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, 2002 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 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 the number of shares outstanding of each of issuer's class of common stock, as of the last practicable date. Common Stock - no par value, 17,135,100 shares, as of August 5, 2002.
TABLE OF CONTENTS PART I. -- FINANCIAL INFORMATION Page ---- ITEM 1. Financial Statements._________________________________________ 1-15 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. __________________________________ 16-39 ITEM 3. Quantitative and Qualitative Disclosures About Market Risks. _ 40-42 PART II. -- OTHER INFORMATION ITEM 1. Legal Proceedings. ___________________________________________ 43 ITEM 2. Changes in Securities. _______________________________________ 43 ITEM 3. Defaults Upon Senior Securities. _____________________________ 43 ITEM 4. Submission of Matters to a Vote of Security Holders. _________ 43-44 ITEM 5. Other Information. ___________________________________________ 44 ITEM 6. Exhibits and Reports on Form 8-K. ____________________________ 45 Signatures ___________________________________________________ 46 Exhibit Index ________________________________________________ 47
PART I ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) (Unaudited) JUNE 30, December 31, June 30, (In thousands) 2002 2001 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> ASSETS Cash and due from banks $ 60,055 $ 71,575 $ 46,282 Federal funds sold and securities purchased under resale agreements 198,089 51,955 162,845 Interest-bearing deposits with banks 543 692 60 Available-for-sale securities, at fair value 380,833 385,350 179,858 Trading account securities 4,618 -- -- Brokerage customer receivables 68,844 -- -- Mortgage loans held-for-sale 27,735 42,904 19,049 Loans, net of unearned income 2,308,945 2,018,479 1,787,257 Less: Allowance for loan losses 16,009 13,686 12,111 - ------------------------------------------------------------------------------------------------------------------------------------ Net loans 2,292,936 2,004,793 1,775,146 Premises and equipment, net 109,509 99,132 91,202 Accrued interest receivable and other assets 49,775 38,936 37,218 Goodwill 25,091 9,976 10,280 Other intangible assets 1,372 109 143 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 3,219,400 $ 2,705,422 $ 2,322,083 ==================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 257,298 $ 254,269 $ 205,414 Interest bearing 2,351,209 2,060,367 1,849,931 - ------------------------------------------------------------------------------------------------------------------------------------ Total deposits 2,608,507 2,314,636 2,055,345 Notes payable 58,650 46,575 25,000 Federal Home Loan Bank advances 140,000 90,000 -- Other borrowings 71,712 28,074 15,217 Long-term debt - trust preferred securities 51,050 51,050 51,050 Accrued interest payable and other liabilities 83,482 33,809 42,502 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 3,013,401 2,564,144 2,189,114 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholders' equity: Preferred stock -- -- -- Common stock 16,955 14,532 14,456 Surplus 147,616 97,956 96,986 Common stock warrants 96 99 99 Treasury stock, at cost -- -- -- Retained earnings 42,789 30,995 21,500 Accumulated other comprehensive loss (1,457) (2,304) (72) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 205,999 141,278 132,969 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 3,219,400 $ 2,705,422 $ 2,322,083 ==================================================================================================================================== </TABLE> See accompanying notes to unaudited consolidated financial statements. - 1 -
<TABLE> <CAPTION> 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) 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 38,366 $ 37,542 $ 75,027 $ 74,405 Interest bearing deposits with banks 5 1 8 3 Federal funds sold and securities purchased under resale agreements 205 1,196 498 2,318 Securities 5,211 2,651 9,711 6,446 Trading account securities 56 -- 80 -- Brokerage customer receivables 695 -- 1,185 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 44,538 41,390 86,509 83,172 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits 16,585 21,423 33,260 43,595 Interest on Federal Home Loan Bank advances 1,078 -- 1,975 -- Interest on notes payable and other borrowings 1,170 664 2,113 1,710 Interest on long-term debt - trust preferred securities 1,288 1,288 2,576 2,576 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 20,121 23,375 39,924 47,881 - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 24,417 18,015 46,585 35,291 Provision for loan losses 2,483 2,264 4,831 3,902 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 21,934 15,751 41,754 31,389 - ------------------------------------------------------------------------------------------------------------------------------------ NON-INTEREST INCOME Trust, asset management and brokerage fees 7,431 523 12,001 973 Fees on mortgage loans sold 1,934 1,948 3,951 3,472 Service charges on deposit accounts 753 606 1,491 1,153 Gain on sale of premium finance receivables 828 1,449 1,594 2,391 Administrative services revenue 931 1,121 1,753 2,142 Net securities (losses) gains 62 86 (153) 372 Other 1,832 1,658 5,886 3,738 - ------------------------------------------------------------------------------------------------------------------------------------ Total non-interest income 13,771 7,391 26,523 14,241 - ------------------------------------------------------------------------------------------------------------------------------------ NON-INTEREST EXPENSE Salaries and employee benefits 15,400 8,735 28,762 17,213 Occupancy, net 1,609 1,178 3,153 2,422 Equipment expense 1,796 1,582 3,526 3,066 Data processing 1,042 822 2,056 1,652 Advertising and marketing 533 426 1,057 733 Professional fees 685 534 1,296 1,065 Amortization of goodwill -- 152 -- 313 Amortization of other intangibles 100 17 117 34 Other 4,741 2,836 8,618 5,755 - ------------------------------------------------------------------------------------------------------------------------------------ Total non-interest expense 25,906 16,282 48,585 32,253 - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes and cumulative effect of accounting change 9,799 6,860 19,692 13,377 Income tax expense 3,492 2,497 7,023 4,856 - ------------------------------------------------------------------------------------------------------------------------------------ Income before cumulative effect of accounting change 6,307 4,363 12,669 8,521 Cumulative effect of change in accounting for derivatives, net of tax -- -- -- (254) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 6,307 $ 4,363 $ 12,669 $ 8,267 ==================================================================================================================================== BASIC EARNINGS PER SHARE: Income before cumulative effect of accounting change $ 0.40 $ 0.34 $ 0.82 $ 0.66 Cumulative effect of accounting change, net of tax -- -- -- (0.02) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER COMMON SHARE - BASIC $ 0.40 $ 0.34 $ 0.82 $ 0.64 ==================================================================================================================================== DILUTED EARNINGS PER SHARE: Income before cumulative effect of accounting change $ 0.37 $ 0.32 $ 0.77 $ 0.63 Cumulative effect of accounting change, net of tax -- -- -- (0.02) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME PER COMMON SHARE - DILUTED $ 0.37 $ 0.32 $ 0.77 $ 0.61 ==================================================================================================================================== CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.000 $ 0.000 $ 0.060 $ 0.047 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average common shares outstanding 15,948 12,992 15,513 12,957 Dilutive potential common shares 1,080 693 1,013 587 - ------------------------------------------------------------------------------------------------------------------------------------ Average common shares and dilutive common shares 17,028 13,685 16,526 13,544 ==================================================================================================================================== </TABLE> See accompanying notes to unaudited consolidated financial statements. - 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<TABLE> <CAPTION> 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 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2000 $ 13,285 $79,282 $ 100 $ (3,863) $ 13,835 $ (363) $ 102,276 Comprehensive income: Net income $ 8,267 -- -- -- -- 8,267 -- 8,267 Other comprehensive income, net of tax: Unrealized gains on securities, net of reclassification adjustment 275 -- -- -- -- -- 275 275 Unrealized gains on derivative instruments 16 -- -- -- -- -- 16 16 ---------- Comprehensive income $ 8,558 ---------- Cash dividends declared on common stock -- -- -- -- (602) -- (602) Common stock issued for: New issuance, net of costs 1,125 17,228 -- 3,863 -- -- 22,216 Employee stock purchase plan 6 72 -- -- -- -- 78 Exercise of common stock warrants 2 6 (1) -- -- -- 7 Exercise of stock options 38 398 -- -- -- -- 436 - --------------------------------------- ------------------------------------------------------------------------------------ Balance at June 30, 2001 $ 14,456 $ 96,986 $ 99 $ -- $ 21,500 $ (72) $ 132,969 ======================================= ==================================================================================== 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 ON COMMON STOCK -- -- -- -- (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 ======================================= ==================================================================================== Six Months Ended June 30, --------------------------------------------- 2002 2001 --------------------- ---------------------- Disclosure of reclassification amount and income tax impact: Unrealized holding gains on available for sale securities during the period, net $ 1,437 $ 817 Unrealized holding (losses) gains on derivative instruments arising during the period (293) 26 Less: Reclassification adjustment for (losses) gains included in net income, net (153) 372 Less: Income tax expense 450 180 --------------------- ---------------------- Net unrealized gains on available for sale securities and derivative instruments $ 847 $ 291 ===================== ====================== </TABLE> See accompanying notes to unaudited consolidated financial statements. - 3 -
