intended to constitute a novation therefor. WINTRUST FINANCIAL CORPORATION By: /s/ David A. Dykstra ------------------------------ Its: Executive VP & CFO ------------------------------ 111024 - 4 - EX-13 3 1999 ANNUAL REPORT TO SHAREHOLDERS. "Indeed, in true entrepreneurial spirit, community banks have used opportunities provided by the mergers of the past decade to their advantage in attracting customers that are either ill-served or ignored by larger, less responsive banks. Community banks have also responded well to technological challenges. "Clearly, many franchises will succeed by continuing to focus on traditional banking. ... Some of the new technologies are beguiling, but we should not lose sight of the exceptional economic value of franchises based on old-fashioned, face to face interpersonal banking. The newer technologies may be awesome but human nature does not change - we still appreciate a face across the desk more than a computer screen. "I am confident, as we enter a new century, that community banks will show they are up to the task and will remain a vital part of their local communities and our financial system." - Alan Greenspan Chairman of the Federal Reserve Board March 8, 2000 SELECTED GROWTH TRENDS **** Five Year Asset Growth Bar Chart OMITTED **** **** Three Year Earnings Per Share Growth Bar Chart OMITTED **** **** Three Year Net Income Growth Bar Chart OMITTED **** **** Three Year Pre-Tax Income Growth Bar Chart OMITTED **** **** Five Year Book Value Per Common Share Bar Chart OMITTED **** **** Three Year Return on Average Equity Bar Chart OMITTED **** - 2 -
SELECTED FINANCIAL HIGHLIGHTS - ------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, ------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ------------------------------------------------------------------------ (dollars in thousands, except per share data) Selected Financial Condition Data (at end of year): Total assets $ 1,679,382 $ 1,348,048 $ 1,053,400 $ 706,037 $ 470,890 Total deposits 1,463,622 1,229,154 917,701 618,029 405,658 Total net loans 1,278,249 992,062 712,631 492,548 258,231 Long-term debt and notes payable 39,400 31,050 20,402 22,057 10,758 Total shareholders' equity 92,947 75,205 68,790 42,620 40,487 - ------------------------------------------------------------------------------------------------------------------------ Selected Statements of Operations Data: Net interest income $ 47,734 $ 36,764 $ 26,772 $ 14,882 $ 9,700 Total net revenues 57,542 44,839 31,716 22,414 18,244 Income (loss) before income taxes 14,151 4,709 1,058 (2,283) 1,002 Net income (loss) 9,427 6,245 4,846 (973) 1,497 Net income (loss) per common share-basic 1.14 0.77 0.62 (0.16) 0.27 Net income (loss) per common share-diluted 1.10 0.74 0.60 (0.16) 0.24 - ------------------------------------------------------------------------------------------------------------------------ Selected Financial Ratios and Other Data: Performance Ratios: Net interest margin 3.54% 3.43% 3.41% 2.91% 2.96% Core net interest margin (1) 3.64 3.45 3.41 2.91 2.96 Net interest spread 3.23 3.00 2.92 2.40 2.41 Non-interest income to average assets 0.66 0.69 0.58 1.34 2.36 Non-interest expense to average assets 2.65 3.04 3.18 4.05 4.37 Net overhead ratio 2.00 2.36 2.60 2.71 2.01 Return on average assets 0.63 0.53 0.56 (0.17) 0.40 Return on average equity 11.58 8.68 7.88 (2.33) 4.66 Average total assets $ 1,496,566 $ 1,177,745 $ 858,084 $ 562,244 $ 362,125 Average shareholders' equity 81,381 71,906 61,504 41,728 31,173 Ending loan-to-deposit ratio 87.3% 80.7% 77.7% 79.7% 63.7% Average loan-to-average deposit ratio 86.6 80.1 80.1 69.8 61.3 Average interest earning assets to average interest bearing liabilities 107.0 108.9 109.9 110.7 111.4 Asset Quality Ratios: Non-performing loans to total net loans 0.54% 0.55% 0.59% 0.36% 0.74% Non-performing assets to total assets 0.41 0.45 0.40 0.25 0.41 Allowance for possible loan losses to: Total loans 0.69 0.71 0.72 0.74 1.07 Non-performing loans 126.10 129.66 121.64 204.15 143.91 Common Share Data at end of year: Market price per common share $ 15.25 $ 19.63 $ 17.00 $ 14.75 N/A Book value per common share 10.60 9.23 8.47 6.45 $ 6.94 Other Data at end of year: Number of: Bank subsidiaries 6 6 6 5 4 Non-bank subsidiaries 3 2 1 1 1 Banking offices 24 21 17 14 11 ======================================================================================================================== (1) The core net interest margin excludes the net impact of the Company's 9.00% Cumulative Trust Preferred Securities offering and certain discretionary investment leveraging transactions.
- 3 - TO OUR FELLOW SHAREHOLDERS, Welcome to our fourth annual report. Let us start out by saying 1999 was a terrific year for Wintrust Financial Corporation. We'd like to sincerely thank all of our employees who went above and beyond in providing our customers with the best service around. Thanks also to the more than 100 directors of Wintrust Financial Corporation and our subsidiaries whose advice and contacts have helped us profitably build our business. And we would like to thank our customers for trusting us to manage and grow their financial assets. We will continue to do everything in our power to retain your confidence. And finally, thanks to our shareholders, many of whom are also customers, for keeping us focused on what we do best. In just our third full year as a corporation, we made great progress on a number of fronts. As a young company, we have finally turned the corner in terms of creating the proper balance between our financial stability and growth. Our earnings, especially our core earnings, are now increasing very quickly as our de novo banks mature, we grow into our overhead and we reap the benefits of becoming an asset-driven organization. We have also been able to achieve something that few banks around the country can brag about these days--our earnings, revenue and assets are all still growing at a very strong rate. We will continue to purposefully grow our de novo banks, our premium finance business, our trust and investment business and the financing and fee business generated by our newest subsidiary, Tricom, Inc. When reviewing earnings and revenue growth, Wintrust Financial Corporation is solidly in the top quartile in both categories amongst all publicly traded bank stocks. When earnings and revenue growth are looked at together, Wintrust Financial Corporation is clearly one of the top performers in the country. We have achieved these results, in part, due to our belief in and strict adherence to the operating philosophy and principles noted below. These guiding strategies help our community banks and other subsidiaries effectively compete with the bigger banks and larger corporations who are our competition. These principles are also our road map for long term growth in shareholder equity. **** Five Year Net Revenue Growth Bar Chart OMITTED **** Here are those operating and growth principles that have been and will continue to be the key to our success: o Provide the best customer service-- bar none o Open/operate de novo community banks in affluent markets where deposits per household leverage is high o Manage each community bank locally with strong participatory boards, experienced local management and local decision making o Be lean and responsive in our decision making and organizational structure o Employ fewer, but more highly qualified and productive individuals o Build employee productivity and loyalty with stock incentives and options o Build customer bases and market share with aggressive (and entertaining!) marketing and loyalty building programs o Utilize technology (the "great equalizer") to more effectively deliver products and services o Utilize the internet as a new distribution vehicle for current products and a portal for marketing and distributing new products o Be asset-driven (i.e. generate more loans than deposits) to augment our community banks' loan portfolios and maximize our profitability and growth potential o Take advantage of the operational and cross-marketing synergy provided by our diverse organizational structure (banks, Wintrust Asset Management, First Insurance Funding, Tricom, Inc.) o Evaluate the acquisition of existing community banks in high opportunity markets and financial services firms to expand our portfolio of asset niches and fee revenues - 4 - Let us not forget that we are still an extremely young company most of which has been grown on a de novo basis. Nine years ago none of our banks existed. On average our six community banks are less than five years old. A significant investment in people, facilities, operations and marketing is necessary to launch each new bank and to reach a critical mass in market share. 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 the early years of operation. However, in our short life, we have been able to reach the number two market share in our mature banks' primary markets and these banks are now achieving good profitability. As our young bank group continues to mature, the Company's earnings have increased markedly. The progression of each bank up the earnings curve has been consistent. And it bodes well for the future of Wintrust as our young companies continue to mature and improve their earnings. Impressive as this is, we have only begun the climb up the mountain. As we said in our fourth quarter letter to shareholders, "While we feel that we have made excellent progress on our journey to improve profitability and franchise value, we feel in some respect like a mountain climber. That is, after climbing partially up the `mountain' we look down and realize how far we have come in such a short period of time, but we look up and see that we've only begun our climb and have many more lofty goals to reach." Nevertheless, we sure are enjoying the climb! **** Five Year Number of Bank Facilities Bar Chart OMITTED **** We are extremely optimistic about the future. Our continued growth in assets and earnings and maturation of our young de novo franchises bode well for the future of Wintrust Financial Corporation and its investors. Please enjoy the next sections of our 1999 Annual Report, which highlight the following areas: o Where We Have Come From o Year in Review o Where We are Going o Audited Consolidated Financial Statements and Notes o Management's Discussion and Analysis of Financial Condition and Results of Operations o Directors and Officers Listing o Corporate Information We are grateful for your support of our organization and are enthusiastic about making the year 2000 another good year in terms of growth in earnings and assets. Thank you for being a shareholder. Sincerely, /s/ John S. Lillard /s/ Edward J. Wehmer John S. Lillard Edward J. Wehmer Chairman President & CEO - 5 - The American Banker recently published its "Century Edition", a book that covers the last 100 years of banking. We thought you would enjoy some snippets from this publication that illustrate how the fundamentals of banking really haven't changed in the last 100 years. It illustrates that the roots of our kind of community banking stretch far back into the early 1900's. o "The first decade of the 1900's set a pattern that endured throughout the century . . . the invisible hand of economics was not the only force at work. There was also the interplay of people and personalities, visions and ideas and ideals--and banking through it all remained very much a people-to-people enterprise. o "The battle between the big banks and country banks was a recurring motif. For decades it raged . . . . o "Though his personal effort to attract new business was successful . . . Giannini (founder of Bank of America) did something else unheard of in the stodgy, elitist banking community of his day--advertise. . . . In 1907 . . . introduced advertising that was probably banking's first branding campaign. The bank took the `ice' out of service read one early ad. We endeavor to treat every depositor just as we would like to be treated." **** Graphic Advertisement OMITTED **** **** Lake Forest Bank & Trust Logo OMITTED **** Our story officially began in December 1991 when a group of local residents, business people and experienced bankers decided that there was a real need for an independent community bank in Lake Forest, Illinois. All of the local financial institutions had been taken over by big banks. Decisions were made for the betterment of the bank's profitability at the expense of the customer. Operating out of a small storefront on Western Avenue in downtown Lake Forest with no customers, but armed with a firm belief in the philosophy of offering superior customer service by a locally run community bank, Lake Forest Bank & Trust ran our first ad. Approximately 30,000 customer households and almost $1,700,000,000 in assets later, the idea of a small community bank has blossomed into one of the fastest growing community bank groups in the country. Here are some of our highlights: o Eight year-old community focused banking organization o Six de novo community banks with 25 locations o Located in Chicago's most affluent markets o Wintrust Asset Management Company (trust and investments) o First Insurance Funding Corp. (commercial premium finance) o Tricom, Inc. (payroll funding and administrative services) o Fastest growing de novo bank group in Illinois - 6 - **** Map of Wintrust Financial Corporation Locations OMITTED **** - 7 - YEAR IN REVIEW 1999 Highlights Wintrust has had a terrific year. We have a lot of good news to talk about. Here is a short listing of some of your Company's accomplishments in 1999: o Wintrust generated record earnings for the year, up 51%. o Our 1999 pre-tax operating earnings increased 201% over 1998 and were over 13 times higher than in 1997. o During 1999, we grew our assets by 25% over a year ago and since the inception of the first bank in December 1991, our annual compound growth rate has been 54%. o Accordingly, we continue to be one of the fastest growing de novo bank groups in the country, not only in assets, but in earnings as well. o Our return on average equity increased 33% for the year and it stood at 12.66% for the fourth quarter of 1999. o During 1999, all of our community banks reached record asset levels and improved upon their profitability. o First Insurance Funding had record growth in premium finance receivables volume. We now are one of the top five premium finance companies in the industry. o Wintrust Asset Management, our trust and investment subsidiary, increased its assets under management to $442 million from $273 million at the end of 1998. o In October, we acquired Tricom, Inc. which adds another earning asset niche, bolsters our fee revenue and is accretive to our earnings per share. o Our asset quality remains strong, as the level of non-performing assets is very manageable and favorable compared to our peer group. o We recently announced the commencement of dividend payments with our first ever semi-annual cash dividend of $0.05 per common share paid in February 2000. o Believing our stock to be undervalued, your Board of Directors also recently announced its approval of a stock buyback program authorizing the purchase of up to 300,000 shares of the Company's common stock. **** Five Year Deposit Growth Bar Chart OMITTED **** THE "BIG MO" We are truly pleased with the progress made in 1999 and think we have significant momentum to carry us forward into the coming years. You can feel it in our community banks and the offices of First Insurance Funding, Wintrust Asset Management and Tricom. You can feel it in hallways around our organization. We have "turned the corner" so to speak and are looking forward to a very strong 2000. OUR HIDDEN EARNINGS POTENTIAL IS STARTING TO SHINE. The true indicator of our performance can be seen in the comparison of pre-tax earnings. Prior to 1999, a large portion of our net income was a result of recording prior net operating tax loss benefits. However, in 1999, our pre-tax operating earnings reached $14.2 million, an increase of $9.4 million, or 201%, over the same twelve-month period a year ago, and an increase of $13.1 million or 13 times over the 1997 pre-tax earnings level. This clearly illustrates how strongly our core earnings have improved. Our strategy of investing heavily in the start-up of our de novo banks continues to pay off as our banks mature and our core earnings accelerate. Also, the acquisition of Tricom has been immediately accretive to our bottom line since its addition in October 1999. - 8 - OUR FOURTH QUARTER "RUN RATE" INDICATES EVEN GREATER EARNINGS GROWTH. As one of the few bank groups in the country that is aggressively growing both assets and earnings, looking at our "total year" numbers is somewhat misleading and can understate our true performance. If we were to annualize the fourth quarter's net income and earnings per share and project those out for a year, here's where we stand before any improvement in performance: o Net after-tax income of $11.2 million o Diluted earnings per share of $1.28 This would represent a 19% pro-forma increase in net income and a 16% pro-forma increase in earnings per share over 1999 results, before any improvement. Most companies would be happy with those increases in year-over-year results but we have plans to continue to grow the earnings at a higher rate. If we were to factor in growth, which is reasonable given our track record, the continued maturation of our young franchise and the positive impact that the Tricom acquisition is expected to have on our results, we conclude that Wintrust Financial Corporation should have another impressive year in 2000. **** 1999 Quarterly Earnings Per Share Growth Bar Chart OMITTED **** WHY IS BEING "ASSET DRIVEN" SUCH AN IMPORTANT ADVANTAGE? During 1999, we accomplished our objective of becoming an "asset driven" organization. That is, the generation of loans is outpacing our growth in deposits. This is beneficial to the Company because it allows us to immediately invest new deposit dollars in loans which bear higher interest rates than alternative short-term investments. Being asset driven also allows us to be more competitive in designated markets where we want to increase market share because we are generating sufficient higher yielding assets to invest the new deposits. Because of our strong loan generation during 1999, we were able to provide the banks with additional liquidity by selling approximately $69 million of premium finance receivables to an unrelated financial institution at a pre-tax gain of over $1.0 million. We anticipate continuing this practice in the future as we balance growth and earnings. Being asset driven also allows us to grow to a size that most community banks can never reach. We think the typical community bank can generate local consumer and small business loans that represent about 50-60% of their deposit base without compromising credit quality. We are able to augment our community banks' loan portfolios with additional earning assets generated by our specialty finance niches. This not only allows us to improve the profitability of our community banks by optimizing their earning asset base, but also allows them to diversify their loan portfolios. Our ability to compete in the future will be materially aided by this asset strategy. **** Five Year Loan Growth Bar Chart OMITTED **** We currently generate additional loan volume from the following specialty asset niches: o Commercial premium finance lending o Temporary staffing industry financing o Indirect auto lending o Equipment leasing o Condominium association lending o Mortgage warehouse lending We are also investigating additional specialty lending areas either by de novo start-up or acquisition. - 9 - PERFORMANCE VERSUS GOALS We have set high standards for the Company and we want to be held accountable for our performance and the attainment of our goals. Here are the "high performing bank" goals that we have set for the Company and by which you should measure us: o Core 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 % The table below tracks the performance of these goals and our asset quality for each of the quarters in 1999 as well as the fourth quarter of 1998. We have generally experienced improvement in these performance measures and have actually surpassed some of our goals already in our more established banks. NET INTEREST MARGIN Growing the net interest margin continues to be our biggest challenge, especially in a period of rising interest rates. During 1999, the prime rate increased three times (and twice again through March 2000) and yields on U.S. Treasury bills steadily increased necessitating the need to raise certain variable deposit rates. This put increasing pressure on our net interest margin as our portfolio of assets generally takes longer to re-price than our deposit base. Over time, however, we believe that higher interest rates will be helpful to us in creating a higher net interest margin. **** Four Year Net Interest Margin Bar Chart OMITTED **** Controlling our funding costs and continuing to be a strong originator of a diversified loan portfolio is key to us achieving our net interest margin goal. Recently, our purchase of Tricom and the Company's new Community Advantage(TM) specialty asset generation program that provides lending and deposit services to condominium, homeowner and community associations have assisted in improving our net interest margin. These new sources of business will provide good growth for our organization and diversify our loan portfolio. NET OVERHEAD RATIO We have worked hard to improve upon our cost control results. During the third quarter of 1999, we attained our goal of operating at a net overhead ratio of less than 2%. And in the fourth quarter we improved on that performance measure even more. As we continue to grow into our existing overhead, we more efficiently leverage our facilities and staff.
Quarter Ended -------------------------------------------------------------------------------- December 31, September 30, June 30, March 31, December 31, 1999 1999 1999 1999 1998 -------------------------------------------------------------------------------- Core Net Interest Margin (1) 3.65% 3.59% 3.62% 3.66% 3.41% Net Overhead Ratio 1.89% 1.91% 2.04% 2.17% 2.24% Return on Average Equity 12.66% 12.46% 11.55% 9.75% 11.09% Return on Average Assets 0.68% 0.65% 0.62% 0.55% 0.63% Non-Performing Assets as a percent of total assets 0.41% 0.38% 0.33% 0.37% 0.45% Non-Performing Core Banking Loans as a percent of Total Core Banking Loans 0.32% 0.29% 0.28% 0.28% 0.38% =============================================================================================================================== (1) By definition, our Core Net Interest Margin excludes certain discretionary investment leveraging transactions and the net impact of the Company's 9.00% Cumulative Trust Preferred Securities offering.
