10-Q 1 b10q063003.txt WINTRUST FINANCIAL CORPORATION UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 Commission File Number 0-21923 WINTRUST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) 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) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes X No --- --- Indicate the number of shares outstanding of each of issuer's classes of common stock, as of the latest practicable date. Common Stock - no par value, 17,453,786 shares, as of August 8, 2003. TABLE OF CONTENTS PART I -- FINANCIAL INFORMATION Page ---- ITEM 1. Financial Statements.________________________________________ 1-16 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. _________________________________ 17-41 ITEM 3. Quantitative and Qualitative Disclosures About Market Risks. 42-45 ITEM 4. Controls and Procedures. ____________________________________ 45 PART II -- OTHER INFORMATION ITEM 1. Legal Proceedings. __________________________________________ 46 ITEM 2. Changes in Securities and Use of Proceeds. __________________ 46 ITEM 3. Defaults Upon Senior Securities. ___________________________ 46 ITEM 4. Submission of Matters to a Vote of Security Holders. ________ 46 ITEM 5. Other Information. _________________________________________ 47 ITEM 6. Exhibits and Reports on Form 8-K. __________________________ 47 Signatures _________________________________________________ 48 PART I ITEM 1. FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) (Unaudited) JUNE 30, December 31, June 30, (In thousands) 2003 2002 2002 ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 123,439 $ 105,671 $ 60,055 Federal funds sold and securities purchased under resale agreements 223,142 151,251 198,089 Interest-bearing deposits with banks 5,748 4,418 543 Available-for-sale securities, at fair value 508,289 547,679 380,833 Trading account securities 4,913 5,558 4,618 Brokerage customer receivables 34,457 37,592 68,844 Mortgage loans held-for-sale 84,643 90,446 27,735 Loans, net of unearned income 2,896,148 2,556,086 2,308,945 Less: Allowance for loan losses 21,310 18,390 16,009 ------------------------------------------------------------------------------------------------------------------------------------ Net loans 2,874,838 2,537,696 2,292,936 Premises and equipment, net 141,488 118,961 109,509 Accrued interest receivable and other assets 99,193 95,852 49,775 Goodwill 29,835 25,266 25,091 Other intangible assets 2,409 1,165 1,372 ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 4,132,394 $ 3,721,555 $ 3,219,400 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 317,104 $ 305,540 $ 257,298 Interest bearing 3,102,842 2,783,584 2,351,209 ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 3,419,946 3,089,124 2,608,507 Notes payable 26,000 44,025 58,650 Federal Home Loan Bank advances 140,000 140,000 140,000 Subordinated notes 50,000 25,000 -- Other borrowings 57,439 46,708 71,712 Long-term debt - trust preferred securities 76,816 50,894 51,050 Accrued interest payable and other liabilities 112,794 98,802 83,482 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 3,882,995 3,494,553 3,013,401 ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity: Preferred stock -- -- -- Common stock 17,428 17,216 16,955 Surplus 158,597 153,614 147,616 Common stock warrants 1,030 81 96 Retained earnings 72,861 56,967 42,789 Accumulated other comprehensive loss (517) (876) (1,457) ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 249,399 227,002 205,999 ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 4,132,394 $ 3,721,555 $ 3,219,400 ====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements. - 1 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, -------------------------------------------------------------- (In thousands, except per share data) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME Interest and fees on loans $ 42,238 $ 38,366 $ 82,829 $ 75,027 Interest bearing deposits with banks 28 5 57 8 Federal funds sold and securities purchased under resale agreements 1,080 205 1,469 498 Securities 5,534 5,211 11,369 9,711 Trading account securities 46 56 84 80 Brokerage customer receivables 339 695 696 1,185 ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 49,265 44,538 96,504 86,509 ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits 17,013 16,585 34,115 33,260 Interest on Federal Home Loan Bank advances 1,473 1,078 2,930 1,975 Interest on subordinated notes 625 -- 1,069 -- Interest on notes payable and other borrowings 671 1,170 1,375 2,113 Interest on long-term debt - trust preferred securities 1,155 1,288 2,083 2,576 ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 20,937 20,121 41,572 39,924 ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 28,328 24,417 54,932 46,585 Provision for loan losses 2,852 2,483 5,493 4,831 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 25,476 21,934 49,439 41,754 ------------------------------------------------------------------------------------------------------------------------------------ NON-INTEREST INCOME Wealth management fees 7,002 7,431 12,953 12,001 Fees on mortgage loans sold 4,544 1,934 9,142 3,951 Service charges on deposit accounts 867 753 1,722 1,491 Gain on sale of premium finance receivables 1,108 828 2,270 1,594 Administrative services revenue 1,068 931 2,159 1,753 Net securities gains (losses) 220 62 606 (153) Other 4,296 1,832 7,996 5,886 ------------------------------------------------------------------------------------------------------------------------------------ Total non-interest income 19,105 13,771 36,848 26,523 ------------------------------------------------------------------------------------------------------------------------------------ NON-INTEREST EXPENSE Salaries and employee benefits 18,265 15,400 35,715 28,762 Equipment expense 1,916 1,796 3,758 3,526 Occupancy, net 1,887 1,609 3,785 3,153 Data processing 1,026 1,042 2,079 2,056 Advertising and marketing 504 533 1,043 1,057 Professional fees 922 685 1,704 1,296 Amortization of other intangibles 159 100 298 117 Other 5,830 4,741 11,038 8,618 ------------------------------------------------------------------------------------------------------------------------------------ Total non-interest expense 30,509 25,906 59,420 48,585 ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes 14,072 9,799 26,867 19,692 Income tax expense 5,053 3,492 9,585 7,023 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 9,019 $ 6,307 $ 17,282 $ 12,669 ==================================================================================================================================== NET INCOME PER COMMON SHARE - BASIC $ 0.52 $ 0.40 $ 1.00 $ 0.82 ==================================================================================================================================== NET INCOME PER COMMON SHARE - DILUTED $ 0.49 $ 0.37 $ 0.94 $ 0.77 ==================================================================================================================================== CASH DIVIDENDS DECLARED PER COMMON SHARE $ -- $ -- $ 0.08 $ 0.06 ==================================================================================================================================== Weighted average common shares outstanding 17,411 15,948 17,360 15,513 Dilutive potential common shares 1,106 1,080 1,113 1,013 ------------------------------------------------------------------------------------------------------------------------------------ Average common shares and dilutive common shares 18,517 17,028 18,473 16,526 ====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements. - 2 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) ACCUMULATED OTHER COMPRE- COMPRE- COMMON HENSIVE TOTAL HENSIVE COMMON STOCK TREASURY RETAINED INCOME SHAREHOLDERS' (In thousands) INCOME STOCK SURPLUS WARRANTS STOCK EARNINGS (LOSS) EQUITY ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $ 14,532 $97,956 $ 99 $ -- $ 30,995 $ (2,304) $ 141,278 Comprehensive income: Net income $ 12,669 -- -- -- -- 12,669 -- 12,669 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment 1,037 -- -- -- -- -- 1,037 1,037 Unrealized losses on derivative instruments (190) -- -- -- -- -- (190) (190) ----------- Comprehensive income $ 13,516 ----------- Cash dividends declared -- -- -- -- (875) -- (875) Purchase of fractional shares resulting from stock split -- (10) -- -- -- -- (10) Common stock issued for: New issuance, net of costs 1,185 30,549 -- -- -- -- 31,734 Acquisition of the Wayne Hummer Companies 763 14,237 -- -- -- -- 15,000 Director compensation plan 3 64 -- -- -- -- 67 Employee stock purchase plan 7 213 -- -- -- -- 220 Exercise of common stock warrants 3 27 (3) -- -- -- 27 Exercise of stock options 462 4,580 -- -- -- -- 5,042 --------------------------------------- ------------------------------------------------------------------------------------ Balance at June 30, 2002 $ 16,955 $ 147,616 $ 96 $ -- $ 42,789 $ (1,457) $ 205,999 --------------------------------------- ------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 2002 $ 17,216 $ 153,614 $ 81 $ -- $ 56,967 $ (876) $ 227,002 COMPREHENSIVE INCOME: NET INCOME $ 17,282 -- -- -- -- 17,282 -- 17,282 OTHER COMPREHENSIVE INCOME, NET OF TAX: UNREALIZED GAINS ON SECURITIES, NET OF RECLASSIFICATION ADJUSTMENT 609 -- -- -- -- -- 609 609 UNREALIZED LOSSES ON DERIVATIVE INSTRUMENTS (250) -- -- -- -- -- (250) (250) ----------- COMPREHENSIVE INCOME $ 17,641 ----------- CASH DIVIDENDS DECLARED -- -- -- -- (1,388) -- (1,388) PURCHASE OF 600 SHARES OF COMMON STOCK -- -- -- (17) -- -- (17) COMMON STOCK ISSUED FOR: ACQUISITION OF LAKE FOREST CAPITAL MANAGEMENT 82 2,418 950 -- -- -- 3,450 DIRECTOR COMPENSATION PLAN 5 121 -- -- -- -- 126 EMPLOYEE STOCK PURCHASE PLAN 17 469 -- -- -- -- 486 EXERCISE OF COMMON STOCK WARRANTS 1 4 (1) -- -- -- 4 EXERCISE OF STOCK OPTIONS 70 1,139 -- 17 -- -- 1,226 RESTRICTED STOCK AWARDS 37 832 -- -- -- -- 869 --------------------------------------- ------------------------------------------------------------------------------------ BALANCE AT JUNE 30, 2003 $ 17,428 $ 158,597 $ 1,030 $ -- $ 72,861 $ (517) $ 249,399 ======================================= ==================================================================================== Six Months Ended June 30, ----------------------------- Disclosure of reclassification amount and income tax impact: 2003 2002 ------------------------------------------------------------ -------------- ------------ Unrealized holding gains on available for sale securities during the period, net $ 1,542 $ 1,437 Unrealized holding losses on derivative instruments arising during the period (387) (293) Less: Reclassification adjustment for gains (losses) included in net income, net 606 (153) Less: Income tax expense 190 450 -------------- -------------- Net unrealized gains on available for sale securities and derivative instruments $ 359 $ 847 -------------- --------------
See accompanying notes to unaudited consolidated financial statements. - 3 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 2003 2002 ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 17,282 $ 12,669 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 5,493 4,831 Depreciation and amortization 4,886 4,422 Deferred income tax expense 390 4,403 Tax benefit from exercises of stock options 688 2,581 Net amortization of securities 819 1,569 Originations of mortgage loans held for sale (825,262) (362,305) Proceeds from sales of mortgage loans held for sale 831,065 377,474 Purchase of trading securities, net 645 193 Net decrease (increase) in brokerage customer receivables 3,135 (5,862) Gain on sale of premium finance receivables (2,270) (1,594) (Gain) loss on sale of available-for-sale securities, net (606) 153 Loss (gain) on sale of premises and equipment, net 33 (11) Increase in accrued interest receivable and other assets, net (3,027) (8,719) Increase in accrued interest payable and other liabilities, net 14,104 28,375 ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 47,375 $ 58,179 ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Proceeds from maturities of available-for-sale securities $ 334,843 $ 221,520 Proceeds from sales of available-for-sale securities 2,571,773 1,281,654 Purchases of available-for-sale securities (2,865,730) (1,498,614) Proceeds from sales of premium finance receivables 131,965 135,975 Net cash paid for Lake Forest Capital Management Company (1,688) -- Net cash paid for the Wayne Hummer Companies -- (8,096) Net (increase) decrease in interest-bearing deposits with banks (1,330) 441 Net increase in loans (473,238) (428,111) Purchase of premises and equipment, net (27,114) (13,826) ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED FOR INVESTING ACTIVITIES $ (330,519) $ (309,057) ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Increase in deposit accounts $ 330,822 $ 293,871 Increase (decrease) in other borrowings, net 10,211 (4,011) (Decrease) increase in notes payable, net (18,025) 12,075 Proceeds from Federal Home Loan Bank advances -- 50,000 Proceeds from issuance of subordinated note 25,000 -- Proceeds from issuance of trust preferred securities 25,000 -- Issuance of common shares, net of issuance costs -- 31,734 Issuance of common shares from stock options, employee stock purchase plan, common stock warrants and cash for stock split fractional shares, net 1,200 2,698 Purchases of common stock (17) -- Dividends paid (1,388) (875) ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES $ 372,803 $ 385,492 ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS $ 89,659 $ 134,614 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 256,922 $ 123,530 ------------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 346,581 $ 258,144 ====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements. - 4 - WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION --------------------- The consolidated financial statements of Wintrust Financial Corporation and Subsidiaries ("Wintrust" or "Company") presented herein are unaudited, but in the opinion of management reflect all necessary adjustments of a normal or recurring nature for a fair presentation of results as of the dates and for the periods covered by the consolidated financial statements. Wintrust is a financial holding company currently engaged in the business of providing traditional community banking services to customers in the Chicago metropolitan area. Additionally, the Company operates various non-bank subsidiaries. As of June 30, 2003, Wintrust had seven wholly-owned bank subsidiaries (collectively, "Banks"), all of which started as de novo institutions, including Lake Forest Bank & Trust Company ("Lake Forest Bank"), Hinsdale Bank & Trust Company ("Hinsdale Bank"), North Shore Community Bank & Trust Company ("North Shore Bank"), Libertyville Bank & Trust Company ("Libertyville Bank"), Barrington Bank & Trust Company, N.A. ("Barrington Bank"), Crystal Lake Bank & Trust Company, N.A. ("Crystal Lake Bank") and Northbrook Bank & Trust Company ("Northbrook Bank"). The Company provides loans to businesses to finance the insurance premiums they pay on their commercial insurance policies ("premium finance receivables") on a national basis, through First Insurance Funding Corporation ("FIFC"). FIFC is a wholly-owned subsidiary of Crabtree Capital Corporation ("Crabtree") which is a wholly-owned subsidiary of Lake Forest Bank. Wintrust, through Tricom, Inc. of Milwaukee ("Tricom"), also provides high-yielding 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 the temporary staffing industry, with clients located throughout the United States. Tricom is a wholly-owned subsidiary of Hinsdale Bank. The Company provides trust and investment services at each of its Banks through its wholly-owned subsidiary, Wayne Hummer Trust Company, N.A. ("WHTC"), a de novo company started in 1998 and formerly known as Wintrust Asset Management Company. Wayne Hummer Investments, LLC ("WHI") is a broker-dealer providing a full range of private client and securities brokerage services to clients located primarily in the Midwest and is a wholly-owned subsidiary of North Shore Bank. Focused Investments LLC ("Focused") is a broker-dealer that provides a full range of investment services to individuals through a network of relationships with community-based financial institutions located primarily in Illinois. Focused is a wholly-owned subsidiary of WHI. Wayne Hummer Asset Management Company ("WHAMC") provides money management services and advisory services to individuals, institutions and municipal and tax-exempt organizations, as well as four proprietary mutual funds in addition to portfolio management and financial supervision for a wide range of pension and profit-sharing plans. WHAMC is a wholly-owned subsidiary of Wintrust. Collectively WHI, WHAMC and Focused are referred to as the "Wayne Hummer Companies" or "WHC". Wintrust Information Technology Services Company provides information technology support, item capture, imaging and statement preparation services to the Wintrust subsidiaries and is a wholly-owned subsidiary of Wintrust. The accompanying consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report and Form 10-K for the year ended December 31, 2002. Operating results for the three-month and year-to-date periods presented are not necessarily indicative of the results which may be expected for the entire year. Reclassifications of certain prior period amounts have been made to conform to the current period presentation. - 5 - The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as information changes, the financial statements could reflect different estimates and assumptions. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. The determination of the allowance for loan losses and the valuation of the retained interest in the premium finance receivables sold are the areas that require the most subjective and complex judgments. (2) SUPPLEMENTAL FINANCIAL MEASURES/RATIOS -------------------------------------- In accordance with new SEC rules required by the Sarbanes-Oxley Act of 2002 regarding the use of financial measures and ratios not calculated in accordance with generally accepted accounting principles ("GAAP"), a reconciliation must be provided that shows these measures and ratios calculated according to GAAP and a statement why management believes these measures and ratios provide useful information to investors regarding the Company's financial condition and results of operation. Certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company's performance. These include taxable-equivalent net interest income (including its individual components), net interest margin (including its individual components), core net interest margin and the efficiency ratio. Management believes that these measures and ratios provide users of the Company's financial information a more accurate view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company's operating efficiency for comparative purposes than most directly comparable GAAP measures would provide. Other financial holding companies may define or calculate these measures and ratios differently. See the table below for supplemental data and the corresponding reconciliation to GAAP financial measures for the three and six-month periods ended June 30, 2003 and 2002. Management reviews yields on certain asset categories and the net interest margin of the Company, and its banking subsidiaries, on a fully taxable-equivalent basis ("FTE"). In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a taxable-equivalent basis is also used in the calculation of the Company's efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses), measures how much it costs to produce one dollar of revenue. Securities gains or losses are excluded from this calculation to better match revenue from daily operations to operational expenses. Management also evaluates the net interest margin excluding the interest expense associated with the Company's Long-term Debt - Trust Preferred Securities ("Core Net Interest Margin"). Because these instruments are utilized by the Company primarily as capital instruments, management finds it useful to view the net interest margin excluding this expense and deems it to be a more accurate view of the operational net interest margin of the Company than the most directly compaarable GAAP measures. - 6 - The following table reconciles the GAAP calculations to the financial measures and ratios used by management as discussed above.