<TABLE> <CAPTION> WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30, - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 12,669 $ 8,267 Adjustments to reconcile net income to net cash provided by, or used for, operating activities: Cumulative effect of accounting change -- 254 Provision for loan losses 4,831 3,902 Depreciation and amortization 4,422 3,913 Net decrease (increase) in deferred income taxes 4,403 (198) Tax benefit from exercises of stock options 2,581 85 Net amortization (accretion) of securities 1,569 (683) Originations of mortgage loans held for sale (362,305) (240,795) Proceeds from sales of mortgage loans held for sale 377,474 232,171 Purchase of trading securities, net 193 13 Net increase in brokerage customer receivables (5,862) -- Gain on sale of premium finance receivables (1,594) (2,391) (Gain) loss on sale of available-for-sale securities, net 153 (372) (Gain) loss on sale of premises and equipment, net (11) 2 Increase in accrued interest receivable and other assets, net (8,719) (2,758) Increase (decrease)in accrued interest payable and other liabilities, net 28,375 (9,027) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES $ 58,179 $ (7,617) - ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Proceeds from maturities of available-for-sale securities $ 221,520 $ 105,825 Proceeds from sales of available-for-sale securities 1,281,654 635,322 Purchases of available-for-sale securities (1,498,614) (726,464) Proceeds from sales of premium finance receivables 135,975 122,859 Net cash paid for the Wayne Hummer Companies (8,096) -- Net (increase) decrease in interest-bearing deposits with banks 441 122 Net increase in loans (428,111) (362,353) Purchase of premises and equipment, net (13,826) (8,443) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED FOR INVESTING ACTIVITIES $ (309,057) $ (233,132) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Increase in deposit accounts $ 293,871 $ 228,769 Increase (decrease) in other borrowings, net (4,011) (28,422) Increase (decrease) in notes payable, net 12,075 (2,575) Proceeds from Federal Home Loan Bank advances 50,000 -- Issuance of common shares, net of issuance costs 31,734 22,216 Issuance of common shares from stock options, employee stock purchase plan, common stock warrants and cash for stock split fractional shares, net 2,698 436 Dividends paid (875) (602) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES $ 385,492 $ 219,822 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 134,614 $ (20,927) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $ 123,530 $ 230,054 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 258,144 $ 209,127 ==================================================================================================================================== Supplemental disclosure of cash flow information: Acquisition of the Wayne Hummer Companies: Fair value of assets acquired, including cash and cash equivalents $ 76,055 $ -- Value ascribed to intangibles 16,495 -- Liabilities assumed 63,577 -- </TABLE> 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, 2002, 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 trust and investment services at each of its Banks through its wholly-owned subsidiary, Wayne Hummer Trust Company, N.A. ("WHTC"), formerly known as Wintrust Asset Management Company. 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 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. 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 Wintrust. Focused Investments LLC ("Focused") is a broker-dealer that provides a full range of investment services to clients through a network of relationships with community-based financial institutions 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 and institutions, municipal and tax-exempt organizations, as well as the Wayne Hummer Companies' (collectively WHI, WHAMC and Focused referred to as the "Wayne Hummer Companies" or "WHC") 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. Wintrust Information Technology Services Company provides information technology support, item capture 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, 2001. 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. (2) 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 which have an original maturity of 90 days or less. - 5 -
(3) AVAILABLE-FOR-SALE SECURITIES ----------------------------- The following table is a summary of the available-for-sale securities portfolio as of the dates shown: <TABLE> <CAPTION> JUNE 30, 2002 December 31, 2001 June 30, 2001 ------------------------------- ---------------------------- ------------------------------ AMORTIZED FAIR Amortized Fair Amortized Fair (In thousands) COST VALUE Cost Value Cost Value ------------------------------------------------------- -------------- ------------ --------------- -------------- --------------- <S> <C> <C> <C> <C> U.S. Treasury $ 2,583 $ 2,582 $ 3,045 $ 3,048 $ 1,058 $ 1,067 U.S. Government agencies 144,858 145,732 151,911 152,185 63,160 63,129 Municipal 6,288 6,417 6,507 6,686 5,641 5,821 Corporate notes and other 25,260 24,257 26,691 25,895 26,737 26,133 Mortgage-backed 187,032 187,826 184,483 181,425 68,860 68,509 Federal Reserve/FHLB Stock and other equity securities 15,894 16,019 15,384 16,111 14,585 15,199 ---------------- -------------- ------------ --------------- -------------- --------------- Total available-for-sale securities $ 381,915 $ 380,833 $ 388,021 $ 385,350 $ 180,041 $ 179,858 ================ ============== ============ =============== ============== =============== </TABLE> (4) LOANS ----- The following table is a summary of the loan portfolio as of the dates shown: <TABLE> <CAPTION> JUNE 30, December 31, June 30, (Dollars in thousands) 2002 2001 2001 - ------------------------------------------------------------------------------------ --------------------- --------------------- <S> <C> <C> <C> BALANCE: Commercial and commercial real estate $ 1,134,082 $ 1,007,580 $ 826,364 Home equity 318,397 261,049 209,149 Residential real estate 138,595 140,041 135,429 Premium finance receivables 459,558 348,163 345,789 Indirect auto loans 183,855 184,209 190,141 Tricom finance receivables 19,228 18,280 16,824 Other loans 55,230 59,157 63,561 --------------------- --------------------- --------------------- Total loans, net of unearned income $ 2,308,945 $ 2,018,479 $ 1,787,257 --------------------- --------------------- --------------------- MIX: Commercial and commercial real estate 49 % 50 % 46 % Home equity 14 13 12 Residential real estate 6 7 8 Premium finance receivables 20 17 19 Indirect auto loans 8 9 11 Tricom finance receivables 1 1 1 Other loans 2 3 3 ------------------------ ---------------------- --------------------- Total loans, net of unearned income 100 % 100 % 100 % ------------------------ ---------------------- --------------------- </TABLE> Included in loans as of June 30, 2002 is an aggregate of $1.7 million of loans to the Company's Chief Executive Officer and Chief Operating Officer secured by 172,500 shares of the Company's common stock. The total maximum available to be borrowed under these loan arrangements is $1.7 million. The loans are full recourse to the borrowers. - 6 -
(5) DEPOSITS -------- The following is a summary of deposits as of the dates shown: <TABLE> <CAPTION> JUNE 30, December 31, June 30, (Dollars in thousands) 2002 2001 2001 -------------------------------------------------------------------------------- ----------------------------------------------- BALANCE: <S> <C> <C> <C> Non-interest bearing $ 257,298 $ 254,269 $ 205,414 NOW 292,370 286,860 193,752 Money market 356,352 335,881 296,362 Brokerage customer deposits 97,531 -- -- Savings 133,110 132,514 105,097 Time certificate of deposits 1,471,846 1,305,112 1,254,720 --------------------- -------------------- -------------------- Total deposits $ 2,608,507 $ 2,314,636 $ 2,055,345 ===================== ==================== ==================== MIX: Non-interest bearing 10 % 11 % 10 % NOW 11 12 9 Money market 14 15 15 Brokerage customer deposits 4 -- -- Savings 5 6 5 Time certificate of deposits 56 56 61 ---------------------- --------------------- -------------------- Total deposits 100 % 100 % 100 % ====================== ===================== ==================== </TABLE> As previously disclosed, following its acquisition of the Wayne Hummer Companies in February 2002, Wintrust has undertaken an effort to migrate funds from the money market mutual fund balances managed by WHAMC into deposit accounts of the Wintrust Banks. 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, 2002, $97.5 million had migrated into an insured bank deposit product at the various 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. As of July 31, 2002, a total of approximately $150 million was resident in this account and Wintrust estimates that approximately $200 to $300 million may migrate to the Banks by the end of 2002. (6) NOTES PAYABLE, FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS: -------------------------------------------------------------------- The following is a summary of notes payable, Federal Home Loan Bank advances and other borrowings as of the dates shown: <TABLE> <CAPTION> JUNE 30, December 31, June 30, (In thousands) 2002 2001 2001 ----------------------------------------------------------------------- --------------------------------------- ------------------ <S> <C> <C> <C> Notes payable $ 58,650 $ 46,575 $ 25,000 Federal Home Loan Bank advances 140,000 90,000 -- Other borrowings: Federal funds purchased 1,400 11,800 -- Securities sold under repurchase agreements 14,365 16,274 15,217 Wayne Hummer Companies borrowings 50,947 -- -- Other 5,000 -- -- --------------------------------------- ------------------ Total other borrowings $ 71,712 $ 28,074 $ 15,217 --------------------------------------- ------------------ Total notes payable, Federal Home Loan Bank advances and other borrowings $ 270,362 $ 164,649 $ 40,217 ======================================= ================== </TABLE> The Wayne Hummer Companies borrowings consists of collateralized demand obligations to third party banks at interest rates approximating the fed funds rate that are used to finance securities purchased by customers on margin and securities owned by WHI and demand obligations to brokers and clearing organizations at rates approximating fed funds. Other represents the Company's interest-bearing deferred portion of the purchase price of the Wayne Hummer Companies. See Note 11 - Business Combinations for further discussion. - 7 -
(7) LONG-TERM DEBT - TRUST PREFERRED SECURITIES ------------------------------------------- The Company issued a total of $51.1 million of Trust Preferred Securities through two separate issuances by Wintrust Capital Trust I and Wintrust Capital Trust II ("Trusts"). The Trusts issued a total of $1,579,000 of common securities, all of which are owned by the Company. The Trust Preferred Securities represent preferred undivided beneficial interests in the assets of the Trusts. The Trusts invested the proceeds from the issuances of the Trust Preferred Securities and the common securities in Subordinated Debentures ("Debentures") issued by the Company, with the same maturities and fixed interest rates as the Trust Preferred Securities. The Debentures are the sole assets of the Trusts and are eliminated, along with the related income statement effects, in the consolidated financial statements. The composition of the Trust Preferred Securities as of June 30, 2002 (Dollars in thousands): <TABLE> <CAPTION> Earliest Issuance Rate Maturity Redemption Issuance Trust Amount Date Type Rate Date Date ------------------------------ --------------- ----------------- --------------- --------------- ---------------- ---------------- <S> <C> <C> <C> <C> <C> <C> Wintrust Capital Trust I $ 31,050 10/98 Fixed 9.00% 09/30/28 09/30/03 Wintrust Capital Trust II 20,000 06/00 Fixed 10.50% 06/30/30 06/30/05 --------------- Total $ 51,050 =============== </TABLE> 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 anytime 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. 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. (8) EARNINGS PER SHARE ------------------ The following table shows the computation of basic and diluted earnings per share for the periods shown: <TABLE> <CAPTION> For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------------------- --------------------------------- (In thousands, except per share data) 2002 2001 2002 2001 - -------------------------------------------------------------- --------------- --------------- ---------------- --------------- <S> <C> <C> <C> <C> Net Income $ 6,307 $ 4,363 $ 12,669 $ 8,267 =============== =============== ================ =============== Average common shares outstanding 15,948 12,992 15,513 12,957 Effect of dilutive common shares 1,080 693 1,013 587 --------------- --------------- ---------------- --------------- Weighted average common shares and effect of dilutive common shares 17,028 13,685 16,526 13,544 =============== =============== ================ =============== Net income per average common share: Basic $ 0.40 $ 0.34 $ 0.82 $ 0.64 --------------- --------------- ---------------- --------------- Diluted $ 0.37 $ 0.32 $ 0.77 $ 0.61 =============== =============== ================ =============== </TABLE> The effect of dilutive common shares outstanding results from stock options, stock warrants and shares issuable 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. - 8 -