- 10 - **** Four Year Net Overhead Ratio Bar Chart OMITTED **** ASSET QUALITY Your management understands that maintaining good credit quality is extremely important to overall profitability. To that end, we are pleased to report that non-performing asset levels remain relatively low. In fact, less than 30 credits comprise the core non-performing loans total. The small number of such non-performing loans allows management to effectively monitor the status of these credits. Careful underwriting of loans and diversification of credit risks contributes to the low level of problem loans. RETURN ON EQUITY Given the progress noted above, our earnings have improved and our annual return on equity has increased to 11.6% in 1999, up from 8.7% in 1998. By balancing both growth and profitability, we should continue to make progress towards attaining our financial goals. ADDITIONAL COMMON EQUITY WAS RAISED In November 1999, we completed a private placement of 352,942 shares of additional common stock. The shares sold were priced at market and raised net proceeds of approximately $6 million. This offering was a cost-effective way to raise core capital needed for continued growth of our young company. We are committed to maintaining an efficient capital structure as we go forward. **** Five Year Total Shareholders' Equity Bar Chart OMITTED **** WINTRUST DECLARES ITS FIRST DIVIDEND In January 2000, the Wintrust Board of Directors approved the first semi-annual cash dividend in the amount of $0.05 per share. The dividend was paid in February to shareholders of record as of February 10, 2000. This dividend was possible as a result of our increasing profitability levels and we are pleased to be commencing the payment of dividends. Annualized, this dividend payment represents about 9% of 1999's earnings. While most mature banking companies pay higher levels of dividends, as a younger, growth oriented company, we still intend to retain the majority of our earnings to fund future growth and continue to build our franchise. There are still too many good opportunities for future growth and profitability to stop investing in our expansion now. STOCK BUYBACK HAS BEEN AUTHORIZED Also in January 2000, the Wintrust Board approved a stock buyback program authorizing the purchase of up to 300,000 shares, or approximately 3%, of the Company's common stock in open market or privately negotiated transactions. Repurchased shares will be available for issuance under the Company's stock incentive plan, employee stock purchase plan and other corporate purposes. Such purchases, at a time when our stock is statistically cheap, would augment shareholder value. WHAT'S HAPPENING AT THE BANKS AND NON-BANK SUBSIDIARIES? Lake Forest Bank & Trust celebrated its eighth birthday in 1999. Total assets reached $499 million, up 13% versus a year ago. This strengthens our position as the number two bank in the market. The bank's newest facility, Bank of Highwood-Fort Sheridan, recently opened. LFB&T now operates seven facilities in the area including West Lake Forest, Lake Bluff, Highwood and drive-through facilities. - 11 - **** Picture of Hinsdale Bank & Trust's Staff OMITTED **** Hinsdale Bank & Trust enjoyed its sixth year of operation, while its Clarendon Hills branch (Clarendon Hills Bank) celebrated its third birthday and its Western Springs branch (The Community Bank of Western Springs) is now two years old. Total assets increased 25% to $350 million. In total, the bank operates four facilities including a drive-through/walk-up in downtown Hinsdale. In 2000, we anticipate opening a separate drive-through/walk-up remote ATM across the railroad tracks from the Clarendon Hills Bank and a new branch in another nearby community. **** Picture of North Shore Community Bank & Trust's Staff OMITTED **** North Shore Community Bank & Trust reached $360 million in total assets, up 22% from last year, while it celebrated its fifth birthday. The bank operates seven facilities in the affluent north shore markets of Wilmette, Winnetka, Glencoe and now Skokie. Its newest branch was opened in October 1999 in the heart of Skokie. It has a perfect location with two other big banks located on opposite corners. That makes it even easier for the big bank refugees to find our safe haven! **** Picture of Libertyville Bank & Trust's Staff OMITTED **** Libertyville Bank & Trust, our fourth community bank in its fourth year of operation, increased its assets by 18% to $219 million. LB&T added its third facility in late 1998 when it opened its new walk-in office in southern Libertyville and is planning to open a new branch in a nearby community in 2000. **** Picture of Barrington Bank & Trust's Staff OMITTED **** Barrington Bank & Trust experienced terrific growth in only its third full year of operation. Total assets reached $177 million, an increase of 48% versus a year ago. In - 12 - addition to growing its core banking business, this bank enjoyed growth from the development of the previously mentioned Community Advantage(TM) program. BB&T is also planning to open a new branch during the latter half of 2000. **** Picture of Crystal Lake Bank & Trust's Staff OMITTED **** Crystal Lake Bank & Trust, our youngest bank, turned the ripe old age of two in late 1999. Its assets reached $89 million in 1999, up 68% versus a year ago. In September 1999, they opened a new full service facility in south Crystal Lake and now have a total of three facilities. WINTRUST ASSET MANAGEMENT COMPANY Wintrust Asset Management Company, our trust and investment subsidiary, continues to increase its assets under management and is showing improvement towards profitability. By the end of the fourth quarter of 1999, assets under management were just over $440 million. **** Picture of Wintrust Asset Management Officer with Client OMITTED **** For the year, Wintrust Asset Management generated approximately $1.2 million in fee income and is now generating in excess of $120,000 in monthly fee income. Revenue generated from our trust and investment activities is an important source of fee income that will help Wintrust diversify its revenue base. We have assembled a very qualified staff of experienced trust, financial planning, administrative and investment professionals at Wintrust Asset Management Company and they are poised to move the business to a higher level of growth in assets under management. **** First Insurance Funding Corp. Logo OMITTED **** HO-HUM. FIRST INSURANCE FUNDING CORP. HAD ANOTHER RECORD YEAR. Coming off its third year of better than thirty percent annual growth, FIRST Insurance Funding Corp. had a remarkable 1999. With approximately $690 million in volume for the twelve months ending December 31, 1999, FIRST's volume grew by 40% over 1998. This record growth comes as a result of continued investments in technology, improved efficiency, and targeted sales and marketing. This growth, coupled with increased automation, reduced per unit costs. In 2000, we expect continued expansion that will be sourced from internal growth and from our alliance with Premium Finance Holdings, a sales organization with which FIRST recently entered into a joint marketing agreement. Additional growth will come from FIRST's pursuit of alternate distribution channels, national endorsements and continued investments in technology and automation. Also in 2000, FIRST will be moving into a new headquarters building that was purchased in Northbrook, Illinois. This will lower their occupancy cost and provide much needed room for growth. - 13 - FIRST's new internet initiative will bring its customers a host of services currently unavailable in the premium finance industry. The improved service and accessibility offered by this new web site will allow FIRST's customers to more easily and efficiently quote, process and record loans, helping FIRST maintain its low overhead costs while growing its business. And providing financial services to the agents and the agent's customers is a value-added benefit that FIRST can offer. **** Tricom Funding Logo OMITTED **** OUR NEWEST FAMILY MEMBER -- TRICOM, INC. Milwaukee-based Tricom, Inc. provides short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to clients in the temporary staffing industry. In October 1999, we purchased 100% of the common stock of Tricom and are now proud to have them operating as a member of the Wintrust family. By virtue of Wintrust's funding resources, we can provide Tricom with additional capital needed to expand its lending services in a national market. Tricom's revenue is derived primarily from interest income from lending activities and fee revenue from administrative services provided to its clients. The acquisition is consistent with our stated strategy of adding a variety of diversified earning asset and fee-based business niches to augment our community-based banking revenues. 1999 was a year when many new highs were recorded at Tricom, from new revenue and profitability highs to record numbers of clients served and checks processed. Year-end W-2's processed grew to 70,000 this year, almost 17% above last year's record of 60,000. The 400,000+ payroll checks processed, also a new high, meant that each week over 8,000 temporary help workers from around the country received their paychecks from us. Tricom's staff expanded to over 50 full time people for the first time in its history. Outstanding receivables exceeded $20 million during 1999 for the first time in Tricom's nine year history leading to historically high revenue levels. This acquisition is anticipated to be accretive by at least $0.08 per diluted common share in the first full year subsequent to the closing date, and accretive by at least $0.14 per diluted common share if the transaction is evaluated based on cash basis earnings per share. This has been a growing business throughout the economic cycle, and the potential for further growth is outstanding. The credit loss experience of Tricom's strong management team has been excellent. We are very pleased to have Tricom as part of the Wintrust team and look forward to their contributions in the years to come. - 14 - WHERE WE ARE GOING GROWTH STRATEGIES THAT WORK Wintrust is one of the fastest growing publicly traded bank groups in the country. Future growth will come from a variety of current strategies that have proven successful and from new strategies: o Growing our current franchises by adding new customers (increased market share) and new branches (new markets); o Introducing new de novo banks in high opportunity markets that contain the right mix of demographic and competitive variables (high wealth, high big bank competition, low community bank competition); o Acquiring existing community banks in high opportunity markets; o Acquiring financial services firms to expand our portfolio of asset niches and fee revenues; and, o Utilizing the internet as a new distribution vehicle for current products and a portal to marketing and distributing new products. DE NOVO GROWTH STRATEGY Opportunities for growing our current community bank franchises are still very strong. 1999 was yet another year filled with big bank mergers and consolidations. These mergers and consolidations are causing more standardized products, poorer service, higher fees and many more upset big bank customers. The big banks' shortcomings should continue to generate incremental business and market share growth for our community banks in the years to come. Advertisements targeted at our larger competitors often resonate with people who have experienced bad service and high charges at big banks. We continue to get a steady stream of big bank refugees from our big bank competitors. Maybe we should have thanked them in the opening of our shareholder letter as well! **** Graphic Advertisement OMITTED **** GROWTH BY ACQUISITION We continue to have conversations with numerous Chicagoland community banks with the goal of merging their community-based bank or branches into the Wintrust family of banks. We believe we are a logical partner for many smaller community banks because of our operating style and the fact that we would allow the bank to continue to operate locally with community bank flair. We also continually look to add earning asset niche or fee generation businesses, either as de novo operations or through acquisition (e.g. Wintrust Asset Management and Tricom). This type of growth will add diversified earning asset and fee-based business revenues to supplement Wintrust's core banking revenues. Your management team and Board of Directors are dedicated to being disciplined with regard to pricing potential acquisitions to be accretive to earnings per share. We have rejected several acquisition opportunities that did not meet our pricing objectives. We will not acquire financial institutions just for the sake of growth through - 15 - acquisition. Acquisition growth will need to fill strategic goals as to franchise location, additional diversified earning asset niches, fee-based business niches to supplement Wintrust's banking revenues or other meaningful objectives. We will keep evaluating opportunities and will update you regularly on our progress. **** Picture of Homepage of www.barringtonbank.com OMITTED **** IMPORTANT INTERNET INITIATIVES We also have a unique three-pronged internet strategy that is feasible given our asset-driven operating philosophy: 1. Offer community banking financial products and services to existing and new bank customers via the banks' internet web sites. 2. Offer "private label" banking and financial products via the internet to participating affinity groups. Our first such program is to offer First Insurance Funding Corp.'s network of independent insurance agents financial products for themselves and their customers. 3. Introduce a free-standing internet bank to offer banking products outside of our market area. This should allow us to obtain deposit funding at targeted rates that will assist us in managing our asset/liability position, as well as offer products through strategic alliances where we would receive fee income. WE PUT THE .COM IN .COMMUNITY BANKING Our six new community bank web sites that will be introduced the second quarter of 2000 are among the most sophisticated internet banking services of any community bank, and rival what the big banks have to offer. All six of our community banks have their own web sites. You can find them at the following addresses on the world wide web: o lakeforestbank.com o hinsdalebank.com o nscbank.com o libertyvillebank.com o barringtonbank.com o crystallakebank.com **** Picture of Inside page of www.barringtonbank.com OMITTED **** Via these sites, we offer or will offer a number of high tech services and features including: o Easy-to-use drop down navigation system that gets you where you want to go in two clicks or less o Quick-load construction so pages can be accessed very quickly o On-line applications and e-mail help screens so products can be opened on-line o Convenient on-line bill pay that lets you quickly pay bills for less than the cost of a stamp o Instant access to your Wintrust Asset Management trust and investment accounts so you can look up current account status - 16 - o Value-added "Community Info" section that includes a comprehensive community calendar and important community internet links. In our communities, we want to be the source of community information and services. In doing so, we will provide value-added service for our current customers and hope to bring non-customers into our bank site. Look for other value-added community services to be added soon. SOPHISTICATED SECURITY SYSTEMS Our on-line Banking, Bill Pay and Trust/Investments are accurate and secure. We use the most advanced software and systems available that are protected by state of the art encryption, firewalls and confidential personal passwords. A personal password, combined with our state-of-the-art software, prohibits any outside parties from acquiring any data. BEST CUSTOMER SERVICE, BAR NONE, ON THE INTERNET Since superior customer service is an integral part of our mission, we believe providing unsurpassed back office customer service support is also critical to making our internet banking a success. To that end, we have developed an internet operations/customer service group that will be responsible for servicing our new bank web sites. While most of our customers want the benefits of our old-fashioned banking service, there is a growing demand to provide these same services via the convenience of the internet. Our banks will be leaders in this area as well. FIRST INSURANCE FUNDING'S WEB SITE A new web site was also launched in December 1999 for First Insurance Funding Corp. which offers internet access for the following services: o Information about products & services o Agent access to a summary of their customer's accounts o On-line quoting o Download/upgrade of First's proprietary software o Customers can access their account statement **** Picture of FIRST's Web Site OMITTED **** BUILDING "VALUE" FOR THE FUTURE Wintrust is still 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 or financial service companies 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 significant hidden stored earnings potential due to the earnings burden of our start-up banks and trust company. OUR HIDDEN EARNINGS POTENTIAL As you look at the asset and earnings growth trends of our six community banks, they are all marching along a similar path of continued improvement as they mature. If you were to project all the banks out to nine years (the current age of our oldest bank franchise) one would see a vastly improved picture in terms of financial returns. - 17 - Investors in bank stocks are not accustomed to analyzing the potential of "growth" companies, since most banks are not growing as rapidly as Wintrust, except through acquisition. We need to help them realize the hidden earnings potential of Wintrust's young franchises. STOCK PRICE PERFORMANCE Over the past two years, Wintrust Financial Corporation had significant annual growth in net income, net revenues and assets, solid credit quality, improving cost efficiencies and a unique story to tell. Given these results, one would expect that our stock price would be significantly ahead of its level of one year ago. Unfortunately, it is not. Our stock price has performed in line with a declining Nasdaq Bank Index despite our well above average growth record. Rather, the market has favored high technology, internet, and ".com" companies. As Vestor Capital said in January 2000, "We view the current speculative behavior as a sideshow to fundamental investing and we know it is only a matter of time before this speculative bubble will burst. With all the attention on technology companies, we continue to identify attractive investment opportunities in other business sectors. By sticking with our fundamental investment discipline, we are confident the attractively valued, well managed businesses we own in our clients' and our own portfolios will continue to thrive, grow in value and be appropriately recognized by the marketplace as the speculative focus on technology stocks eventually subsides." Take heart fellow shareholders, companies historically are rewarded for consistent growth in profits and we think the market will recognize our performance as we continue to post positive trends. And finally, 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. Our management, bank directors and their families own over 25% of our outstanding stock, so making Wintrust a rewarding investment is a high priority. We are in this for the long haul, looking to maximize long-term shareholder value. INVESTOR RELATIONS PROGRAM We also continue to make presentations at investor conferences, provide interviews to financial publications, distribute investor packages to interested investors through various programs, and make presentations to interested institutional buyers. We believe that communicating our story is important to creating awareness about our Company and thereby creating demand for our stock. The launch of our three new internet initiatives also represent significant opportunities for us to generate some positive awareness in a ".com" arena that offers great potential. We continue to have a terrific story to tell. Currently, six respected investment firms are writing research on Wintrust and all are recommending the purchase of Wintrust common stock. o ABN AMRO Incorporated o Advest, Inc. o First Union Securities, Inc. o Howe Barnes Investments, Inc. o Keefe, Bruyette & Woods, Inc. o U.S. Bancorp Piper Jaffray - 18 - **** Graphic Advertisement OMITTED **** - 19 - CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (In thousands, except share data) ============================================================================================================================ DECEMBER 31, ------------------------------------------ 1999 1998 ------------------------------------------ ASSETS Cash and due from banks $ 53,066 33,924 Federal funds sold 28,231 18,539 Interest bearing deposits with banks 2,547 7,863 Available-for-Sale securities, at fair value 205,795 209,119 Held-to-Maturity securities, at amortized cost, fair value of $5,001 in 1998 - 5,000 Loans, net of unearned income 1,278,249 992,062 Less: Allowance for possible loan losses 8,783 7,034 - ---------------------------------------------------------------------------------------------------------------------------- Net loans 1,269,466 985,028 Premises and equipment, net 72,851 56,964 Accrued interest receivable and other assets 35,943 30,082 Goodwill and other intangible assets, net of accumulated amortization of $520 in 1999 and $258 in 1998 11,483 1,529 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 1,679,382 1,348,048 ============================================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 154,034 131,309 Interest bearing 1,309,588 1,097,845 - ---------------------------------------------------------------------------------------------------------------------------- Total deposits 1,463,622 1,229,154 Short-term borrowings 59,843 - Notes payable 8,350 - Long-term debt - trust preferred securities 31,050 31,050 Accrued interest payable and other liabilities 23,570 12,639 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,586,435 1,272,843 - ---------------------------------------------------------------------------------------------------------------------------- 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, 1999 and 1998 - - Common stock, no par value; $1.00 stated value; 30,000,000 shares authorized; 8,770,805 and 8,149,946 issued and outstanding at December 31, 1999 and 1998, respectively 8,771 8,150 Surplus 82,792 72,878 Common stock warrants 100 100 Retained earnings (deficit) 3,555 (5,872) Accumulated other comprehensive loss (2,271) (51) - ---------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 92,947 75,205 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 1,679,382 1,348,048 ============================================================================================================================
See accompanying notes to consolidated financial statements - 20 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) ============================================================================================================================ YEARS ENDED DECEMBER 31, --------------------------------------------- 1999 1998 1997 --------------------------------------------- INTEREST INCOME Interest and fees on loans $ 97,270 75,369 56,066 Interest bearing deposits with banks 204 2,283 1,764 Federal funds sold 1,536 2,327 3,493 Securities 10,321 8,000 3,788 - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 109,331 87,979 65,111 - ---------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 56,026 49,069 37,375 Interest on short-term borrowings and notes payable 2,633 1,399 964 Interest on long-term debt - trust preferred securities 2,938 747 - - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 61,597 51,215 38,339 - ---------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 47,734 36,764 26,772 Provision for possible loan losses 3,713 4,297 3,404 - ---------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for possible loan losses 44,021 32,467 23,368 - ---------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Fees on mortgage loans sold 3,206 5,569 2,341 Service charges on deposit accounts 1,562 1,065 724 Trust fees 1,171 788 626 Gain on sale of premium finance receivables 1,033 - - Administrative services revenue 996 - - Net securities gains 5 - 111 Other 1,835 653 1,142 - ---------------------------------------------------------------------------------------------------------------------------- Total non-interest income 9,808 8,075 4,944 - ---------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 20,808 18,944 14,204 Equipment expense 3,199 2,221 1,713 Occupancy, net 2,991 2,435 1,896 Data processing 2,169 1,676 1,337 Advertising and marketing 1,402 1,612 1,309 Professional fees 1,203 1,654 1,343 Amortization of intangibles 251 120 100 Other 7,655 7,171 5,352 - ---------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 39,678 35,833 27,254 - ---------------------------------------------------------------------------------------------------------------------------- Income before income taxes 14,151 4,709 1,058 Income tax expense (benefit) 4,724 (1,536) (3,788) - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 9,427 6,245 4,846 ============================================================================================================================ NET INCOME PER COMMON SHARE - BASIC $ 1.14 0.77 0.62 NET INCOME PER COMMON SHARE - DILUTED $ 1.10 0.74 0.60 ============================================================================================================================
See accompanying notes to consolidated financial statements - 21 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) =================================================================================================================================== ACCUMULATED COMPRE- OTHER HENSIVE COMMON RETAINED COMPREHENSIVE TOTAL INCOME PREFERRED COMMON STOCK EARNINGS INCOME SHAREHOLDERS' (LOSS) STOCK STOCK SURPLUS WARRANTS (DEFICIT) (LOSS) EQUITY --------------------------------------------------------------------------------------- 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 Comprehensive Income: Net income 9,427 - - - - 9,427 - 9,427 Other comprehensive loss, net of tax: Unrealized losses on securities, net of reclassification adjustment (2,220) - - - - - (2,220) (2,220) ---------- Comprehensive Income $ 7,207 Common stock issuance, net of costs - 581 9,403 - - - 9,984 Common stock issued upon exercise of stock options - 32 371 - - - 403 Common stock issued through employee stock purchase plan - 8 140 - - - 148 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $ - 8,771 82,792 100 3,555 (2,271) 92,947 ===================================================================================================================================