Three Months Ended Six Months Ended June 30, June 30, ------------------------------------------------------------ (Dollars in thousands) 2003 2002 2003 2002 --------------------------------------------------------------------------------------------------------------------------------- (A) INTEREST INCOME (GAAP) $ 49,265 $ 44,538 $ 96,504 $86,509 Taxable-equivalent adjustment - Loans 124 168 265 356 - Liquidity management assets 73 23 134 43 - Other earning assets 39 -- 39 -- ------------ ------------- ------------ ------------ Interest income - FTE $ 49,501 $ 44,729 $ 96,942 $86,908 (B) INTEREST EXPENSE (GAAP) 20,937 20,121 41,572 39,924 ------------ ------------- ------------ ------------ Net interest income - FTE $ 28,564 $ 24,608 $ 55,370 $46,984 ------------ ------------- ------------ ------------ (C) NET INTEREST INCOME (GAAP) (A MINUS B) $ 28,328 $ 24,417 $ 54,932 $46,585 Net interest income - FTE $ 28,564 $ 24,608 $ 55,370 $46,984 Add: Interest expense on long-term debt - trust preferred securities 1,155 1,288 2,083 2,576 ------------ ------------- ------------ ------------ Core net interest income - FTE (1) $ 29,719 $ 25,896 $ 57,453 $49,560 ------------ ------------- ------------ ------------ (D) NET INTEREST MARGIN (GAAP) 3.11 % 3.53 % 3.12 % 3.49 % Net interest margin - FTE 3.14 % 3.56 % 3.14 % 3.52 % Core net interest margin - FTE (1) 3.26 % 3.74 % 3.26 % 3.72 % (E) EFFICIENCY RATIO (GAAP) 64.62 % 67.95 % 65.17 % 66.32 % Efficiency ratio - FTE 64.30 % 67.61 % 64.86 % 65.96 % ================================================================================================================================= (1) Core net interest income and core net interest margin are by definition non-GAAP measures/ratios. The GAAP equivalents are the net interest income and net interest margin determined in accordance with GAAP (lines C and D in the table).
(3) CASH AND CASH EQUIVALENTS ------------------------- For the purposes of the Consolidated Statements of Cash Flows, the Company considers cash and cash equivalents to include cash and due from banks, federal funds sold and securities purchased under resale agreements with original maturities of 90 days or less. (4) AVAILABLE-FOR-SALE SECURITIES ----------------------------- The following table is a summary of the available-for-sale securities portfolio as of the dates shown:
JUNE 30, 2003 December 31, 2002 June 30, 2002 ------------------------------------------------------------ ------------------------------ AMORTIZED FAIR Amortized Fair Amortized Fair (In thousands) COST VALUE Cost Value Cost Value ------------------------------------------------------- -------------------------------------------- ------------------------------ U.S. Treasury $ 12,856 $ 12,563 $ 34,150 $ 34,022 $ 2,583 $ 2,582 U.S. Government agencies 218,701 219,849 139,707 140,752 144,858 145,732 Municipal 8,545 8,686 6,311 6,467 6,288 6,417 Corporate notes and other 75,791 76,122 76,809 75,193 25,260 24,257 Mortgage-backed 139,885 139,883 270,091 270,962 187,032 185,826 Federal Reserve/FHLB Stock and other equity securities 51,186 51,186 20,221 20,283 15,894 16,019 --------------- -------------------------------------------- ------------------------------ Total available-for-sale securities $ 506,964 $ 508,289 $ 547,289 $ 547,679 $ 381,915 $ 380,833 =============== ============================================ ==============================
- 7 - (5) LOANS ----- The following table is a summary of the loan portfolio as of the dates shown:
JUNE 30, December 31, June 30, (Dollars in thousands) 2003 2002 2002 ------------------------------------------------------------- --------------------- --------------------- --------------------- BALANCE: ------- Commercial and commercial real estate $ 1,458,566 $ 1,320,598 $ 1,134,082 Home equity 412,787 365,521 318,397 Residential real estate 140,365 156,213 138,595 Premium finance receivables 625,840 461,614 459,558 Indirect auto loans 167,198 178,234 183,855 Tricom finance receivables 24,062 21,048 19,228 Consumer and other loans 67,330 52,858 55,230 --------------------- --------------------- --------------------- Total loans, net of unearned income $ 2,896,148 $ 2,556,086 $ 2,308,945 ===================== ===================== ===================== MIX: --- Commercial and commercial real estate 50 % 52 % 49 % Home equity 14 14 14 Residential real estate 5 6 6 Premium finance receivables 22 18 20 Indirect auto loans 6 7 8 Tricom finance receivables 1 1 1 Consumer and other loans 2 2 2 --------------------- --------------------- --------------------- Total loans, net of unearned income 100 % 100 % 100 % ===================== ===================== =====================
(6) DEPOSITS -------- The following is a summary of deposits as of the dates shown:
JUNE 30, December 31, June 30, (Dollars in thousands) 2003 2002 2002 ---------------------------------------------------------- --------------------- --------------------- -------------------- BALANCE: ------- Non-interest bearing $ 317,104 $ 305,540 $ 257,298 NOW 393,462 354,499 292,370 NOW - Brokerage customer deposits 261,475 231,700 97,531 Money market 435,830 399,441 356,352 Savings 161,116 147,669 133,110 Time certificate of deposits 1,850,959 1,650,275 1,471,846 --------------------- -------------------- -------------------- Total deposits $ 3,419,946 $ 3,089,124 $ 2,608,507 ===================== ==================== ==================== MIX: --- Non-interest bearing 9 % 10 % 10 % NOW 11 11 11 NOW - Brokerage customer deposits 8 8 4 Money market 13 13 14 Savings 5 5 5 Time certificate of deposits 54 53 56 --------------------- -------------------- -------------------- Total deposits 100 % 100 % 100 % ===================== ==================== ====================
Following its acquisition of the Wayne Hummer Companies in February 2002, Wintrust undertook an effort to migrate funds from the money market mutual fund managed by WHAMC into deposit accounts of the Wintrust Banks ("NOW -- Brokerage customer deposits" in the table above). Consistent with reasonable interest rate risk parameters, the funds will - 8 - generally be invested in excess loan production of the Banks as well as other investments suitable for banks. The migration of additional funds to the Banks is subject to the desire of the customers to make the transition of their funds into FDIC-insured bank accounts, capital capacity of the Company and the availability of suitable investments in which to deploy the funds. The net assets of the WHAMC money market mutual fund decreased $161 million from June 30, 2002 to June 30, 2003, and the NOW-Brokerage customer deposits at the Banks increased $164 million during this period. (7) NOTES PAYABLE, FEDERAL HOME LOAN BANK ADVANCES, SUBORDINATED NOTES AND OTHER ---------------------------------------------------------------------------- BORROWINGS: ---------- The following is a summary of notes payable, Federal Home Loan Bank advances, subordinated notes and other borrowings as of the dates shown:
JUNE 30, December 31, June 30, (In thousands) 2003 2002 2002 ----------------------------------------------------------------------- --------------------------------------- ------------------- Notes payable $ 26,000 $ 44,025 $ 58,650 Federal Home Loan Bank advances 140,000 140,000 140,000 Subordinated notes 50,000 25,000 -- Other borrowings: Federal funds purchased 18,900 2,000 1,400 Securities sold under repurchase agreements 20,148 24,560 14,365 Wayne Hummer Companies borrowings 14,691 15,148 50,947 Other 3,700 5,000 5,000 --------------------------------------- ------------------- Total other borrowings $ 57,439 $ 46,708 $ 71,712 --------------------------------------- ------------------- Total notes payable, Federal Home Loan Bank advances, subordinated notes and other borrowings $ 273,439 $ 255,733 $ 270,362 ======================================= ===================
In the second quarter of 2003, the Company entered into a $25 million subordinated note agreement with an unaffiliated bank. The note matures in 2013 and requires annual principal payments of $5.0 million beginning in 2009. Interest is calculated at a floating rate equal to LIBOR plus 260 basis points. The note qualifies as Tier II capital for regulatory purposes. The Wayne Hummer Companies borrowings consist of collateralized demand obligations to third party banks that are used to finance securities purchased by customers on margin and securities owned by WHI and demand obligations to brokers and clearing organizations. These borrowings are at rates approximating fed funds. Other represents the Company's interest-bearing deferred portion of the purchase price of the Wayne Hummer Companies. (8) LONG-TERM DEBT - TRUST PREFERRED SECURITIES ------------------------------------------- The Company issued a total of $76.1 million of Trust Preferred Securities through three separate issuances by Wintrust Capital Trust I, Wintrust Capital Trust II and Wintrust Capital Trust III ("Trusts"). The Trusts also issued a total of $2.4 million of Common Securities, all of which are owned by the Company. The Trust Preferred Securities represent preferred undivided beneficial interests in the assets of the Trusts. The Trusts invested the proceeds from the issuances of the Trust Preferred Securities and the Common Securities in Subordinated Debentures ("Debentures") issued by the Company, with the same maturities and interest rates as the Trust Preferred Securities. The Debentures are the sole assets of the Trusts. Capital Trust I and Capital Trust II are consolidated in the Company's financial statements and the Debentures and related income statement effects are eliminated in the consolidated financial statements and the trust preferred securities are reflected as "Long-term debt - Trust Preferred Securities." However, in accordance with recent guidance provided on the application of FIN 46, "Consolidation of Variable Interest Entities", Capital Trust III, which was formed in April 2003, was not consolidated in the Company's financial statements. Accordingly, the Debentures issued by the Company to this Trust (as opposed to the trust preferred securities issued by this Trust) are reflected in the Company's Statement of Condition as "Long-term debt - Trust Preferred Securities." - 9 - A summary of the Company's Long-term debt - trust preferred securities as of June 30, 2003 is as follows (dollars in thousands):
Trust Earliest Preferred Issuance Rate Maturity Redemption Issuance Trust Securities Debentures Date Type Rate Date Date ---------------------------- -------------- ------------------------------------------ -------------------------------------------- Wintrust Capital Trust I $ 31,050 $ 32,010 10/98 Fixed 9.00% 09/30/28 09/30/03 Wintrust Capital Trust II 20,000 20,619 06/00 Fixed 10.50% 06/30/30 06/30/05 Wintrust Capital Trust III 25,000 25,774 04/03 Floating LIBOR+3.25% 04/30/33 04/30/08
The Company has guaranteed the payment of distributions on and payments upon liquidation or redemption of the Trust Preferred Securities, in each case to the extent of funds held by the Trusts. The Company and the Trusts believe that, taken together, the obligations of the Company under the guarantees, the subordinated debentures, and other related agreements provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a subordinated basis, of all of the obligations of the Trusts under the Trust Preferred Securities. Subject to certain limitations, the Company has the right to defer payment of interest on the Debentures at any time, or from time to time, for a period not to exceed 20 consecutive quarters. The Trust Preferred Securities are subject to mandatory redemption, in whole or in part, upon repayment of the Debentures at maturity or their earlier redemption. The Debentures of the Trusts are redeemable in whole or in part prior to maturity at any time after the date shown above, and earlier at the discretion of the Company if certain conditions are met, and, in any event, only after the Company has obtained Federal Reserve approval, if then required under applicable guidelines or regulations. Under current regulatory guidelines the Trust Preferred Securities, subject to certain limitations, qualify as Tier 1 capital of the Company for regulatory purposes. Interest expense on the Trust Preferred Securities is deductible for tax purposes. (9) EARNINGS PER SHARE ------------------ The following table shows the computation of basic and diluted earnings per share for the periods shown:
For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------------------- --------------------------------- (In thousands, except per share data) 2003 2002 2003 2002 -------------------------------------------------------------- --------------- --------------- ---------------- --------------- Net Income $ 9,019 $ 6,307 $ 17,282 $ 12,669 =============== =============== ================ =============== Average common shares outstanding 17,411 15,948 17,360 15,513 Effect of dilutive common shares 1,106 1,080 1,113 1,013 --------------- --------------- ---------------- --------------- Weighted average common shares and effect of dilutive common shares 18,517 17,028 18,473 16,526 =============== =============== ================ =============== Net income per average common share: Basic $ 0.52 $ 0.40 $ 1.00 $ 0.82 =============== =============== ================ =============== Diluted $ 0.49 $ 0.37 $ 0.94 $ 0.77 =============== =============== ================ ===============
The effect of dilutive common shares outstanding results from stock options, restricted stock unit awards, stock warrants and shares to be issued under the Employee Stock Purchase Plan and the Directors Deferred Fee and Stock Plan, all being treated as if they had been either exercised or issued, computed by application of the treasury stock method. - 10 - (10) SEGMENT INFORMATION ------------------- The segment financial information provided in the following tables has been derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. 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. Inter-segment revenue and transfers are generally accounted for at current market prices. The other category, as shown in the following table, reflects parent company information. The net interest income and segment profit 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, thereby causing the inter-segment elimination amounts shown in the following table. The following table presents a summary of certain operating information for each reportable segment for three months ended for the periods shown:
Three Months Ended June 30, $ Change in % Change in --------------------------------------- (Dollars in thousands) 2003 2002 Contribution Contribution ----------------------------------------------- ------------------ ------------------ ------------------- ---------------------- NET INTEREST INCOME: Banking $ 25,634 $ 22,765 $ 2,869 12.6 % Premium finance 11,220 8,060 3,160 39.2 Indirect auto 1,778 2,028 (250) (12.3) Tricom 910 1,085 (175) (16.1) Wealth management 1,747 722 1,025 142.0 Inter-segment eliminations (10,725) (8,221) (2,504) (30.5) Other (2,236) (2,022) (214) (10.6) ------------------ ------------------ ------------------- ---------------------- Total net interest income $ 28,328 $ 24,417 $ 3,911 16.0 % ================== ================== =================== ====================== NON-INTEREST INCOME: Banking $ 9,837 $ 3,868 $ 5,969 154.3 % Premium finance 1,108 827 281 33.9 Indirect auto 18 10 8 80.0 Tricom 1,071 933 138 14.8 Wealth management 7,207 7,623 (416) (5.5) Inter-segment eliminations (136) 456 (592) (129.8) Other -- 54 (54) N/M ------------------ ------------------ ------------------- ---------------------- Total non-interest income $ 19,105 $ 13,771 $ 5,334 38.7 % ================== ================== =================== ====================== SEGMENT PROFIT (LOSS): Banking $ 9,325 $ 7,021 $ 2,304 32.8 % Premium finance 5,244 3,327 1,917 57.6 Indirect auto 573 810 (237) (29.3) Tricom 392 486 (94) (19.3) Wealth management 164 (87) 251 288.5 Inter-segment eliminations (4,608) (3,448) (1,160) (33.6) Other (2,071) (1,802) (269) (14.9) ------------------ ------------------ ------------------- ---------------------- Total segment profit $ 9,019 $ 6,307 $ 2,712 43.0 % ================== ================== =================== ====================== SEGMENT ASSETS (AT PERIOD END): Banking $ 4,035,623 $ 3,108,704 $ 926,919 29.8 % Premium finance 690,342 487,953 202,389 41.5 Indirect auto 172,619 189,797 (17,178) (9.1) Tricom 39,371 33,351 6,020 18.1 Wealth management 77,553 104,052 (26,499) (25.5) Inter-segment eliminations (912,624) (714,137) (198,487) (27.8) Other 29,510 9,680 19,830 204.9 ------------------ ------------------ ------------------- ---------------------- Total segment assets $ 4,132,394 $ 3,219,400 $ 912,994 28.4 % ================== ================== =================== ====================== N/M = not meaningful
- 11 - The following table presents a summary of certain operating information for each reportable segment for six months ended for the periods shown:
Six Months Ended June 30, $ Change in % Change in --------------------------------------- (Dollars in thousands) 2003 2002 Contribution Contribution ----------------------------------------------- ------------------ ------------------ ------------------- ---------------------- NET INTEREST INCOME: Banking $ 49,348 $ 43,538 $ 5,810 13.3 % Premium finance 20,464 16,177 4,287 26.5 Indirect auto 3,614 4,030 (416) (10.3) Tricom 1,764 1,998 (234) (11.7) Wealth management 3,303 1,310 1,993 152.1 Inter-segment eliminations (19,410) (16,522) (2,888) (17.5) Other (4,151) (3,946) (205) (5.2) ------------------ ------------------ ------------------- ---------------------- Total net interest income $ 54,932 $ 46,585 $ 8,347 17.9 % ================== ================== =================== ====================== NON-INTEREST INCOME: Banking $ 19,156 $ 9,398 $ 9,758 103.8 % Premium finance 2,270 2,843 (573) (20.2) Indirect auto 35 18 17 94.4 Tricom 2,162 1,754 408 23.3 Wealth management 13,395 12,296 1,099 8.9 Inter-segment eliminations (189) (286) 97 33.9 Other 19 500 (481) (96.2) ------------------ ------------------ ------------------- ---------------------- Total non-interest income $ 36,848 $ 26,523 $ 10,325 38.9 % ================== ================== =================== ====================== SEGMENT PROFIT (LOSS): Banking $ 17,812 $ 13,214 $ 4,598 34.8 % Premium finance 9,436 7,414 2,022 27.3 Indirect auto 1,230 1,538 (308) (20.0) Tricom 789 757 32 4.2 Wealth management (117) (229) 112 48.9 Inter-segment eliminations (8,043) (6,911) (1,132) (16.4) Other (3,825) (3,114) (711) (22.8) ------------------ ------------------ ------------------- ---------------------- Total segment profit $ 17,282 $ 12,669 $ 4,613 36.4 % ================== ================== =================== ======================