(9) 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: <TABLE> <CAPTION> Three Months Ended June 30, $ Change in % Change in --------------------------------------- (Dollars in thousands) 2002 2001 Contribution Contribution ----------------------------------------------- ------------------ ------------------ ------------------- ---------------------- <S> <C> <C> <C> <C> NET INTEREST INCOME: Banking $ 22,765 $ 17,127 $ 5,638 32.9 % Premium finance 8,060 6,510 1,550 23.8 Indirect auto 2,028 1,604 424 26.4 Tricom 1,085 965 120 12.4 Trust, asset management and brokerage 722 186 536 288.2 Inter-segment eliminations (8,221) (6,603) (1,618) (24.5) Other (2,022) (1,774) (248) (14.0) ------------------ ------------------ ------------------- ---------------------- Total net interest income $ 24,417 $ 18,015 $ 6,402 35.5 % ================== ================== =================== ====================== NON-INTEREST INCOME: Banking $ 3,868 $ 4,457 $ (589) (13.2) % Premium finance 827 1,449 (622) (42.9) Indirect auto 10 2 8 400.0 Tricom 933 1,100 (167) (15.2) Trust, asset management and brokerage 7,623 523 7,100 1,357.6 Inter-segment eliminations 456 (140) 596 N/M Other 54 -- 54 N/M ------------------ ------------------ ------------------- ---------------------- Total non-interest income $ 13,771 $ 7,391 $ 6,380 86.3 % ================== ================== =================== ====================== SEGMENT PROFIT (LOSS): Banking $ 7,021 $ 4,871 $ 2,150 44.1 % Premium finance 3,327 2,703 624 23.1 Indirect auto 810 558 252 45.2 Tricom 486 323 163 50.5 Trust, asset management and brokerage (87) (108) 21 19.4 Inter-segment eliminations (3,448) (2,462) (986) (40.0) Other (1,802) (1,522) (280) (18.4) ------------------ ------------------ ------------------- ---------------------- Total segment profit $ 6,307 $ 4,363 $ 1,944 44.6 % ================== ================== =================== ====================== SEGMENT ASSETS: Banking $ 3,108,704 $ 2,290,168 $ 818,536 35.7 % Premium finance 487,953 379,969 107,984 28.4 Indirect auto 189,797 197,396 (7,599) (3.8) Tricom 33,351 27,683 5,668 20.5 Trust, asset management and brokerage 104,052 5,408 98,644 1,824.0 Inter-segment eliminations (714,137) (592,704) (121,433) (20.5) Other 9,680 14,163 (4,483) (31.7) ------------------ ------------------ ------------------- ---------------------- Total segment assets $ 3,219,400 $ 2,322,083 $ 897,317 38.6 % ================== ================== =================== ====================== <FN> N/M = not meaningful </FN> </TABLE> - 9 -
The following table presents a summary of certain operating information for each reportable segment for six months ended for the periods shown: <TABLE> <CAPTION> Six Months Ended June 30, $ Change in % Change in --------------------------------------- (Dollars in thousands) 2002 2001 Contribution Contribution ----------------------------------------------- ------------------ ------------------ ------------------- ---------------------- <S> <C> <C> <C> <C> NET INTEREST INCOME: Banking $ 43,538 $ 33,555 $ 9,983 29.8 % Premium finance 16,177 12,483 3,694 29.6 Indirect auto 4,030 2,991 1,039 34.7 Tricom 1,998 1,849 149 8.1 Trust, asset management and brokerage 1,310 352 958 272.2 Inter-segment eliminations (16,522) (12,369) (4,153) (33.6) Other (3,946) (3,570) (376) (10.5) ------------------ ------------------ ------------------- ---------------------- Total net interest income $ 46,585 $ 35,291 $ 11,294 32.0 % ================== ================== =================== ====================== NON-INTEREST INCOME: Banking $ 9,398 $ 8,857 $ 541 6.1 % Premium finance 2,843 2,348 495 21.1 Indirect auto 18 2 16 800.0 Tricom 1,754 2,142 (388) (18.1) Trust, asset management and brokerage 12,296 973 11,323 1,163.7 Inter-segment eliminations (286) (222) (64) (28.8) Other 500 141 359 254.6 ------------------ ------------------ ------------------- ---------------------- Total non-interest income $ 26,523 $ 14,241 $ 12,282 86.2 % ================== ================== =================== ====================== SEGMENT PROFIT (LOSS): Banking $ 13,214 $ 9,748 $ 3,466 35.6 % Premium finance 7,414 4,772 2,642 55.4 Indirect auto 1,538 932 606 65.0 Tricom 757 602 155 25.7 Trust, asset management and brokerage (229) (304) 75 24.7 Inter-segment eliminations (6,911) (4,586) (2,325) (50.7) Other (3,114) (2,897) (217) (7.5) ------------------ ------------------ ------------------- ---------------------- Total segment profit $ 12,669 $ 8,267 4,402 53.2 % ================== ================== =================== ====================== SEGMENT ASSETS: Banking $ 3,108,704 $ 2,290,168 $ 818,536 35.7 % Premium finance 487,953 379,969 107,984 28.4 Indirect auto 189,797 197,396 (7,599) (3.8) Tricom 33,351 27,683 5,668 20.5 Trust, asset management and brokerage 104,052 5,408 98,644 1,824.0 Inter-segment eliminations (714,137) (592,704) (121,433) (20.5) Other 9,680 14,163 (4,483) (31.7) ------------------ ------------------ ------------------- ---------------------- Total segment assets $ 3,219,400 $ 2,322,083 $ 897,317 38.6 % ================== ================== =================== ====================== </TABLE> - 10 -
(10) DERIVATIVE FINANCIAL INSTRUMENTS -------------------------------- The Company enters into certain derivative financial instruments as part of its strategy to manage its exposure to market risk. Market risk is the possibility that, due to changes in interest rates or other economic conditions, the Company's net interest income will be adversely affected. The derivative financial instruments that are currently being utilized by the Company to manage this risk include interest rate cap and interest rate swap contracts. The amounts potentially subject to market and credit risks are the streams of interest payments under the contracts and not the notional principal amounts used to express the volume of the transactions. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended by SFAS 137 and SFAS 138 (collectively referred to as SFAS 133). As a result of the adoption of SFAS 133, the Company recognizes all derivative financial instruments, such as interest rate cap and interest rate swap agreements, in the consolidated financial statements at fair value regardless of the purpose or intent for holding the instrument. Derivative financial instruments are included in other assets or other liabilities, as appropriate, on the Consolidated Statement of Condition. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders' equity as a component of comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income along with the portions of the changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective hedges, are recorded in other comprehensive income net of deferred taxes. Changes in fair values of derivative financial instruments not qualifying as hedges are reported in income. Derivative financial instruments owned by the Company on January 1, 2001 were not designated as hedges in accordance with SFAS 133. As a result, the effect of recording the derivative financial instruments at fair value upon adoption resulted in a charge of $254,000 (net of tax) in the Consolidated Statement of Income to reflect the cumulative effect of a change in accounting principle. During the first six months of 2002, $130 million notional principal amount of interest rate cap contracts matured. At June 30, 2002, the Company had $125 million of notional principal amounts of interest rate caps with maturities ranging from July 2002 to February 2003. These contracts were purchased to mitigate the effect of rising rates on certain floating rate deposit products and provide for the receipt of payments when the 91-day Treasury bill rate exceeds the predetermined strike rates that range from 3.75% to 6.50%. The payment amounts, if any, are determined and received on a monthly basis and are recorded as an adjustment to net interest income. At June 30, 2002, the Company had $25 million notional principal amount of an interest rate swap contract maturing in February 2004. This contract effectively converts a portion of the Company's floating-rate notes payable to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expense. The following table presents a summary of derivative instruments that were outstanding as of the dates shown and whether the changes in fair values are accounted for in the income statement (IS) or as other comprehensive income (OCI): <TABLE> <CAPTION> JUNE 30, 2002 December 31, 2001 --------------------------------------- ------------------------------------- (In thousands) Change NOTIONAL FAIR Notional Fair in market value AMOUNT VALUE Amount Value - ----------------------------- --------------------- ------------------- ------------------ -------------------- --------------- <S> <C> <C> <C> <C> <C> Interest rate caps IS $55,000 $ -- $ 185,000 $ -- Interest rate caps OCI 70,000 1 70,000 54 Interest rate swap OCI 25,000 (959) 25,000 (681) </TABLE> 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. The option premium income generated by these transactions is also recognized as other non-interest income. There were no call options outstanding as of June 30, 2002, December 31, 2001 or June 30, 2001, respectively. - 11 -
(11) BUSINESS COMBINATIONS --------------------- In February, 2002, Wintrust completed its acquisition of Wayne Hummer Investments, LLC ("WHI" - including its wholly owned subsidiary, Focused Investments LLC) and Wayne Hummer Management Company (subsequently renamed Wayne Hummer Asset Management Company "WHAMC"). The results of the Wayne Hummer Companies have been included in Wintrust's consolidated financial statements only since the effective date (February 1, 2002) of the acquisition. The acquisition of the Wayne Hummer Companies will augment fee-based revenue and diversify Wintrust's revenue stream by adding brokerage services as well as offering traditional banking products to the customers of the Wayne Hummer Companies, thereby providing a more comprehensive menu of financial products and services to the customers of Wintrust and the Wayne Hummer Companies. The aggregate purchase price was $28 million consisting of $8 million in cash, 762,742 shares of Wintrust's common stock (then valued at $15 million) and $5 million of deferred cash payments to be made over a three-year period subsequent to the closing date. Wintrust is obligated to pay additional consideration contingent upon the attainment of certain performance measures over the next five years. The additional consideration, if paid, will be recorded as additional goodwill at its fair value when paid, or when the additional consideration is deemed, beyond a reasonable doubt, to have been earned. The value of Wintrust's common stock issued was determined based on the unweighted average of the high and low sales prices of Wintrust's common stock on the Nasdaq National Market for the 10 trading days ending on the second trading day preceding the effective date of the acquisition. The Company recorded $15.1 million of goodwill and $1.4 million of finite-lived intangible assets related to the customer list of WHAMC. The following pro forma information reflects the Company's results of operations for the periods shown as if the Wayne Hummer Companies would have been included from the beginning of the periods shown. The Wintrust as reported results include the results of the Wayne Hummer Companies since the effective date of the acquisition: <TABLE> <CAPTION> Three Months Ended June 30, ----------------------------------------- (Dollars in thousands, except per share data) 2002 2001 -------------------------------------------------------------------------------------- -------------------- -------------------- <S> <C> <C> NET REVENUE: Wintrust as reported (includes WHC from February 1, 2002) $ 38,188 $ 25,406 WHC (results prior to February 1, 2002) -- 8,270 -------------------- -------------------- Pro forma net revenue $ 38,188 $ 33,676 ==================== ==================== INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE: Wintrust as reported (includes WHC from February 1, 2002) $ 9,799 $ 6,860 WHC (results prior to February 1, 2002) -- 680 -------------------- -------------------- Pro forma income before taxes and cumulative effect of accounting change $ 9,799 $ 7,540 ==================== ==================== NET INCOME: Wintrust as reported (includes WHC from February 1, 2002) $ 6,307 $ 4,363 WHC (results prior to February 1, 2002) -- 442 -------------------- -------------------- Pro forma net income $ 6,307 $ 4,805 ==================== ==================== BASIC EPS: Wintrust as reported (includes WHC from February 1, 2002) $ 0.40 $ 0.34 WHC (results prior to February 1, 2002) -- 0.01 -------------------- -------------------- Pro forma basic EPS $ 0.40 $ 0.35 ==================== ==================== DILUTED EPS: Wintrust as reported (includes WHC from February 1, 2002) $ 0.37 $ 0.32 WHC (results prior to February 1, 2002) -- 0.01 -------------------- -------------------- Pro forma diluted EPS $ 0.37 $ 0.33 ==================== ==================== </TABLE> - 12 -