YEARS ENDED DECEMBER 31, ------------------------------------------------- Disclosure of reclassification amount and income tax impact: 1999 1998 1997 ------------------------------------------------- Unrealized holding gains (losses) arising during the year $ (3,460) (153) 166 Less: Reclassification adjustment for gains included in net income 5 - 111 Less: Income tax expense (benefit) (1,245) (59) 21 - ------------------------------------------------------------------------------------------------------------------------------ Net unrealized gains (losses) $ (2,220) (94) 34 ==============================================================================================================================
See accompanying notes to consolidated financial statements - 22 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) ============================================================================================================================== YEARS ENDED DECEMBER 31, ------------------------------------------------- 1999 1998 1997 ------------------------------------------------- OPERATING ACTIVITIES: Net income $ 9,427 6,245 4,846 Adjustments to reconcile net income to net cash used for, or provided by, operating activities: Provision for possible loan losses 3,713 4,297 3,404 Depreciation and amortization 4,246 2,952 2,394 Deferred income tax benefit (835) (1,961) (3,788) Net (accretion) amortization of securities (490) (340) (670) Originations of mortgage loans held for sale (263,857) (399,007) (171,960) Proceeds from sales of mortgage loans held for sale 273,765 390,528 171,192 Gain on sale of premium finance receivables (1,033) - - Purchase of trading securities (5,558) - - Proceeds from sale of trading securities 5,567 - - Gain on sale of trading securities (9) - - Gain on sale of Available-for-Sale securities (19) - (111) Loss on sale of Available-for-Sale securities 14 - - (Increase) decrease in other assets, net (3,585) (12,603) 5,189 Increase (decrease) in other liabilities, net 5,580 1,625 (5,224) - ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 26,926 (8,264) 5,272 - ------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Proceeds from maturities of Available-for-Sale securities 368,889 481,297 92,336 Proceeds from maturities of Held-to-Maturity securities 5,000 - - Proceeds from sales of Available-for-Sale securities 15,166 - 420 Purchases of Available-for-Sale securities (383,723) (588,296) (124,522) Proceeds from sales of premium finance receivables 68,875 - - Acquisition of Tricom, Inc. of Milwaukee, net of cash acquired (4,227) - - Net decrease (increase) in interest bearing deposits with banks 5,316 77,237 (66,368) Net increase in loans (346,778) (273,918) (221,239) Purchases of premises and equipment, net (17,217) (15,459) (16,063) - ------------------------------------------------------------------------------------------------------------------------------ NET CASH USED FOR INVESTING ACTIVITIES (288,699) (319,139) (335,436) - ------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Increase in deposit accounts 234,468 311,453 299,672 Increase (decrease) in short-term borrowings, net 41,254 (35,493) 28,435 Increase (decrease) in notes payable, net 8,350 (20,402) (1,655) Proceeds from trust preferred securities offering - 31,050 - Issuance of common stock, net of issuance costs and fractional shares 5,984 - 20,326 Common stock issued upon exercise of stock options 403 264 964 Common stock issued through employee stock purchase plan 148 - - - ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 290,607 286,872 347,742 - ------------------------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,834 (40,531) 17,578 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52,463 92,994 75,416 - ------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 81,297 52,463 92,994 ============================================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 60,667 51,158 37,499 Income taxes 4,241 787 - Acquisition of Tricom, Inc. of Milwaukee: Fair value of assets acquired 22,116 - - Goodwill recorded from acquisition 10,052 - - Fair value of liabilities assumed 23,941 - - NON-CASH INVESTING ACTIVITIES: Common stock issued for acquisition of Tricom, Inc. of Milwaukee 4,000 - - Transfer to other real estate owned from loans - 587 - ==============================================================================================================================
See accompanying notes to consolidated financial statements - 23 - 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, trust and investment services, commercial insurance premium financing, short-term accounts receivable financing, and certain administrative services, such as data processing of payrolls, billing and cash management services. Wintrust provides banking services to customers in the Chicago metropolitan area through its six wholly-owned banking subsidiaries (collectively, "Banks"), all of which started as de novo institutions, including Lake Forest Bank & Trust Company ("Lake Forest Bank"), Hinsdale Bank & Trust Company ("Hinsdale Bank"), North Shore Community Bank & Trust Company ("North Shore Bank"), Libertyville Bank & Trust Company ("Libertyville Bank"), Barrington Bank & Trust Company, N.A. ("Barrington Bank") and Crystal Lake Bank & Trust Company, N.A. ("Crystal Lake Bank"). On September 30, 1998, Wintrust began providing trust and investment services at each of the Wintrust banks through Wintrust Asset Management Company, N.A. ("WAMC"). Previously, the Company provided trust services through the trust department of Lake Forest Bank. The Company provides financing for the payment of commercial insurance premiums ("premium finance receivables"), on a national basis, through First Insurance Funding Corporation ("FIFC"), a wholly-owned subsidiary of Crabtree Capital Corporation ("Crabtree") which is a wholly-owned subsidiary of Lake Forest Bank. On October 26, 1999, Hinsdale Bank acquired Tricom, Inc. of Milwaukee ("Tricom"), a provider of short-term accounts receivable financing ("Tricom finance receivables") and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States. 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 currently classified as available-for-sale as they may be sold prior to maturity. Held-to-maturity securities are stated at amortized cost which represents actual cost adjusted for premium amortization and discount accretion using methods that approximate the effective interest method. Available-for-sale securities are stated at fair value. Unrealized gains and losses on available-for-sale securities, net of related taxes, are 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 at December 31, 1999, 1998 or 1997. Trading account income or loss is included in other non-interest income. 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. Loans and Allowance for Possible Loan Losses Loans, which include lease financing, premium finance receivables and Tricom finance receivables, are recorded at the principal amount outstanding. Interest income is - 24 - 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 cover losses inherent in the portfolio. In estimating potential 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. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. For financial reporting purposes depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets ranging from three to ten years for equipment, 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. Other Real Estate Owned Other real estate owned is comprised of real estate acquired in partial or full satisfaction of loans and is included in other assets at the lower of cost or fair market value less estimated selling costs. When the property is acquired through foreclosure, any excess of the related loan balance over the adjusted fair market value less expected selling costs, is charged against the allowance for possible loan losses. Subsequent write-downs or gains and losses upon sale, if any, are charged to other non-interest expense. Intangible Assets Goodwill, representing the cost in excess of the fair value of net assets acquired, is primarily amortized on a straight-line basis over periods of fifteen to twenty years. The Company periodically evaluates the carrying value - 25 - and remaining amortization period of intangible assets and other long-lived assets for impairment, and adjusts the carrying amounts, as appropriate. Trust Preferred Securities Offering Costs In connection with the Company's October 1998 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 and is included as a component of non-interest income. Income Taxes Wintrust files 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. 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 Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of this entity. Stock Option Plans The Company follows the disclosure requirements of Statement of Financial Accounting Standards ("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 follows 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 as the exercise price is equal to the market value on the option grant date. Further disclosures are presented in Note 13. Recent Accounting Pronouncements In March 1998, the Accounting Standards Executive Committee ("AcSEC") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires companies to capitalize certain costs incurred in connection with internal-use software projects and is effective for fiscal years beginning after December 15, 1998, with early adoption permitted. The Company elected early adoption of SOP 98-1 as of January 1, 1998 and capitalized certain salary costs in both 1998 and 1999 related to the configuration and installation of new software and the modification of existing software that provided additional functionality. These costs are being amortized over periods of three to five years. In April 1998, AcSEC issued Statement of Position 98-5 ("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 expensed approximately $200,000 of remaining unamortized deferred organizational costs. This write-off, however, was not material to be presented as a cumulative effect of a change in accounting principle. - 26 - Beginning in 1999, all start-up and organizational costs are being expensed as incurred. In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 137 to effectively defer the implementation date of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" for one year. SFAS No. 133 was issued in June 1998 and 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. With the issuance of SFAS No. 137, this standard is now effective for the Company as of January 1, 2001. The adoption of this new statement is currently not expected to have a material effect on the Company's future financial condition, results of operations, or liquidity. (2) SECURITIES A summary of the securities portfolio presenting carrying amounts and gross unrealized gains and losses as of December 31, 1999 and 1998 is as follows (in thousands):
DECEMBER 31, 1999 DECEMBER 31, 1998 --------------------------------------------- ------------------------------------------ GROSS GROSS GROSS GROSS AMORTIZED UNREALIZEDUNREALIZED FAIR AMORTIZED UNREALIZEDUNREALIZED FAIR COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------------------------------------------- ------------------------------------------ Held-to-maturity: U.S. Treasury $ - - - - 5,000 1 - 5,001 Available-for-sale: U.S. Treasury 40,587 - (1,416) 39,171 5,650 14 - 5,664 U.S. Government agencies 70,664 - (480) 70,184 54,696 3 (9) 54,690 Municipal securities 4,046 - (8) 4,038 504 - - 504 Corporate notes and other 40,152 2 (1,129) 39,025 142,165 9 (72) 142,102 Mortgage-backed securities 46,613 - (489) 46,124 - - - - Federal Reserve Bank and Federal Home Loan Bank stock 7,253 - - 7,253 6,159 - - 6,159 --------------------------------------------- ------------------------------------------ Total securities available-for-sale 209,315 2 (3,522) 205,795 209,174 26 (81) 209,119 --------------------------------------------- ------------------------------------------ Total securities $ 209,315 2 (3,522) 205,795 214,174 27 (81) 214,120 ==============================================================================================================================
The amortized cost and fair value of securities as of December 31, 1999 and 1998, by contractual maturity, are shown below. Contractual maturity may differ from actual maturities as borrowers may have the right to call or repay obligations with or without call or prepayment penalties. Mortgage-backed securities are not included in the maturity categories in the following maturity summary as actual maturities may differ from contractual maturities because the underlying mortgages may be called or prepaid without any penalties.
============================================================================================================================ December 31, 1999 December 31, 1998 -------------------------------- ------------------------------ Amortized Fair Amortized Fair Cost Value Cost Value -------------------------------- ------------------------------ (in thousands) Held-to-maturity securites: Due in one year or less $ - - 5,000 5,001 -------------------------------- ------------------------------ Available-for-sale securities: Due in one year or less 66,020 65,841 190,001 189,977 Due in one to five years 69,934 68,086 6,693 6,662 Due in five to ten years 5,949 5,904 6,321 6,321 Due after ten years 13,546 12,587 - - Mortgage-backed securities 46,613 46,124 - - Federal Reserve Bank and Federal Home Loan Bank stock 7,253 7,253 6,159 6,159 -------------------------------- ------------------------------ Total available-for-sale securities 209,315 205,795 209,174 209,119 -------------------------------- ------------------------------ Total securities $ 209,315 205,795 214,174 214,120 ============================================================================================================================
In 1999 and 1997, the Company had gross realized gains on sales of available-for-sale securities of $19,000 and $111,000, respectively. During 1999, gross realized losses on sales of available-for-sale securities totaled $14,000. In 1998, there were no sales of available-for-sale securities. Proceeds from sales of available-for-sale securities during 1999 - 27 - and 1997 were $15,166,000 and $420,000, respectively. At December 31, 1999 and 1998, securities having a carrying value of $139,185,000 and $104,874,000, respectively, were pledged as collateral for public deposits, trust deposits and securities sold under agreements to repurchase. (3) LOANS A summary of the loan portfolio, including commercial lease financing receivables, at December 31, 1999 and 1998 is as follows (in thousands): ================================================================== 1999 1998 -------------------------- Commercial and commercial real estate $ 485,776 366,229 Premium finance receivables 225,239 183,165 Indirect auto 255,434 210,137 Home equity 139,194 111,537 Residential real estate 111,026 91,525 Tricom finance receivables 17,577 - Installment and other 49,925 34,650 -------------------------- Total loans 1,284,171 997,243 Less: Unearned income 5,922 5,181 -------------------------- Total loans, net of unearned income $ 1,278,249 992,062 ================================================================== Residential mortgage loans held for sale totaled $8,123,000 and $18,031,000 at December 31, 1999 and 1998, respectively. Certain residential real estate and home equity loans with balances totaling approximately $142.1 million at December 31, 1999 were pledged as collateral to secure the availability of borrowings from certain Federal agency banks. 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 $22,148,000 and $19,791,000 at December 31, 1999 and 1998, 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 the years ended December 31, 1999, 1998 and 1997 is as follows (in thousands): ====================================================================== Year Ended December 31, ------------------------------ 1999 1998 1997 ------------------------------ Allowance at beginning of year $ 7,034 5,116 3,636 Provision 3,713 4,297 3,404 Acquired allowance for loan losses 175 - - Charge-offs-continuing operations (2,449) (2,737) (1,874) Charge-offs-discontinued operations - - (241) Recoveries 310 358 191 ------------------------------ Allowance at end of year $ 8,783 7,034 5,116 ====================================================================== The provision for possible loan losses is charged to operations and recognized loan losses (recoveries) are charged (credited) to the allowance. At December 31, 1999, 1998 and 1997, non-accrual loans totaled $4,338,000, $3,137,000 and $2,440,000, respectively. At December 31, 1999, 1998 and 1997, loans that were considered to be impaired totaled $1,768,000, $1,714,000 and $1,139,000, respectively. At December 31, 1999 and 1998, impaired loans totaling $458,000 and $285,000, respectively, had allocated specific allowance for loan losses of approximately $125,000 at each year-end. There was no specific allowance for loan losses allocated for impaired loans as of December 31, 1997. The average balance of impaired loans during 1999, 1998 and 1997 was approximately $1,295,000, $4,167,000 and $990,000, respectively. During 1999 and 1998, interest income recognized on impaired loans totaled approximately $14,000 and $155,000, respectively. In 1997, this amount was insignificant. Management evaluated the value of the impaired loans primarily by using the fair value of the collateral. During 1999 and 1998, the effect of non-performing loans reduced interest income by approximately $100,000 and $197,000, respectively. During 1997, 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 $87.1 million and $82.1 million at December 31, 1999 and 1998, respectively. The following is a summary of the changes in mortgage servicing rights for the years ended December 31, 1999, 1998 and 1997 (in thousands): ===================================================================== Year Ended December 31, ----------------------------- 1999 1998 1997 ----------------------------- Balance at beginning of year $ 715 313 123 Servicing rights capitalized 214 577 226 Amortization of servicing rights (281) (175) (36) Valuation allowance - - - ----------------------------- Balance at end of year $ 648 715 313 ===================================================================== - 28 - (6) PREMISES AND EQUIPMENT, NET A summary of premises and equipment at December 31, 1999 and 1998 is as follows (in thousands): =================================================================== 1999 1998 ------------------------- Land $ 10,606 9,607 Buildings and improvements 50,591 35,251 Furniture, equipment and computer software 19,244 12,802 Equipment under leasing contracts 2,704 473 Construction in progress 1,437 6,638 ------------------------- 84,582 64,771 Less accumulated depreciation and amortization 11,731 7,807 ------------------------- Premises and equipment, net $ 72,851 56,964 =================================================================== (7) TIME DEPOSITS Certificates of deposit in amounts of $100,000 or more approximated $432,982,000 and $346,046,000, respectively, at December 31, 1999 and 1998. Interest expense related to these deposits approximated $14,365,000, $12,003,000 and $10,954,000 for the years ended December 31, 1999, 1998 and 1997, respectively. (8) SHORT-TERM BORROWINGS At December 31, 1999, short-term borrowings totaled $59,843,000 and comprised $54,277,000 of securities sold under agreements to repurchase, $5,000,000 of federal funds purchased and $566,000 of other short-term borrowings. There were no short-term borrowings outstanding as of December 31, 1998. As of December 31, 1999, the weighted average borrowing rate was 5.65%. (9) NOTES PAYABLE The notes payable balance of $8,350,000 at December 31, 1999 represented the balance on a revolving credit line agreement ("Agreement") with an unaffiliated bank. There was no outstanding notes payable balance as of December 31, 1998. The original $25 million Agreement was effective September 1, 1996 for one year and has been renewed on that date in each subsequent year. Currently, the total amount of the revolving credit line is $40 million and interest is calculated at a floating rate equal to, at the Company's option, either the lender's prime rate or LIBOR plus 1.25%. The maturity date is August 30, 2000. 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 financial institutions or other finance related companies, or other general corporate matters. (10) LONG-TERM DEBT - TRUST PREFERRED SECURITIES In October 1998, the Company raised $31,050,000 of Trust Preferred Securities. These proceeds were used to pay-off the outstanding balance of the revolving credit line and for other corporate purposes. The Trust Preferred Securities offering 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 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 occurred 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, taken together, the obligations of the Company under the - 29 - 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) MINIMUM LEASE COMMITMENTS Gross rental expense for all operating leases was $1,016,000, $922,000 and $798,000, in 1999, 1998 and 1997, respectively. Gross rental income related to the Company's buildings totaled $415,000, $390,000 and $289,000, in 1999, 1998 and 1997, respectively. In 1999 and 1998, the Company also recorded equipment lease income of approximately $397,000 and $55,000, respectively. Minimum gross rental commitments, primarily for office space, and future minimum gross rental income and equipment lease income as of December 31, 1999 for all noncancelable leases are as follows (in thousands): ===================================================================== Future Future Future minimum minimum minimum gross gross equipment rental rental lease commitments income income ------------------------------- 2000 $ 805 306 695 2001 791 205 598 2002 708 143 472 2003 567 128 358 2004 420 124 170 2005 and thereafter 3,264 80 - ------------------------------- Total minimum future amounts $ 6,555 986 2,293 ===================================================================== (12) INCOME TAXES For the years ended December 31, 1999 and 1998, Wintrust had approximately $5.6 million and $571,000, respectively, of current Federal income tax expense and no current state income tax. For the year ended December 31, 1997, Wintrust had no current Federal or state income tax expense. In 1999, 1998 and 1997, the Company recorded net deferred Federal tax benefits of approximately $1.2 million, $2.3 million and $2.9 million, respectively, and net deferred state tax (expense) benefits of approximately ($393,000), ($271,000) and $890,000, respectively. During 1999, 1998 and 1997, such amounts exclude approximately $72,000, $78,000 and $316,000 of Federal tax benefits and $18,000, $17,000 and $67,000 of state tax benefits, respectively, that were recorded directly to shareholders' equity related to the exercise of certain common stock options. Income taxes for 1999, 1998 and 1997 differ from the expected tax expense for those years (computed by applying the applicable statutory U.S. Federal income tax rate of 35% in 1999 and 34% in 1998 and 1997 to income before income taxes) as follows (in thousands): ============================================================================== Year Ended December 31, ------------------------------ 1999 1998 1997 ------------------------------ Computed "expected" income tax expense $ 4,953 1,601 360 Increase (decrease) in tax resulting from: Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets (460) (3,357) (4,204) Other, net 231 220 56 ------------------------------ Income tax expense (benefit) $ 4,724 (1,536) (3,788) ============================================================================== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1999 and 1998 are presented below (in thousands): ============================================================================== 1999 1998 --------------------------- Deferred tax assets: Allowance for possible loan losses $ 3,313 2,405 Net unrealized losses on securities 1,249 32 Federal net operating loss carryforward 5,984 6,985 State net operating loss carryforward 660 1,390 Deferred compensation 315 170 Premises and equipment 235 - Other, net 380 202 --------------------------- Total gross deferred tax assets 12,136 11,184 Less: Valuation allowance 346 806 --------------------------- Total deferred tax assets 11,790 10,378 --------------------------- Deferred tax liabilities: Premises and equipment - 125 Deferred loan fees 860 1,034 Accrual to cash adjustment 261 711 Other, net 749 640 --------------------------- Total gross deferred tax liabilities 1,870 2,510 --------------------------- Net deferred tax assets $ 9,920 7,868 ============================================================================== During 1997, 1998 and 1999, 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. At December 31, 1999, Wintrust and its subsidiaries had Federal net operating losses of approximately $17.1 million and state net operating losses of approximately $9.2 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, certain of the federal - 30 - net operating losses 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 1999, 1998 and 1997 was as follows: ================================================================================ Common Range of Weighted Average Shares Strike Prices Strike Price - -------------------------------------------------------------------------------- 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 Granted 261,169 16.69 - 20.06 17.38 Exercised 31,933 7.75 - 14.53 9.79 Forfeited or canceled 41,791 10.77 - 19.25 17.73 ----------------------------------------- Outstanding at December 31, 1999 1,712,429 $ 5.80 - 21.75 $13.15 ================================================================================ At December 31, 1999, 1998 and 1997, the weighted-average remaining contractual life of outstanding options was 6.2 years, 6.6 years and 7.4 years, respectively. Additionally, at December 31, 1999, 1998 and 1997, the number of options exercisable was 1,185,697, 887,514 and 809,520, respectively, and the weighted-average per share exercise price of those options was $11.23, $9.38 and $9.08, respectively. Expiration dates for the options range from June 19, 2000 to October 28, 2009. The following table presents certain information about the outstanding options and the currently exercisable options as of December 31, 1999:
============================================================================================================================== 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 - -------------------------------------------------------------- ------------------------------------------------------------- $ 5.80 - 6.31 213,944 $ 6.22 1.73 years 213,944 $ 6.22 7.24 - 8.48 270,681 7.91 4.29 years 270,681 7.91 9.30 - 12.42 289,944 10.78 5.40 years 267,064 10.66 12.43 - 16.69 270,790 14.43 6.83 years 182,056 14.00 17.00 - 17.94 217,269 17.18 9.50 years 148,409 17.04 18.00 - 18.00 335,824 18.00 7.94 years 78,426 18.00 18.44 - 21.75 113,977 19.57 7.90 years 25,117 20.38 - -------------------------------------------------------------- ------------------------------------------------------------- $ 5.80 - 21.75 1,712,429 $ 13.15 6.18 years 1,185,697 $ 11.23 ==============================================================================================================================
- 31 - 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, ------------------------------- 1999 1998 1997 ------------------------------- Net income As reported $ 9,427 6,245 4,846 Pro forma 8,082 5,659 4,488 Earnings per share-Basic As reported $ 1.14 0.77 0.62 Pro forma 0.98 0.70 0.58 Earnings per share-Diluted As reported $ 1.10 0.74 0.60 Pro forma 0.94 0.67 0.56 ============================================================================ The pro forma amounts indicated above may not be representative of the effects on reported net income for future years. 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, 1999, 1998 and 1997, respectively: dividend yield of 0.6% for 1999 and 0.0% for 1998 and 1997; expected volatility of 27.5% for 1999, 24.2% for 1998 and 22.5% for 1997; risk free rate of return of 5.6% for 1999, 5.3% for 1998 and 6.4% for 1997; and, expected life of 7.2 years for 1999, 7.5 years for 1998 and 8.0 years for 1997. The per share weighted average fair value of stock options granted during 1999, 1998 and 1997 was $6.98, $7.54 and $8.10, 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 both 1999 and 1998 and $9,500 in 1997. 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 $57,000, $52,000 and $41,000 in 1999, 1998 and 1997, 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 either newly issued shares of the Company or shares issued from treasury, if any. In accordance with the SPP, the purchase price of the shares of Common Stock may not be lower than the lessor of 85% of the fair market value per share of the Common Stock on the first day of the offering period or 85% of the fair market value per share of the Common Stock on the last date for the offering period. The Company's Board of Directors authorized a purchase price calculation at 90% of fair market value for each of the first two offering periods of 1999. During 1999, a total of 8,349 shares were issued to participant accounts and approximately $19,000 was recognized as compensation expense. The third offering period concludes on March 31, 2000. The Company plans to continue to periodically offer Common Stock through this SPP subsequent to March 31, 2000. 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, 1999 and 1997. As of January 1, 2000, the Banks had approximately $12.6 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, 1999 and 1998, reserve balances of approximately $11,672,000 and $8,171,000, respectively, were required. - 32 - 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, 1999 and 1998, that the Company and the Banks met all minimum capital adequacy requirements. As of December 31, 1999 and 1998, 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 following tables. 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, 1999 and 1998 are presented in the following table (dollars in thousands):
================================================================================================================================ December 31, 1999 December 31, 1998 ------------------------------------------------------ ------------------------------------------------------- To Be Adequately Capitalized To Be Adequately Capitalized Actual by Regulatory Definition Actual by Regulatory Definition ------------------------------------------------------ ------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------ ------------------------------------------------------- TOTAL CAPITAL (TO RISK WEIGHTED ASSETS): Consolidated $123,466 8.4% $118,312 8.0% $111,811 9.7% $92,390 8.0% Lake Forest 37,541 8.9 33,779 8.0 30,347 8.8 27,575 8.0 Hinsdale 24,755 9.0 21,975 8.0 21,163 8.3 20,469 8.0 North Shore 27,095 8.5 25,452 8.0 23,760 9.1 20,937 8.0 Libertyville 16,444 9.1 14,470 8.0 14,691 8.8 13,295 8.0 Barrington 14,903 9.8 12,189 8.0 11,328 10.9 8,343 8.0 Crystal Lake 8,893 13.0 5,474 8.0 6,028 12.4 3,882 8.0 TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS): Consolidated $114,683 7.8% $59,156 4.0% $ 98,303 8.5% $46,195 4.0% Lake Forest 35,106 8.3 16,889 4.0 28,404 8.2 13,788 4.0 Hinsdale 22,839 8.3 10,988 4.0 19,546 7.6 10,234 4.0 North Shore 25,239 7.9 12,726 4.0 22,148 8.5 10,469 4.0 Libertyville 15,224 8.4 7,235 4.0 13,775 8.3 6,648 4.0 Barrington 14,063 9.2 6,094 4.0 10,734 10.3 4,171 4.0 Crystal Lake 8,376 12.2 2,737 4.0 5,677 11.7 1,941 4.0 TIER 1 LEVERAGE CAPITAL (TO AVERAGE QUARTERLY ASSETS): Consolidated $114,683 7.1% $65,047 4.0% $ 98,303 7.5% $52,344 4.0% Lake Forest 35,106 6.9 20,274 4.0 28,404 7.0 16,331 4.0 Hinsdale 22,839 6.9 13,227 4.0 19,546 7.2 10,878 4.0 North Shore 25,239 7.1 14,199 4.0 22,148 7.6 11,578 4.0 Libertyville 15,224 6.9 8,845 4.0 13,775 7.5 7,363 4.0 Barrington 14,063 8.3 6,793 4.0 10,734 9.5 4,527 4.0 Crystal Lake 8,376 9.7 3,447 4.0 5,677 12.0 1,888 4.0 ================================================================================================================================
The ratios required for the Banks to be "well capitalized" by regulatory definition are 10.0%, 6.0%, and 5.0% for the Total Capital-to-Risk Weighted Assets, Tier 1 Capital-to-Risk Weighted Assets and Tier 1 Leverage Capital-to-Average Quarterly Assets ratios, respectively. - 33 - (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, 1999 and 1998 were $431.9 million and $334.9 million, respectively. Standby letters of credit amounts were $13.5 million and $10.0 million at December 31, 1999 and 1998, 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 INSTRUMENTS The Company is a party to certain derivative financial instruments with off-balance sheet risk in the normal course of business to effectively manage its exposure to market risk. Market risk is the possibility that, due to changes in interest rates or other economic conditions, the Company's net interest income will be adversely affected. The derivative financial instruments that are currently being utilized by the Company to manage this risk include interest rate cap contracts. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and not the notional principal amounts used to express the volume of the transactions. As of December 31, 1999, the Company had $240 million notional principal amount of interest rate cap contracts that mature in $60 million notional principal amount intervals on April 30, 2000, September 1, 2000, October 30, 2000 and January 3, 2001. These contracts were purchased to mitigate the effect of rising rates on certain floating rate deposit products and provide for the receipt of payments when the 91-day Treasury bill rate exceeds predetermined strike rates that range from 4.75% to 5.38%. The payment amounts, if any, are determined and received on a monthly basis and are recorded as an adjustment to net interest income. Premiums paid for the purchase of interest rate cap contracts are amortized over the term of the agreement as an adjustment to net interest income. The Company may enter into other derivative financial instruments in the future to more effectively manage its market risk. Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the Banks' investment portfolios. These covered call option transactions are designed to utilize excess capital at certain Banks and increase the total return associated with holding these securities as earning assets. The option premium income generated by these transactions is recognized as other non-interest income if the option expires unexercised, or as a component of the gain or loss on the underlying security if the option is exercised by the purchaser. There were no call option agreements outstanding as of December 31, 1999 or 1998. - 34 - (17) FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 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, 1999 and 1998 (in thousands):
============================================================================================================================== At December 31, 1999 At December 31, 1998 ------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------------------------------------------- Financial assets: Cash and demand balances from banks $ 53,066 53,066 33,924 33,924 Federal funds sold 28,231 28,231 18,539 18,539 Interest bearing deposits with banks 2,547 2,547 7,863 7,863 Available-for-Sale securities 205,795 205,795 209,119 209,119 Held-to-Maturity securities - - 5,000 5,001 Loans, net of unearned income 1,278,249 1,272,395 992,062 999,312 Accrued interest receivable 8,843 8,843 6,989 6,989 Financial liabilities: Non-maturity deposits 609,860 609,860 543,524 543,524 Deposits with stated maturities 853,762 856,600 685,630 691,850 Short-term borrowings 59,843 59,843 - - Notes payable 8,350 8,350 - - Long-term borrowings-trust preferred securities 31,050 30,119 31,050 32,059 Accrued interest payable 2,757 2,757 1,827 1,827 Off-balance sheet derivative contracts: Interest rate cap agreements - positive value 450 464 151 20 ==============================================================================================================================
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. - 35 - Notes payable: The carrying value of notes payable approximate fair value due to the relatively short period of time to repricing of variable interest rates. 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 agreements: The carrying value of interest rate cap agreements represent the remaining unamortized cost of the contracts. The fair value is based on quoted market prices as of the last business day of the year. Commitments to extend credit and standby letters of credit: The fair value of commitments to extend credit is based on fees currently charged to enter into similar arrangements, the remaining term of the agreement, the present creditworthiness of the counterparty, and the difference between current interest rates and committed interest rates on the commitments. 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. The above fair value estimates were made at a point in time based on relevant market information and other assumptions about the financial instruments. As no active market exists for a significant portion of the Company's financial instruments, fair value estimates were based on judgements regarding current economic conditions, future expected cash flows and loss experience, risk characteristics and other factors. These estimates are subjective in nature and involve uncertainties and therefore cannot be calculated with precision. Changes in these assumptions could significantly affect these estimates. In addition, the fair value estimates only reflect existing on and off-balance sheet financial instruments and do not attempt to assess the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the value of depositor relationships, premises and equipment, intangible assets and the Company's trust and investment business have not been considered. (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, 1999 and 1998, respectively, with expiration dates ranging from December 2002 through November 2005. (19) ACQUISITION On October 26, 1999 (effective as of October 1, 1999), Hinsdale Bank, a wholly-owned subsidiary of the Company, acquired 100% of the common stock of Tricom for $8.0 million, consisting of $4.0 million in cash and 227,635 shares of the Company's common stock. In accordance with the purchase agreement, $500,000 of the $4.0 million cash portion was deposited into an escrow account with an unaffiliated bank and will be released to the sellers after March 31, 2000, subject to having met certain conditions of the transaction. The transaction was recorded using the purchase method of accounting and, accordingly, a tentative purchase price allocation was completed that included the $500,000 contingent payment in the purchase price. This tentative allocation resulted in approximately $10.1 million being allocated to goodwill, which is being amortized over a 20 year period. The purchase price allocation will be finalized after the $500,000 contingent payment has been resolved. Tricom has been in business for approximately ten years and provides short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States. Tricom revenue is derived primarily from interest income from financing activities and fee revenue from administrative services provided to its clients. - 36 - Results of operations for Tricom have been included in the Company's Consolidated Statements of Income beginning on October 1, 1999, as shown in the table below. The following pro forma financial information reflects the Company's results of operations as if Tricom's results would have been included for the entire twelve-month periods ended December 31, 1999 and 1998 (in thousands, except per share data): =============================================================== Year Ended December 31, --------------------------------- 1999 1998 --------------------------------- Net interest income: As reported $ 47,734 36,764 Tricom included above 826 - Pro forma 49,764 38,730 Non-interest income: As reported 9,808 8,075 Tricom included above 1,009 - Pro forma 12,550 12,198 Net income: As reported 9,427 6,245 Tricom included above 340 - Pro forma 9,953 7,066 Earnings per share-Basic: As reported 1.14 0.77 Tricom included above 0.04 - Pro forma 1.18 0.84 Earnings per share-Diluted: As reported 1.10 0.74 Tricom included above 0.04 - Pro forma 1.14 0.81 =============================================================== (20) SEGMENT INFORMATION The Company's operations consist of five primary segments: banking, premium finance, indirect auto, Tricom 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. A significant portion of the loans originated by FIFC are sold to the Banks and are retained in each of their loan portfolios. The indirect auto segment is operated from one of the Company's bank subsidiaries and is in the business of providing high quality new and used auto loans through a large network of auto dealerships within the Chicago metropolitan area. All loans originated by this segment are currently retained within the Banks' loan portfolios. The Tricom segment encompasses the operations of the Company's recent non-bank acquisition, as described in Note 19. The operating segment information of Tricom is included in the following tables since October 1, 1999, the effective date of the acquisition. The trust segment is operated through WAMC, which was formed in September 1998 to offer trust and investment management services at each of the 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 five reportable segments are strategic business units that are separately managed as they offer different products and services and have different marketing strategies. In addition, each segment's customer base has varying characteristics. The banking and indirect auto segments also have a different regulatory environment than the premium finance, Tricom and trust 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. 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. - 37 - The following is a summary of certain operating information for reportable segments (in thousands): ============================================================= Year Ended December 31, -------------------------------- 1999 1998 1997 -------------------------------- NET INTEREST INCOME: Banking $ 44,293 34,245 25,537 Premium finance 12,643 9,714 7,359 Indirect auto 8,201 5,595 3,610 Tricom 826 N/A N/A Trust 469 359 182 Intersegment eliminations (15,511) (11,168) (8,963) Other (3,187) (1,981) (953) -------------------------------- Total $ 47,734 36,764 26,772 - ------------------------------------------------------------- NON-INTEREST INCOME: Banking $ 7,140 7,700 3,745 Premium finance 1,033 - 147 Indirect auto 1 2 1 Tricom 1,009 N/A N/A Trust 1,171 788 626 Intersegment eliminations (606) (418) 425 Other 60 3 - -------------------------------- Total $ 9,808 8,075 4,944 - ------------------------------------------------------------- PROVISION FOR POSSIBLE LOAN LOSSES (NON-CASH ITEM): Banking $ 3,774 4,403 2,474 Premium finance 263 401 1,058 Indirect auto 1,665 855 446 Tricom 10 N/A N/A Trust - - - Intersegment eliminations (1,999) (1,362) (574) -------------------------------- Total $ 3,713 4,297 3,404 - ------------------------------------------------------------- DEPRECIATION AND AMORTIZATION (NON-CASH ITEM): Banking $ 3,245 2,457 1,968 Premium finance 294 284 288 Indirect auto 36 30 23 Tricom 248 N/A N/A Trust 58 48 22 Intersegment eliminations - (62) (45) Other 365 195 138 -------------------------------- Total $ 4,246 2,952 2,394 - ------------------------------------------------------------- INCOME TAX EXPENSE (BENEFIT): Banking $ 5,831 3,046 880 Premium finance 2,697 1,276 236 Indirect auto 1,692 1,168 773 Tricom 238 N/A N/A Trust (299) (114) 149 Intersegment eliminations (3,726) (5,424) (4,912) Other (1,709) (1,488) (914) -------------------------------- Total $ 4,724 (1,536) (3,788) ============================================================= ============================================================= Year Ended December 31, -------------------------------- 1999 1998 1997 -------------------------------- SEGMENT PROFIT (LOSS): Banking $ 10,284 5,131 4,112 Premium finance 4,273 2,022 373 Indirect auto 2,680 1,850 1,225 Tricom 340 N/A N/A Trust (559) (189) 237 Intersegment eliminations (4,764) (99) (114) Other (2,827) (2,470) (987) -------------------------------- Total $ 9,427 6,245 4,846 - ------------------------------------------------------------- EXPENDITURES FOR ADDITIONS TO PREMISES AND EQUIPMENT: Banking $ 14,521 14,644 12,827 Premium finance 1,712 500 3,221 Indirect auto 55 33 28 Tricom 364 N/A N/A Trust 146 72 12 Intersegment eliminations - (33) (40) Other 419 243 15 -------------------------------- Total $ 17,217 15,459 16,063 - ------------------------------------------------------------- At December 31, -------------------------------- 1999 1998 -------------------------------- SEGMENT ASSETS: Banking $ 1,676,983 1,377,641 Premium finance 260,323 234,779 Indirect auto 266,040 219,232 Tricom 29,213 N/A Trust 2,578 2,886 Intersegment eliminations (559,139) (491,795) Other 3,384 5,305 -------------------------------- Total $ 1,679,382 1,348,048 ============================================================= 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. - 38 - (21) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS ========================================================================= CONDENSED BALANCE SHEET (in thousands): DECEMBER 31, 1999 1998 -------------------------------- ASSETS Cash $ 269 2,312 Investment in subsidiaries 130,967 102,634 Other assets 3,115 2,993 -------------------------------- Total assets $ 134,351 107,939 ========================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 1,044 724 Notes payable 8,350 - Long-term debt - trust preferred securities 32,010 32,010 Shareholders' equity 92,947 75,205 -------------------------------- Total liabilities and shareholders' equity $ 134,351 107,939 ========================================================================= ========================================================================= CONDENSED STATEMENTS OF INCOME (IN THOUSANDS): YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------------------------------- INCOME Dividends from subsidiary $ - 8,250 - Other income 60 3 - --------------------------------- Total income 60 8,253 - --------------------------------- EXPENSES Interest expense 3,187 1,981 953 Salaries and employee benefits 252 1,095 333 Amortization of goodwill and organizational costs 212 161 138 Other expenses 945 724 477 --------------------------------- Total expenses 4,596 3,961 1,901 --------------------------------- Income (loss) before income taxes and equity in undistributed net income of subsidiaries (4,536) 4,292 (1,901) Income tax benefit (1,709) (1,488) (914) --------------------------------- Income (loss) before equity in undistributed net income of subsidiaries (2,827) 5,780 (987) Equity in undistributed net income of subsidiaries 12,254 465 5,833 --------------------------------- Net income $ 9,427 6,245 4,846 ========================================================================= ========================================================================= CONDENSED STATEMENTS OF CASH FLOWS (in thousands): YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------------------------------- OPERATING ACTIVITIES: Net income $ 9,427 6,245 4,846 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of goodwill and organizational costs 212 161 138 Deferred income taxes (249) 519 (914) (Increase) decrease in other assets (84) (416) 95 Increase (decrease) in other liabilities 320 568 (111) Equity in undistributed net income of subsidiaries (12,254) (465) (5,833) --------------------------------- Net cash provided by (used for) operating activities (2,628) 6,612 (1,779) --------------------------------- INVESTING ACTIVITIES: Capital infusions to subsidiaries (14,300) (17,026) (17,850) --------------------------------- Net cash used for investing activities (14,300) (17,026) (17,850) --------------------------------- FINANCING ACTIVITIES: Increase (decrease) in notes payable, net 8,350 (20,402) (1,655) Proceeds from long-term debt - 32,010 - Common stock issuance, net 5,984 - 20,326 Common stock issued upon exercise of stock options 403 264 964 Common stock issued through employee stock purchase plan 148 - - Advances from subsidiaries - - 785 --------------------------------- Net cash provided by financing activities 14,885 11,872 20,420 --------------------------------- Net increase (decrease) in cash (2,043) 1,458 791 Cash at beginning of year 2,312 854 63 --------------------------------- Cash at end of year $ 269 2,312 854 ========================================================================= - 39 - (22) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per common share for 1999, 1998 and 1997 (in thousands, except per share data): ========================================================================== 1999 1998 1997 ------------------------------ Net income (A) $ 9,427 6,245 4,846 ------------------------------ Average common shares outstanding (B) 8,249 8,142 7,755 Effect of dilutive common shares 309 353 331 ------------------------------ Weighted average common shares and effect of dilutive common shares (C) 8,558 8,495 8,086 ------------------------------ Net earnings per average common share - Basic (A/B) $ 1.14 0.77 0.62 Net earnings per average common share - Diluted (A/C) $ 1.10 0.74 0.60 ========================================================================== The effect of dilutive common shares outstanding results from stock options, stock warrants and shares to be issued under the SPP, all being treated as if they had been either exercised or issued, and are computed by application of the treasury stock method. (23) QUARTERLY FINANCIAL SUMMARY (UNAUDITED) The following is a summary of quarterly financial information for the years ended December 31, 1999 and 1998 (in thousands, except per share data):
============================================================================================================================ 1999 QUARTERS 1998 QUARTERS -------------------------------------------- ----------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH -------------------------------------------- ----------------------------------------- Interest income $ 24,278 26,114 28,084 30,855 19,900 21,447 22,941 23,691 Interest expense 13,462 14,516 15,862 17,757 11,896 12,537 13,068 13,714 -------------------------------------------- ----------------------------------------- Net interest income 10,816 11,598 12,222 13,098 8,004 8,910 9,873 9,977 Provision for possible loan losses 784 933 990 1,006 1,267 1,073 971 986 -------------------------------------------- ----------------------------------------- Net interest income after provision for possible loan losses 10,032 10,665 11,232 12,092 6,737 7,837 8,902 8,991 Non-interest income, excluding net securities gains (losses) 2,308 2,118 2,002 3,375 1,683 1,989 2,009 2,394 Net securities gains (losses) - - 15 (10) - - - - Non-interest expense (1) 9,536 9,528 9,430 11,184 7,932 9,467 8,639 9,795 -------------------------------------------- ----------------------------------------- Income before income taxes 2,804 3,255 3,819 4,273 488 359 2,272 1,590 Income tax expense (benefit) 970 995 1,292 1,467 (554) (604) 118 (496) -------------------------------------------- ----------------------------------------- Net income $ 1,834 2,260 2,527 2,806 1,042 963 2,154 2,086 ============================================ ========================================= Net income per common share - Basic $ 0.22 0.28 0.31 0.33 0.13 0.12 0.26 0.26 Net income per common share - Diluted $ 0.22 0.27 0.30 0.32 0.12 0.11 0.25 0.25 ============================================================================================================================ (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.