- 12 - (11) DERIVATIVE FINANCIAL INSTRUMENTS -------------------------------- The Company enters into certain derivative financial instruments as part of its strategy to manage its exposure to market risk. Market risk is the possibility that, due to changes in interest rates or other economic conditions, the Company's net interest income will be adversely affected. The derivative financial instruments historically utilized by the Company to manage this risk include interest rate cap and interest rate swap contracts. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and not the notional principal amounts used to express the volume of the transactions. In accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended, the Company recognizes all derivative financial instruments, such as interest rate cap and interest rate swap agreements, in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Derivative financial instruments are included in other assets or other liabilities, as appropriate, on the Consolidated Statements of Condition. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders' equity as a component of comprehensive income, depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective hedges, are recorded as a component of other comprehensive income net of deferred taxes. Changes in fair values of derivative financial instruments not qualifying as hedges are reported in income. At June 30, 2003, the Company had $81.05 million notional principal amount of interest rate swap contracts outstanding, all of which qualified for hedge accounting. The following table presents a summary of these derivative instruments and whether the contracts were cash flow (CF) hedges with changes in fair values reported as other comprehensive income (OCI) or fair value (FV) hedges with changes in fair values reported in the income statement (IS):
June 30, 2003 December 31, 2002 -------------------------- ------------------------ Type of Change in Maturity Notional Fair Notional Fair (In thousands) hedge market value Date Amount Value Amount Value ----------------------------- ------------- ---------------- ----------------- -------------------------- ------------------------ Interest rate swap CF OCI 2/27/04 $25,000 $ (737) $25,000 $ (1,125) Interest rate swap CF OCI 10/29/12 25,000 (1,540) 25,000 ( 723) Interest rate swap (callable) FV IS 9/30/28 (03) 31,050 ( 4) 31,050 ( 156)
During the first quarter of 2003, $75 million notional principal amount of interest rate cap contracts matured. These contracts were purchased to mitigate the effect of rising rates on certain floating rate deposit products and provided for the receipt of payments when the 91-day Treasury bill rate exceeded the predetermined strike rates. No interest rate cap contacts were entered into in 2003, and the Company had no interest rate cap contracts outstanding at June 30, 2003. Periodically, the Company will sell options to a bank or dealer for the right to purchase certain securities held within the Banks' investment portfolios. These covered call option transactions are designed primarily to increase the total return associated with holding these securities as earning assets. These transactions do not qualify as hedges pursuant to SFAS 133 and, accordingly, changes in fair values of these contracts are reported in other non-interest income. There were no call options outstanding as of June 30, 2003, December 31, 2002 or June 30, 2002. (12) BUSINESS COMBINATIONS --------------------- In February 2003, Wintrust completed the acquisition of Lake Forest Capital Management Company ("LFCM") based in Lake Forest, Illinois. LFCM is operating as a separate division of Wayne Hummer Asset Management Company, Wintrust's existing asset management subsidiary. LFCM's results of operations are included in Wintrust's 2003 results since the effective date of acquisition (February 1, 2003). In February, 2002, Wintrust completed its acquisition of The Wayne Hummer Companies. The results of the Wayne Hummer Companies have been included in Wintrust's consolidated financial statements since the effective date of the acquisition (February 1, 2002). - 13 - (13) GOODWILL AND OTHER INTANGIBLE ASSETS ------------------------------------ Wintrust adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. SFAS 142 requires companies to no longer amortize goodwill and intangible assets with indefinite useful lives, but instead test these assets for impairment at least annually in accordance with the provisions of SFAS 142. Under SFAS 142, intangible assets with definite useful lives continue to be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". A summary of the Company's goodwill assets by business segment is presented in the following table:
January 1, Goodwill Impairment JUNE 30, (In thousands) 2003 Acquired Losses 2003 ------------------------------------------- ------------------ ------------------ -------------------- ------------------ Banking $ 1,018 $ -- $ -- $ 1,018 Premium finance -- -- -- -- Indirect auto -- -- -- -- Tricom 8,958 -- -- 8,958 Wealth management 15,290 4,569 -- 19,859 Parent and other -- -- -- -- ------------------ ------------------ -------------------- ------------------ Total $ 25,266 $ 4,569 $ -- $ 29,835 ================== ================== ==================== ==================
At June 30, 2003 and 2002, Wintrust had $2.4 million and $1.4 million, respectively, in unamortized finite-lived intangible assets. As a result of the acquisitions of WHAMC and LFCM, $1.38 million and $1.54 million, respectively, were assigned to the customer lists of the acquired companies. These intangible assets are being amortized over 7-year periods on an accelerated basis. Total amortization expense associated with these intangible assets in the first six months of 2003 and 2002 was $298,000 and $117,000, respectively. Estimated amortization expense on finite-lived intangible assets for the years ended 2003 through 2007 is as follows: (In thousands) -------------------------------------- 2003 $ 592 2004 511 2005 449 2006 385 2007 330 (14) STOCK-BASED COMPENSATION PLANS ------------------------------ The Company follows Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. APB 25 uses the intrinsic value method and provides that compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant. The Company follows the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation" (as amended by SFAS 148), rather than the recognition provisions of SFAS 123, as allowed by the statement. Compensation expense for restricted share awards is ratably recognized over the period of service, usually the restricted period, based on the fair value of the stock on the date of grant. The following table reflects the Company's pro forma net income and earnings per share as if compensation expense for the Company's stock options, determined based on the fair value at the date of grant consistent with the method of SFAS 123, had been included in the determination of the Company's net income. - 14 -
Three Months Ended Six Months Ended June 30, June 30, ------------------------------- ------------------------------- (Dollars in thousands, except share data) 2003 2002 2003 2002 ------------------------------------------------------------ --------------- --------------- --------------- --------------- Net income As reported $ 9,019 $ 6,307 $ 17,282 $ 12,669 Compensation cost of stock options based on fair value, net of related tax effect (326) (311) (654) (578) ------------------------------- ------------------------------- Pro forma $ 8,693 $ 5,996 $ 16,628 $12,091 =============================== =============================== Earnings per share - Basic As reported $ 0.52 $ 0.40 $ 1.00 $ 0.82 Compensation cost of stock options based on fair value, net of related tax effect (0.02) (0.02) (0.04) (0.04) ------------------------------- ------------------------------- Pro forma $ 0.50 $ 0.38 $ 0.96 $ 0.78 =============================== =============================== Earnings per share - Diluted As reported $ 0.49 $ 0.37 $ 0.94 $ 0.77 Compensation cost of stock options based on fair value, net of related tax effect (0.02) (0.02) (0.04) (0.04) ------------------------------- ------------------------------- Pro forma $ 0.47 $ 0.35 $ 0.90 $ 0.73 =============================== ===============================
The fair values of stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model is sensitive to changes in the subjective assumptions, which can materially affect the fair value estimates. As a result, the pro forma amounts indicated above may not be representative of the effects on reported net income for future years. Included in the determination of net income as reported is compensation expense related to restricted share awards of $196,000 ($121,000 net of tax) in the second quarter of 2003 and $174,000 ($107,000 net of tax) in the second quarter of 2002. For the six months ended June 30, 2003 and 2002, net income as reported included compensation expense related to restricted share awards of $387,000 ($239,000 net of tax) and $304,000 ($187,000 net of tax), respectively. (15) RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- In May 2003, SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" was issued, establishing standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement requires that an issuer classify certain financial instruments, which may previously have been classified as equity, as a liability. This generally includes financial instruments which either: 1) require mandatory redemption at a specified time other than upon liquidation or termination of the entity; 2) include an obligation to either repurchase the issuer's equity shares or is indexed to such an obligation and which may require settlement in cash; or 3) require the issuance of a variable number of the issuer's shares based on a monetary amount which is generally unrelated to the value of those shares. The Statement is effective as of July 1, 2003, and is not expected to have a material impact on the Company's accounting and reporting. In April 2003, SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" was issued, amending and clarifying financial accounting and reporting for certain derivative instruments. This Statement is generally effective for contracts entered into or modified after June 30, 2003. The Statement is not expected to have a material impact on the Company's accounting and reporting for derivatives. - 15 - (16) SUBSEQUENT EVENTS ----------------- On July 2, 2003, the Company announced the signing of a definitive agreement to acquire Advantage National Bancorp, Inc. ("Advantage"), the parent company of Advantage National Bank, in a stock transaction. Advantage National Bank is a de novo bank that began operations in January 2001, had total assets of approximately $104 million at June 30, 2003, and bank locations in Elk Grove Village and Roselle, Illinois. The aggregate purchase price, assuming all currently outstanding warrants are exercised prior to closing, is approximately $24.4 million. Pursuant to the terms of the agreement, Wintrust will issue shares of its common stock in exchange for all of the outstanding shares of Advantage. The number of shares to be issued by Wintrust will depend on Wintrust's average trading price over a period of time prior to closing, determined in accordance with the terms of the agreement. On August 7, 2003, Wintrust announced the signing of a definitive agreement to acquire Village Bancorp, Inc., the parent company of Village Bank and Trust - Arlington Heights ("Village") in a stock transaction. Village is a de novo bank that began operations in 1995, had total assets of approximately $74 million at June 30, 2003, and bank locations in Arlington Heights and Prospect Heights, Illinois. The aggregate purchase price is approximately $9.0 million. Pursuant to the terms of the agreement, Wintrust will issue shares of its common stock in exchange for all of the shares of Village. The number of shares to be issued by Wintrust will depend on Wintrust's average trading price over a period of time prior to closing, determined in accordance with the terms of the agreement. Each transaction is subject to approval by the respective selling shareholders as well as the applicable bank regulators. Both transactions are expected to close in the fourth quarter of 2003. - 16 - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition as of June 30, 2003, compared with December 31, 2002, and June 30, 2002, and the results of operations for the three and six-month periods ended June 30, 2003 and 2002 should be read in conjunction with the Company's unaudited consolidated financial statements and notes contained in this report. This discussion contains forward-looking statements that involve risks and uncertainties and, as such, future results could differ significantly from management's current expectations. See the last section of this discussion for further information on forward-looking statements. OVERVIEW AND STRATEGY Wintrust's operating subsidiaries were organized within approximately the last twelve years. We have grown to $4.1 billion in total assets at June 30, 2003 from $3.2 billion in total assets at June 30, 2002, an increase of 28%. The historical financial performance of the Company has been affected by costs associated with growing market share in deposits and loans, establishing new banks and opening new branch facilities, and building an experienced management team. The Company's financial performance generally reflects the improved profitability of its operating subsidiaries as they mature, offset by the costs of establishing new banks and opening new branch facilities. The Company's experience has been that it generally takes 13 to 24 months for new banks to first achieve operational profitability depending on the number and timing of branch facilities added. The Banks began operations during the period indicated in the table below: Operations opened in: ---------------------------------- Month Year ----------------- ------------- Lake Forest Bank........................... December 1991 Hinsdale Bank.............................. October 1993 North Shore Bank........................... September 1994 Libertyville Bank.......................... October 1995 Barrington Bank............................ December 1996 Crystal Lake Bank.......................... December 1997 Northbrook Bank............................ November 2000 Subsequent to these initial dates of operations, each of the Banks, except Northbrook Bank, has established additional full-service banking facilities. As of June 30, 2003, the Banks had 32 banking facilities. Since June 30, 2002, Crystal Lake Bank opened a new temporary facility in Cary (January 2003) and a new permanent facility for its McHenry branch. Construction is underway for a new larger facility in South Libertyville (a branch of Libertyville Bank) and property has been purchased for several additional facilities. The Company has also begun organizing its eighth de novo bank to be located in the Beverly neighborhood of Chicago. In addition the Company has announced the signing of definitive agreements to acquire Advantage Bancorp, Inc., with banking locations in Elk Grove Village and Roselle, and Village Bancorp Inc., with banking locations in Arlington Heights and Prospect Heights. While committed to a continuing growth strategy, management's ongoing focus is also to balance further asset growth with earnings growth by seeking to more fully leverage the existing capacity within each of the operating subsidiaries. One aspect of this strategy is to continue to pursue specialized earning asset niches in order to maintain the mix of earning assets in higher-yielding loans as well as diversify the loan portfolio. Another aspect of this strategy is a continued focus on less aggressive deposit pricing at the Banks in markets where they have significant market share and more established customer bases. FIFC is the Company's most significant specialized earning asset niche, originating $568 million in loan (premium finance receivables) volume in the second quarter of 2003, $1.1 billion in the first six months of 2003 and $1.7 billion during the full year 2002. FIFC makes loans to businesses to finance the insurance premiums they pay on their - 17 - commercial insurance policies. The loans are originated by FIFC working through independent medium and large insurance agents and brokers located throughout the United States. The insurance premiums financed are primarily for commercial customers' purchases of liability, property and casualty and other commercial insurance. This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature of this lending and because the borrowers are located nationwide, this segment may be more susceptible to third party fraud. The majority of these loans are purchased by the Banks in order to more fully utilize their lending capacity. These loans generally provide the Banks higher yields than alternative investments. However, as a result of continued growth in origination volume in 2003, FIFC sold approximately $59.3 million, or 10%, of the receivables generated in the second quarter of 2003, to an unrelated third party with servicing retained. The Company began selling the excess of FIFC's originations over the capacity to retain such loans within the Banks' loan portfolios during 1999. In addition to recognizing gains on the sale of these receivables, the proceeds provide the Company with additional liquidity. Consistent with the Company's strategy to be asset-driven, it is probable that similar sales of these receivables will occur in the future; however, future sales of these receivables depends on the level of new volume growth in relation to the capacity to retain such loans within the Banks' loan portfolios. In October 1999, the Company acquired Tricom as part of its continuing strategy to pursue specialized earning asset niches. Based in the Milwaukee area, Tricom has been in business for more than eleven years and specializes in providing high yielding, short-term accounts receivable financing and value-added, out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to clients in the temporary staffing industry. Tricom's clients, located throughout the United States, provide staffing services to businesses in diversified industries. These receivables may involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral. The principal sources of repayments on the receivables are payments to borrowers from their customers who are located throughout the United States. The Company mitigates this risk by employing lockboxes and other cash management techniques to protect their interests. By virtue of the Company's funding resources, this acquisition has provided Tricom with additional capital necessary to expand its financing services in a national market. Tricom's revenue principally consists of interest income from financing activities and fee-based revenues from administrative services. In addition to the earning asset niches provided by the Company's non-bank subsidiaries, several earning asset niches operate within the Banks, including our indirect auto lending which is conducted through a division of Hinsdale Bank, Lake Forest Bank's equipment leasing division and Barrington Bank's Community Advantage program that provides lending, deposit and cash management services to condominium, homeowner and community associations. In addition, Hinsdale Bank operates a mortgage warehouse lending program that provides loan and deposit services to mortgage brokerage companies located predominantly in the Chicago metropolitan area, and Crystal Lake Bank has recently developed a specialty in small aircraft lending. The Company plans to continue pursuing the development or acquisition of other specialty lending businesses that generate assets suitable for bank investment and/or