The following pro forma information reflects the Company's results of operations for the periods shown as if the Wayne Hummer Companies would have been included from the beginning of the periods shown. The Wintrust as reported results include the results of the Wayne Hummer Companies since the effective date of the acquisition: <TABLE> <CAPTION> Six Months Ended June 30, ----------------------------------------- (Dollars in thousands, except per share data) 2002 2001 -------------------------------------------------------------------------------------- -------------------- -------------------- <S> <C> <C> NET REVENUE: Wintrust as reported (includes WHC from February 1, 2002) $ 73,108 $ 49,532 WHC (results prior to February 1, 2002) 2,919 16,690 -------------------- -------------------- Pro forma net revenue $ 76,027 $ 66,222 ==================== ==================== INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE: Wintrust as reported (includes WHC from February 1, 2002) $ 19,692 $ 13,377 WHC (results prior to February 1, 2002) 108 1,199 -------------------- -------------------- Pro forma income before taxes and cumulative effect of accounting change $ 19,800 $ 14,576 ==================== ==================== NET INCOME: Wintrust as reported (includes WHC from February 1, 2002) $ 12,669 $ 8,267 WHC (results prior to February 1, 2002) 70 779 -------------------- -------------------- Pro forma net income $ 12,739 $ 9,046 ==================== ==================== BASIC EPS: Wintrust as reported (includes WHC from February 1, 2002) $ 0.82 $ 0.64 WHC (results prior to February 1, 2002) (0.01) 0.02 -------------------- -------------------- Pro forma basic EPS $ 0.81 $ 0.66 ==================== ==================== DILUTED EPS: Wintrust as reported (includes WHC from February 1, 2002) $ 0.77 $ 0.61 WHC (results prior to February 1, 2002) (0.01) 0.02 -------------------- -------------------- Pro forma diluted EPS $ 0.76 $ 0.63 ==================== ==================== </TABLE> (12) GOODWILL AND OTHER INTANGIBLE ASSETS ------------------------------------ In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also specifies the criteria for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. 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 the FASB's Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). Wintrust adopted the provisions of SFAS 142 effective January 1, 2002. As of the date of adoption, Wintrust had unamortized goodwill in the amount of $10.0 million, and unamortized identifiable intangible assets in the amount of $109,000, all of which were subject to the transition provisions of SFAS 141 and SFAS 142. As part of its adoption of SFAS 142, the Company has performed a transitional impairment test on its goodwill assets, which indicated that no impairment charge was required. In addition, no material reclassifications or adjustments to the useful lives of finite-lived intangible assets were made as a result of adopting the new guidance. The full impact of adopting SFAS 142 is expected to result in an increase in net income of approximately $413,000, or approximately $0.02 per diluted share, in 2002 as a result of Wintrust no longer having to amortize goodwill against earnings. - 13 -
Assuming retroactive adoption of SFAS 142, net income for the six months ended June 30, 2001 increased as a result of ceasing amortization of goodwill. The following table sets forth the reconcilement of net income and earnings per share excluding goodwill amortization for the periods shown. The 2001 period is presented on a pro forma basis excluding goodwill amortization: <TABLE> <CAPTION> Six Months Ended Six Months Ended June 30, June 30, 2002 2001 ---------------------------------- --------------------------------- NET EARNINGS Net Earnings (Dollars in thousands, except per share data) INCOME PER SHARE Income Per Share - ---------------------------------------------------------- ----------------- --------------- --------------- --------------- <S> <C> <C> <C> <C> Earnings per share - Basic: Net income/Basic EPS as reported $ 12,669 $ 0.82 $ 8,267 $ 0.64 Add back: Goodwill amortization -- -- 313 0.02 Less: Tax on deductible goodwill -- -- 99 (0.01) ----------------- --------------- --------------- --------------- Adjusted net income/Basic EPS $ 12,669 $ 0.82 $ 8,481 $ 0.65 ================= =============== =============== =============== Earnings per share - Diluted: Net income/Diluted EPS as reported $ 12,669 $ 0.77 $ 8,267 $ 0.61 Add back: Goodwill amortization -- -- 313 0.02 Less: Tax on deductible goodwill -- -- 99 (0.01) ----------------- --------------- --------------- --------------- Adjusted net income/Diluted EPS $ 12,669 $ 0.77 $ 8,481 $ 0.62 ================= =============== =============== =============== </TABLE> A summary of goodwill assets by business segment is presented in the following table: <TABLE> <CAPTION> January 1, Goodwill Impairment JUNE 30, (In thousands) 2002 Acquired Losses 2002 ------------------------------------------ ------------------ ------------------ --------------------- ------------------- <S> <C> <C> <C> <C> Banking $ 1,018 $ -- $ -- $ 1,018 Premium finance -- -- -- -- Indirect auto -- -- -- -- Tricom 8,958 -- -- 8,958 Trust, asset management and brokerage -- 15,115 -- 15,115 Parent and other -- -- -- -- ------------------ ------------------ --------------------- ------------------- Total $ 9,976 $ 15,115 $ -- $ 25,091 ================== ================== ===================== =================== </TABLE> At June 30, 2002 and 2001, Wintrust had $1.4 million and $143,000, respectively, in unamortized finite-lived intangible assets. As a result of the acquisition of WHAMC, $1.38 million was assigned to the customer list of WHAMC and is being amortized over a 7-year period on an accelerated basis. Total amortization expense associated with these intangible assets in the first six months of 2002 and 2001 was $117,000 and $34,000, respectively. Estimated amortization expense on finite-lived intangible assets for the years ended 2002 through 2006 is as follows: (In thousands) -------------------------------------- 2002 $ 324 2003 310 2004 229 2005 202 2006 168 - 14 -
(13) RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- On January 1, 2002, Wintrust adopted SFAS 144, which superseded SFAS 121 and provides a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. SFAS 144 also supersedes the provisions of Accounting Principles Board (APB) Opinion 30 with regard to reporting the effects of a disposal of a segment of a business and requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred (rather than as of the measurement date as presently required by APB Opinion 30). In addition, more dispositions will qualify for discontinued operations treatment in the income statement. The adoption of SFAS 144 did not have a material impact on Wintrust's financial condition or results of operations. - 15 -
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, 2002, compared with December 31, 2001, and June 30, 2001, and the results of operations for the three and six-month periods ended June 30, 2002 and 2001 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. On January 24, 2002, Wintrust's Board of Directors declared a 3-for-2 stock split of its common stock, effected in the form of a 50% stock dividend, paid on March 14, 2002 to shareholders of record as of March 4, 2002. All historical share data and per share amounts have been restated to reflect this split. OVERVIEW AND STRATEGY Wintrust's operating subsidiaries were organized within approximately the last ten years. We have grown from $2.32 billion in total assets at June 30, 2001 to $3.22 billion in total assets at June 30, 2002, an increase of 39%. The historical financial performance of the Company has been affected by costs associated with growing market share in deposits and loans, new banks and branch facilities, and building an experienced management team. The Company's recent financial performance generally reflects the improved profitability of our operating subsidiaries, as they mature, offset by the costs of opening new banks and branch facilities. The Company's experience has been that it generally takes 13 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: <TABLE> <CAPTION> Operations opened in: ----------------------------------- Month Year ----------------- -------------- <S> <C> <C> 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 </TABLE> 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, 2002, the Banks had 31 banking facilities. Since June 30, 2001, Barrington Bank opened a branch facility in Hoffman Estates in September 2001, Northbrook Bank opened its new permanent facility in December 2001 and Hinsdale Bank opened a branch facility in Riverside in January 2002. In May 2002 Lake Forest Bank opened a new branch in Highland Park. In June 2002 and July 2002 we opened a new permanent facility for our Wauconda branch of Libertyville Bank and our McHenry branch of Crystal Lake Bank, respectively. Construction is currently underway on our South Libertyville branch of Libertyville Bank and our Skokie branch of North Shore Community Bank. Additionally the Company has purchased property for a permanent facility in Highland Park and has purchased property for new facilities in Cary and Deerfield. While committed to a continuing growth strategy, management's ongoing focus is also to balance further asset growth with earnings growth by seeking to more fully leverage the existing capacity within each of the Banks, FIFC, WHTC, Tricom and the Wayne Hummer Companies. One aspect of this strategy is to continue to pursue specialized earning asset niches in order to maintain the mix of earning assets in higher-yielding loans as well as diversify the loan portfolio. Another aspect of this strategy is a continued focus on less aggressive deposit pricing at the Banks with significant market share and more established customer bases. - 16 -