- 40 - INDEPENDENT AUDITORS' REPORTS - -------------------------------------------------------------------------------- The Board of Directors Wintrust Financial Corporation We have audited the accompanying consolidated statement of condition of Wintrust Financial Corporation and subsidiaries (the "Company") as of December 31, 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1999, and the consolidated results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Chicago, Illinois February 16, 2000 ================================================================================ The Board of Directors Wintrust Financial Corporation: We have audited the accompanying consolidated statement of condition of Wintrust Financial Corporation and subsidiaries (the "Company") as of December 31, 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the two-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 the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Chicago, Illinois March 19, 1999 - 41 - MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights the significant factors affecting the operations and financial condition of Wintrust for the three years ended December 31, 1999. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto, and Selected Financial Highlights appearing elsewhere within this report. This discussion contains forward-looking statements concerning the Company's business that are based on estimates and involve risks and uncertainties. Therefore, future results could differ significantly from management's current expectations and the related forward-looking statements. See the last section of this discussion for further information regarding forward-looking statements. OPERATING SUMMARY Wintrust's income before income taxes increased by over 200% for the second consecutive year. In addition, the Company's key operating measures and balance sheet growth showed impressive improvement in 1999 as evidenced by the table below (in thousands, except per share data): =============================================================== YEAR ENDED YEAR ENDED PERCENT 12/31/99 12/31/98 IMPROVEMENT ---------------------------------- Income before income taxes $ 14,151 $ 4,709 200.5% Net income 9,427 6,245 51.0 Net income per common share - Diluted 1.10 0.74 48.6 Net revenues 57,542 44,839 28.3 Net interest income 47,734 36,764 29.8 Net interest margin 3.54% 3.43% 3.2 Net overhead ratio 2.00 2.36 15.3 Return on average assets 0.63 0.53 18.9 Return on average equity 11.58 8.68 33.4 Total assets $ 1,679,382 $ 1,348,048 24.6 Total net loans 1,278,249 992,062 28.8 Total deposits 1,463,622 1,229,154 19.1 Book value per common share $ 10.60 $ 9.23 14.8 =============================================================== Please refer to the Consolidated Results of Operations section later in this discussion for further analysis of the Company's operations for the past three years. OVERVIEW AND STRATEGY Wintrust's operating subsidiaries were organized within the last eight years, with an average life of its six subsidiary banks of approximately five 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, 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 it 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. 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, FIFC, WAMC and Tricom. 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. Another aspect of this strategy is a continued focus on less aggressive deposit pricing at the Banks with significant market share and more established customer bases. FIFC is the Company's most significant specialized earning asset niche and had approximately $690 million in premium finance receivable volume during 1999. Although a large portion of this receivable volume is retained within the Banks' loan portfolios, FIFC sold approximately $69 million of these receivables to an unrelated third party in 1999 as a result of continued volume growth. In addition to recognizing gains on the sale of these receivables, the proceeds provided the Company with additional liquidity. Consistent with the Company's strategy to be asset-driven, it is probable that similar future sales of these receivables will occur depending on the level of new volume growth in relation to the capacity to retain such loans within the Banks' loan portfolios. - 42 - 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.
================================================================================================================================== Month Year Bank Location Type of Facility - ---------------------------------------------------------------------------------------------------------------------------------- (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. ==================================================================================================================================
The October 1999 acquisition of Tricom is another significant step in the Company's strategy to pursue specialized earning asset niches. Tricom is a Milwaukee-based company that has been in business for approximately ten years and specializes in providing, on a national basis, short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to clients in the temporary staffing industry. On an annual basis, Tricom currently finances and processes payrolls with associated billings in excess of $200 million and generates approximately $7 million in revenues. By virtue of the Company's funding resources, this acquisition will provide Tricom with additional capital necessary to expand its financing services in a national market. Tricom's revenue principally consists of interest income from financing activities and fee-based revenues from administrative services. In addition to expanding the Company's earning asset niches, this acquisition will add to the level of fee-based income and augment its community-based banking revenues. Other newer specialized earning asset niches include Lake Forest Bank's MMF Leasing Services ("MMF") equipment leasing division, a previously established small business that was acquired in July 1998, and Barrington Bank's recently established program that provides lending and deposit services to condominium, homeowner and community associations. In addition, Hinsdale Bank's mortgage warehouse lending program provides loan and deposit services to approximately thirty mortgage brokerage companies located predominantly in the Chicago metropolitan area. The Company plans to continue pursuing the development or acquisition of other specialty earning asset niches or finance businesses that generate assets suitable for bank investment and/or secondary market sales. With the formation of WAMC in September 1998, the Company intends to expand the trust and investment management services that were previously provided through the trust department of the Lake Forest Bank. With a separately chartered trust subsidiary, the - 43 - Company is now better 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 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 continue to operate from offices at the Lake Forest Bank. Prospective trust customers at Libertyville Bank and Crystal Lake Bank are currently being served on an appointment basis, as the need arises. Services offered by WAMC typically 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 has caused relatively high overhead levels when compared to fee income generated by WAMC. The overhead consists 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 cover the overhead of WAMC. 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 security 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, service charges on deposit accounts, trust fees, gains on sales of premium finance receivables, administrative services revenue and other miscellaneous fees and income. Non-interest expense includes salaries and employee benefits as well as occupancy, equipment, data processing, advertising and marketing, professional fees, amortization of intangible assets and other operating expenses. Net interest income is dependent on the amounts and yields of interest-earning assets as compared to the amounts and rates on interest-bearing liabilities. Net interest income is sensitive to changes in market rates of interest and the Company's asset/liability management actions. The provision for loan losses is dependent on increases in the loan portfolio, management's assessment of the collectibility of the loan portfolio, net loans charged-off, historical loss experience, as well as economic conditions and other market factors. Fees on mortgage loans sold relate to the Company's practice of originating long-term fixed-rate mortgage loans for sale into the secondary market in order to satisfy customer demand for such loans while avoiding the interest-rate risk associated with holding long-term fixed-rate mortgage loans in the Banks' portfolios. These fees are highly dependent on the mortgage interest rate environment and the volume of real estate transactions and mortgage refinancing activity. The Company earns trust fees for managing and administering trust and investment accounts for individuals and businesses. Gains on sales of premium finance receivables result from FIFC's sale of a portion of new origination volumes to an unaffiliated third party. Administrative services revenue results from various value-added services that Tricom provides to its temporary staffing service clients such as data processing of payrolls, billing and cash management services. Miscellaneous fees and income primarily include income generated from other ancillary banking services, premium income from the sale of covered call options and rental income from leased equipment. Non-interest expenses are heavily influenced by the growth of operations, with additional employees necessary to staff new banks, branch facilities and trust expansion, higher levels of occupancy and equipment costs, as well as advertising and marketing expenses necessary to promote the growth. The increase in the number of account relationships directly affects such expenses as data processing costs, supplies, postage, loan expenses, and other miscellaneous operating expenses. - 44 - 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, 1999, 1998, and 1997. The yields and costs include loan origination fees and certain direct origination costs which are considered adjustments to yields. Interest income on non-accruing loans is reflected in the year that it is collected, to the extent it is not applied to principal. Such amounts are not material to net interest income or net change in net interest income in any year. Non-accrual loans are included in the average balances and do not have a material effect on the average yield. Net interest income and the related net interest margin have been adjusted to reflect tax-exempt income, such as interest on municipal securities and loans, on a tax-equivalent basis. This table should be referred to in conjunction with this analysis and discussion of the financial condition and results of operations (dollars in thousands).
============================================================================================================================== 1999 1998 1997 ---------------------------------------------------------------------------------------------- Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance(1) Interest Cost Balance(1) Interest Cost Balance(1) Interest Cost ---------------------------------------------------------------------------------------------- Assets Interest bearing deposits with banks $ 3,840 $ 204 5.31% $ 40,094 $ 2,283 5.69% $ 32,319 $ 1,764 5.46% Securities (2) 187,258 10,336 5.52 142,770 8,000 5.60 69,887 3,793 5.43 Federal funds sold 30,844 1,536 4.98 43,784 2,327 5.31 63,889 3,493 5.47 Loans, net of unearned income (2) 1,135,200 97,529 8.59 848,344 75,464 8.90 620,801 56,134 9.04 ---------------------------------------------------------------------------------------------- Total earning assets 1,357,142 109,605 8.08 1,074,992 88,074 8.19 786,896 65,184 8.28 ---------------------------------------------------------------------------------------------- Cash and due from banks 39,285 26,585 17,966 Allowance for possible loan losses (7,980) (5,983) (4,522) Premises and equipment, net 65,539 50,681 35,634 Other assets 42,580 31,470 22,110 ---------------------------------------------------------------------------------------------- Total assets $1,496,566 $1,177,745 $ 858,084 ============================================================================================================================== Liabilities and Shareholders' Equity Deposits - interest bearing: NOW accounts $ 123,846 $ 3,607 2.91% $ 89,963 $ 2,849 3.17% $ 66,221 $ 2,535 3.83% Savings and money market deposits 309,525 11,194 3.62 256,644 10,480 4.08 191,317 8,220 4.30 Time deposits 751,286 41,225 5.49 611,199 35,740 5.85 444,587 26,620 5.99 ---------------------------------------------------------------------------------------------- Total interest bearing deposits 1,184,657 56,026 4.73 957,806 49,069 5.12 702,125 37,375 5.32 ---------------------------------------------------------------------------------------------- Short-term borrowings and notes payable 53,076 2,633 4.96 21,249 1,399 6.58 13,694 964 7.04 Long-term debt - trust preferred securities(3) 31,050 2,938 9.46 7,915 747 9.44 - - - ---------------------------------------------------------------------------------------------- Total interest bearing liabilities 1,268,783 61,597 4.85 986,970 51,215 5.19 715,819 38,339 5.36 ---------------------------------------------------------------------------------------------- Non-interest bearing deposits 126,388 100,712 73,280 Other liabilities 20,014 18,157 7,481 Shareholders' equity 81,381 71,906 61,504 ---------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,496,566 $1,177,745 $ 858,084 - ------------------------------------------------------------------------------------------------------------------------------ Net interest income/spread $ 48,008 3.23% $ 36,859 3.00% $ 26,845 2.92% Net interest margin 3.54% 3.43% 3.41% Core net interest margin(4) 3.64% 3.45% 3.41% ============================================================================================================================== (1) Average balances were generally computed using daily balances. (2) Interest income on tax advantaged securities and loans reflects a tax-equivalent adjustment based on a marginal federal tax rate of 35% for 1999 and 34% for both 1998 and 1997. This total adjustment reflected in the above table is $274, $95 and $73 in 1999, 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 rates shown above are higher than the 9.00% coupon rate due to 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. (4) The core net interest margin excludes the net impact of the Company's 9.00% Cumulative Trust Preferred Securities offering and certain discretionary investment leveraging transactions.