secondary market sales. The Company is not pursuing growth in the indirect auto segment, however, and anticipates that the indirect auto loan portfolio will comprise a smaller portion of the net loan portfolio in the future. Wintrust's strategy also includes building and growing its wealth management business, including trust, asset management and brokerage services. On February 20, 2002, the Company completed its acquisition of the Wayne Hummer Companies, comprising Wayne Hummer Investments LLC ("WHI"), Wayne Hummer Management Company (subsequently renamed Wayne Hummer Asset Management Company "WHAMC") and Focused Investments LLC ("FI"), each based in the Chicago area. WHI, established in 1931, provides a full-range of investment products and services tailored to meet the specific needs of individual investors throughout the country, primarily in the Midwest. Although headquartered in Chicago, WHI also operates an office in Appleton, Wisconsin that opened in 1936 that serves the greater Appleton area. WHI has established branch locations in offices at Lake Forest Bank, Hinsdale Bank and Barrington Bank and plans to open offices at each of the Banks. WHI is a member of the New York Stock Exchange, the American Stock Exchange and the National Association of Securities Dealers. FI, a NASD member broker/dealer, is a wholly-owned subsidiary of WHI and provides a full range of investment services to clients through a network of relationships with community-based financial institutions primarily in Illinois. - 18 - WHAMC, established in 1981, is the investment advisory affiliate of WHI and is advisor to the Wayne Hummer family of mutual funds. The Wayne Hummer family of funds includes the Wayne Hummer Growth Fund, the Wayne Hummer Core Portfolio Fund, the Wayne Hummer Income Fund, and the Wayne Hummer Money Market Fund. WHAMC also provides money management and advisory services to individuals and institutional, municipal and tax-exempt organizations and portfolio management and financial supervision for a wide-range of pension and profit sharing plans. To further expand the Company's wealth management business in the Chicago metropolitan area, on February 4, 2003, the Company acquired Lake Forest Capital Management Company, a registered investment advisor. LFCM is operating as a division of WHAMC. In September 1998, the Company formed a trust subsidiary originally named Wintrust Asset Management Company, which was renamed in May 2002 to Wayne Hummer Trust Company ("WHTC") to expand the trust and investment management services that were previously provided through the trust department of Lake Forest Bank. With a separately chartered trust subsidiary, the Company is better able to offer trust and investment management services to all communities served by the Banks. In addition to offering these services to existing bank customers at each of the Banks, the Company believes WHTC can successfully compete for trust business by targeting small to mid-size businesses and affluent individuals whose needs command the personalized attention offered by WHTC's experienced trust professionals. Services offered by WHTC typically include traditional trust products and services, as well as investment management services. The following table presents a summary of the approximate amount of assets under administration and/or management in the Company's wealth management operating subsidiaries as of the dates shown:
JUNE 30, December 31, June 30, (Dollars in thousands) 2003 2002 2002 ------------------------------------------------------------------------------------ --------------------- --------------------- WHTC $ 485,295 $ 444,818 $ 466,030 WHAMC (1) 704,900 391,175 397,481 WHAMC's four proprietary mutual funds 309,824 324,012 487,968 WHI - brokerage assets in custody 4,200,000 3,800,000 3,800,000 --------------------------------------------------------------- (1) excludes the four proprietary mutual funds managed by WHAMC, but includes LFCM division, which was acquired in February 2003
- 19 - RESULTS OF OPERATIONS EARNINGS SUMMARY The Company's key operating measures for 2003 as compared to the same periods last year, are shown in the table below:
SIX MONTHS Six Months Percentage (%)/ ENDED Ended Basis Point (bp) (Dollars in thousands, except per share data) JUNE 30, 2003 June 30, 2002 Change ---------------------------------------------------------------- --------------------- --------------------- ------------------- Net income $ 17,282 $ 12,669 36 % Net income per common share - Basic 1.00 0.82 22 Net income per common share - Diluted 0.94 0.77 22 Net revenue (1) 91,780 73,108 26 Net interest income 54,932 46,585 18 Net interest margin (5) 3.14 % 3.52 % (38) bp Core net interest margin (2) (5) 3.26 3.72 (46) Net overhead ratio (3) 1.18 1.54 (36) Efficiency ratio (4) (5) 64.86 65.96 (110) Return on average assets 0.90 0.88 2 Return on average equity 14.74 15.85 (111) ---------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS Three Months Percentage (%)/ ENDED Ended Basis Point (bp) JUNE 30, 2003 June 30, 2002 Change --------------------- --------------------- ------------------ Net income $ 9,019 $ 6,307 43 % Net income per common share - Basic 0.52 0.40 30 Net income per common share - Diluted 0.49 0.37 32 Net revenues (1) 47,433 38,188 24 Net interest income 28,328 24,417 16 Net interest margin (5) 3.14 % 3.56 % (42) bp Core net interest margin (2) (5) 3.26 3.74 (48) Net overhead ratio (3) 1.16 1.63 (47) Efficiency ratio (4) (5) 64.30 67.61 (331) Return on average assets 0.91 0.85 6 Return on average equity 14.95 14.75 20 AT END OF PERIOD Total assets $ 4,132,394 $ 3,219,400 28 % Total loans, net of unearned income 2,896,148 2,308,945 25 Total deposits 3,419,946 2,608,507 31 Total shareholders' equity 249,399 205,999 21 Book value per common share 14.31 12.15 18 Market price per common share 29.79 34.57 (14) Allowance for loan losses to total loans 0.74 % 0.69 % 5 bp Non-performing assets to total assets 0.35 0.37 (2) ---------------------------------------------------------------------------------------------------------------------------------- (1) Net revenue includes net interest income and non-interest income. (2) The core net interest margin excludes the interest expense associated with Wintrust's Long-term Debt - Trust Preferred Securities. (3) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period's total average assets. A lower ratio indicates a higher degree of efficiency. (4) The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenue (less securities gains or losses). A lower ratio indicates more efficient revenue generation. (5) See Note 2, "Supplemental Financial Measures/Ratios," (page 6) for additional information on this performance measure/ratio.
- 20 - The Company analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as other ratios such as the net overhead ratio, efficiency ratio and core net interest margin. These performance measures are presented as supplemental information to enhance the readers' understanding of, and highlight trends in, the Company's financial results. These measures should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. The calculations used by the Company to derive core net interest margin, net overhead ratio and the efficiency ratio may vary from, and not be comparable to, other companies. See Note 2 "Supplemental Measures/Ratios" on page 6 for additional information. The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as information changes, the financial statements could reflect different estimates and assumptions. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Management considers the determination of the allowance for loan losses and the valuation of the retained interest in the premium finance receivables sold as the areas requiring the most subjective and complex judgments. For a more detailed discussion on these critical accounting policies, see "Summary of Critical Accounting Policies" on page 62 of the Company's Annual Report to shareholders for the year ended December 31, 2002. Net income for the second quarter ended June 30, 2003 totaled $9.0 million, an increase of $2.7 million, or 43%, over the $6.3 million recorded in the second quarter of 2002. On a per share basis, net income for the second quarter of 2003 totaled $0.49 per diluted common share, a $0.12 per share, or 32%, increase as compared to the 2002 second quarter total of $0.37 per diluted common share. The lower growth rate in the earnings per share as compared to net income was primarily due to the issuance of 1,362,750 additional shares of common stock in June and July 2002. The return on average equity for the second quarter of 2003 was 14.95%, compared to 14.75% for the same period of 2002. For the first six months of 2003, net income totaled $17.3 million, or $0.94 per diluted common share, an increase of $4.6 million, or 36%, when compared to $12.7 million, or $0.77 per diluted common share, for the same period in 2002. Return on average equity for the first six months of 2003 was 14.74% versus 15.85% for the same period of 2002. The results for the first six months of 2002 include pre-tax income of $1.25 million, or $754,000 after-tax ($0.05 per diluted share), for a partial settlement related to a charge recorded in 2000 for a fraud perpetrated against FIFC. On February 20, 2002, Wintrust completed its acquisition of the Wayne Hummer Companies. The Wayne Hummer Companies' results of operations are included in Wintrust's year-to-date 2002 results from the effective date of the acquisition (February 1, 2002). On February 4, 2003, Wintrust completed the acquisition of Lake Forest Capital Management Company. LFCM is operating as a division of WHAMC, the Company's existing asset management subsidiary. LFCM's results of operations are included in Wintrust's 2003 results since the effective date of the acquisition (February 1, 2003). NET INTEREST INCOME Net interest income, which is the difference between interest income and fees on earning assets and interest expense on deposits and borrowings, is the major source of earnings for Wintrust. Tax-equivalent net interest income for the quarter ended June 30, 2003 totaled $28.6 million, an increase of $4.0 million, or 16%, as compared to the $24.6 million recorded in the same quarter of 2002. This increase resulted from loan growth offsetting the effect of narrower spreads. Average earning assets in the second quarter of 2003 increased $879 million, or 32%, over the second quarter of 2002, while the interest rate spread (the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities) decreased to 2.91% in the second quarter of 2003, compared to 3.27% in the second quarter of 2002. - 21 - Net interest margin represents tax-equivalent net interest income as a percentage of the average earning assets during the period. For the second quarter of 2003 the net interest margin was 3.14%, a decrease of 42 basis points when compared to the net interest margin of 3.56% in the prior year second quarter, and was essentially unchanged compared to the net interest margin of 3.15% in the first quarter of 2003. The core net interest margin, which excludes the interest expense related to Wintrust's Long-term Debt - Trust Preferred Securities, was 3.26% for the second quarter of 2003, and decreased 48 basis points when compared to the prior year second quarter's core margin of 3.74%. The net interest margin in the second quarter of 2003 contracted from the prior year quarter due to compression in the yields earned on earning assets and rates paid on interest bearing liabilities. This compression was caused by lower interest rates, the Company's preference for variable rate loans, and agency securities with call options written against them being called resulting in the proceeds being invested in lower yielding liquid assets. The following table presents a summary of the Company's net interest income and related net interest margins, calculated on a fully taxable equivalent basis, for the periods shown:
FOR THE QUARTER ENDED For the Quarter Ended JUNE 30, 2003 June 30, 2002 --------------------------------------- --------------------------------------- (Dollars in thousands) ---------------------- YIELD/ Yield/ AVERAGE INTEREST RATE Average Interest Rate --------------------------------------- --------------------------------------- Liquidity management assets (1) (2) (8) $ 756,598 $ 6,715 3.56 % $ 484,483 $ 5,444 4.51 % Other earning assets (3) 40,162 424 4.23 71,100 751 4.24 Loans, net of unearned income (2) (4) (8) 2,856,728 42,362 5.95 2,218,968 38,534 6.97 --------------------------------------- --------------------------------------- Total earning assets (8) $ 3,653,488 $ 49,501 5.43 % $ 2,774,551 $ 44,729 6.47 % --------------------------------------- --------------------------------------- Interest-bearing deposits $ 2,988,099 $ 17,013 2.28 % $ 2,203,247 $ 16,585 3.02 % Federal Home Loan Bank advances 140,000 1,473 4.22 104,938 1,078 4.12 Notes payable and other borrowings 91,433 671 2.94 164,587 1,170 2.85 Subordinated notes 42,033 625 5.88 -- -- -- Long-term debt - trust preferred securities 70,830 1,155 6.52 51,050 1,288 10.09 --------------------------------------- --------------------------------------- Total interest-bearing liabilities $ 3,332,395 $ 20,937 2.52 % $ 2,523,822 $ 20,121 3.20 % --------------------------------------- --------------------------------------- Interest rate spread (5) (8) 2.91 % 3.27 % Net free funds/contribution (6) $ 321,093 0.23 $ 250,729 0.29 --------------- ------------ --------------- ------------ Net interest income/Net interest margin (8) $ 28,564 3.14 % $ 24,608 3.56 % -------------- -------------- ------------ ------------ Core net interest margin (7) (8) 3.26 % 3.74 % ------------ ------------ ---------------------------------------------------------------------------------------------------------------------------------- (1) Liquidity management assets include available-for-sale securities, interest earning deposits with banks and federal funds sold. (2) Interest income on tax-advantaged loans and securities reflects a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total adjustments for the quarters ended June 30, 2003 and 2002 were $236,000 and $191,000, respectively. (3) Other earning assets include brokerage customer receivables and trading account securities. (4) Loans, net of unearned income, include mortgages held for sale and non-accrual loans. (5) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities. (6) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities. (7) Core net interest margin excludes the effect of Wintrust's Long-term Debt - Trust Preferred Securities. (8) See "Supplemental Financial Measures/Ratios" (Note 2 on page 6) for additional information on this performance measure/ratio.
The yield on total earning assets for the second quarter of 2003 was 5.43% as compared to 6.47% in 2002, a decrease of 104 basis points resulting primarily from the effect of decreases in general market rates on liquidity management assets and loans. The yield on earning assets is heavily dependent on the yield earned on loans since average loans comprised 78% of earning assets in the second quarter of 2003 and 80% of average earning assets in the same period of 2002. The yield on loans was 5.95% in the second quarter of 2003, a decrease of 102 basis points from the 6.97% in the same period of 2002. The lower yield in 2003 is due to lower market rates (prime rate was 50 basis points lower in the 2003 - 22 - period compared to 2002) as well as the Company's preference for variable rate loans which generally have lower rates than fixed rate loans. The rate paid on interest-bearing liabilities for the second quarter of 2003 was 2.52%, compared to 3.20% in the second quarter of 2002, a decline of 68 basis points. Interest-bearing deposits accounted for 90% of total interest-bearing funding in the second quarter of 2003, compared to 87% in the same period of 2002. The rate paid on interest-bearing deposits averaged 2.28% for the second quarter of 2003 versus 3.02% for the same quarter of 2002, a decrease of 74 basis points. Since June 30, 2002, the Company issued $50 million of subordinated notes and $25 million of long-term debt - trust preferred securities and used a portion of the proceeds to reduce its notes payable. The following table presents a summary of the Company's net interest income and related net interest margins, calculated on a fully taxable equivalent basis, for the periods shown:
FOR THE SIX MONTHS ENDED For the Six Months Ended JUNE 30, 2003 June 30, 2002 ----------------------------------------------------------------------------------- (Dollars in thousands) ---------------------- YIELD/ Yield/ AVERAGE INTEREST RATE Average Interest Rate --------------------------------------- --------------------------------------- Liquidity management assets (1) (2) (8) $ 736,041 $ 13,029 3.57% $ 468,103 $ 10,260 4.42 % Other earning assets (3) 40,571 819 4.07 58,082 1,265 4.39 Loans, net of unearned income (2) (4) (8) 2,777,958 83,094 6.03 2,162,593 75,383 7.03 --------------------------------------- --------------------------------------- Total earning assets (8) $ 3,554,570 $ 96,942 5.50% $ 2,688,778 $ 86,908 6.52 % --------------------------------------- --------------------------------------- Interest-bearing deposits $ 2,921,536 $ 34,115 2.35% $ 2,151,117 $ 33,260 3.12 % Federal Home Loan Bank advances 140,000 2,930 4.22 97,735 1,975 4.08 Notes payable and other borrowings 91,946 1,375 3.02 139,325 2,113 3.06 Subordinated notes 33,564 1,069 6.33 -- -- -- Long-term debt - trust preferred securities 60,917 2,083 6.84 51,050 2,576 10.09 --------------------------------------- --------------------------------------- Total interest-bearing liabilities $ 3,247,963 $ 41,572 2.58% $ 2,439,227 $ 39,924 3.30 % --------------------------------------- --------------------------------------- Interest rate spread (5) (8) 2.92 % 3.22 % Net free funds/contribution (6) $ 306,607 0.22 $ 249,551 0.30 ---------------- ------------ ---------------- ------------ Net interest income/Net interest margin (8) $ 55,370 3.14 % $ 46,984 3.52 % --------------- -------------- ------------ ------------ Core net interest margin (7) (8) 3.26 % 3.72 % ------------ ------------ ---------------------------------------------------------------------------------------------------------------------------------- (1) Liquidity management assets include available-for-sale securities, interest earning deposits with banks and federal funds sold. (2) Interest income on tax-advantaged loans and securities reflects a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total adjustments for the six months ended June 30, 2003 and 2002 were $438,000 and $399,000 respectively. (3) Other earning assets include brokerage customer receivables and trading account securities. (4) Loans, net of unearned income, include mortgages held for sale and non-accrual loans. (5) Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities. (6) Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The contribution is based on the rate paid for total interest-bearing liabilities. (7) Core net interest margin excludes the effect of Wintrust's Long-term Debt - Trust Preferred Securities. (8) See "Supplemental Financial Measures/Ratios" (Note 2 on page 6) for additional information on this performance measure/ratio.