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, has been providing a full-range of investment products and services tailored to meet the specific needs of individual investors throughout the country, primarily in the Midwest. WHI also operates an office in Appleton, Wisconsin that opened in 1936. WHI has approximately 163 employees, including over 40 active brokers, and is a member of the New York Stock Exchange, the American Stock Exchange and the National Association of Securities Dealers. At June 30, 2002, the number of WHI client households was estimated to be in excess of 20,000, with over $3.8 billion in customer assets in custody. WHI's Appleton branch serves the greater Appleton area. 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 CorePortfolio Fund, the Wayne Hummer Income Fund, and the Wayne Hummer Money Market Fund. With assets under management in excess of $895 million, the investment management group provides advisory services to individuals and institutions, municipal and tax-exempt organizations, including approximately $488 million in the Wayne Hummer Mutual Funds. Additionally, WHAMC also provides portfolio management and continuous financial supervision for a wide-range of pension and profit sharing plans. These defined portfolios are managed for public and private clients, bank portfolios and trusts, endowments and foundations, and both taxable and tax-deferred portfolios for individual investors. WHAMC manages over $400 million in these portfolios. 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. FIFC is the Company's most significant specialized earning asset niche, originating approximately $1.3 billion in loan volume for the full year of 2001 and $837 million in the first six months of 2002. FIFC makes loans to businesses to finance the insurance premiums they pay on their 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. The majority of these loans are purchased by the Banks in order to more fully utilize their lending capacity. The Company began selling the excess of FIFC's originations over the capacity to retain such loans within the Banks' loan portfolios during the second quarter of 1999 to an unrelated third party with servicing retained. 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. Tricom is a Milwaukee-based company that has been in business for more than ten 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 the temporary staffing industry, with clients throughout the United States. 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 source 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 expanding the Company's earning asset niches, this acquisition has added to the level of fee-based income. In addition to the earning asset niches provided by the Company's non-bank subsidiaries, several earning asset niches operate within the Banks, including our indirect auto lending which we conduct through a division of Hinsdale Bank, Lake Forest Bank's MMF Leasing Services equipment leasing division and Barrington Bank's Community Advantage - 17 -
program that provides lending, deposit and cash management services to condominium, homeowner and community associations. In addition, Hinsdale Bank's mortgage warehouse lending program provides loan and deposit services to mortgage brokerage companies located predominantly in the Chicago metropolitan area, and Crystal Lake Bank has recently developed a specialty in small aircraft lending. The Company plans to continue pursuing the development or acquisition of other specialty 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. 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. - 18 -
RESULTS OF OPERATIONS EARNINGS SUMMARY The Company's key operating measures, as compared to the same period last year, are shown in the table below: <TABLE> <CAPTION> SIX MONTHS Six Months Percentage (%)/ ENDED Ended Basis Point (bp) (Dollars in thousands, except per share data) JUNE 30, 2002 June 30, 2001 Change - ------------------------------------------------------------ --------------------- --------------------- ------------------- <S> <C> <C> <C> Net income before cumulative effect of accounting change $ 12,669 $ 8,521 48.7 % Net income 12,669 8,267 53.2 Net income per common share - Basic 0.82 0.64 28.1 Net income per common share - Diluted 0.77 0.61 26.2 Net revenues 73,108 49,532 47.6 Net interest income 46,585 35,291 32.0 Net interest margin 3.52 % 3.63 % (11) bp Core net interest margin(1) 3.72 3.89 (17) Net overhead ratio (2) 1.54 1.68 (14) Efficiency ratio (3) 65.96 65.05 91 Return on average assets 0.88 0.77 11 Return on average equity 15.85 15.81 4 THREE MONTHS Three Months Percentage (%)/ ENDED Ended Basis Point (bp) JUNE 30, 2002 June 30, 2001 Change --------------------- --------------------- ------------------ Net income before cumulative effect of accounting change $ 6,307 $ 4,363 44.6 % Net income 6,307 4,363 44.6 Net income per common share - Basic 0.40 0.34 17.6 Net income per common share - Diluted 0.37 0.32 15.6 Net revenues 38,188 25,406 50.3 Net interest income 24,417 18,015 35.5 Net interest margin 3.56 % 3.59 % (3) bp Core net interest margin(1) 3.74 3.84 (10) Net overhead ratio (2) 1.63 1.61 2 Efficiency ratio (3) 67.61 63.77 384 Return on average assets 0.85 0.79 6 Return on average equity 14.75 16.21 (146) AT END OF PERIOD Total assets $ 3,219,400 $ 2,322,083 38.6 % Total loans, net of unearned income 2,308,945 1,787,257 29.2 Total deposits 2,608,507 2,055,345 26.9 Total shareholders' equity 205,999 132,969 54.9 Book value per common share 12.15 9.20 32.1 Market price per common share 34.57 16.57 108.6 Allowance for loan losses to total loans 0.69 % 0.68 % 1 bp Non-performing assets to total assets 0.37 0.55 (18) - ------------------------------------------------------------------------------------------------------------------------------ <FN> (1) The core net interest margin excludes the interest expense associated with Wintrust's Long-term Debt - Trust Preferred Securities. (2) 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. (3) The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenues (less securities gains or losses). A lower ratio indicates more efficient revenue generation. </FN> </TABLE> - 19 -
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. Net income for the second quarter ended June 30, 2002 totaled $6.3 million, an increase of $1.9 million, or 45%, over the $4.4 million recorded in the second quarter of 2001. On a per share basis, net income for the second quarter of 2002 totaled $0.37 per diluted common share, a $0.05 per share, or 16%, increase as compared to the 2001 second quarter total of $0.32 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 1,488,750 additional shares of common stock in June 2001, 762,742 shares issued in the February 2002 acquisition of the Wayne Hummer Companies and the issuance of 1,185,000 additional shares of common stock in June 2002. The return on average equity for the second quarter of 2002 stood at 14.75%. For the first six months of 2002, net income totaled $12.7 million, or $0.77 per diluted common share, an increase of $4.4 million, or 53%, when compared to $8.3 million, or $0.61 per diluted common share, for the same period in 2001. Return on average equity for the first six months of 2002 was 15.85% versus 15.81% for the same period of 2001. The results for the first six months of 2002 include pre-tax income of $1.25 million, or $754,000 after-tax, for a partial settlement related to the non-recurring charge recorded in 2000. Excluding this settlement income, net income in the first six months of 2002 was $11.9 million, or $0.72 per diluted share. Included in the first six months of 2001 is a cumulative effect of a change in accounting for interest rate caps resulting in an after-tax charge of $254,000, or $0.02 per diluted share. On February 20, 2002, Wintrust completed its acquisition of the Wayne Hummer Companies. Accounted for as a purchase, the Wayne Hummer Companies results of operations are included in Wintrust's year-to-date 2002 results only since the effective date of the acquisition (February 1, 2002). 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, 2002 totaled $24.6 million, an increase of $6.4 million, or 35%, as compared to the $18.2 million recorded in the same quarter of 2001. Average loans in the second quarter of 2002 increased $483 million, or 28%, over the second quarter of 2001. This growth helped offset the lower spreads as a result of the eleven rate cuts by the Federal Reserve in 2001 totaling 475 basis points. 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 2002 the net interest margin was 3.56%, a decrease of three basis points when compared to the net interest margin of 3.59% in the prior year second quarter. This decline resulted primarily from the effects of continued decreases during 2001 in short-term rates causing compression in the spread between the rates on interest-bearing liabilities and the yields on earning assets. Spread compression results when deposit rates cannot be reduced commensurate with changes in market rates due to current low level of rates paid on certain deposit accounts. The core net interest margin, which excludes the interest expense related to Wintrust's Long-term Debt - Trust Preferred Securities, was 3.74% for the second quarter of 2002, and decreased 10 basis points when compared to the prior year second quarter's core margin of 3.84%. In the absence of additional rate cuts by the Federal Reserve and a changing yield curve, Wintrust's net interest margin improved by eight basis points when compared to the first quarter of 2002. This improvement was a result of total funding costs declining by 21 basis points while the yield on total earning assets declined by nine basis points. Interest-bearing deposits accounted for the majority of the decline in the cost of funding, decreasing by 20 basis points from the first quarter of 2002. - 20 -
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: <TABLE> <CAPTION> FOR THE QUARTER ENDED For the Quarter Ended JUNE 30, 2002 June 30, 2001 --------------------------------------- --------------------------------------- YIELD/ Yield/ (Dollars in thousands) AVERAGE INTEREST RATE Average Interest Rate ---------------------- --------------------------------------- --------------------------------------- <S> <C> <C> <C> <C> <C> <C> Liquidity management assets (1) (2) $ 484,483 $ 5,444 4.51 % $ 302,848 $ 3,863 5.12 % Other earning assets (3) 71,100 751 4.24 -- -- -- Loans, net of unearned income (2) (4) 2,218,968 38,534 6.97 1,735,696 37,741 8.72 --------------------------------------- --------------------------------------- Total earning assets $ 2,774,551 $ 44,729 6.47 % $ 2,038,544 $ 41,604 8.19 % --------------------------------------- --------------------------------------- Interest-bearing deposits $ 2,203,247 $ 16,585 3.02 % $ 1,769,910 $ 21,423 4.85 % Federal Home Loan Bank advances 104,938 1,078 4.12 -- -- -- Notes payable and other borrowings 164,587 1,170 2.85 46,915 664 5.68 Long-term debt - trust preferred securities 51,050 1,288 10.09 51,050 1,288 10.09 --------------------------------------- --------------------------------------- Total interest-bearing liabilities $ 2,523,822 $ 20,121 3.20 % $ 1,867,875 $ 23,375 5.02 % --------------------------------------- --------------------------------------- Interest rate spread (5) 3.27 % 3.17 % Net free funds/contribution (6) $ 250,729 0.29 $ 170,669 0.42 =============== ------------ =============== ------------ Net interest income/Net interest margin $ 24,608 3.56 % $ 18,229 3.59 % ========================= ========================= Core net interest margin (7) 3.74 % 3.84 % ============ ============ - ---------------------------------------------------------------------------------------------------------------------------------- <FN> (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, 2002 and 2001 were $191,000 and $214,000 respectively. (3) Other earning assets include brokerage customer receivables and trading account securities. (4) Loans, net of unearned income includes 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) The core net interest margin excludes the impact of Wintrust's Long-term Debt - Trust Preferred Securities. </FN> </TABLE> The yield on total earning assets for the second quarter of 2002 was 6.47% as compared to 8.19% in 2001, a decrease of 172 basis points resulting primarily from the effect of decreases in general market rates on liquidity management assets and loans. The other earning assets shown in the second quarter of 2002 reflect interest-bearing brokerage customer receivables and trading account securities managed at the Wayne Hummer Companies. The yield on earning assets is heavily dependent on the yield on loans since average loans comprised approximately 80% of total average earning assets. The second quarter 2002 yield on loans was 6.97%, a 175 basis point decrease when compared to the prior year second quarter yield of 8.72%. The average prime lending rate was 4.75% during the second quarter of 2002 versus 7.35% for the second quarter of 2001, reflecting a decrease of 260 basis points. Wintrust's loan portfolio does not re-price in a parallel fashion to decreases or increases in the prime rate due to a portion of the portfolio being longer-term fixed rate loans. The rate paid on interest-bearing liabilities for the second quarter of 2002 was 3.20%, compared to 5.02% in the second quarter of 2001, a decline of 182 basis points. Interest-bearing deposits accounted for 87% of total interest-bearing funding in the second quarter of 2002, compared to 95% in the same period of 2001. The rate paid on interest-bearing deposits averaged 3.02% for the second quarter of 2002 versus 4.85% for the same quarter of 2001, a decrease of 183 basis points. 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. The increase in notes payable and other borrowings in the second quarter of 2002 was a result of the funding at the Wayne Hummer Companies for the brokerage customer receivables, additional funding required - 21 -