- 45 - 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):
============================================================================================================================ YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------- 1999 COMPARED TO 1998 1998 COMPARED TO 1997 --------------------------------------------------------------------------- CHANGE CHANGE CHANGE CHANGE DUE TO DUE TO TOTAL DUE TO DUE TO TOTAL RATE VOLUME CHANGE RATE VOLUME CHANGE --------------------------------------------------------------------------- INTEREST INCOME: Interest bearing deposits with banks $ (142) (1,937) (2,079) 79 440 519 Federal funds sold (138) (653) (791) (95) (1,071) (1,166) Securities (116) 2,452 2,336 127 4,080 4,207 Loans (2,695) 24,760 22,065 (925) 20,255 19,330 --------------------------------------------------------------------------- Total interest income (3,091) 24,622 21,531 (814) 23,704 22,890 --------------------------------------------------------------------------- INTEREST EXPENSE: NOW accounts (247) 1,005 758 (489) 803 314 Savings and money market deposits (1,280) 1,994 714 (426) 2,686 2,260 Time deposits (2,323) 7,808 5,485 (637) 9,757 9,120 Short-term borrowings and notes payable (417) 1,651 1,234 (66) 501 435 Long-term debt-trust preferred securities 2 2,189 2,191 - 747 747 --------------------------------------------------------------------------- Total interest expense (4,265) 14,647 10,382 (1,618) 14,494 12,876 --------------------------------------------------------------------------- Net interest income $ 1,174 9,975 11,149 804 9,210 10,014 ============================================================================================================================
The changes in net interest income are created by various changes in both interest rates and volumes and, therefore, require significant analysis. However, it is clear that the change in the Company's net interest income for the periods under review was predominantly impacted by the growth in the volume of the overall interest-earning assets (specifically loans) and interest-bearing deposit liabilities. In the table above, volume variances are computed using the change in volume multiplied by the previous year's rate. Rate variances are computed using the change in rate multiplied by the previous year's volume. The change in interest due to both rate and volume has been allocated between factors in proportion to the relationship of the absolute dollar amounts of the change in each. ANALYSIS OF FINANCIAL CONDITION The dynamics of community bank balance sheets 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 five years old, the generation of new deposit relationships to gain market share and establish themselves in the community as the bank of choice is particularly important. When determining a community to establish a de novo bank, the Company generally will only enter a community where it believes the bank can gain the number one or two position in deposit market share. This is usually accomplished by initially paying competitively high deposit rates to gain the relationship and then by introducing the customer to the Company's unique way of providing local banking services. Deposits. Over the past three years, the Company has experienced significant growth in both the number of accounts and the balance of deposits primarily as a result of de novo bank formations, new branch openings and strong marketing efforts. Total deposit balances increased 19.1% to $1.46 billion at December 31, 1999 as compared to $1.23 billion at December 31, 1998, which increased 33.9% when compared to the balance of $917.7 million at December 31, 1997. As can be seen from the following table, the composition of the deposit base has remained relatively consistent when comparing the ending balances as of December 31, 1999, 1998 and 1997 (dollars in thousands): - 46 -
================================================================================== 1999 1998 1997 ---------------------------------------------------------------------------------- Ending Percent Ending Percent Ending Percent Balance of Total Balance of Total Balance of Total ---------------------------------------------------------------------------------- Non-interest bearing deposits $ 154,034 11% $ 131,309 11% $ 92,840 10% NOW accounts 130,625 9 114,284 9 83,301 9 Savings and money market deposits 325,201 22 297,932 24 216,338 24 Time deposits 853,762 58 685,629 56 525,222 57 ---------------------------------------------------------------------------------- Total deposits $ 1,463,622 100% $ 1,229,154 100% $ 917,701 100% =============================================================================================================================
Additionally, growth in the deposit base continues to be generated by each of the Banks. The following table presents deposit balances by the Banks and the relative percentage of total deposits held by each Bank at December 31 for the past three years (dollars in thousands):
============================================================================================================================= 1999 1998 1997 ---------------------------------------------------------------------------------- Deposit Percent Deposit Percent Deposit Percent Balances of Total Balances of Total Balances of Total ---------------------------------------------------------------------------------- Lake Forest Bank $ 416,642 29% $ 371,900 30% $ 287,765 31% Hinsdale Bank 296,127 20 259,333 21 206,197 22 North Shore Bank 327,130 22 270,030 22 245,184 27 Libertyville Bank 191,085 13 171,735 14 112,658 12 Barrington Bank 156,859 11 109,130 9 64,803 7 Crystal Lake Bank 75,779 5 47,026 4 1,094 1 ---------------------------------------------------------------------------------- Total deposits $ 1,463,622 100% $ 1,229,154 100% $ 917,701 100% ================================================================================== Percentage increase from prior year-end 19.1% 33.9% 48.5% =============================================================================================================================
Short-term borrowings. Short-term borrowings predominantly include securities sold under agreements to repurchase and federal funds purchased and totaled $59.8 million at December 31, 1999. There were no short-term borrowings outstanding as of December 31, 1998. This funding category fluctuates based on daily liquidity needs of the Banks, FIFC and Tricom. Notes payable. As of December 31, 1999, notes payable totaled $8.4 million and represented the outstanding balance on the Company's $40 million revolving credit line with an unaffiliated bank. At December 31, 1998, there were no notes payable outstanding as the proceeds from the October 1998 Trust Preferred Securities offering were used to pay-off the previous outstanding balance on this revolving credit line. This revolving credit line is available for corporate purposes such as to provide capital to fund continued growth at existing bank subsidiaries, expansion of WAMC, possible future acquisitions and for other general corporate matters. See Note 9 to the Consolidated Financial Statements for further discussion of the terms of this revolving credit line. Long-term debt - trust preferred securities. As of December 31, 1999 and 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 increased the Company's regulatory capital, and provided for the continued growth of its banking and trust franchise. The ability to treat these Trust Preferred Securities as regulatory capital under Federal Reserve 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 $1.68 billion at December 31, 1999, an increase of $331.3 million, or 24.6%, when compared to $1.35 billion at December 31, 1998, which increased $294.6 million, or 28.0%, over the December 31, 1997 total of $1.05 billion. Earning assets totaled $1.51 billion at December 31, 1999, an increase of $282.2 million, or 22.9%, from the balance of $1.23 billion a year earlier. Earning assets as a percentage of total assets dropped to 90.2% as of December 31, 1999 when compared to - 47 - 91.4% as of December 31, 1998. This decline was due mainly to an unusually high level of cash and due from bank balances maintained at the end of 1999 in connection with the Company's contingency and liquidity planning for the Year 2000 issue. The increases in total assets and earning assets since December 31, 1998 were primarily attributable to the $234.5 million increase in deposits, which mainly resulted from continued market share growth. The Company had a total of 24 banking facilities at the end of 1999 compared to 21 at the end of 1998. Loans. Total loans, net of unearned income, continued on a solid growth track during 1999 and totaled $1.28 billion at December 31, 1999, an increase of $286.2 million, or 28.8%, over the December 31, 1998 balance of $992.1 million. This growth occurred in all core and specialty loan categories. Total loans, net of unearned income, comprised 84.4% of total earning assets at December 31, 1999 as compared to 80.5% at December 31, 1998. This shift toward higher yielding earning assets is consistent with management's objective of being an asset-driven organization whereby loan generation is on a faster pace than deposit funding. The following table presents loan balances, net of unearned income, by category as of December 31, 1999 and 1998 (dollars in thousands): ========================================================================= 1999 1998 -------------------------------------- Percent Percent Balances of Total Balances of Total -------------------------------------- Commercial and commercial real estate $ 485,776 38% $ 366,229 37% Indirect auto, net 255,410 20 209,983 21 Premium finance, net 219,341 17 178,138 18 Home equity 139,194 11 111,537 11 Residential real estate 111,026 9 91,525 9 Tricom finance receivables 17,577 1 - - Other loans 49,925 4 34,650 4 -------------------------------------- Total loans, net $ 1,278,249 100% $ 992,062 100% ========================================================================= 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 that generally have large volumes of homogeneous assets that can be acquired for the Banks' portfolios and possibly sold in the secondary market to generate fee income. These specialty niches also diversify the Banks' loan portfolios and add higher yielding earning assets that help to improve the net interest margin. Currently, the Company's two largest loan niches function as separate operating segments and consist of the premium finance and indirect auto segments. Other specialty loan programs include finance receivables from the October 1999 Tricom acquisition, medical and municipal equipment leases through a division of Lake Forest Bank, mortgage broker warehouse lending through Hinsdale Bank, and commercial loans through the Community Advantage program at Barrington Bank, which began in mid-1999 to provide lending and deposit services to condominium, homeowner and community associations. Management continues to evaluate other specialized types of earning assets to assist with the deployment of deposit funds and to diversify the earning asset portfolio. Premium finance receivables. The Company originates commercial premium finance receivables through FIFC, which currently sells them to the Banks and an unrelated third party; 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. Premium finance receivables totaled $219.3 million at December 31, 1999 and increased $41.2 million, or 23.1%, from the $178.1 million balance a year earlier. In addition to this growth, FIFC sold approximately $69 million of new 1999 volume to an unrelated third party and recognized approximately $1.0 million in gains from the sales of these loans. During 1999, loan originations totaled almost $690 million, an increase of over 40% from the prior year volume level. In July 1999, a program agreement was signed with Dallas-based Premium Finance Holdings ("PFH") to originate premium finance receivables referred by PFH, which is anticipated to add almost $200 million in volume in 2000. The addition of the PFH relationship coupled with other business development efforts including new product offerings and targeted marketing programs have been the primary factors for the volume growth during 1999. With continued growth expectations in 2000, it is probable that the Company will continue selling a portion of these new receivables to unrelated third parties. 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 - 48 - standards that management believes results in a high quality portfolio. The Company does not currently originate any significant level of sub-prime loans, which are made to individuals with impaired credit histories at generally higher rates, and accordingly, with higher levels of credit risk. Management continually monitors the dealer relationships and the Banks are not dependent on any one dealer as a source of such loans. The Company began to originate these loans in mid-1995 and has consistently increased the level of outstanding loans. As of December 31, 1999, net indirect auto loans were the second largest loan category and totaled $255.4 million, an increase of $45.4 million, or 21.6%, over the previous year-end balance. This increase was the result of higher volumes from a strong auto market, favorable auto loan rates and new dealer relationships. Tricom finance receivables. The October 1999 acquisition of Tricom added this newest category to the Company's loan portfolio. These receivables consist of high-yielding short-term accounts receivable financing to clients in the temporary staffing industry located throughout the United States. Typically, Tricom will also provide value-added out-sourced administrative services to many of these clients, such as data processing of payrolls, billing and cash management services, which generates additional fee income. As of December 31, 1999, Tricom had approximately 170 clients and outstanding finance receivables of $17.6 million. Core Loan Categories Commercial and commercial real estate loans, the largest loan category, totaled $485.8 million at December 31, 1999 and increased $119.5 million, or 32.6%, over the December 31, 1998 balance of $366.2 million. This category comprised 38% of the loan portfolio at the end of 1999 and the increase over the prior year-end balance was mainly due to the combination of increased business development efforts, a favorable interest rate environment and a continued healthy economy. Home equity loans totaled $139.2 million as of December 31, 1999 and increased $27.7 million, or 24.8%, when compared to the December 31, 1998 balance of $111.5 million. This increase was mainly the result of increased line of credit usage and special marketing programs. Unused commitments on home equity lines of credit have increased approximately $20 million, or 12%, over the balance at December 31, 1998 and totaled $188.3 million at December 31, 1999. Residential real estate loans totaled $111.0 million at December 31, 1999, and increased $19.5 million, or 21.3%, over the prior year-end balance due mainly to the low mortgage interest rate environment earlier in 1999 and the related high levels of refinancing activity. Mortgage loans held for sale are included in this category and totaled $8.1 million and $18.0 million at December 31, 1999 and 1998, 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 remaining loans in this category are maintained within the Banks' loan portfolios and comprise mostly adjustable rate mortgage loans and shorter-term fixed rate mortgage loans. Liquidity Management Assets. Funds that are not utilized for loan originations are used to purchase investment securities and short-term money market investments, to sell as federal funds and to maintain in interest-bearing deposits with banks. The balances of these assets fluctuate frequently based on deposit inflows and loan demand. As a result of anticipated significant growth in the development of de novo banks, it has been Wintrust's policy to generally maintain its securities portfolio in short-term, liquid, and diversified high credit quality securities at the Banks in order to facilitate the funding of quality loan demand as it emerges and to keep the Banks in a liquid condition in the event that deposit levels fluctuate. The aggregate carrying value of these earning assets declined slightly to $236.6 million at December 31, 1999 from $240.5 million at December 31, 1998. As a percent of total earning assets, total liquidity management assets declined to 15.6% at December 31, 1999 from 19.5% at December 31, 1998. A detail of the carrying value of the individual categories as of December 31, 1999 and 1998 is set forth in the following table (in thousands): ======================================================================= 1999 1998 ----------------------------- Federal funds sold $ 28,231 18,539 Interest-bearing deposits with banks 2,547 7,863 Securities 205,795 214,119 ----------------------------- Total liquidity management assets $ 236,573 240,521 ======================================================================= - 49 - CONSOLIDATED RESULTS OF OPERATIONS Overview of the Company's profitability characteristics. The following discussion of Wintrust's results of operations requires an understanding that the Company's bank subsidiaries have all been started as new banks since December 1991 and have an average life of approximately five years. The Company's premium finance company, FIFC, began limited operations in 1991 as a start-up company. The Company's trust and investment company, WAMC, began operations in September 1998. Previously, the Company's Lake Forest Bank operated a trust department on a much smaller scale than WAMC. Tricom, the Company's newest subsidiary, started operations as a new company in 1989. Accordingly, Wintrust is still a young Company that has a strategy of continuing to build its customer base and securing broad product penetration in each marketplace that it serves. The Company has expanded its banking offices from 5 in 1994 to 24 at the end of 1999, adding three new offices in 1999 and four new offices in 1998. In addition, WAMC 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 continue to increase. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 Earnings summary. Net income for the year ended December 31, 1999 totaled $9.4 million and increased $3.2 million, or 51.0%, over the prior year. Net income per basic common share totaled $1.14 in 1999 versus $0.77 in 1998, an increase of $0.37 per share, or 48.1%. On a diluted basis, net income per common share totaled $1.10 in 1999 as compared to $0.74 in 1998, an increase of $0.36 per share, or 48.6%. Excluding the impact of the 1998 non-recurring charge mentioned later in the non-interest expense section, the increase in net income for the year ended December 31, 1999 would have been $2.6 million, or 37.5%, over 1998. On a diluted basis, net income per common share would have increased $0.29, or 35.8%. The increase in net income during 1999 was most favorably impacted by a $11.0 million increase in net interest income that primarily resulted from a higher earning asset base, particularly from growth in the loan portfolio. A $1.7 million increase in non-interest income also contributed to the higher 1999 earnings and was mainly the result of gains from the sale of premium finance receivables, higher levels of deposit service charges, growth in trust fee income and the addition of administrative service revenues resulting from the October 1999 acquisition of Tricom. Partially offsetting these increases was a $2.4 million decline in fees from the sale of mortgage loans into the secondary market due to significantly lower levels of mortgage origination volumes, particularly refinancing activity, caused by the increases in mortgage interest rates. A $3.8 million increase in total non-interest expense during 1999 also offset a portion of the income growth, and was due primarily to the growth and expansion experienced by the Company during 1999 coupled with the Tricom acquisition. A significant factor that contributed to the prior year net income was the recognition of income tax benefits from the realization of previously unvalued tax loss benefits. Due to the prior year recognition of tax benefits, the Company's true growth in profitability over the past year has been masked. Therefore, a comparison of pre-tax operating income is more representative of the Company's improvement in operating results. On a pre-tax basis, operating income totaled $14.2 million in 1999, an increase of $8.4 million, or 148%, over 1998, exclusive of the previously mentioned prior year non-recurring charge. This significant improvement in operating results has been primarily the result of enhanced performance of the Company's more established subsidiaries and the fourth quarter 1999 acquisition of Tricom. For further information regarding the recognition of income tax benefits, please refer to the Income Taxes section of this discussion and analysis. Net interest income. Net interest income totaled $47.7 million for the year ended December 31, 1999, an increase of $11.0 million, or 29.8%, when compared to 1998. This increase was primarily attributable to a 26.2% increase in average earning assets, including a 33.8% increase in average loans and a 2.1% decline in average securities and other liquidity management assets. Total average loans as a percentage of total average earning assets increased to 83.6% in 1999 from 78.9% in 1998 as a result of solid loan growth. This improved loan proportion creates a higher net interest margin, as loans earn interest at a higher rate than the Company's other earning assets. The net interest margin increased from 3.43% in 1998 to 3.54% in 1999. The core net interest margin, which excludes the impact of the 9.00% Cumulative Trust Preferred Securities offering and certain discretionary investment leveraging transactions, was 3.64% in 1999, an increase of 19 basis points over the core margin of 3.45% in 1998. These margin increases were the result of a decline in overall funding cost rates and loan growth. The total deposit funding cost rate declined 39 basis points since the prior year and was 4.73% for the year ended December 31, 1999. This improvement was due mainly to less aggressive deposit pricing in the markets - 50 - of the more mature banks that have already established significant market share. The average earning asset yield declined to 8.08% in 1999 as compared to 8.19% in 1998, due mostly to the 31 basis point decline in the average loan yield to 8.59% in 1999. This decline was due primarily to a lower average prime lending rate of 8.00% in 1999 versus an average prime lending rate of 8.36% in 1998. 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 totaled $3.7 million for the year ended December 31, 1999, a $584,000 decline from the total of $4.3 million in 1998. The higher provision in 1998 was necessary to cover increased loan charge-offs that occurred at one banking office in early 1998. Management believes the allowance for possible loan losses is adequate to provide for inherent losses in the portfolio. There can be no assurances, 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 regulatory environment, the level of past-due and non-performing loans, and other factors. Non-interest income. For the year ended December 31, 1999, total non-interest income was $9.8 million and increased $1.7 million, or 21.5%, when compared to $8.1 million in 1998. The October 1999 acquisition of Tricom added approximately $1.0 million of administrative services revenue to total non-interest income in 1999. This revenue comprises income from administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States. Tricom also earns interest and fee income from providing short-term accounts receivable financing to this same client base, as mentioned earlier in this discussion. During 1999, approximately $69 million of premium finance receivables were sold by FIFC to an unrelated third party and resulted in the recognition of approximately $1.0 million in gains, which are shown as a separate category of non-interest income. There were no sales of premium finance receivables in 1998. Consistent with Wintrust's strategy to be asset-driven, it is probable that similar future sales of premium finance receivables will occur depending on the level of new volume growth in relation to the capacity to retain such loans within the Banks' loan portfolios. 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, 1999, these fees totaled $3.2 million, a decline of $2.4 million, or 42.4%, from the 1998 total of $5.6 million. This decline was due to significantly lower levels of mortgage origination volumes, particularly refinancing activity, caused by the increases in mortgage interest rates. Service charges on deposit accounts totaled $1.6 million for the year ended December 31, 1999 and increased $497,000, or 46.7%, when compared to the 1998 total of $1.1 million. This increase was due mainly to a higher deposit base and a larger number of accounts at both the mature banks and the newer de novo banks. 