For the first six months of 2003, tax-equivalent net interest income totaled $55.4 million and increased $8.4 million, or 18% over the $47.0 million recorded in the same period in 2002. Growth in the Company's earning asset base was the primary contributor to this increase, as year-to-date average loans increased 28%. The yield on total earning assets for the first six months of 2003 was 5.50% as compared to 6.52% in 2002, a decrease of 102 basis points resulting primarily from the effect of decreases in general market rates on liquidity management assets and loans. The rate paid on interest-bearing liabilities for the first six months of 2003 was 2.58%, compared to 3.30% in the first six months of 2002, a decline of 72 basis points. As a result of a more significant decrease in the yield on earning - 23 - assets compared to the decrease in the rate paid on interest bearing liabilities, the interest rate spread (difference between the yield on earning assets and the rate paid on interest-bearing liabilities) declined 30 basis points to 2.92% for first six months of 2003 when compared to the first six months of 2002. The net interest margin declined 38 basis points to 3.14% during the first six months of 2003 compared to the 3.52% net interest margin reported for the first six months of 2002, and was primarily attributable to the 30 basis point decline in the interest rate spread. The following table presents an analysis of the changes in the Company's tax-equivalent net interest income comparing the three-month periods ended June 30, 2003 and March 31, 2003, the six-month periods ended June 30, 2003 and June 30, 2002 and comparing the three-month periods ended June 30, 2003 and June 30, 2002. The reconciliation sets forth the change in the tax-equivalent net interest income as a result of changes in volumes, rates, the change due to the combination of volume and rate and the differing number of days in each period:
Second Quarter First Six Months Second Quarter of 2003 of 2003 of 2003 Compared to Compared to Compared to First Quarter First Six Months Second Quarter (Dollars in thousands) of 2003 of 2002 of 2002 ---------------------------------------------------------------------------------------- --------------------- -------------------- Tax-equivalent net interest income for comparative period $ 26,806 $ 46,984 $ 24,608 Change due to mix and growth of earning assets and interest-bearing liabilities (volume) 1,569 13,858 7,347 Change due to interest rate fluctuations (rate) (271) (4,325) (2,560) Change due to rate and volume fluctuations (rate/volume) (165) (1,147) (831) Change due to number of days in each quarter (days) 625 -- -- --------------------- --------------------- -------------------- TAX-EQUIVALENT NET INTEREST INCOME FOR THE PERIOD ENDED JUNE 30, 2003 $ 28,564 $ 55,370 $ 28,564 ===================== ===================== ====================
NON-INTEREST INCOME For the second quarter of 2003, non-interest income totaled $19.1 million and increased $5.3 million, or 39%, over the prior year quarter. For the six months ended June 30, 2003 non-interest income totaled $36.8 million and increased $10.3 million, or 39%, over the same period last year. Significant increases were realized in both the quarterly and year-to-date periods of 2003 in fees on mortgage loans sold and premium income from covered call option transactions. The following table presents non-interest income by category for the periods presented:
Three Months Ended June30, ------------------------------------- $ % (Dollars in thousands) 2003 2002 Change Change --------------------------------------------------------------- ------------------ ------------------ --------------- ------------ Trust and asset management fees $ 1,817 $ 1,779 38 2.1 Brokerage fees 5,185 5,652 (467) (8.3) -------------- --------------- --------------- ------------ Total wealth management fees 7,002 7,431 (429) (5.8) Fees on mortgage loans sold 4,544 1,934 2,610 135.0 Service charges on deposit accounts 867 753 114 15.1 Gain on sale of premium finance receivables 1,108 828 280 33.8 Administrative services revenue 1,068 931 137 14.7 Fees from covered call options 2,636 789 1,847 234.1 Net available-for-sale securities gains 220 62 158 254.8 Other 1,660 1,043 617 59.2 ------------------ ------------------ --------------- ------------ Total non-interest income $ 19,105 $ 13,771 5,334 38.7 ================== ================== =============== ============
- 24 -
Six Months Ended June 30, ------------------------------------- $ % (Dollars in thousands) 2003 2002 Change Change --------------------------------------------------------------- ------------------ ------------------ --------------- ------------ Trust and asset management fees $ 3,431 $ 3,188 243 7.6 Brokerage fees 9,522 8,813 709 8.0 -------------- --------------- --------------- ------------ Total wealth management fees 12,953 12,001 952 7.9 Fees on mortgage loans sold 9,142 3,951 5,191 131.4 Service charges on deposit accounts 1,722 1,491 231 15.5 Gain on sale of premium finance receivables 2,270 1,594 676 42.4 Administrative services revenue 2,159 1,753 406 23.2 Fees from covered call options 4,780 2,357 2,423 102.8 Net available-for-sale securities (losses) gains 606 (153) 759 496.1 Partial recovery of premium finance defalcation -- 1,250 (1,250) N/M Other 3,216 2,279 937 41.1 ------------------ ------------------ --------------- ------------ Total non-interest income $ 36,848 $ 26,523 10,325 38.9 ------------------ ------------------ --------------- ------------ N/M = calculation not meaningful
Trust and asset management fees represent the revenue streams generated by WHTC and WHAMC, which includes the fees generated by LFCM since its acquisition in February 2003. WHTC generates fees for assets under management, custody fees and other trust related fees and WHAMC generates fees for advisory services to individuals and institutions, municipal and tax-exempt organizations, including the management of the Wayne Hummer Mutual Funds. WHAMC was acquired effective February 1, 2002 and LFCM was acquired effective February 1, 2003 and the results of operations of each of these acquisitions are included in the Company's financials from the effective dates of the respective acquisitions. Brokerage fees include brokerage commissions, trading commissions and insurance product commissions generated by WHI and FI. WHI and FI were also acquired effective February 1, 2002 and the revenues from these entities are included in the 2002 results from that date. The slight increase in trust and asset management fees in the second quarter of 2003 of $38,000, or 2%, compared to the second quarter of 2002 is attributable to the revenue generated by LFCM in 2003. Equity market declines and weaker economic conditions negatively impact wealth management fees. Lower valuations of the equity securities under management affect the fees earned thereon and lower trading volumes affect brokerage fees. Wealth management fees increased $952,00 or 8%, for the first six months of 2003 compared to the same period last year, and increased $1.1 million, or 18%, in the second quarter of 2003 compared to the first quarter of 2003. These increases are as a result of recent gains in the overall equity market as well as the Company's efforts to grow this business. Wintrust is committed to growing the wealth management business in order to better service its customers and create a more diversified revenue stream, as evidenced by its acquisition of LFCM in February 2003. Fees on mortgage loans sold include fees from originating and selling residential real estate loans into the secondary market. For the quarter ended June 30, 2003, these fees totaled $4.5 million, an increase of $2.6 million, or 135%, from the prior year second quarter. On a year-to-date basis, fees on mortgage loans sold totaled $9.1 million and increased $5.2 million, or 131%, compared to the prior year period. Although these fees are a continuous source of revenue, they continue to be at elevated levels due to higher levels of mortgage origination volumes, particularly refinancing activity, caused by the historically low level of mortgage interest rates. Management anticipates that the levels of refinancing activity may taper off in second half of 2003, barring any further reductions in mortgage interest rates. Service charges on deposit accounts totaled $867,000 for the second quarter of 2003, an increase of $114,000, or 15%, when compared to the same quarter of 2002. On a year-to-date basis, service charges on deposit accounts totaled $1.7 million an increase of 16% compared to the same period of 2002. These increases were mainly due to a larger deposit base and a greater number of accounts at the banking subsidiaries. The majority of deposit service charges relates 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. - 25 - The administrative services revenue contributed by Tricom added $1.1 million to total non-interest income in the second quarter of 2003, an increase of $137,000 from the second quarter of 2002. This revenue comprises income from administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States. The revenue increase over the second quarter of 2002 is primarily attributable to the acquisition of a competitor's customer base in early January 2003. Tricom also earns interest and fee income from providing short-term accounts receivable financing to its client base, which is included in the net interest income category. Fees from covered call option transactions in the second quarter of 2003 were $2.6 million, representing an increase of $1.8 million compared to $789,000 in the same quarter last year. On a year-to-date basis the Company recognized $4.8 million in fees in 2003 and $2.4 million in 2002. During the first six months of 2003, call option contracts were written against $1.3 billion of underlying securities, compared to $864 million in the first six months of 2002. The Company routinely enters into these transactions with the goal of enhancing its overall return on its investment portfolio. The same security may be included in this total more than once to the extent that multiple call option contracts were written against it if the initial call option contracts were not exercised. The Company writes call options with terms of less than three months against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes. The call option transactions are designed to increase the total return associated with holding certain investment securities and do not qualify as hedges pursuant to SFAS 133. There were no outstanding call options at June 30, 2003, December 31, 2002 or June 30, 2002. As a result of continued strong loan originations of premium finance receivables, Wintrust sold premium finance receivables to an unrelated third party in the second quarter of 2003 and recognized gains of $1.1 million related to this activity on sales of $59.3 million of net receivables, compared with $828,000 of recognized gains in the second quarter of 2002 on sales of $74.1 million. On a year-to-date basis, the Company recognized gains of $2.3 million in 2003 on sales of $132.0 million, compared to $1.6 million in 2002 on sales of $136.0 million. Recognized gains related to this activity are significantly influenced by the spread between the net yield on the loans sold and the rate passed on to the purchaser. The net yield on the loans sold and the rate passed on to the purchaser typically do not react in a parallel fashion, therefore causing the spreads to vary from period to period. This spread ranged from 4.44% to 4.82% in the second quarter and first six months of 2003 compared to a range of 4.85% to 5.22% during the second quarter of 2002 and 4.85% to 5.51% in the first six months of 2002. The higher amount of gain recognized in the second quarter of 2003 compared to the prior year quarter, despite lower interest spreads, was due to lower estimated credit losses and adjustments from clean-up calls during the periods. FIFC continues to maintain an interest in the loans sold and establishes a servicing asset, interest only strip and a recourse obligation upon each sale. Recognized gains, recorded in accordance with SFAS 140, as well as the Company's retained interests in these loans are based on the Company's projection of cash flows that will be generated from the loans. The cash flow model incorporates the amounts contractually due from the customers, including an estimate of late fees, the amounts due to the purchaser of the loans, commissions paid to agents as well as estimates of the term of the loans and credit losses. Significant differences in actual cash flows and the projected cash flows can cause impairment to the servicing asset and interest only strip as well as the recourse obligation. The Company typically makes a clean up call by repurchasing the remaining loans in the pools sold after approximately 10 months from the sale date. Upon repurchase, the loans are recorded in the Company's premium finance receivables portfolio and any remaining balance of the Company's retained interest is recorded as an adjustment to the gain on sale of premium finance receivables. Clean up calls made during the second quarter of 2002 resulted in charges of approximately $355,000. The Company continuously monitors the performance of the loan pools to the projections and adjusts the assumptions in its cash flow model when warranted. In the second quarter of 2003, clean up calls resulted in increased gains of approximately $97,000. During the first six months of 2003 estimated credit losses were reduced to 0.50% from 0.75% in the first six months of 2002. The decrease in estimated credit losses was a result of a lower level of charge-offs in recent quarters in the overall premium finance receivables portfolio (see page 36 "Allowance for Loan Losses" for more detail). The average term of the loans was estimated at approximately eight months during the first six months of 2003 and 2002. The applicable discount rate used in determining gains related to this activity was unchanged from the discount rate used in 2002. At June 30, 2003, premium finance loans sold and serviced for others for which the Company retains a recourse obligation related to credit losses totaled approximately $110.7 million. The recourse obligation is considered in computing the net gain on the sale of the premium finance receivables. At June 30, 2003, the remaining estimated recourse obligation carried in other liabilities is approximately $672,000. - 26 - Credit losses, net of recoveries, incurred on loans sold are applied against the recourse obligation liability that is established at the date of sale. Credit losses, net recoveries, in the first six months of 2003 and 2002 for premium finance receivables sold and serviced for others totaled $75,000 and $10,000, respectively. Non-performing loans related to this sold portfolio at June 30, 2003 were approximately $1.2 million, or 1.05%, of the sold loans. Ultimate losses on premium finance loans are substantially less than non-performing loans for the reason noted in the "Non-performing Premium Finance Receivables" portion of the "Asset Quality" section of this report on page 38. Wintrust strives to maintain its average loan-to-deposit ratio in the range of 85-90%. During the second quarter of 2003, the ratio was approximately 87%. Consistent with Wintrust's strategy to be asset-driven and the desire to maintain our loan-to-deposit ratio in the aforementioned range, it is probable that similar sales of premium finance receivables will occur in the future. During the third quarter of 2002, the Company purchased $41.1 million of Bank Owned Life Insurance ("BOLI"). The BOLI policies were purchased to consolidate existing term life insurance contracts of executive officers and to mitigate the mortality risk associated with death benefits provided for in the executives' employment contracts. Adjustments to the cash surrender value of the BOLI policies are recorded as other non-interest income and totaled $487,000 for the second quarter of 2003 and $969,000 for the six months ended June 30, 2003. - 27 - NON-INTEREST EXPENSE Non-interest expense for the second quarter of 2003 totaled $30.5 million and increased $4.6 million, or 18%, from the second quarter 2002 total of $25.9 million. The increase in non-interest expense, particularly salaries and employee benefits, over the second quarter of 2002, reflects the continued growth and expansion of the banks with additional branches, the growth in the premium finance business, the addition of Lake Forest Capital Management in the first quarter of 2003 and the expansion of the Wayne Hummer Companies. Salaries and employee benefits totaled $18.3 million for the second quarter of 2003, an increase of $2.9 million, or 19%, as compared to the prior year's second quarter total of $15.4 million. This increase was primarily due to increases in salaries and employee benefit costs as a result of continued growth and expansion of the banking franchise, commissions associated with increased mortgage loan origination activity, normal annual increases in salaries and the employee benefit costs and to the salary and benefit costs of Lake Forest Capital Management Company. The remaining categories of non-interest expense, such as occupancy costs, equipment expense, professional fees and other increased $1.7 million, or 17%, over the prior year second quarter due primarily to the general growth and expansion of the banks and the acquisition of Lake Forest Capital Management Company. Total deposits and total loans increased 31% and 25%, respectively, from June 30, 2002 to June 30, 2003, requiring higher levels of staffing and other costs to both attract and service the larger customer base. The following table presents non-interest expense by category for the periods presented:
Three Months Ended June 30, -------------------------------------- $ % (Dollars in thousands) 2003 2002 Change Change ------------------------------------------------------------ ------------------ ------------------ --------------- ------------ Salaries and employee benefits $ 18,265 $ 15,400 2,865 18.6 Equipment 1,916 1,796 120 6.7 Occupancy, net 1,887 1,609 278 17.3 Data processing 1,026 1,042 (16) (1.5) Advertising and marketing 504 533 (29) (5.4) Professional fees 922 685 237 34.6 Amortization of other intangibles 159 100 59 59.0 Other 5,830 4,741 1,089 23.0 ------------------ ------------------ --------------- ------------ Total non-interest expense $ 30,509 $ 25,906 4,603 17.8 ================== ================== =============== ============
Six Months Ended June 30, -------------------------------------- $ % (Dollars in thousands) 2003 2002 Change Change ------------------------------------------------------------ ------------------ ------------------ --------------- ------------ Salaries and employee benefits $ 35,715 $ 28,762 6,953 24.2 Equipment 3,758 3,526 232 6.6 Occupancy, net 3,785 3,153 632 20.0 Data processing 2,079 2,056 23 1.1 Advertising and marketing 1,043 1,057 (14) (1.3) Professional fees 1,704 1,296 408 31.5 Amortization of other intangibles 298 117 181 154.7 Other 11,038 8,618 2,420 28.1 ------------------ ------------------ --------------- ------------ Total non-interest expense $ 59,420 $ 48,585 10,835 22.3 ================== ================== =============== ============
On a year-to-date basis non-interest expense totaled $59.4 million and increased $10.8 million, or 22%, over the first six months of 2002. The increase is predominantly due to a $7.0 million increase in salaries and employee benefits costs and the higher general operating costs associated with operating additional and larger banking offices. - 28 - INCOME TAXES The Company recorded income tax expense of $5.1 million for the three months ended June 30, 2003 versus $3.5 million for the same period of 2002. On a year-to-date basis, income tax expense was $9.6 million in 2003 and $7.0 million in 2002. The effective tax rate was 35.9% and 35.6 % in the second quarter of 2003 and 2002, respectively, and 35.7% on a year-to-date basis for both 2003 and 2002. OPERATING SEGMENT RESULTS As shown in Note 10 to the unaudited consolidated financial statements, the Company's operations consist of five primary segments: banking, premium finance, indirect auto, Tricom and wealth management. The Company's profitability is primarily dependent on the net interest income, provision for loan losses, non-interest income and operating expenses of its banking segment. For the second quarter of 2003, the banking segment's net interest income totaled $25.6 million, an increase of $2.9 million, or 13%, as compared to $22.8 million recorded in the same quarter of 2002. This increase was the direct result of earning asset growth, particularly in the loan portfolio. The banking segment's non-interest income totaled $9.8 million for the second quarter of 2003 and increased $6.0 million, or 154%, when compared to the prior year quarterly total of $3.9 million. Contributing to this increase were a $2.6 million increase in fees on mortgage loans sold, a $1.8 million increase in premium income from certain covered call option transactions and $487,000 from BOLI. The banking segment's after-tax profit for the quarter ended June 30, 2003, totaled $9.3 million, an increase of $2.3 million, or 33%, as compared to the prior year quarterly total of $7.0 million. On a year-to-date basis, net interest income totaled $49.3 million for the first six months of 2003, an increase of $5.8 million, or 13%, as compared to the $43.5 million recorded last year. Non-interest income increased $9.8 million to $19.2 million in the first six months of 2003. This increase was due primarily to a $5.2 million increase in fees on mortgage loans sold, a $2.4 million increase in premium income from certain covered call option transactions, a $759,000 increase in net securities gains, a $231,000 increase in service charges on deposit accounts due to a higher deposit base and a larger number of accounts at the banking subsidiaries and $969,000 from BOLI. The banking segment's after-tax profit for the six months ended June 30, 2003, totaled $17.8 million, an increase of $4.6 million, or 35%, as compared to the prior year total of $13.2 million. The banking segment accounted for the majority of the Company's total asset growth since June 30, 2002, increasing by $927 million. Net interest income from the premium finance segment totaled $11.2 million for the quarter ended June 30, 2003, an increase of $3.2 million, or 39%, over the $8.1 million recorded in the same quarter of 2002. This improvement was due to an increase in average premium finance receivables of approximately 36%. Non-interest income (gains from the sale of premium finance receivables) for the three months ended June 30, 2003 totaled $1.1 million, compared to $827,000 in the same quarter of 2002. After-tax profit for the premium finance segment totaled $5.2 million for the three-month period ended June 30, 2003, an increase of $1.9 million, or 58%, over the same period of 2002. This increase was due to higher levels of premium finance receivables resulting from market increases in insurance premiums charged by insurance carriers and continued targeted marketing programs. On a year-to-date basis, net interest income totaled $20.5 million for the first six months of 2003, an increase of $4.3 million, or 27%, as compared to the $16.2 million recorded last year. Non-interest income decreased $573,000 to $2.3 million in the first six months of 2003. This decrease reflects an increase of $676,000 on gains from the sale of premium finance receivables offset by $1.25 million included in last year's first quarter results from a partial settlement related to a fraud charge recorded in 2000. The premium finance segment's after-tax profit for the six months ended June 30, 2003, totaled $9.4 million, an increase of $2.0 million, or 27%, as compared to the prior year total of $7.4 million. The indirect auto segment recorded $1.8 million of net interest income for the second quarter of 2003, a decrease of $250,000, or 12%, as compared to the 2002 quarterly total. Average outstanding loans decreased 8% in the second quarter of 2003, compared to the same quarter of 2002. After-tax segment profit totaled $573,000 for the three-month period ended June 30, 2003, a decrease of $237,000, or 29%, when compared to the same period of 2002. The decrease in this segment's profitability was caused mainly by the lower volume of outstanding loans compared to the second quarter of 2002, contributing to the lower levels of net interest income. On a year-to-date basis, net interest income totaled $3.6 million for the first six months of 2003, a decrease of $416,000, or 10%, as compared to the $4.0 million recorded last - 29 - year. The indirect auto segment's after-tax profit for the six months ended June 30, 2003 totaled $1.2 million, a decrease of $308,000, or 20%, as compared to the prior year total of $1.5 million. Consistent with the after-tax profit contribution in the second quarter of 2003, year-to-date profitability was negatively impacted by lower volume of outstanding loans compared to the first six months of the prior year. Due to the impact of the current economic and competitive environment surrounding this type of lending, management continues to be de-emphasize, in relation to other loan categories, growth in the indirect automobile loan portfolio. The Tricom segment data reflects the net interest income, non-interest income and segment profit associated with short-term accounts receivable financing and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, that Tricom provides to its clients in the temporary staffing industry. The Tricom segment reported net interest income of $910,000 for the second quarter of 2003, a decrease of $175,000, or 16%, compared to $1.1 million reported in the same period of 2002. Non-interest income was $1.1 million in the second quarter of 2003, an increase of $138,000, or 15%, compared to $933,000 in the second quarter of 2002. The increase in non-interest income in the second quarter of 2003 is primarily attributable to the acquisition of a competitor's customer base in early January 2003. The segment's after-tax profit was $392,000 in the second quarter of 2003, a decrease of $94,000, or 19%, as compared to the prior year second quarter of $486,000. On a year-to-date basis, net interest income totaled $1.8 million for the first six months of 2003, a decrease of $234,000, or 12%, as compared to the $2.0 million recorded in the first six months of 2002. Non-interest income increased $408,000 to $2.2 million in the first six months of 2003. The Tricom segment's after-tax profit for the six months ended June 30, 2003, totaled $789,000, an increase of $32,000, or 4%, as compared to $757,000 in the first six months of 2002. The wealth management segment reported net interest income of $1.7 million for the second quarter of 2003 compared to $722,000 for the same period last year. The rise in net interest income reported is due to the net interest allocated to the segment from non-interest bearing and interest-bearing account balances on deposit at the Banks offsetting a decrease in the segment's earning assets, primarily the interest-bearing brokerage customer receivables at WHI. This segment recorded non-interest income of $7.2 million for the second quarter of 2003 as compared to $7.6 for the same quarter of 2002, a decrease of $416,000. The substantial decline in the market values of securities managed and client trading activity in the last 12 months more than offset the impact of the addition of Lake Forest Capital Management Company and new business development. However, non-interest income from the wealth management segment increased $1.1 million when compared to the first quarter of 2003 as a result of recent gains in the overall equity markets as well as the Company's efforts to grow this business. The wealth management segment recorded a $164,000 after-tax gain for the three-month period ended June 30, 2003, as compared to an after-tax loss of $87,000 for the same period of 2002. On a year-to-date basis, net interest income totaled $3.3 million for the first six months of 2003, an increase of $2.0 million, or 152%, as compared to the $1.3 million recorded last year. This increase, on a year-to-date basis, is consistent with the net interest income contribution in the second quarter of 2003 compared to the prior year. Non-interest income increased $1.1 million to $13.4 million in the first six months of 2003. The increase is attributable to higher levels of client trading revenues and the contribution from Lake Forest Capital Management Company. This segment's after-tax loss for the six months ended June 30, 2003, totaled $117,000, an improvement of $112,000, or 49%, as compared to the prior year loss of $229,000. FINANCIAL CONDITION Total assets were $4.13 billion at June 30, 2003, reflecting an increase of $913 million, or 28%, over $3.22 billion at June 30, 2002. Total funding, which includes deposits, all notes and advances, as well as the Long-term Debt-Trust Preferred Securities, was $3.77 billion at June 30, 2003, and increased $840 million, or 29%, over the June 30, 2002 reported amounts. The increased funding was primarily utilized to fund increases in the loan portfolio of $587 million since June 30, 2002 and provide liquidity to the Company on a temporary basis. See Notes 4-8 of the Company's unaudited consolidated financial statements on pages 7-10 for additional period-end detail. - 30 - INTEREST-EARNING ASSETS The following table sets forth, by category, the composition of average earning asset balances and the relative percentage of total average earning assets for the periods presented:
THREE MONTHS ENDED Three Months Ended Three Months Ended JUNE 30, 2003 March 31, 2003 June 30, 2002 ---------------------------- ------------------------------------------------------ (Dollars in thousands) BALANCE PERCENT Balance Percent Balance Percent -------------------------------------------------------------------------- ------------------------------------------------------ Loans: Commercial and commercial real estate $ 1,381,956 38 % $ 1,283,931 37 % $ 1,059,413 38 % Home equity 405,663 11 378,320 11 304,674 11 Residential real estate (1) 228,040 6 234,737 7 161,663 6 Premium finance receivables 589,373 16 544,114 15 432,603 16 Indirect auto loans 169,066 4 174,387 5 183,209 6 Tricom finance receivables 24,786 1 22,285 1 18,436 1 Consumer and other loans 57,844 2 57,372 2 58,970 2 ---------------------------- ------------------------------------------------------ Total loans, net of unearned income $ 2,856,728 78 % $ 2,695,146 78 % $ 2,218,968 80 % Liquidity management assets (2) 756,598 21 715,338 21 484,483 17 Other earning assets (3) 40,162 1 41,221 1 71,100 3 ---------------------------- ------------------------------------------------------ Total average earning assets $ 3,653,488 100 % $ 3,451,705 100 % $ 2,774,551 100 % ============================ ====================================================== Total average assets $ 3,971,542 $ 3,757,564 $ 2,992,133 ================ ================ =============== Total average earning assets to total average assets 92 % 92 % 93 % ============ ============ =========== ------------------------------------------------------------ (1) Includes mortgages held for sale (2) Liquidity management assets include available-for-sale securities, interest earning deposits with banks and federal funds sold and securities purchased under resale agreements. (3) Other earning assets include brokerage customer receivables and trading account securities.
Average earning assets for the second quarter of 2003, increased $879 million, or 32%, compared to the second quarter of 2002. The ratio of average earning assets as a percent of total average assets remained consistent at approximately 92% - 93% as of each reporting period date shown in the above table. Loan growth continued to fuel the Company's earning asset growth in the second quarter of 2003. Total average loans increased by $162 million, or 24%, during the second quarter of 2003. Commercial and commercial real estate loans grew on average by 31%, home equity by 29% and premium finance receivables by 33%, all on an annualized basis, over the first quarter of 2003. Other earning assets in the table include brokerage customer receivables and trading account securities from the Wayne Hummer Companies. In the normal course of business, WHI activities involve the execution, settlement, and financing of various securities transactions. These activities may expose WHI to risk in the event the customer is unable to fulfill its contractual obligations. WHI maintains cash and margin accounts for its customers generally located in the Chicago, Illinois and Appleton, Wisconsin metropolitan areas of the Midwest. WHI's customer securities activities are transacted on either a cash or margin basis. In margin transactions, WHI extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in customer's accounts. In connection with these activities, WHI executes and clears customer transactions relating to the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to individual exchange regulations. Such transactions may expose WHI to off-balance-sheet risk, particularly in volatile trading markets, in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy its obligations, WHI may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations. WHI seeks to control the risks associated with its customers' activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. WHI monitors required margin levels daily and, pursuant to such guidelines, requires the customer to deposit additional collateral or to reduce positions when necessary. - 31 - WHI's customer financing and securities settlement activities require WHI to pledge customer securities as collateral in support of various secured financing sources such as bank loans and securities loaned. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, WHI may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its customer obligations. WHI attempts to control this risk by monitoring the market value of securities pledged on a daily basis and by requiring adjustments of collateral levels in the event of excess market exposure. In addition, WHI establishes credit limits for such activities and monitors compliance on a daily basis. The following table sets forth, by category, the composition of average earning asset balances and the relative percentage of total average earning assets for the periods presented:
SIX MONTHS ENDED Six Months Ended JUNE 30, 2003 June 30, 2002 -------------------------------- ------------------------------- (Dollars in thousands) BALANCE PERCENT Balance Percent ------------------------------------------------------- ----------------- ------------- ----------------- ------------- Loans: Commercial and commercial real estate $ 1,333,830 37 % $ 1,021,374 38 % Home equity 392,177 11 289,677 11 Residential real estate (1) 232,534 6 165,417 6 Premium finance receivables 566,942 16 421,224 15 Indirect auto loans 171,506 5 184,174 7 Tricom finance receivables 23,536 1 18,295 1 Other loans 57,433 2 62,432 2 ----------------- ------------- ----------------- ------------- Total loans, net of unearned income $ 2,777,958 78 % $ 2,162,593 80 % Liquidity management assets (2) 736,041 21 468,103 17 Other earning assets (3) 40,571 1 58,082 3 ----------------- ------------- ----------------- ------------- Total average earning assets $ 3,554,570 100 % $ 2,688,778 100 % ================= ============= ================= ============= Total average assets $ 3,866,918 $ 2,897,465 ================= ================= Total average earning assets to total average assets 92 % 93 % ============= ============= ------------------------------------------------------------ (1) Includes mortgages held for sale. (2) Liquidity management assets include available-for-sale securities, interest earning deposits with banks and federal funds sold and securities purchased under resale agreements. (3) Other earning assets include brokerage customer receivables and trading account securities.