for the purchase of the Wayne Hummer Companies and borrowings utilized to fund the additional capital requirements of the Banks. The rate paid on Federal Home Loan Bank advances, notes payable and other borrowings decreased 233 basis points to 3.35% in the second quarter of 2002 as compared to 5.68% in the second quarter of 2001. 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: <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED For the Six Months Ended ----------------------------------------------------------------------------------- JUNE 30, 2002 June 30, 2001 ----------------------------------------------------------------------------------- YIELD/ Yield/ (Dollars in thousands) AVERAGE INTEREST RATE Average Interest Rate ---------------------- ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Liquidity management assets (1) (2) $ 468,103 $ 10,260 4.42% $ 310,887 $ 8,796 5.71 % Other earning assets (3) 58,082 1,265 4.39 -- -- -- Loans, net of unearned income (2) (4) 2,162,593 75,383 7.03 1,674,309 74,795 9.01 ----------------------------------------------------------------------------------- Total earning assets $ 2,688,778 $ 86,908 6.52% $ 1,985,196 $ 83,591 8.49 % ----------------------------------------------------------------------------------- Interest-bearing deposits $ 2,151,117 $ 33,260 3.12% $ 1,720,246 $ 43,595 5.11 % Federal Home Loan Bank advances 97,735 1,975 4.08 -- -- -- Notes payable and other borrowings 139,325 2,113 3.06 57,348 1,710 6.01 Long-term debt - trust preferred securities 51,050 2,576 10.09 51,050 2,576 10.09 ----------------------------------------------------------------------------------- Total interest-bearing liabilities $ 2,439,227 $ 39,924 3.30% $ 1,828,644 $ 47,881 5.28 % ----------------------------------------------------------------------------------- Interest rate spread (5) 3.22 % 3.21 % Net free funds/contribution (6) $ 249,551 0.30 $ 156,552 0.42 ================ ============================== ============ Net interest income/Net interest margin $ 46,984 3.52 % $ 35,710 3.63 % ========================== ========================= Core net interest margin (7) 3.72 % 3.89 % ============ ============ - ---------------------------------------------------------------------------------------------------------------------------------- <FN> (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, 2002 and 2001 were $399,000 and $419,000 respectively. (3) Other earning assets include brokerage customer receivables and trading account securities. (4) Loans, net of unearned income includes 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) The core net interest margin excludes the impact of Wintrust's Long-term Debt - Trust Preferred Securities. </FN> </TABLE> For the first six months of 2002, tax-equivalent net interest income totaled $47.0 million and increased $11.3 million, or 32% over the $35.7 million recorded in the same period in 2001. Growth in the Company's earning asset base was the primary contributor to this increase, as year-to-date average loans increased 29%. The yield on total earning assets for the first six months of 2002 was 6.52% as compared to 8.49% in 2001, a decrease of 197 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 2002 was 3.30%, compared to 5.28% in the second quarter of 2001, a decline of 198 basis points. The interest rate spread (difference between the yield on earning assets and the rate paid on interest-bearing liabilities) remained stable in the first six months of 2002, increasing by one basis point when compared to the first six months of 2001. The decline in the net interest margin was mainly caused by a 12 basis point reduction in the contribution from net free funds as the substitute value of these free funds fell by 198 basis points in 2002. - 22 -
The following table presents a reconciliation of the Company's tax-equivalent net interest income between the three-month periods ended June 30, 2002 and March 31, 2002, the six-month periods ended June 30, 2002 and June 30, 2001 and between the three-month periods ended June 30, 2002 and June 30, 2001. 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: <TABLE> <CAPTION> Second Quarter First Six Months Second Quarter of 2002 of 2002 of 2002 Compared to Compared to Compared to First Quarter First Six Months Second Quarter (Dollars in thousands) of 2002 of 2001 of 2001 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Tax-equivalent net interest income for comparative period $ 22,376 $ 35,710 $ 18,229 Change due to mix and growth of earning assets and interest-bearing liabilities (volume) 1,292 12,906 5,919 Change due to interest rate fluctuations (rate) 640 (612) 373 Change due to rate and volume fluctuations (rate/volume) 38 (1,020) 87 Change due to number of days in each quarter (days) 262 -- -- ----------------------------------------------------------- TAX-EQUIVALENT NET INTEREST INCOME FOR THE PERIOD ENDED JUNE 30, 2002 $ 24,608 $ 46,984 $ 24,608 =========================================================== </TABLE> NON-INTEREST INCOME For the second quarter of 2002, non-interest income totaled $13.8 million and increased $6.4 million, or 86%, over the prior year quarter. The following table presents non-interest income by category for the periods presented: <TABLE> <CAPTION> Three Months Ended June30, ------------------------------------- $ % (Dollars in thousands) 2002 2001 Change Change - --------------------------------------------------------------- ------------------ ------------------ --------------- ------------- <S> <C> <C> <C> <C> Trust, asset management and brokerage fees $ 7,431 $ 523 6,908 1,320.8 Fees on mortgage loans sold 1,934 1,948 (14) (0.7) Service charges on deposit accounts 753 606 147 24.3 Gain on sale of premium finance receivables 828 1,449 (621) (42.9) Administrative services revenue 931 1,121 (190) (16.9) Fees from covered call options 789 956 (167) (17.5) Net available-for-sale securities gains 62 86 (24) (27.9) Other 1,043 702 341 48.6 ------------------ ------------------ --------------- ------------- Total non-interest income $ 13,771 $ 7,391 6,380 86.3 ================== ================== =============== ============= </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, ------------------------------------- $ % (Dollars in thousands) 2002 2001 Change Change - --------------------------------------------------------------- ------------------ ------------------ --------------- ------------- <S> <C> <C> <C> <C> Trust, asset management and brokerage fees $ 12,001 $ 973 11,028 1,133.4 Fees on mortgage loans sold 3,951 3,472 479 13.8 Service charges on deposit accounts 1,491 1,153 338 29.3 Gain on sale of premium finance receivables 1,594 2,391 (797) (33.3) Administrative services revenue 1,753 2,142 (389) (18.2) Fees from covered call options 2,357 2,303 54 2.3 Net available-for-sale securities (losses) gains (153) 372 (525) (141.1) Premium finance defalcation-partial settlement 1,250 -- 1,250 N/M Other 2,279 1,435 844 58.8 ------------------ ------------------ --------------- ------------- Total non-interest income $ 26,523 $ 14,241 12,282 86.2 ================== ================== =============== ============= <FN> N/M = calculation not meaningful </FN> </TABLE> - 23 -
For the six months ended June 30, 2002 non-interest income totaled $26.5 million and increased $12.3 million, or 86%, over the same period last year. Significant increases were realized in both the second quarter of 2002 and the first six months of 2002 in trust, asset management and brokerage fees as a result of the Wayne Hummer Companies acquisition which occurred during the first quarter of 2002. Trust, asset management and brokerage fees are comprised of the asset management revenue of Wayne Hummer Trust Company (name changed from Wintrust Asset Management Company in May 2002) and the asset management fees, brokerage commissions, trading commissions and insurance product commissions at the Wayne Hummer Companies. The increase in this category, up $6.9 million over the second quarter of 2001 and $11.0 million over the first six months of 2001, is primarily attributable to the revenues from the Wayne Hummer Companies. Wintrust is committed to growing the trust and investment business in order to better service its customers and create a more diversified revenue stream. This commitment is evidenced by the acquisition of the Wayne Hummer Companies. Non-interest income comprised approximately 29% of total net revenues in the second quarter of 2001. Primarily as a result of the Wayne Hummer Companies acquisition, this has increased to approximately 36% for the second quarter of 2002. Fees on mortgage loans sold include income from originating and selling residential real estate loans into the secondary market. For the quarter ended June 30, 2002, these fees totaled $1.9 million, a slight decrease of $14,000, or 1%, from the prior year second quarter and down slightly from the $2.0 million recorded in the first quarter of 2002. Although they are a continuous source of revenue, these fees have historically increased due to higher levels of mortgage origination volumes, particularly refinancing activity, caused by the low level of mortgage interest rates. It is possible that the levels of refinancing activity may taper off for the remainder of 2002, barring any further reductions in mortgage interest rates. Service charges on deposit accounts totaled $753,000 for the second quarter of 2002, an increase of $147,000, or 24%, when compared to the same quarter of 2001. This increase was 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 providing high quality service without encumbering that service with numerous activity charges. The administrative services revenue contributed by Tricom added $931,000 to total non-interest income in the second quarter of 2002, a decrease of $190,000 from the second quarter of 2001 and an increase of $109,000 from the first quarter of 2002. This revenue comprises income from administrative services, such as data processing of payrolls, billing and cash management services, to clients in the temporary staffing industry located throughout the United States. The revenue growth at Tricom had stagnated in previous quarters due to the general slowdown in the United States economy and the reduction in the placement of temporary staffing individuals by Tricom's customers. This business segment appears to be rebounding as exhibited by the higher levels of revenue recorded by Tricom when compared to the first quarter of 2002. Tricom also earns interest and fee income from providing short-term accounts receivable financing to this same client base, which is included in the net interest income category. Fees from covered call option transactions in the second quarter of 2002 decreased by $167,000 to $789,000, compared to $956,000 million in the same quarter last year. On a year-to-date basis the Company has recognized $2.4 million in fees in 2002 compared to $2.3 million in 2001, an increase of $54,000. During the first six months of 2002, call option contracts were written against $864 million of underlying securities, compared to $531 million in the first six months of last year. 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 routinely enters into these transactions with the goal of enhancing its overall return on its investment portfolio. In the first six months of both years, the Company wrote call options against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes for terms of less than three months. There were no outstanding call options at June 30, 2002, December 31, 2001 or June 30, 2001. 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 2002 and recognized gains of $828,000 related to this activity on sales of $74.1 million of net receivables, compared with $1.4 million of recognized gains in the second - 24 -