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 $1.2 million for the year ended December 31, 1999, an increase of $383,000, or 48.6%, over 1998. This increase was the result of new business development efforts generated by a larger staff of experienced trust officers that were added in late 1998 with the formation of WAMC. Wintrust is committed to growing the trust and investment business in order to better service its customers and create a more diversified revenue stream. However, as the introduction of expanded trust and investment services continues to unfold, it is expected that overhead levels will be high when compared to the fee income that is generated. This overhead will consist primarily of the salaries and benefits of experienced trust professionals. It is anticipated that trust fees will eventually increase to a level sufficient to cover this overhead within a few years. Other non-interest income totaled $1.8 million for the year ended December 31, 1999 and increased $1.2 million, or 181%, over the 1998 total of $653,000. This increase was due primarily to $508,000 in premium income from certain call option transactions and a $355,000 increase in rental income from equipment leased through the MMF division of Lake Forest Bank, a small business that was acquired in mid-1998. The call option transactions were - 51 - designed to utilize the excess capital at certain banks, increase the total return associated with holding certain securities as earning assets, and yield additional fee income. Non-interest expense. For the year ended December 31, 1999, total non-interest expense was $39.7 million and increased $3.8 million, or 10.7%, over 1998. Excluding the prior year 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, total non-interest expense would have increased $4.8 million, or 13.9%, over 1998. The increases in non-interest expense were predominantly caused by the continued growth and expansion of the Banks, as discussed in earlier sections of this analysis, the development of WAMC and the October 1999 acquisition of Tricom. For example, the increase in total operating expenses from 1998 to 1999 for Barrington Bank and Crystal Lake Bank were $485,000 and $600,000, respectively, and the September 1998 start-up of WAMC added $1.5 million to total 1999 non-interest expense when compared to the 1998 total. In addition, the October 1999 acquisition of Tricom added $1.2 million to 1999 non-interest expense. Since December 31, 1998, total deposits have grown 19.1% and total loan balances have risen 28.8%, requiring higher levels of staffing and other operating costs, such as occupancy, equipment, advertising and data processing, to both attract and service the larger customer base. Despite the growth and the related increases in many of the non-interest expense categories, Wintrust's ratio of non-interest expense to total average assets declined from 3.04% in 1998 to 2.65% in 1999, and is favorable to the Company's most recent peer group ratio. In addition, the net overhead ratio for 1999 declined to 2.00% as compared to the 1998 ratio of 2.36%. The improvement in this ratio has caused this key indicator of overhead to reach the upper end of Wintrust's previously stated performance goal range of 1.50% - 2.00%. Salaries and employee benefits for the year ended December 31, 1999 totaled $20.8 million, an increase of $2.8 million, or 15.3%, from the 1998 total, excluding the impact of the prior year non-recurring charge mentioned earlier. This increase was directly caused by higher staffing levels necessary to support the continued growth of the Banks, the late 1998 hiring of several experienced trust professionals in conjunction with the start-up of WAMC, approximately $600,000 related to the October 1999 acquisition of Tricom, and normal salary increases. For the year ended December 31, 1999, salaries and employee benefits as a percent of average assets was 1.39% versus 1.53% in 1998, exclusive of the non-recurring charge. Equipment expense, which includes furniture, equipment and computer software depreciation and repairs and maintenance costs, totaled $3.2 million for year ended December 31, 1999, a $978,000, or 44.0%, increase over the 1998 total. This increase was caused mainly by higher levels of depreciation expense related to the opening of new facilities, the expansion of existing facilities, the acquisition of Tricom and other growth as discussed earlier. Net occupancy expenses for the year ended December 31, 1999 increased $556,000, or 22.8%, to $3.0 million as compared to $2.4 million for 1998. This increase was due mainly to the opening of three additional facilities in 1999, the expansion of the Lake Forest Bank and corporate office facilities, and the acquisition of Tricom. Data processing expenses totaled $2.2 million for the year ended December 31, 1999, an increase of $493,000, or 29.4%, when compared to 1998. This increase was due primarily to the additional transactional charges related to the larger deposit and loan portfolios, which increased, on an average basis, 23.9% and 33.8%, respectively, in 1999 when compared to the prior year. Advertising and marketing expenses totaled $1.4 million for the year ended December 31, 1999, a decline of $210,000, or 13.0%, when compared to 1998. In the prior year, higher levels of marketing costs were necessary to attract loans and deposits at the newly chartered Crystal Lake Bank and Barrington Bank and to announce the expansion of trust and investment services through WAMC. Professional fees, which includes legal, audit and tax fees, external loan review costs and normal regulatory exam assessments, totaled $1.2 million for the year ended December 31, 1999, a decline of $451,000, or 27.3%, from the 1998 total. This decline was caused by a higher level of fees in 1998 related to certain non-performing loan work-outs and approximately $100,000 in legal fees related to the non-recurring severance charge mentioned earlier. Amortization of intangibles expense totaled $251,000 for the year ended December 31, 1999 as compared to $120,000 for the same period in 1998. The $131,000 increase was due to goodwill and other intangibles amortization from the October 1999 Tricom acquisition and amortization expense from the mid-1998 acquisition of MMF. Based on existing intangible assets at December - 52 - 31, 1999, this category of expense will increase to approximately $715,000 in 2000 to reflect the inclusion of a full year of amortization for the Tricom acquisition. Other non-interest expenses for the year ended December 31, 1999 totaled $7.7 million and increased $484,000, or 6.7%, over the prior year. This category includes loan expenses, correspondent bank service charges, insurance, postage, stationery and supplies, telephone, directors fees, organizational cost amortization, and other sundry expenses. In 1998, one subsidiary bank recorded a $600,000 operations loss. Without this prior year expense, the 1999 increase would have been $1.1 million, or 16.5%. This increase was generally caused by the Company's expansion activities and the Tricom acquisition, as discussed earlier, including increased costs from the origination and servicing of a larger base of deposit and loan accounts. Income taxes. The Company recorded income tax expense of $4.7 million for the year ended December 31, 1999 as compared to $1.5 million of income tax benefits in 1998. 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. As the 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 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. Accordingly, unlike prior periods, the Company's results in 1999 and future years will not benefit significantly from the recognition of net operating loss carryforwards. The value of prior net operating losses recognized for financial statement reporting purposes for 1999 and 1998 was approximately $460,000 and $3.4 million, respectively. Please refer to Note 12 to the Consolidated Financial Statements for further discussion and analysis of the Company's tax position. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997 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 mentioned non-recurring $1.0 million pre-tax charge. 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. 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 a low mortgage interest rate environment that 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. 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 years 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 reflected 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. Excluding the impact of income tax benefits and the non-recurring charge mentioned above, the Company recorded operating income of $5.7 million and $1.1 million in 1998 and 1997, respectively. This significant improvement in 1998 operating results was due to the - 53 - 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 increased slightly 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. 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. 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. 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 for the year ended December 31, 1998 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 were the major reasons for this significant revenue increase. Service charges on deposit accounts continued to increase throughout 1998 when compared to 1997, 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. 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 and the September 1998 start-up of WAMC. 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 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. 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. As of December 31, 1998, when compared to the prior year-end balances, total deposits increased 33.9% and total loans rose 39.2%, which required higher levels of staffing and other operating costs, such as occupancy, advertising and data processing, to both attract and service the larger customer base. 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 recorded in 1998 related 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 - 54 - 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. Equipment expense 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. 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 during 1998. 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. 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. Professional fees 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. 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. 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 were reviewed and additional controls and procedures were put into place, where considered necessary. 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. 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. As noted earlier, the Company recorded income tax benefits that 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. The value of prior net operating losses recognized for financial statement reporting purposes for 1998 and 1997 was approximately $3.4 million and $4.2 million, respectively. OPERATING SEGMENT RESULTS As described in Note 20 to the Consolidated Financial Statements, the Company's operations consist of five primary segments: banking, premium finance, indirect auto, Tricom 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, 1999 totaled $44.3 million as compared to $34.2 million for the same period in 1998, an increase of $10.0 million, or 29.3%. The increase in net interest income for 1998 when compared to the total of $25.5 million in 1997 was $8.7 million, or 34.1%. These increases were the direct result of growth in the loan portfolio and an improved net interest margin, as discussed in the Consolidated Results of Operations section. The banking segment's non-interest income totaled $7.1 million in 1999, a decline of $560,000, or 7.3%, when compared to the 1998 total of $7.7 million. This decline was due to a $2.4 million reduction in fees from the sale of residential mortgage loans, which was partially offset by increases in deposit service charges, call option premium income and leased equipment rental income, as discussed earlier in the Consolidated Results of Operations section. The reduction in mortgage fees was - 55 - mainly caused by increases in mortgage interest rates, which significantly lowered mortgage origination volumes, particularly refinancing activity. In 1998, non-interest income for the banking segment totaled $7.7 million and increased $4.0 million, or 105.6%, over the total of $3.7 million in 1997. This increase was 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 $10.3 million for the year ended December 31, 1999, an increase of $5.2 million, or 100.4%, as compared to the 1998 total of $5.1 million. The total segment profit in 1998 increased $1.0 million over the $4.1 million that was recorded in 1997. These after-tax segment profit increases were primarily the result of higher levels of net interest income, as noted above, and the general continued maturation and related profitability improvements of the more established de novo bank subsidiaries. Net interest income for the premium finance segment totaled $12.6 million for the year ended December 31, 1999 and increased $2.9 million, or 30.2%, over the $9.7 million in 1998. This increase resulted from higher levels of premium finance receivables produced from various business development efforts including a new program agreement with PFH, as mentioned earlier, and other new product offerings and targeted marketing programs. In 1998, net interest income increased $2.4 million, or 32.0%, over the 1997 total of $7.4 million due to new programs and targeted marketing efforts. The premium finance segment non-interest income for the year ended December 31, 1999 totaled $1.0 million and related to gains from the sale of premium finance receivables, as more fully discussed in the Consolidated Results of Operations section. Net after-tax profit of the premium finance segment totaled $4.3 million for the year ended December 31, 1999, as compared to $2.0 million in 1998 and and $373,000 in 1997. The improvements in profitability during both 1998 and 1999 were due mainly to the combination of higher volumes and the implementation of additional collection procedures and upgraded systems. Net interest income for the indirect auto segment totaled $8.2 million in 1999, a $2.6 million, or 46.6%, increase over 1998 as a result of a 42.7% increase in average outstanding loans. In 1998, total net interest income of $5.6 million increased $2.0 million, or 55.0%, over the 1997 total of $3.6 million, due to higher average outstanding loans. The indirect auto segment after-tax profit totaled $2.7 million for the year ended December 31, 1999, an increase of $830,000, or 44.9%, over the 1998 total of $1.8 million. In 1998, after-tax segment profit increased $625,000, or 51.0%, over the 1997 total of $1.2 million. These increases were the result of growth in the Chicago area automobile dealer network and increased loan volumes, which produced higher levels of average outstanding loans. The Tricom segment is the Company's newest reportable operating segment that was created from the October 1999 acquisition. This segment's results of operations began to be included in the Company's consolidated earnings as of October 1, 1999, the effective date of the acquisition. For the year ended December 31, 1999, the Tricom segment added $826,000 to the Company's net interest income, $1.0 million to the Company's non-interest income and $340,000 to the Company's net income. Please refer to Note 19 to the Consolidated Financial Statements for further information related to Tricom including a description of the business and certain pro forma financial information. 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 $469,000 for 1999 as compared to $359,000 in 1998 and $182,000 in 1997. Trust fee income totaled $1.2 million in 1999 as compared to $788,000 in 1998, an increase of $383,000, or 48.6%, due mainly to new business development efforts from a larger staff of experienced trust officers. The increase in 1998 when compared to the 1997 total of $626,000 was $162,000, or 25.9%. The trust segment after-tax loss totaled $559,000 for the year ended December 31, 1999 as compared to a loss of $189,000 in 1998 and a profit of $237,000 in 1997. The losses in both 1999 and 1998 were 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. - 56 - 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 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 is 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. One method utilized by financial institutions to limit interest rate risk is to enter into derivative financial instruments. A derivative financial instrument includes interest rate swaps, interest rate caps and floors, futures, forwards, option contracts and other financial instruments with similar characteristics. As of December 31, 1999, the Company had $240 million notional principal amount of interest rate cap contracts that mature in $60 million notional principal amount intervals on April 30, 2000, September 1, 2000, October 30, 2000 and January 3, 2001. These contracts were purchased to mitigate the effect of rising rates on certain floating rate deposit products. During 1999, the Company also entered into certain covered call option transactions related to certain securities held by the Company. These transactions were designed to utilize excess capital at certain banks and increase the total return associated with holding these securities as earning assets. The Company may enter into other derivative financial instruments in the future to effectively manage its interest rate risk. The Company's exposure to interest rate risk is reviewed on a regular basis by management and the boards of directors of the Banks and the Company. The objective is to measure the effect on net income and to adjust balance sheet and 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, 1999 (dollars in thousands): - 57 -
============================================================================================================================= Time to Maturity or Repricing ------------------------------------------------------------------------- 0-90 91-365 1-5 Over 5 Days Days Years Years Total ------------------------------------------------------------------------- Rate sensitive assets (RSA) $ 642,780 323,969 493,991 218,642 1,679,382 Rate sensitive liabilities (RSL) 849,674 383,295 118,163 328,250 1,679,382 Cumulative gap (GAP = RSA - RSL) (1) (206,894) (266,220) 109,608 Cumulative RSA/RSL (1) 0.76 0.78 1.08 RSA/Total assets 0.38 0.19 0.29 RSL/Total assets (1) 0.51 0.23 0.07 GAP/Total assets (1) (12)% (16)% 7% GAP/Cumulative RSA (1) (32)% (28)% 8% ============================================================================================================================= (1) The GAP amount and related ratios do not reflect $240 million notional principal amount of interest rate caps, as discussed in the ~ following paragraph.
While the gap position illustrated above is a useful tool that management can assess 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 off-balance sheet interest rate cap contracts. As of December 31, 1999, the Company had $240 million notional principal amount of interest rate caps that reprice on a monthly basis. These interest rate caps, which mature in intervals throughout the next 12 months, were purchased to mitigate the effect of rising rates on certain floating rate deposit products. When the gap position in the above table is adjusted for the impact of these interest rate caps, the Company's short-term gap position becomes relatively neutral in that the level of rate sensitive assets that reprice within one year approximately match the level of rate sensitive liabilities that reprice within one year. Management uses an additional measurement tool to evaluate its asset-liability sensitivity that determines exposure to changes in interest rates by measuring the percentage change in net interest income due to changes in interest rates over a two-year time horizon. Management measures its exposure to changes in interest rates using many different interest rate scenarios. One interest rate scenario utilized is to measure the percentage change in net interest income assuming an instantaneous permanent parallel shift in the yield curve of 200 basis points, both upward and downward. This analysis also includes the impact of the interest rate cap agreements mentioned above. Utilizing this measurement concept, the interest rate risk of the Company, expressed as a percentage change in net interest income over a two-year time horizon due to changes in interest rates, at December 31, 1999, is as follows: ========================================================================= +200 Basis -200 Basis Points Points --------------------------- Percentage change in net interest income due to an immediate 200 basis point shift in the yield curve 2.9% 0.1% ========================================================================= LIQUIDITY AND CAPITAL RESOURCES The following table reflects various measures of the Company's capital at December 31, 1999 and 1998: ========================================================================= December 31, ------------------------- 1999 1998 ------------------------- Average equity-to-average asset ratio 5.4% 6.1% Leverage ratio 7.1 7.5 Tier 1 risk-based capital ratio 7.8 8.5 Total risk-based capital ratio 8.4 9.7 Dividend payout ratio 0.0 0.0 ========================================================================= The Company's consolidated leverage ratio (Tier 1 capital/total fourth quarter average assets less intangibles) was 7.1 % at December 31, 1999, which is in excess of the "well capitalized" regulatory level. Consolidated Tier 1 and total risk-based capital ratios were 7.8% and 8.4%, respectively. Based on guidelines established by the Federal Reserve Bank, a bank holding company is required to maintain a ratio of Tier 1 capital to risk-based assets of 4.0% and a ratio of total capital to risk-based assets of 8.0% in order to be deemed "adequately capitalized". The Company's principal source of funds at the holding company level are from dividends from its subsidiaries, borrowings on its revolving credit line with an unaffiliated bank, proceeds from trust preferred securities offerings or additional equity offerings. Refer to Notes 9 and 10 of the - 58 - Consolidated Financial Statements for further information on the Company's revolving credit line and Trust Preferred Securities offering, respectively. In November 1999, the Company completed a private placement of 352,942 shares of common stock, which were priced at market, and received net proceeds of approximately $6.0 million. 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, 2000, subject to minimum capital requirements at the Banks, approximately $12.6 million was available as dividends from the Banks without prior regulatory approval. There were no dividends paid by the subsidiaries to the holding company in either 1999 or 1997. During 1998, Lake Forest Bank paid dividends of $8.25 million to the holding company. In January 2000, the Company's Board of Directors approved the first semi-annual cash dividend on its common stock. The dividend, in the amount of $0.05 per share, was paid on February 24, 2000 to shareholders of record as of February 10, 2000. Additionally, in January 2000, the Board of Directors approved a stock repurchase program authorizing the purchase of up to 300,000 shares of common stock, from time to time, in open market or privately negotiated transactions. The shares authorized to be repurchased represent approximately 3% of the Company's currently outstanding shares. Shares repurchased, if any, would be available for issuance under the Company's stock incentive plan, employee stock purchase plan and other corporate purposes. Liquidity management at the Banks involves planning to meet anticipated funding needs at a reasonable cost. Liquidity management is guided by policies, formulated and monitored by the Company's senior management and each Bank's asset/liability committee, which take into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. The Banks' principal sources of funds are deposits, short-term borrowings and capital contributions from the holding company. In addition, the Banks are eligible to borrow under Federal Home Loan Bank advances, another source of short-term liquidity. 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, 1999, approximately 61% of the Company's total assets were funded by core deposits with balances less than $100,000, as compared to approximately 66% at the end of 1998. 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, 1999, net liquid assets totaled approximately $57.2 million, compared to approximately $116.5 million at December 31, 1998. 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, 1999 and 1998, the Banks had approximately $139.2 million and $104.9 million, respectively, of securities collateralizing such public deposits and other short-term borrowings. Deposits requiring pledged assets are not considered to be core deposits, and the assets that are pledged as collateral for these deposits are not deemed to be liquid assets. The Company is not aware of any known trends, commitments, events, regulatory recommendations or uncertainties that would have any adverse effect on the Company's capital resources, operations or liquidity. CREDIT RISK AND ASSET QUALITY Management believes that the loan portfolio is well diversified and well secured, without undue concentration in any specific risk area. Control of loan quality is continually monitored by management and is reviewed by the Banks' Board of Directors and their Credit Committees on a monthly basis. Independent external review of the loan portfolio is provided by the examinations conducted by - 59 - 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).