Average earning assets for the six months ended June 30, 2003 increased $866 million, or 32%, over the first six months of 2002. The ratio of year-to-date total average earning assets as a percent of year-to date total average assets remained stable at approximately 92% to 93% for each reporting period shown in the above table, consistent with this ratio on a quarterly basis. Loan growth fueled the Company's year-to-date total earning asset growth in 2003. Total average loans increased by $615 million in the first six months of 2003 compared to the same period of 2002. Average commercial and commercial real estate loans increased 31%, home equity loans 35% and premium finance receivables by 35% in the first six months of 2003 compared to the first six months of 2002. - 32 - DEPOSITS The following table sets forth, by category, the composition of average deposit balances and the relative percentage of total average deposits for the periods presented:
THREE MONTHS ENDED Three Months Ended Three Months Ended JUNE 30, 2003 March 31, 2003 June 30, 2002 --------------------------------------------------------- ---------------------------- (Dollars in thousands) BALANCE PERCENT Balance Percent Balance Percent ------------------------------------------ --------------------------------------------------------- ---------------------------- Non-interest bearing $ 312,096 9 % $ 298,977 9 % $ 241,180 10 % NOW 360,294 11 345,299 11 286,013 12 NOW-Brokerage customer deposits 257,709 8 243,973 8 14,631 1 Money market 422,351 13 406,229 13 364,754 15 Savings 157,775 5 151,218 5 130,247 5 Time certificate of deposits 1,789,970 54 1,704,924 54 1,407,602 57 --------------------------------------------------------- ---------------------------- Total average deposits $ 3,300,195 100 % $ 3,150,620 100 % $ 2,444,427 100 % ========================================================= ============================
Total average deposits for the second quarter of 2003 were $3.3 billion, an increase of $856 million, or 35%, over the second quarter of 2002 and an increase of $150 million, or 19% on an annualized basis, over the first quarter of 2003. The percentage mix of average deposits for the second quarter of 2003 was relatively consistent with the deposit mix as of the prior period dates presented, with the exception of the NOW-Brokerage customer deposits, which was first introduced in the product line during the second quarter of 2002. As previously disclosed, following its acquisition of the Wayne Hummer Companies in February 2002, Wintrust undertook efforts to migrate funds from the money market mutual fund balances managed by Wayne Hummer Asset Management Company into deposit accounts of the Wintrust Banks ("NOW-Brokerage customer deposits" in table above). Consistent with reasonable interest rate risk parameters, the funds will generally be invested in excess loan production of the Banks as well as other investments suitable for banks. As of June 30, 2003, $261.5 million had migrated into an insured bank deposit product at the Banks. The migration of additional funds to the Banks is subject to the desire of the customers to make the transition of their funds into FDIC insured bank accounts, capital capacity of the Company and the availability of suitable investments in which to deploy the funds. OTHER FUNDING SOURCES Although deposits are the Company's main source of funding its interest-earning asset growth, the Company's ability to manage the types and terms of deposits is somewhat limited by customer preferences and market competition. As a result, the Company uses several other funding sources to support its interest-earning asset growth. These sources include short-term borrowings, notes payable, FHLB advances, subordinated debt, trust preferred securities, the issuance of equity securities as well as the retention of earnings. Average total interest-bearing funding, from sources other than deposits and including trust preferred securities, was $344 million in the second quarter of 2003 and increased by $36 million compared to the first quarter of 2003 average balance of $308 million. These funding sources increased by $24 million compared to the prior year second quarter average total balance of $321 million. - 33 - The following table sets forth, by category, the composition of average other funding sources for the periods presented:
Three Months Ended --------------------------------------------------------- JUNE 30, March 31, June 30, (In thousands) 2003 2003 2002 ----------------------------------------------------------------------- --------------------------------------- ----------------- Notes payable $ 30,994 $ 42,837 $ 66,323 Federal Home Loan Bank advances 140,000 140,000 104,938 Federal funds purchased 17,545 2,162 24,386 Securities sold under repurchase agreements 21,666 23,623 19,230 Wayne Hummer Companies borrowings 17,328 18,397 49,648 Other 3,900 5,000 5,000 Subordinated notes 42,033 25,000 -- Long-term Debt - Trust Preferred Securities 70,830 50,894 51,050 --------------------------------------- ----------------- Total average other funding sources $ 344,296 $ 307,913 $ 320,575 ======================================= =================
During the second quarter of 2003, the Company borrowed into an additional $25 million under a subordinated note agreement with an unaffiliated bank, resulting in $50 million of subordinated notes outstanding as of June 30, 2003. See Note 7 on page 9 for further information on this note. In addition, during the second quarter of 2003, the Company issued $25 million of additional Trust Preferred Securities. See Note 8 on page 9 for further information on these securities. During 2001, Wintrust initiated borrowing from the Federal Home Loan Bank ("FHLB"). The Company initially borrowed from the FHLB in the third and fourth quarters of 2001 and borrowed an additional $50 million in the second quarter of 2002 as part of the Company's interest rate risk management. The Wayne Hummer Companies borrowings consist of demand obligations to third party banks primarily collateralized with customer assets to finance securities purchased by customers on margin and securities owned by WHI and demand obligations to brokers and clearing organizations. The Wayne Hummer Companies borrowings are at rates approximating fed funds. The lower average balances in the first and second quarter of 2003, as compared to the second quarter of 2002, are a result of lower balances required to finance securities purchased by customers on margin. Other represents the Company's interest-bearing deferred portion of the purchase price of the Wayne Hummer Companies. - 34 - SHAREHOLDERS' EQUITY Total shareholders' equity was $249.4 million at June 30, 2003 and increased $43.4 million since June 30, 2002 and $22.4 million since the end of 2002. The increase from year-end was the result of the Company's issuance of stock and warrants valued at approximately $3.5 million in connection with the acquisition of Lake Forest Capital Management, net income of $17.3 million, $2.7 million from the issuance of stock pursuant to various stock compensation plans and $359,000 of other comprehensive income, offset by $1.4 million of cash dividends paid on the Company's common stock. The annualized return on average equity for the six months ended June 30, 2003 was 14.74%, compared to 15.85% for the first six months of 2002. The following tables reflect various consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve Bank for a bank holding company:
JUNE 30, December 31, June 30, 2003 2002 2002 -------------------- ------------------- ---------------- Leverage ratio 7.5 % 7.0 % 7.8 % Tier 1 risk-based capital ratio 8.4 8.0 8.6 Total risk-based capital ratio 10.5 9.4 9.2 Dividend payout ratio 8.5 7.5 7.7 ------------------------------------------------------------------- ------------------------------------------------------------- Minimum Capital Adequately Well Requirements Capitalized Capitalized -------------------- ------------------- ---------------- Leverage ratio 3.0 % 4.0 % 5.0 % Tier 1 risk-based capital ratio 4.0 4.0 6.0 Total risk-based capital ratio 8.0 8.0 10.0 ------------------------------------------------------------------- -------------------------------------------------------------
The Company attempts to maintain an efficient capital structure in order to provide higher returns on equity. Additional capital is required from time to time, however, to support the growth of the organization. The issuance of additional common stock, additional trust preferred securities or subordinated debt are the primary forms of capital that are considered as the Company evaluates its capital position. As previously noted, the Company borrowed an additional $25 million under a subordinated debt agreement with an unaffiliated bank in the second quarter of 2003. The subordinated notes qualify as Tier II (supplemental) regulatory capital. In addition during the second quarter of 2003, the Company issued $25 million of trust preferred securities that qualify as Tier II (supplemental) regulatory capital and subject to certain regulatory capital limitations, qualify as Tier I (core) regulatory capital. The Company's goal is to support the continued growth of the Company and to maintain its capital structure at the well-capitalized level in accordance with regulatory guidelines. On January 23, 2003, Wintrust declared a semi-annual cash dividend of $0.08 per common share. Subsequent to the end of the second quarter, the Company declared a semi-annual cash dividend of $0.08 per common share, payable August 19, 2003 to shareholders of record on August 5, 2003. The 2003 semi-annual dividends represent a 33% increase over the semi-annual dividend of $0.06 paid in 2002. - 35 - ASSET QUALITY ALLOWANCE FOR LOAN LOSSES A reconciliation of the activity in the balance of the allowance for loan losses for the periods presented is shown below:
Three Months Ended Six Months Ended June 30, June 30, -------------------------------------- ------------------------------------- (Dollars in thousands) 2003 2002 2003 2002 --------------------------------------------------------------------------------------------- ------------------------------------- BALANCE AT BEGINNING OF PERIOD $ 19,773 $ 14,697 $ 18,390 $ 13,686 PROVISION FOR LOAN LOSSES 2,852 2,483 5,493 4,831 CHARGE-OFFS: Commercial and commercial real estate loans 366 178 811 403 Home equity loans -- -- -- -- Residential real estate loans -- -- -- -- Consumer and other loans 27 73 130 148 Premium finance receivables 817 977 1,490 1,844 Indirect automobile loans 314 187 530 475 Tricom finance receivables -- 9 -- 9 ---------------- --------------- ----------------- ---------------- Total charge-offs 1,524 1,424 2,961 2,879 ================ =============== ================= ================ RECOVERIES: Commercial and commercial real estate loans 95 115 138 135 Home equity loans -- -- -- -- Residential real estate loans 13 -- 13 -- Consumer and other loans 1 12 24 12 Premium finance receivables 58 66 125 129 Indirect automobile loans 42 40 84 70 Tricom finance receivables -- 20 4 25 ---------------- --------------- ----------------- ---------------- Total recoveries 209 253 388 371 ---------------- --------------- ----------------- ---------------- NET CHARGE-OFFS (1,315) (1,171) (2,573) (2,508) ---------------- --------------- ----------------- ---------------- BALANCE AT JUNE 30 $ 21,310 $ 16,009 $ 21,310 $ 16,009 ================ =============== ================= ================ Annualized net charge-offs as a percentage of average: Commercial and commercial real estate loans 0.08 % 0.02 % 0.10 % 0.05 % Home equity loans -- -- -- -- Residential real estate loans (0.02) -- (0.01) -- Consumer and other loans 0.18 0.41 0.37 0.44 Premium finance receivables 0.52 0.84 0.49 0.82 Indirect automobile loans 0.65 0.32 0.52 0.44 Tricom finance receivables -- (0.24) (0.03) (0.18) ----------------- ---------------- ------------------ ---------------- Total loans 0.18 % 0.21 % 0.19 % 0.23 % ================= ================ ================== ================ Net charge-offs as a percentage of the provision for loan losses 46.11 % 47.16 % 46.84 % 51.91 % ----------------- ---------------- ------------------ ---------------- Loans at June 30 $ 2,896,148 $ 2,308,945 ================== ================ Allowance as a percentage of loans at period-end 0.74 % 0.69 % ================== ================
Management believes that the loan portfolio is well diversified and well secured, without undue concentration in any specific risk area. Loan quality is continually monitored by management and is reviewed by the Banks' Boards of Directors and their Credit Committees on a monthly basis. Independent external review of the loan portfolio is provided by the examinations conducted by regulatory authorities and an independent loan review performed by an entity engaged by the Board of Directors. Management evaluates on a quarterly basis a variety of factors, including actual charge-offs during the period, historical loss experience, delinquent and other potential problem loans, and economic conditions and trends in the market area in assessing the adequacy of the allowance for loan losses. - 36 - The allowance for loan losses is maintained at a level believed adequate by management to cover losses inherent in the portfolio and is based on an assessment of individual problem loans, actual and anticipated loss experience and other pertinent factors. The allowance for loan losses consists of an allocated and unallocated component. The Company reviews potential problem loans on a case-by-case basis to allocate a specific dollar amount of reserves, whereas all other loans are reserved for based on assigned reserve percentages evaluated by loan groupings. The loan groupings utilized by the Company are commercial, commercial real estate, residential real estate, home equity, premium finance receivables, indirect automobile, Tricom finance receivables and consumer. The reserve percentages applied to these loan groups attempts to account for the inherent risk in the portfolio based upon various factors including industry concentration, geographical concentrations, local and national economic indicators, levels of delinquencies, historical loss experience, changes in trends in risk ratings assigned to loans, changes in underwriting standards and other pertinent factors. The unallocated portion of the allowance for loan losses reflects management's estimate of probable inherent but undetected losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. Management believes the unallocated portion of the allowance for loan losses is necessary due to the imprecision inherent in estimating expected future credit losses. The amount of future additions to the allowance for 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. (See "Past Due Loans and Non-performing Assets" below). The provision for loan losses totaled $2.9 million for the second quarter of 2003, an increase of $369,000 from a year earlier. For the quarter ended June 30, 2003 net charge-offs totaled $1.3 million, up from the $1.2 million of net charge-offs recorded in the same period of 2002. On a ratio basis, annualized net charge-offs as a percentage of average loans decreased to 0.18% in the second quarter of 2003 from 0.21% in the same period in 2002. On a year-to-date basis the provision for loan losses totaled $5.5 million in 2003, an increase of $662,000 over the same period last year. Net charge-offs for the first six months of 2003 were $2.6 million, essentially unchanged from the net charge-offs recorded in the same period last year. On a ratio basis, annualized net charge-offs as a percentage of average loans decreased to 0.19% for the first six months of 2003 from 0.23% in the first six months of 2002. The allowance for loan losses increased $2.9 million from December 31, 2002 to June 30, 2003. This increase relates to growth in the commercial and commercial real estate portfolio during this period of $138 million, or 21% on an annualized basis, and growth in the premium finance receivables portfolio of $164 million, or 72% on an annualized basis, as well as an increase in the performing loans on the Company's Watch List from $34.2 million at December 31, 2002 to $37.6 million at June 30, 2003. The allowance for loan losses as a percentage of total loans was 0.74% at June 30, 2003 compared to 0.69% at June 30, 2002. The commercial and commercial real estate portfolios and the premium finance portfolio have traditionally experienced the highest levels of charge-offs by the Company, along with losses related to the indirect automobile portfolio. The level of the allowance for loan losses was not impacted significantly by changes in the amount or credit risk associated with the indirect automobile loan portfolio as that portfolio has declined by $11 million, or 12% on an annualized basis, since December 31, 2002, and improvements have been realized in the delinquencies, underwriting standards and collection routines. - 37 - PAST DUE LOANS AND NON-PERFORMING ASSETS The following table sets forth the Company's non-performing assets as of the dates presented:
JUNE 30, March 31, December 31, June 30, (Dollars in thousands) 2003 2003 2002 2002 ------------------------------------------------------------------ ----------------- --------------- ----------------- ------------- PAST DUE GREATER THAN 90 DAYS AND STILL ACCRUING: Residential real estate and home equity $ 61 $ 13 $ 32 $ 16 Commercial, consumer and other 2,829 2,053 3,047 1,055 Premium finance receivables 2,673 1,574 2,198 2,141 Indirect automobile loans 324 399 423 340 Tricom finance receivables -- -- -- -- ----------------- --------------- ----------------- ------------- Total past due greater than 90 days and still accruing 5,887 4,039 5,700 3,552 ----------------- --------------- ----------------- ------------- NON-ACCRUAL LOANS: Residential real estate and home equity 415 375 711 401 Commercial, consumer and other 2,543 2,053 1,132 1,528 Premium finance receivables 4,575 5,694 4,725 5,417 Indirect automobile loans 196 246 254 163 Tricom finance receivables 8 14 20 104 ----------------- --------------- ----------------- ------------- Total non-accrual 7,737 8,382 6,842 7,613 ----------------- --------------- ----------------- ------------- TOTAL NON-PERFORMING LOANS: Residential real estate and home equity 476 388 743 417 Commercial, consumer and other 5,372 4,106 4,179 2,583 Premium finance receivables 7,248 7,268 6,923 7,558 Indirect automobile loans 520 645 677 503 Tricom finance receivables 8 14 20 104 ----------------- --------------- ----------------- ------------- Total non-performing loans 13,624 12,421 12,542 11,165 ----------------- --------------- ----------------- ------------- OTHER REAL ESTATE OWNED 921 984 76 756 ----------------- --------------- ----------------- ------------- TOTAL NON-PERFORMING ASSETS $ 14,545 $ 13,405 $ 12,618 $ 11,921 ================= =============== ================= ============= Total non-performing loans by category as a percent of its own respective category: Residential real estate and home equity 0.09 % 0.07 % 0.14 % 0.09 % Commercial, consumer and other 0.35 0.30 0.30 0.22 Premium finance receivables 1.16 1.37 1.50 1.64 Indirect automobile loans 0.31 0.38 0.38 0.27 Tricom finance receivables 0.03 0.06 0.10 % 0.54 ----------------- --------------- ----------------- ------------- Total non-performing loans 0.47 % 0.47 % 0.49 % 0.48 % ================= =============== ================= ============= Total non-performing assets as a percentage of total assets 0.35 % 0.34 % 0.34 % 0.37 % ================= =============== ================= ============= Allowance for loan losses as a percentage of non-performing loans 156.42 % 159.19 % 146.63 % 143.39 % ================= =============== ================= =============
The information in the table should be read in conjunction with the detailed discussion following the table. - 38 - Non-performing Residential Real Estate, Commercial, Consumer and Other Loans Total non-performing loans for Wintrust's residential real estate, commercial, consumer and other loans were $5.8 million compared to the $4.5 million reported at March 31, 2003 and $4.9 million reported at December 31, 2002. These loans consist primarily of a small number of commercial, residential real estate and home equity loans, which management believes are well secured and in the process of collection. The small number of such non-performing loans allows management to monitor the status of these credits and work with the borrowers to resolve these problems effectively. On July 1, 2003 a single credit in the amount of $1.9 million classified as past due greater than 90 days and still accruing at June 30, 2003 (included in the $5.8 million of non-performing residential real estate, commercial, consumer and other loans) was brought into a performing status by the customer. Non-performing Premium Finance Receivables The table below presents the level of non-performing premium finance receivables as of June 30, 2002 and 2002, and the amount of net charge-offs for the six months then ended.