quarter of 2001 on sales of $71.7 million. On a year-to-date basis, the Company recognized gains of $1.6 million in 2002 on sales of $136.0 million, compared to $2.4 million in 2001 on sales of $122.9 million. Recognized gains related to this activity are significantly influenced by the spread between the net yield on the loans sold and the rate, based on a fixed spread to LIBOR, passed on to the purchaser. This spread ranged from 4.85% to 5.51% in the first six months of 2002 compared to a range of 5.96% to 6.54% in the same period last year. The net yield on the loans sold and the rates passed on to the purchaser typically do not react in a parallel fashion, therefore causing the spreads to vary from period to period. The lower amount of gain recognized in the second quarter of 2002 compared to the prior year was influenced by lower spreads as well as increased estimates of credit losses. During the first six months of 2002 credit losses were estimated at 0.75%, compared to 0.25% in the first six months of 2001. The increase was a result of a higher level of charge-offs in recent quarters in the overall premium finance receivables portfolio (see page 34 "Allowance for Loan Losses".) The lower gain recognized in 2002 was also significantly influenced by a reduction in the number of months these loans are estimated to be outstanding. This reduction was due to recent trends of early pay-downs as the economy has weakened, insurance rates have escalated and borrowers cancelled their existing insurance in favor of cheaper alternatives. The average terms of the loans in the first six months of 2002 were estimated at approximately 8 months compared to 9 months in the same period last year. The applicable discount rate used in determining gains related to this activity was unchanged from the discount rate used in 2001. At June 30, 2002, premium finance loans sold and serviced for others for which we retain a recourse obligation related to credit losses totaled approximately $112.4 million. The recourse obligation is considered in computing the net gain on the sale of the premium finance receivables. At June 30, 2002, the remaining estimated recourse obligation carried in other liabilities is approximately $504,000. Credit losses 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 2002 for premium finance receivables sold and serviced for others totaled $10,000. Non-performing loans related to this sold portfolio at June 30, 2002 were approximately $1.7 million, or 1.53%, 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 37. Wintrust has a philosophy of maintaining its average loan-to-deposit ratio in the range of 85-90%. During the second quarter of 2002, the ratio was approximately 90%. 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. - 25 -
NON-INTEREST EXPENSE Non-interest expense for the second quarter of 2002 totaled $25.9 million and increased $9.6 million, or 59%, from the second quarter 2001 total of $16.3 million. Operating expenses of the Wayne Hummer Companies and the continued growth of the loan and deposit portfolios are the major causes for this increase. Since June 30, 2001 total deposits and total loans have increased 27% and 29%, respectively, requiring higher levels of staffing and other costs to both attract and service the larger customer base. Excluding the impact of the Wayne Hummer Companies, total non-interest expense increased $2.5 million, or 16%, when compared to the second quarter of 2001, well below the pace of the balance sheet growth. The following table presents non-interest expense by category for the periods presented: <TABLE> <CAPTION> Three Months Ended June 30, -------------------------------------- $ % (Dollars in thousands) 2002 2001 Change Change ------------------------------------------------------------ ------------------ ------------------ --------------- ------------- <S> <C> <C> <C> <C> Salaries and employee benefits $ 15,400 $ 8,735 6,665 76.3 Occupancy, net 1,609 1,178 431 36.6 Equipment 1,796 1,582 214 13.5 Data processing 1,042 822 220 26.8 Advertising and marketing 533 426 107 25.1 Professional fees 685 534 151 28.3 Amortization of goodwill -- 152 (152) (100.0) Amortization of other intangibles 100 17 83 488.2 Other 4,741 2,836 1,905 67.2 ------------------ ------------------ --------------- ------------- Total non-interest expense $ 25,906 $ 16,282 9,624 59.1 ================== ================== =============== ============= </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, -------------------------------------- $ % (Dollars in thousands) 2002 2001 Change Change ------------------------------------------------------------ ------------------ ------------------ --------------- ------------- <S> <C> <C> <C> <C> Salaries and employee benefits $ 28,762 $ 17,213 11,549 67.1 Occupancy, net 3,153 2,422 731 30.2 Equipment 3,526 3,066 460 15.0 Data processing 2,056 1,652 404 24.5 Advertising and marketing 1,057 733 324 44.2 Professional fees 1,296 1,065 231 21.7 Amortization of goodwill -- 313 (313) (100.0) Amortization of other intangibles 117 34 83 244.1 Other 8,618 5,755 2,863 49.7 ------------------ ------------------ --------------- ------------- Total non-interest expense $ 48,585 $ 32,253 16,332 50.6 ================== ================== =============== ============= </TABLE> On a year-to-date basis non-interest expense totaled $48.6 million and increased $16.3 million, or 51%, over the first six months of 2001. The Wayne Hummer Companies contributed $11.9 million of this increase. The $4.4 million increase, excluding the Wayne Hummer Companies, is predominantly due to a $2.8 million increase in salaries and employee benefits costs and the higher general operating costs associated with operating additional and larger banking offices. Despite balance sheet growth in loans and deposits of near 30%, Wintrust's net overhead ratio, excluding the impact of the Wayne Hummer Companies, decreased from 1.68% for the first six months of 2001 to 1.49% for the comparable period in 2002. Salaries and employee benefits totaled $15.4 million for the second quarter of 2002, an increase of $6.7 million, or 76%, as compared to the prior year's second quarter total of $8.7 million. This increase was primarily due to the employee costs associated with the Wayne Hummer Companies, increases in salaries and employee benefit costs as a result of continued growth and expansion of the Banks and normal annual increases in salaries and the employee benefit costs. Excluding the impact of the Wayne Hummer Companies, total salaries and employee benefits expense increased $1.5 - 26 -
million, or 18%, when compared to the second quarter of 2001 and decreased slightly by $59,000, or less than 1%, when compared to the first quarter of 2002. Other categories of non-interest expense, such as occupancy costs, equipment expense and data processing, also increased over the prior year second quarter primarily due to the acquisition of the Wayne Hummer Companies. Amortization expense related to goodwill and other intangibles totaled $100,000 for the second quarter of 2002, compared with $169,000 in the second quarter of 2001. See Note 12 - Goodwill and Other Intangible Assets to the Company's unaudited consolidated financial statements for a detailed discussion of intangible amortization. INCOME TAXES The Company recorded income tax expense of $3.5 million for the three months ended June 30, 2002 versus $2.5 million for the same period of 2001. On a year-to-date basis, income tax expense was $7.0 million in 2002 and $4.9 million in 2001. The effective tax rate was 35.6% in the second quarter of 2002 and 36.4 % in the second quarter of 2001. OPERATING SEGMENT RESULTS As shown in Note 9 to the unaudited consolidated financial statements, the Company's operations consist of five primary segments: banking, premium finance, indirect auto, Tricom and trust/asset management/brokerage. 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 2002, the banking segment's net interest income totaled $22.8 million, an increase of $5.6 million, or 33%, as compared to $17.1 million recorded in the same quarter of 2001. This increase was the direct result of earning asset growth, particularly in the loan portfolio. The banking segment's non-interest income totaled $3.9 million for the second quarter of 2002 and decreased $589,000, or 13%, when compared to the prior year quarterly total of $4.5 million. Contributing to this decrease was a $167,000 decline in fees from certain covered call option transactions, which are routinely entered into to enhance the overall return on the investment portfolio. The banking segment's after-tax profit for the quarter ended June 30, 2002, totaled $7.0 million, an increase of $2.1 million, or 44%, as compared to the prior year quarterly total of $4.9 million. On a year-to-date basis, net interest income totaled $43.5 million for the first six months of 2002, an increase of $10.0 million, or 30%, as compared to the $33.5 million recorded last year. Non-interest income increased $541,000 to $9.4 million in the first six months of 2002. This increase was due primarily to a $479,000 increase in fees on mortgage loans sold resulting from higher levels of refinancing activity as well as increased service charges on deposit accounts of $338,000 due to a larger deposit base and a higher number of accounts at the banking subsidiaries. The banking segment's after-tax profit for the six months ended June 30, 2002, totaled $13.2 million, an increase of $3.5 million, or 36%, as compared to the prior year total of $9.7 million. The banking segment accounted for the majority of the Company's total asset growth since June 30, 2001, increasing by $819 million. Net interest income from the premium finance segment totaled $8.1 million for the quarter ended June 30, 2002, an increase of $1.6 million, or 24%, over the $6.5 million recorded in the same quarter of 2001. This improvement was due to an increase in average premium finance receivables of approximately 21% and higher net spread contributions on these balances. Non-interest income for the three months ended June 30, 2002 totaled $827,000 million, compared to $1.4 million in the same quarter of 2001. Gains from the sale of premium finance receivables decreased by $621,000 compared to the same period last year. After-tax profit for the premium finance segment totaled $3.3 million for the three-month period ended June 30, 2002, and increased $624,000, or 23%, over the same period of 2001. This increase was due to higher levels of premium finance receivables created from targeted marketing programs and market increases in insurance premiums charged by insurance carriers. On a year-to-date basis, net interest income totaled $16.2 million for the first six months of 2002, an increase of $3.7 million, or 30%, as compared to the $12.5 million recorded last year. Non-interest income increased $495,000 to $2.8 million in the first six months of 2002. The proceeds from a partial settlement during the first quarter of 2002, related to the premium finance defalcation which occurred and was recognized in 2000, of $1.25 million was offset by a decrease of $797,000 on gains from the sale of premium finance receivables compared to the same period last year. The premium finance segment's after-tax profit for the six months ended June 30, 2002, totaled $7.4 million, an increase of $2.6 million, or 55%, as compared to the prior year total of $4.8 million. - 27 -