============================================================================================================================= 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------- Balance at beginning of year $ 7,034 5,116 3,636 2,763 1,702 Total loans charged-off: Core banking loans (837) (1,636) (448) (190) (43) Premium finance (456) (455) (1,126) (207) (247) Indirect auto (1,156) (646) (300) (123) - Discontinued leasing operations - - (241) (583) (109) ----------------------------------------------------------------------------- Total loans charged-off (2,449) (2,737) (2,115) (1,103) (399) Total recoveries 310 358 191 41 30 ----------------------------------------------------------------------------- Net loans charged-off (2,139) (2,379) (1,924) (1,062) (369) Provision for possible loan losses 3,713 4,297 3,404 1,935 1,430 Acquired allowance for possible loan losses 175 - - - - ----------------------------------------------------------------------------- Balance at end of year $ 8,783 7,034 5,116 3,636 2,763 ============================================================================= Year-end total loans, net of unearned income $ 1,278,249 992,062 712,631 492,548 258,231 Average total loans, net of unearned income 1,135,200 848,344 620,801 347,076 183,614 Allowance as percent of year-end total loans 0.69% 0.71% 0.72% 0.74% 1.07% Net loans charged-off to average total loans 0.19 0.28 0.31 0.31 0.20 Net loans charged-off to the provision for possible loan losses 57.61 55.36 56.52 54.88 25.80 =============================================================================================================================
Net charge-offs of core banking loans for the year ended December 31, 1999 totaled $795,000 as compared to a total of $1.4 million for 1998. Included in the prior year net charge-offs was approximately $815,000 attributable to loans originated at one banking office and reflect what management believes to be an isolated problem that has been resolved. Core loan net charge-offs as a percentage of average core loans were 0.12% in 1999 as compared to 0.29% in 1998, the reduction due to the prior year issue noted above. Premium finance receivable net charge-offs for the year ended December 31, 1999 totaled $289,000 as compared to $328,000 recorded in 1998. Net charge-offs were 0.14% of average premium finance receivables in 1999 versus 0.18% in 1998. Indirect auto loan net charge-offs totaled $1.1 million for the year ended December 31, 1999 as compared to $604,000 in 1998. Net charge-offs as a percentage of average indirect auto loans were 0.44% in 1999 in comparison to 0.36% in 1998. The higher level of net charge-offs in 1999 was the result of an in-depth review of all problem credits and the implementation of a more aggressive charge-off policy. - 60 - The allowance for possible loan losses as a percentage of total net loans at December 31, 1999 and 1998 was 0.69% and 0.71%, respectively. Management believes that the allowance for possible loan losses is adequate to provide for losses inherent 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):
============================================================================================================================= 1999 1998 1997 1996 1995 ------------------------------------------------------------------------- Past Due greater than 90 days and still accruing: Core banking loans $ 713 800 868 75 121 Indirect auto loans 391 274 11 20 - Premium finance receivables 1,523 1,214 887 - 21 ------------------------------------------------------------------------- Total 2,627 2,288 1,766 95 142 ------------------------------------------------------------------------- Non-accrual loans: Core banking loans 1,895 1,487 782 448 684 Indirect auto loans 298 195 29 - - Premium finance receivables 2,145 1,455 1,629 1,238 1,094 ------------------------------------------------------------------------- Total non-accrual loans 4,338 3,137 2,440 1,686 1,778 ------------------------------------------------------------------------- Total non-performing loans: Core banking loans 2,608 2,287 1,650 523 805 Indirect auto loans 689 469 40 20 - Premium finance receivables 3,668 2,669 2,516 1,238 1,115 ------------------------------------------------------------------------- Total non-performing loans 6,965 5,425 4,206 1,781 1,920 ------------------------------------------------------------------------- Other real estate owned - 587 - - - ------------------------------------------------------------------------- Total non-performing assets $ 6,965 6,012 4,206 1,781 1,920 ========================================================================= Total non-performing loans by category as a percent of its own respective category: Core banking loans 0.32% 0.38% 0.37% 0.15% 0.39% Indirect auto loans 0.27 0.22 0.03 0.02 0.00 Premium finance receivables 1.67 1.50 1.96 2.15 7.22 Total non-performing loans 0.54 0.55 0.59 0.36 0.74 Total non-performing assets to total assets 0.41 0.45 0.40 0.25 0.41 Non-accrual loans to total loans 0.34 0.32 0.34 0.34 0.69 Allowance for possible loan losses as a percentage of non-performing loans 126.10 129.66 121.64 204.15 143.91 =============================================================================================================================
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 $2.6 million as of December 31, 1999, an increase from the $2.3 million as of December 31, 1998. As a percentage of total core banking loans, however, non-performing core banking loans declined to 0.32% at the end of 1999 versus 0.38% a year earlier. Although the outstanding core loan portfolio has increased 33% from a year ago, the amount of non-performing core loans has only increased 14% from the prior year total. 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. In fact, the loans comprising the non-performing core loan category total less than 30 individual credits. The small number of such non-performing loans allows management to effectively monitor the status of these credits and work with the borrowers to resolve these problems. The other real estate owned balance of $587,000 as of December 31, 1998 consisted of one local residential real estate property that was sold during 1999 at a small loss. - 61 - NON-PERFORMING PREMIUM FINANCE RECEIVABLES The table below presents the level of non-performing premium finance receivables as of December 31, 1999 and 1998, and the amount of net charge-offs for the years then ended. ================================================================================ As of % of Premium As of % of Premium 12/31/99 Finance Rec. 12/31/98 Finance Rec. ----------------------------------------------- Non-performing premium finance receivables $3,668,000 1.67% $2,669,000 1.50% Net charge-offs of premium finance receivables 289,000 0.14 328,000 0.18 ================================================================================ It is important to note that the ratio of net charge-offs is substantially less than the ratio of non-performing assets. The ratio of non-performing premium finance receivables fluctuates throughout the year due to the nature and timing of canceled account collections from insurance carriers. Due to the nature of collateral for premium finance receivables, it customarily takes 60-150 days to convert the collateral into cash collections. Accordingly, the level of non-performing premium finance receivables is not necessarily indicative of the loss inherent in the portfolio. In the event of default, the Company has the power to cancel the insurance policy and collect the unearned portion of the premium from the insurance carrier. In the event of cancellation, the cash returned in payment of the unearned premium by the insurer should generally be sufficient to cover the receivable balance, the interest and other charges due. Due to notification requirements and processing time by most insurance carriers, many receivables will become delinquent beyond 90 days while the insurer is processing the return of the unearned premium. Management continues to accrue interest until maturity as the unearned premium is ordinarily sufficient to pay-off the outstanding balance and contractual interest due. 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. NON-PERFORMING INDIRECT AUTO LOANS Total non-performing indirect automobile loans were $689,000 at December 31, 1999 as compared to $469,000 at the end of 1998. The ratio of these non-performing loans has increased slightly to 0.27% of total net indirect automobile loans at December 31, 1999 from 0.22% at December 31, 1998. Despite the increase in the level of non-performing loans, these ratios continue to be 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 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, 1999 and 1998 were approximately $14.4 million and $5.1 million, respectively. The December 31, 1999 balance included one local residential real estate development loan totaling $5.7 million that is well secured and actively monitored. 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, 1999 or 1998, except for loans included in the indirect auto and premium finance operating segments. - 62 - EFFECTS OF INFLATION A banking organization's assets and liabilities are primarily monetary. Changes in the rate of inflation do not have as great an impact on the financial condition of a bank as do changes in interest rates. Moreover, interest rates do not necessarily change at the same percentage as does inflation. Accordingly, changes in inflation are not expected to have a material impact on the Company. An analysis of the Company's asset and liability structure provides the best indication of how the organization is positioned to respond to changing interest rates. IMPACT OF YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. During the last half of 1999, the Company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in mission critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company incurred approximately $125,000 in costs during 1999 in connection with remediating and testing its systems. This cost does not include internal salary and employee benefit costs for persons that were involved with the Year 2000 project. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products or services, its internal systems, or the products and services of third party data processing providers and other vendors. The Company will continue to monitor its mission critical computer applications and those of its third party data processing providers and other vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. EFFECTS OF NEW ACCOUNTING PRINCIPLE In June 1999, the FASB issued SFAS No. 137 to effectively defer the implementation date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" for one year. SFAS No. 133 was issued in June 1998 and 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. With the issuance of SFAS No. 137, this standard is now effective for the Company as of January 1, 2001. The adoption of this new statement is currently not expected to have a material effect on the Company's future financial condition, results of operations, or liquidity. FORWARD-LOOKING STATEMENTS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to the Company's projected growth, anticipated improvements in earnings, earnings per share and other financial performance measures, and management's long-term performance goals, as well as statements relating to the anticipated effects on financial results of condition from expected development or events, the Company's business and growth strategies, including anticipated internal growth, plans to form additional de novo banks and to open new branch offices, and to pursue additional potential development or acquisition of banks or specialty finance businesses. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following: o The level of reported net income, return on average assets and return on average equity for the Company will in the near term continue to be impacted by start-up costs associated with de novo bank formations, branch openings, and expanded trust and investment operations. De novo banks 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 and investment services through the Company's newer trust subsidiary, WAMC, is expected to be in a start-up phase for 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. 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. - 63 - 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 preparedness efforts, 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 that have been developed. o Unforeseen future events that may cause slower than anticipated development and growth of the Tricom business, changes in the temporary staffing industry or difficulties integrating the Tricom acquisition. o Changes in the economic environment, competition, or other factors, may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio and loan and deposit pricing. - 64 - DIRECTORS & OFFICERS - -------------------------------------------------------------------------------- WINTRUST FINANCIAL CORPORATION - --------------------------------------- DIRECTORS Joseph Alaimo Peter Crist Bruce K. Crowther Maurice F. Dunne, Jr. William C. Graft Kathleen R. Horne John Leopold 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 Robert F. Key Executive Vice President/Marketing Todd A. Gustafson Vice President/Finance Richard J. Pasminski Vice President/Controller David J. Galvan Vice President/Investments Jolanta K. Slusarski Vice President/Compliance 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 Frank Mariani 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 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/Consumer Lending Lori Higgins Assistant Vice President/Loan Operations Maria Santello Loan Administration Officer Laura Cascarano Loan Administration Officer Susan Potash Loan Servicing Officer MMF LEASING SERVICES David E. Gross Vice President Richard A. Eichner Assistant Vice President James C. Miller Leasing Officer PERSONAL BANKING Lynn Van Cleave Vice President/Personal Banking Twila D. Hungerford Assistant Vice President/Personal Banking Susan G. Mineo Assistant Vice President/Personal Banking Piera Dallabattista Personal Banking Officer Lee Cankar Personal Banking Officer OPERATIONS/FINANCE/OTHER Mary Ann Gannon Vice President/Operations Richard J. Pasminski Vice President/Controller Margaret Zacher Assistant Controller Kathleen E. Bickmore Assistant Cashier Pamela Barker Operations Officer Elizabeth K. Pringle Network Administrator Andrea Levitt Administration Officer - 65 - 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 Bank Stephen C. Pleimling President - The Community Bank of Western Springs LOANS Richard Stefanski Senior Vice President/Indirect Lending Eric Westberg Senior Vice President/Mortgages Kay Olenec Senior Vice President/Mortgages Colleen Ryan Senior Vice President/Commercial Lending Robert D. Meyrick Vice President/Indirect Lending Cora Mae Corley Assistant Vice President Pat Gray Assistant Vice President Kathy Oergel Commercial Lending Officer Maria Chialdikis Loan Processing Officer PERSONAL BANKING/OPERATIONS Anne O'Neill Vice President & Cashier Michelle Kennedy Vice President/Controller Michelle Paetsch Assistant Vice President Amy Boburka Assistant Vice President Kim Fernandez Operations Officer Patricia Mayo Operations Officer Kevin Barry Personal Banking Officer NORTH SHORE COMMUNITY BANK & TRUST COMPANY - ------------------------------------------ DIRECTORS Brian C. Baker (non-voting) Gilbert W. Bowen T. Tolbert Chisum Thomas J. Dammrich Joseph DeVivo Maurice F. Dunne, Jr. James Fox (Director Emeritus) John W. Haben Randolph M. Hibben Gayle Inbinder Thomas J. McCabe, Jr. Marguerite Savard McKenna Robert H. Meeder Donald L. Olson Hollis W. Rademacher John J. Schornack Ingrid S. Stafford Lemuel H. Tate (Chairman) Elizabeth C. Warren Edward J. Wehmer Stanley R. Weinberger Richard J. Witry EXECUTIVE OFFICERS Randolph M. Hibben President & CEO Donald F. Krueger Executive Vice President/Operations Robert H. Meeder Executive Vice President/Lending LOANS Henry L. Apfelbach Senior Vice President/Mortgages Lauretta Burke Senior Vice President/Lending/Manager - Skokie Robert Clausen Vice President/Commercial Lending Mary Carole Gavula Vice President/Mortgages - 66 - Frank McCabe Vice President/Lending - Glencoe Susan Mundy Vice President/Mortgages James L. Sefton Vice President/Lending Gina Stec Vice President/Lending - Winnetka Susan J. Weisbond Vice President/Lending/Manager - Glencoe Mark A. Stec Assistant Vice President/Mortgages Romelia Lemus Loan Officer Ann T. Tyler Loan Administration Officer PERSONAL BANKING/OPERATIONS John A. Barnett Vice President/Controller James P. Waters Vice President/Personal Banking Catherine W. Biggam Assistant Vice President/Personal Banking Eric Jordan Assistant Vice President/Personal Banking / Manager-Winnetka David Morse Assistant Vice President/Personal Banking - Skokie Leslie A. Niemark Assistant Vice President/Personal Banking - Glencoe Jennifer A. Waters Assistant Vice President/Human Resources/Marketing Beatrice Borre Personal Banking Officer LIBERTYVILLE BANK & TRUST COMPANY - --------------------------------------- DIRECTORS Bert Carstens Robert O. Dunn David A. Dykstra Bert Getz, Jr. Donald Gossett Jeffrey A. Harger 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 Bert Carstens Chairman & CEO Edward R. Werdell President COMMERCIAL BANKING Brian B. Mikaelian Executive Vice President William J. Westerman Executive Vice President Michael A. Buchert Second Vice President Betty Berg Vice President/Commercial Banking Services RESIDENTIAL REAL ESTATE Michael Spies Vice President/Residential Real Estate Rosemarie Garrison Mortgage Loan Officer PERSONAL BANKING Sharon Worlin Vice President Ursula Schuebel Second Vice President Bobbie Callese Second Vice President Deborah Motzer Personal Banking Officer Julie Rolfsen Personal Banking Officer OPERATIONS/FINANCE Suzanne Chamberlain Vice President/Operations Lynn Dohnalik Vice President/Cashier Dwayne Nicholson Operations Officer/MIS Deborah Wrigley Operations Officer - 67 - 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 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 Chairman & CEO W. Bradley Stetson President LOANS Linda J. Schiff Senior Vice President Barbara Ringquist-Tomasello Vice President John D. Haniotes Vice President Charlotte Neault Assistant Vice President Christopher P. Marrs Assistant Vice President Karen G. Smith Loan Administration Officer PERSONAL BANKING/OPERATIONS Ronald A. Branstrom Senior Vice President & Retail Banking James Weiler Vice President/Controller Gloria B. Andersen Assistant Vice President 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 Donald Franz EXECUTIVE OFFICERS Charles D. Collier President & CEO Jim Thorpe Executive Vice President/Loans Pam Umberger Senior Vice President/Operations LOANS Monica Garver Vice President/ Manager Residential Loans Mark J. Peteler Vice President/Construction Loans PERSONAL BANKING/OPERATIONS Pamela L. Bialas Assistant Vice President Peter Fidler Controller - 68 - WINTRUST ASSET MANAGEMENT COMPANY - --------------------------------------- DIRECTORS Joseph Alaimo Robert Acri Bert A. Getz, Jr. Robert Harnach Randolph M. Hibben John S. Lillard Hollis W. Rademacher 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 Claire Rosati Executive Vice President Jeanette E. Amstutz Vice President/Lake Forest Susan Gavinski Assistant Vice President 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/North Shore Mary Anne Martin Vice President/North Shore Jennifer Czerwinski Vice President/North Shore Elizabeth Martin Trust Officer/North Shore Judith Richards Trust Officer/North Shore Edward Edens Vice President/Hinsdale Gerald Leenheers Vice President/Hinsdale Ann Wiesbrock Vice President/Hinsdale Timothy J. Keefe Vice President/Barrington Michael Peifer Vice President/Barrington - --------------------------------------- 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 Executive 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 Mark A. Steenberg Vice President/Customer Service Helene A. Torrenga Assistant Vice President - --------------------------------------- TRICOM, INC. OF MILWAUKEE - --------------------------------------- DIRECTORS John Leopold Julie Ann Blazei Edward J. Wehmer David A. Dykstra Mary Martha Mooney Katharine V. Sylvester Hollis W. Rademacher SENIOR STAFF John Leopold President Julie Ann Blazei Operations and Technology Manager Mary Jo Heim Accounting Manager Linda Walsch Client Services Manager - 69 - CORPORATE LOCATIONS ================================================================================ WINTRUST FINANCIAL CORPORATION 727 North Bank Lane Lake Forest, IL 60045 (847) 615-4096 www.wintrust.com LAKE FOREST BANK & TRUST COMPANY Lake Forest Locations Main Bank 727 North Bank Lane Lake Forest, IL 60045 (847) 234-2882 www.lakeforestbank.com Main Drive-thru 780 North Bank Lane Lake Forest, IL 60045 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 1100 Pembridge Drive Lake Forest, IL 60045 Lake Bluff 103 East Scranton Avenue Lake Bluff, IL 60044 (847) 615-4060 Bank of Highwood - Fort Sheridan 128 Washington Avenue Highwood, IL 60040 (847) 266-7600 MMF Leasing Services 263 East Westminster Lake Forest, IL 60045 (847) 604-5060 HINSDALE BANK & TRUST COMPANY Hinsdale Locations Main Bank 25 East First Street Hinsdale, IL 60521 (630) 323-4404 www.hinsdalebank.com Drive-thru 130 West Chestnut Hinsdale, IL 60521 (630) 655-8025 Clarendon Hills Bank 200 West Burlington Avenue Clarendon Hills, IL 60514 (630) 323-1240 The Community Bank of Western Springs 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 www.nscbank.com 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 Skokie Location 5049 Oakton Street Skokie, IL 60077 (847) 933-1900 LIBERTYVILLE BANK & TRUST COMPANY Main Bank 507 North Milwaukee Avenue Libertyville, IL 60048 (847) 367-6800 www.libertyvillebank.com Drive-thru 201 Hurlburt Court Libertyville, IL 60048 (847) 247-4045 South Libertyville 1167 South Milwaukee Avenue Libertyville, IL 60048 (847) 367-6800 BARRINGTON BANK & TRUST COMPANY Main Bank 201 S. Hough Street Barrington, IL 60010 (847) 842-4500 www.barringtonbank.com CRYSTAL LAKE BANK & TRUST COMPANY Main Bank 70 N. Williams Street Crystal Lake, IL 60014 (815) 479-5200 www.crystallakebank.com Drive-thru 27 N. Main Street Crystal Lake, IL 60014 South Crystal Lake 1000 McHenry Avenue Crystal Lake, IL 60014 (815) 479-5715 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 201 S. Hough Street Barrington, IL 60010 (847) 842-4500 FIRST INSURANCE FUNDING CORP. 520 Lake Cook Road, Suite 300 Deerfield, IL 60015 (847) 374-3000 www.firstinsurancefunding.com TRICOM, INC. OF MILWAUKEE 11270 West Park Place Suite 100 Milwaukee, WI 53224 (414) 410-2200 www.tricom.com - 70 - 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 a financial relations internet website at the following location: www.wintrust.com ANNUAL MEETING OF SHAREHOLDERS May 25, 2000 Michigan Shores Club 911 Michigan Avenue Wilmette, Illinois 10:00 A.M. FORM 10-K The Form 10-K Annual Report to the Securities and Exchange Commission will be available to holders of record upon written request to the Secretary of the Company. The information is also available on the Internet at the Securities and Exchange Commission's website. The address for the web site is: http://www.sec.gov. TRANSFER AGENT Illinois Stock Transfer Company 209 West Jackson Boulevard Suite 903 Chicago, Illinois 60606 Telephone: (312) 427-2953 Facsimile: (312) 427-2879 PRIMARY MARKET MAKERS FOR WINTRUST FINANCIAL CORPORATION COMMON STOCK ABN AMRO Incorporated Advest, Inc. First Union Securities, Inc. Howe Barnes Investments, Inc. Sandler O'Neill & Partners U.S. Bancorp Piper Jaffray - 71 - *** Graphic Advertisement OMITTED *** - 72 - EX-21 4 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 ------------ Subsidiaries of the Registrant State of Organization Subsidiary or Incorporation ---------- ---------------- Lake Forest Bank and Trust Company Illinois North Shore Community Bank and Trust Company Illinois Hinsdale Bank and Trust Company Illinois Libertyville Bank and Trust Company Illinois Barrington Bank and Trust Company, N.A. National Banking Association Crystal Lake Bank and Trust Company, N.A. National Banking Association Crabtree Capital Corporation Delaware First Insurance Funding Corporation Illinois Tricom, Inc. of Milwaukee Wisconsin Upgrad Personnel Services, Inc. Wisconsin Wintrust Asset Management Company, N.A. National Banking Association Wintrust Capital Trust I Delaware EX-23 5 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following documents of our report dated February 16, 2000, with respect to the consolidated financial statements of Wintrust Financial Corporation incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1999: o Registration Statement (Form S-8 No. 333-33459) pertaining to the Wintrust Financial Corporation Employee Stock Purchase Plan. o Registration Statement (Form S-3 No. 333-90211) pertaining to shares of Wintrust Financial Corporation issued in connection with the acquisition of Tricom, Inc. o Registration Statement (Form S-3 No. 333-92075) pertaining to shares of Wintrust Financial Corporation issued in a private placement. /s/ Ernst & Young LLP Chicago, Illinois March 29, 2000 The Board of Directors Wintrust Financial Corporation: We consent to incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-92075 and 333-90211) and on Form S-8 (No. 333-33459) of Wintrust Financial Corporation of our report dated March 19, 1999, relating to the consolidated statement of condition of Wintrust Financial Corporation and subsidiaries as of December 31, 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the two-year period ended December 31, 1998, which report is incorporated by reference in the December 31, 1999 Annual Report on Form 10-K of Wintrust Financial Corporation. /s/ KPMG LLP Chicago, Illinois March 30, 2000 EX-27 6
9 This schedule contains summary financial information extracted from the annual audited financial statements of Wintrust Financial Corporation for the years ended December 31, 1999 and 1998, and is qualified in its entirety by reference to such consolidated financial statements. 0001015328 WINTRUST FINANCIAL CORPORATION 1,000 12-MOS 12-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 53,066 33,924 2,547 7,863 28,231 18,539 0 0 205,795 209,119 0 5,000 0 5,001 1,278,249 992,062 8,783 7,034 1,679,382 1,348,048 1,463,622 1,229,154 68,193 0 23,570 12,639 31,050 31,050 0 0 0 0 8,771 8,150 84,176 67,055 1,679,382 1,348,048 97,270 75,369 12,061 12,610 0 0 109,331 87,979 56,026 49,069 61,597 51,215 47,734 36,764 3,713 4,297 5 0 39,678 35,833 14,151 4,709 9,427 6,245 0 0 0 0 9,427 6,245 1.14 0.77 1.10 0.74 3.54 3.43 4,338 3,137 2,627 2,288 0 0 14,438 5,143 7,034 5,116 (2,449) (2,737) 310 358 8,783 7,034 7,964 6,225 0 0 819 809
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