(Dollars in thousands) JUNE 30, 2003 June 30, 2002 ---------------------------------------------------------------------------------- ---------------------- --------------------- Non-performing premium finance receivables $ 7,248 $ 7,558 - as a percent of premium finance receivables 1.16% 1.64% Net charge-offs of premium finance receivables $ 1,365 $ 1,715 - annualized as a percent of premium finance receivables 0.49% 0.82% ---------------------------------------------------------------------------------- --------------------- ----------------------
Management continues to see progress in this portfolio and continues to expect the level of non-performing loans related to this portfolio to remain at relatively low levels. 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 Wintrust 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. Non-performing Indirect Automobile Loans Total non-performing indirect automobile loans were $520,000 at June 30, 2003, compared to $677,000 at December 31, 2002 and $503,000 at June 30, 2002. The ratio of these non-performing loans to total indirect automobile loans was 0.31% of total indirect automobile loans at June 30, 2003 compared to 0.38% at December 31, 2002 and 0.27% at June 30, 2002. As noted in the Allowance for Loan Losses table, net charge-offs as a percent of total indirect automobile loans were 0.52% in the first six months of 2003 compared to 0.44% in the same period in 2002. The level of non-performing and net charge-offs of indirect automobile loans continues to be below standard industry ratios for this type of lending. Due to the impact of the current economic and competitive environment surrounding this type of lending, management continues to de-emphasize, in relation to other loan categories, growth in the indirect automobile loan portfolio. Indirect automobile loans at June 30, 2003 were $167 million, down from $178 million at December 31, 2002 and $184 million at June 30, 2002. - 39 - Credit Quality Review Procedures The Company utilizes a loan rating system to assign risk to loans and utilizes that risk rating system to assist in developing an internal problem loan identification system ("Watch List"). The Watch List is used to monitor the credits as well as a means of reporting non-performing and potential problem loans. At each scheduled meeting of the Boards of Directors of the Banks and the Wintrust Board, a Watch List is presented, showing all loans that are non-performing and loans that may warrant additional monitoring. Accordingly, 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 Watch List, which exhibit a higher than normal credit risk. These credits are reviewed individually by management to determine whether any specific reserve amount should be allocated for each respective credit. However, these loans are still performing and, accordingly, are not included in non-performing loans. Management's philosophy is to be proactive and conservative in assigning risk ratings to loans and identifying loans to be on the Watch List. The principal amount of loans on the Company's Watch List (exclusive of those loans reported as non-performing) as of June 30, 2003, December 31, 2002 and June 30, 2002 were $37.6 million, $34.3 million and $46.6 million, respectively. We believe these loans are performing and, accordingly, do not cause management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. LIQUIDITY Wintrust manages the liquidity position of its banking operations to ensure that sufficient funds are available to meet customers' needs for loans and deposit withdrawals. The liquidity to meet the demand is provided by maturing assets, sales of premium finance receivables, liquid assets that can be converted to cash, and the ability to attract funds from external sources. Liquid assets refer to federal funds sold and to marketable, unpledged securities, which can be quickly sold without material loss of principal. Please refer to the Interest-Earning Assets, Deposits, Other Funding Sources and Shareholders' Equity discussions of this report for additional information regarding the Company's liquidity position. 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. See "Quantitative and Qualitative Disclosure About Market Risks" beginning on page 42. - 40 - FORWARD-LOOKING STATEMENTS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to anticipated improvements in financial performance and management's long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial 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 the acquisition of banks, specialty finance or fee-related 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 wealth management services through the Company's acquisition of the Wayne Hummer Companies in 2002 and lake Forest Capital Management in 2003 will depend on the successful integration of these businesses. o The Company's success to date has been and will continue to be strongly influenced by its ability to attract and retain senior management experienced in banking and financial services. o Although management believes the allowance for loan losses is adequate to absorb losses inherent in the existing portfolio of loans and leases, there can be no assurance that the allowance will prove sufficient to cover actual 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 may not be able to successfully adapt to technological changes to compete effectively in the marketplace. o Future events may cause slower than anticipated development and growth of the Tricom business should the temporary staffing industry experience continued slowness. 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 the pricing of loans and deposits and may affect the Company's ability to successfully pursue acquisition and expansion strategies. o The conditions in the financial services markets and economic conditions generally, as well as unforeseen future events surrounding the wealth management business, including competition and related pricing of brokerage, trust and asset management products. o Unexpected difficulties or unanticipated developments related to the pending acquisitions of Advantage National Bancorp, Inc. and Village Bancorp, Inc. - 41 - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS As a continuing part of its financial strategy, the Company attempts to manage the impact of fluctuations in market interest rates on net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Asset-liability management policies are established and monitored by management in conjunction with the boards of directors of the Banks, subject to general oversight by the Company's Board of Directors. The policy establishes guidelines for acceptable limits on the sensitivity of the market value of assets and liabilities to changes in interest rates. Interest rate risk arises when the maturity or repricing periods and interest rate indices of the interest earning assets, interest bearing liabilities, and derivative financial instruments are different. It is the 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 derivative 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 simulation analysis of potential interest rate environments. If a potential adverse swing in net interest margin and/or net income is identified, management then would take appropriate actions with its asset-liability structure to counter these potentially adverse situations. Please refer to the "Net Interest Income" section of this report for further discussion of the net interest margin. Since the Company's primary source of interest bearing liabilities is customer deposits, the Company's ability to manage the types and terms of such deposits may be somewhat limited by customer preferences and local competition in the market areas in which the Company operates. The rates, terms and interest rate indices of the Company's interest earning assets result primarily from the Company's strategy of investing in loans and short-term securities that permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving an acceptable interest rate spread. The Company's exposure to interest rate risk is reviewed on a regular basis by management and the boards of directors of the Banks and the Company. The objective is to measure the effect on net income and to adjust balance sheet and derivative financial instruments to minimize the inherent risk while at the same time maximize net interest income. Tools used by management include a standard gap analysis and a rate simulation model whereby changes in net interest income are measured in the event of various changes in interest rate indices. An institution with more assets than liabilities repricing over a given time frame is considered asset sensitive and will generally benefit from rising rates, and conversely, a higher level of repricing liabilities versus assets would be beneficial in a declining rate environment. Standard gap analysis starts with contractual repricing information for assets, liabilities and derivative financial instruments. These items are then combined with repricing estimations for administered rate (NOW, savings and money market accounts) and non-rate related products (demand deposit accounts, other assets, other liabilities). These estimations recognize the relative insensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experiences. Also included are estimates for those items that are likely to materially change their payment structures in different rate environments, including residential loan products, certain commercial and commercial real estate loans and certain mortgage-related securities. Estimates for these sensitivities are based on industry assessments and are substantially driven by the differential between the contractual coupon of the item and current market rates for similar products. - 42 - The following table illustrates the Company's estimated interest rate sensitivity and periodic and cumulative gap positions as of June 30, 2003:
------------------------------------------------------------------------------------------------------------------------------------ Time to Maturity or Repricing ------------------------------------------------------------------ 0-90 91-365 1-5 Over 5 (Dollars in thousands) Days Days Years Years Total ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: Federal funds sold and securities purchased under resale agreements $ 223,142 $ -- $ -- $ -- $ 223,142 Interest-bearing deposits with banks 5,748 -- -- -- 5,748 Available-for-sale securities 193,748 99,804 110,363 104,374 508,289 ------------------------------------------------------------------ Total liquidity management assets 422,638 99,804 110,363 104,374 737,179 Loans, net of unearned income (1) 1,923,278 531,609 476,287 49,617 2,980,791 Other earning assets 39,370 -- -- -- 39,370 ------------------------------------------------------------------ Total earning assets 2,385,286 631,413 586,650 153,991 3,757,340 Other non-earning assets -- -- -- 375,054 375,054 ------------------------------------------------------------------ Total assets (RSA) $ 2,385,286 $631,413 $586,650 $ 529,045 $ 4,132,394 ------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits (2) $ 1,681,823 $692,405 $716,963 $ 11,651 $ 3,102,842 Federal Home Loan Bank advances -- -- 121,000 19,000 140,000 Notes payable and other borrowings 83,439 -- -- -- 83,439 Subordinated notes 50,000 -- -- -- 50,000 Long-term Debt - Trust Preferred Securities 25,774 -- -- 51,042 76,816 ------------------------------------------------------------------ Total interest-bearing liabilities 1,841,036 692,405 837,963 81,693 3,453,097 Demand deposits -- -- -- 317,104 317,104 Other liabilities -- -- -- 112,794 112,794 Shareholders' equity -- -- -- 249,399 249,399 EFFECT OF DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swaps (Company pays fixed, receives floating) (50,000) 25,000 -- 25,000 -- ------------------------------------------------------------------ Total liabilities and shareholders' equity including effect of derivative financial instruments (RSL) $ 1,791,036 $717,405 $837,963 $ 785,990 $ 4,132,394 ------------------------------------------------------------------ Repricing gap (RSA - RSL) $ 594,250 $ (85,992) $ (251,313) $(256,945) Cumulative repricing gap $ 594,250 $508,258 $256,945 $ -- Cumulative RSA/Cumulative RSL 133% 120% 108% Cumulative RSA/Total assets 58% 73% 87% Cumulative RSL/Total assets 43% 61% 81% Cumulative GAP/Total assets 14% 12% 6% Cumulative GAP/Cumulative RSA 25% 17% 7% ------------------------------------------------------------------------------------------------------------------------------------ (1) Loans, net of unearned income, include mortgages held for sale and nonaccrual loans. (2) Non-contractual interest-bearing deposits are subject to immediate withdrawal and, therefore, are included in 0-90 days.
While the gap position and related ratios illustrated in the table are useful tools that management can use to assess the general positioning of the Company's and its subsidiaries' balance sheets, it is only as of a point in time. - 43 - 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. 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 June 30, 2003, December 31, 2002 and June 30, 2002, 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: JUNE 30, 2003 12.8% (27.5)% December 31, 2002 7.5% (26.4)% June 30, 2002 7.4% (16.4)% ========================================================================================= ===================== ====================
Due to the low rate environment, the 200 basis point immediate permanent downward parallel shift in the yield curve can impact a majority of rate sensitive assets by the entire 200 basis points, while certain interest-bearing deposits may already be at their floor, or reprice significantly less than 200 basis points. This compression causes the results in a 200 basis point immediate permanent downward parallel shift in the yield curve to reflect a larger decrease in net interest income at June 30, 2003 and December 31, 2002 compared to June 30, 2002. These results are based solely on a permanent parallel shift in the yield curve and do not reflect the net interest income sensitivity that may arise from other factors, such as changes in the shape of the yield curve or the change in spread between key market rates. The above results are conservative estimates due to the fact that no management action to mitigate potential changes in net interest income are included in this simulation process. These management actions could include, but would not be limited to, delaying a change in deposit rates, extending the maturities of liabilities, the use of derivative financial instruments, changing the pricing characteristics of loans or modifying the growth rate of certain types of assets or liabilities. As the table above shows, management has positioned the balance sheet so that the Company benefits from a rise in interest rates and believes this is a prudent position. Until a rise in rates occurs, the Company is fortunate that the business strategy provides a solid base to grow the deposit and loan portfolios. This growth in the balance sheet has helped fuel earnings growth despite the lower net interest margins. The Company also mitigates the net interest margin pressure by realizing income from strong residential real estate lending activity and from covered call option transactions to, in effect, compensate for reduced net interest income. Management actively monitors the relationships between growth, net interest income and other income to provide for earnings growth in a challenging interest rate environment. One method utilized by financial institutions to manage interest rate risk is to enter into derivative financial instruments. A derivative financial instrument includes interest rate swaps, interest rate caps and floors, futures, forwards, option contracts and other financial instruments with similar characteristics. During 2001, the Company entered into a $25 million notional principal amount interest rate swap contract that matures in February 2004. This contract effectively converts a portion of the Company's floating-rate notes payable to a fixed-rate basis, thus reducing the impact of rising interest rates on future interest expense. During the fourth quarter of 2002, the Company completed a $25 million variable rated subordinated debt agreement with an unaffiliated bank that qualifies as Tier II regulatory capital. The Company also entered into two interest rate swap contracts in the fourth quarter of 2002. A $25 million notional principal amount swap was entered into to convert the newly issued subordinated note from variable-rate to fixed-rate. The swap matures in 2012, and the notional principal amount is reduced $5 million annually, beginning in 2008, to match the principal reductions on the subordinated note. Additionally, a $31.05 million interest rate swap contract was entered into to convert the Company's 9% Trust Preferred Securities from fixed-rate to variable-rate. This swap has a termination date of September 30, 2028, and provides the counterparty with a call option on any date on or after September 30, 2003. The call option in the swap coincides with the Company's call option in the trust preferred securities. All of the Company's interest rate swap contracts qualify as perfect hedges pursuant to SFAS 133. - 44 - During the second quarter of 2003, the Company also entered into certain covered call option transactions related to certain securities held by the Company. The Company uses these covered call option transactions (rather than entering into other derivative interest rate contracts, such as interest rate floors), to mitigate the effects of an asset-sensitive balance sheet in a falling rate environment and increase the total return associated with the related securities. Although the revenue from these covered call option transactions is recorded as non-interest income rather than interest income, the increased return attributable to the related securities from these transactions contributes to the Company's overall profitability. The Company's exposure to interest rate risk may be effected by these transactions. To mitigate this risk, the Company may acquire fixed rate term debt or use financial derivative instruments. There were no call options outstanding as of June 30, 2003. ITEM 4 CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company's Chief Executive Officer and Chief Financial Officer carried out an evaluation under their supervision, with the participation of other members of management as they deemed appropriate, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act. - 45 - PART II ITEM 1: LEGAL PROCEEDINGS. This item has been omitted from this Form 10-Q since it is inapplicable or would contain a negative response. ITEM 2: CHANGES IN SECURITIES. In April 2003, the Company issued $25.0 million of trust preferred securities through Wintrust Capital Trust III, a wholly-owned, statutory business trust subsidiary, to certain qualified institutional investors. The preferred securities pay interest at a floating rate based on LIBOR plus 3.25%. Simultaneously with the issuance of the preferred securities, the Company issued an equivalent amount of subordinated debentures to Wintrust Capital Trust III. The debentures mature on April 30, 2033, and may be redeemed on or after April 30, 2008, if certain conditions are met. The Company paid a placement agent fee equal to 2.5% of the total amount of preferred securities issued in the transaction. The issuance of the preferred securities and the subordinated debentures was exempt from registration under the Securities Act pursuant to Section 4(2) thereunder. ITEM 3: DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (a) The Annual Meeting of Shareholders was held on May 22, 2003. (b) At the Annual Meeting of Shareholders, the following matter was submitted to and approved by a vote of the shareholders: o The election of four Class I directors to the Board of Directors to hold office for a three-year term expiring at the Annual Meeting of Shareholders in 2006.
Votes Withheld Director Nominees For Authority ------------------------------------------------------ ----------------- ---------------- James B. McCarthy 15,195,187 128,994 Thomas J. Neis 15,228,292 95,889 J. Christopher Reyes 14,909,651 414,530 Edward J. Wehmer 15,213,982 110,199
All director nominees were re-elected at the Annual Meeting. The following Class II and Class III directors continued to serve after the Annual Meeting:
Continuing Director Director Class Term Expires ------------------------------------- ----------------------- ------------------ Bruce K. Crowther Class II 2004 Bert A. Getz, Jr. Class II 2004 Marguerite Savard McKenna Class II 2004 Albin F. Moschner Class II 2004 Ingird S. Stafford Class II 2004 Peter D. Crist Class III 2005 Philip W. Hummer Class III 2005 John S. Lillard Class III 2005 Hollis W. Rademacher Class III 2005 John J. Schornack Class III 2005
- 46 - ITEM 5: OTHER INFORMATION. None. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits -------- 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). 3.3 Amended and Restated By-laws of Wintrust Financial Corporation (incorporated by reference to Exhibit 3.3 of the Company's Form 10-Q for the quarter ended March 31, 2003). 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 Exchange Commission on August 28, 1998). 4.2 Certain instruments defining the rights of holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the Commission upon request. 10.1 $25 million Subordinated Note between Wintrust Financial Corporation and LaSalle National Association, dated April 30, 2003. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of President and Chief Executive Officer and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. ------------------- - Form 8-K report filed with the SEC on April 18, 2003, provided the Company's first quarter 2003 earnings release dated April 17, 2003. - Form 8-K report filed with the SEC on April 24, 2003, reported that the Company issued $25 million of floating rate trust preferred securities in a private placement offering on April 22, 2003. - Form 8-K report filed with the SEC on May 30, 2003, provided the Company's letter to shareholders mailed in May 2003, including a copy of the Company's first quarter 2003 earnings release dated April 17, 2003. - 47 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WINTRUST FINANCIAL CORPORATION (Registrant) Date: August 14, 2003 /s/ DAVID L. STOEHR ------------------- Executive Vice President and Chief Financial Officer (Principal Accounting Officer) - 48 - EXHIBIT INDEX ------------- 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). 3.3 Amended and Restated By-laws of Wintrust Financial Corporation (incorporated by reference to Exhibit 3.3 of the Company's Form 10-Q for the quarter ended March 31, 2003). 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 Exchange Commission on August 28, 1998). 4.2 Certain instruments defining the rights of holders of long-term debt of the Company and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis, have not been filed as Exhibits. The Company hereby agrees to furnish a copy of any of these agreements to the Commission upon request. 10.1 $25 million Subordinated Note between Wintrust Financial Corporation and LaSalle National Association, dated April 30, 2003. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of President and Chief Executive Officer and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - 49 -