The indirect auto segment recorded $2.0 million of net interest income for the second quarter of 2002, an increase of $424,000, or 26%, as compared to the 2001 quarterly total. Average outstanding loans decreased 3% in the second quarter of 2002, compared to the same quarter of 2001. After-tax segment profit totaled $810,000 for the three-month period ended June 30 2002, an increase of $252,000, or 45%, when compared to the same period of 2001. The increase in this segment's profitability was caused mainly by lower variable rate funding costs in the second quarter of 2002 contributing to the higher levels of net interest income. On a year-to-date basis, net interest income totaled $4.0 million for the first six months of 2002, an increase of $1.0 million, or 35%, as compared to the $3.0 million recorded last year. The indirect auto segment's after-tax profit for the six months ended June 30, 2002 totaled $1.5 million, an increase of $606,000, or 65%, as compared to the prior year total of $932,000. Consistent with the after-tax profit contribution in the second quarter of 2002, year-to-date profitability was positively impacted due to lower variable rate funding costs. 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 $1.1 million for the second quarter of 2002, an increase of $120,000, or 12%, compared to $965,000 reported in the same period of 2001. Non-interest income was $933,000 in the second quarter of 2002, a decrease of $167,000, or 15%, compared to $1.1 million in the second quarter of 2001. This represents the first quarter of increased non-interest revenue from this segment after three consecutive quarters of declines. The segment's after-tax profit was $486,000 in the second quarter of 2002, an increase of $163,000, or 51%, as compared to the prior year second quarter of $323,000. On a year-to-date basis, net interest income totaled $2.0 million for the first six months of 2002, an increase of $149,000, or 8%, as compared to the $1.8 million recorded in the first six months of 2001. Non-interest income decreased $388,000 to $1.8 million in the first six months of 2002. The Tricom segment's after-tax profit for the six months ended June 30, 2002, totaled $757,000, an increase of $155,000, or 26%, as compared to $602,000 in the first six months of 2001. As discussed in Note 12 - Goodwill and Other Intangible Assets to the Company's unaudited consolidated financial statements, Tricom benefited from the adoption of SFAS 142. Ceasing amortization of goodwill contributed $86,000 to the segment's after-tax profit in the second quarter of 2002 and $172,000 to the segment's year-to-date 2002 after-tax profits. The trust, asset management and brokerage segment reported net interest income of $722,000 for the second quarter of 2002 and $186,000 for the same period last year. The net interest income reported is due to an increase in the segment's earning assets, primarily the interest-bearing brokerage customer receivables at WHI, as well as the net interest allocated to the segment from account balances on deposit at the Banks. This segment recorded non-interest income of $7.6 million for the second quarter of 2002 as compared to $523,000 for the same quarter of 2001, an increase of $7.1 million. The increase is attributable to the revenues from the Wayne Hummer Companies. Wintrust is committed to growing the trust and investment business in order to better service its customers and create a more diversified revenue stream. The trust, asset management and brokerage segment's after-tax loss totaled $87,000 for the three-month period ended June 30, 2002, as compared to an after-tax loss of $108,000 for the same period of 2001. On a year-to-date basis, net interest income totaled $1.3 million for the first six months of 2002, an increase of $958,000, or 272%, as compared to the $352,000 recorded last year. Non-interest income increased $11.3 million to $12.3 million in the first six months of 2002. The increase is attributable to the revenues from the Wayne Hummer Companies. This segment's after-tax loss for the six months ended June 30, 2002, totaled $229,000, an improvement of $75,000, or 25%, as compared to the prior year loss of $304,000. FINANCIAL CONDITION Total assets were $3.22 billion at June 30, 2002, an increase of $897 million, or 39%, over $2.32 billion at June 30, 2001, and $514 million, or 38% on an annualized basis, over $2.71 billion at December 31, 2001. Growth at the newer Banks and branches along with market share increases at the more mature Banks and the addition of the Wayne Hummer Companies were the primary factors for the increases since year-end, adding $420 million and $94 million in total assets, respectively. Total funding, which includes retail deposits, wholesale borrowings and Long-term Debt-Trust Preferred Securities, was $2.93 billion at June 30, 2002, and increased $783 million, or 36%, over the June 30, 2001 reported amounts, and $400 million, or 32% on an annualized basis, since December 31, 2001. The increased funding was primarily utilized to fund growth in the loan portfolio of $522 million since June 30, 2001 and $290 million since year-end. See Notes 3-7 of the Company's unaudited consolidated financial statements on pages 6-8 for additional period-end detail. - 28 -
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: <TABLE> <CAPTION> THREE MONTHS ENDED Three Months Ended Three Months Ended JUNE 30, 2002 March 31, 2002 June 30, 2001 ---------------------------- ------------------------------------------------------- (Dollars in thousands) BALANCE PERCENT Balance Percent Balance Percent -------------------------------------------------------------------------- ------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans: Commercial and commercial real estate $ 1,059,413 38 % $ 982,902 38 % $ 754,170 37 % Home equity 304,674 11 274,076 11 191,661 9 Residential real estate (1) 161,663 6 168,443 6 150,532 7 Premium finance receivables 432,603 16 408,869 16 358,817 18 Indirect auto loans 183,209 6 184,993 7 189,168 9 Tricom finance receivables 18,436 1 18,153 1 18,753 1 Other loans 58,970 2 64,366 2 72,595 4 ---------------------------- ------------------------------------------------------- Total loans, net of unearned income $ 2,218,968 80 % $ 2,101,802 81 % $ 1,735,696 85 % Liquidity management assets (2) 484,483 17 458,922 17 302,848 15 Other earning assets (3) 71,100 3 44,920 2 -- -- ---------------------------- ------------------------------------------------------- Total earning assets $ 2,774,551 100 % $ 2,605,644 100 % $ 2,038,544 100 % ============================ ======================================================= Total assets $ 2,992,133 $ 2,805,594 $ 2,214,280 ================ ================ =============== Total earning assets to total assets 93 % 93 % 92 % ============ ============ ============ - ------------------------------------------------------------ <FN> (1) Includes mortgages held for sale (2) Liquidity management assets include available-for-sale securities, interest earning deposits with banks and federal funds sold. (3) Other earning assets include brokerage customer receivables and trading account securities. </FN> </TABLE> Average earning assets for the second quarter of 2002, increased $169 million, or 26% on an annualized basis, over the first 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 2002. Total average loans increased by $117 million over the previous quarter. Commercial and commercial real estate loans grew on average by 31%, home equity by 45% and premium finance receivables by 23%, all on an annualized basis, over the first quarter of 2002. Average earning assets for the second quarter of 2002, increased $736 million, or 36%, over the year-earlier second quarter. Average loans accounted for $483 million of the total average earning asset growth. Average other earning assets, comprising the trading account securities and brokerage customer receivables as a result of the acquisition of the Wayne Hummer Companies, contributed $71 million to total average earning asset growth. In the normal course of business, Wayne Hummer Investments, LLC ("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 - 29 -
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. 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: <TABLE> <CAPTION> SIX MONTHS ENDED Six Months Ended JUNE 30, 2002 June 30, 2001 -------------------------------- ------------------------------- (Dollars in thousands) BALANCE PERCENT Balance Percent ------------------------------------------------------- ----------------- ------------- ----------------- ------------- <S> <C> <C> <C> <C> Loans: Commercial and commercial real estate $ 1,021,374 38 % $ 709,066 36 % Home equity 289,677 11 186,969 9 Residential real estate (1) 165,417 6 145,243 7 Premium finance receivables 421,224 15 351,858 18 Indirect auto loans 184,174 7 192,557 9 Tricom finance receivables 18,295 1 18,681 1 Other loans 62,432 2 69,935 4 ----------------- ------------- ----------------- ------------- Total loans, net of unearned income $ 2,162,593 80 % $ 1,674,309 84 % Liquidity management assets (2) 468,103 17 310,887 16 Other earning assets (3) 58,082 3 -- -- ----------------- ------------- ----------------- ------------- Total earning assets $ 2,688,778 100 % $ 1,985,196 100 % ================= ============= ================= ============= Total assets $ 2,897,465 $ 2,162,430 ================= ================= Total earning assets to total assets 93 % 92 % ============= ============= - ------------------------------------------------------------ <FN> (1) Includes mortgages held for sale. (2) Liquidity management assets include available-for-sale securities, interest earning deposits with banks and federal funds sold. (3) Other earning assets include brokerage customer receivables and trading account securities. </FN> </TABLE> Average earning assets for the six months ended June 30, 2002 increased $704 million, or 35%, over the first six months of 2001. 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 has fueled the Company's year-to-date total earning asset growth in 2002. Total average loans increased by $488 million in the second quarter of 2002 over the previous quarter. Commercial and commercial real estate loans grew on average by 44%, home equity by 55% and premium finance receivables by 20% in the first six months of 2002 compared to the first six months of 2001. - 30 -
DEPOSITS Total average deposits for the second quarter of 2002 were $2.44 billion, an increase of $477 million, or 24%, over the second quarter of 2001 and an increase of $105 million, or 18% on an annualized basis, over the first quarter of 2002. 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: <TABLE> <CAPTION> THREE MONTHS ENDED Three Months Ended Three Months Ended JUNE 30, 2002 March 31, 2002 June 30, 2001 --------------------------------------------------------- ----------------------------- (Dollars in thousands) BALANCE PERCENT Balance Percent Balance Percent ------------------------------------------ --------------------------------------------------------- ----------------------------- <S> <C> <C> <C> <C> <C> <C> Non-interest bearing $ 241,180 10 % $ 242,012 10 % $ 197,870 10 % NOW 286,013 12 285,756 12 178,766 9 Money market 364,754 15 352,574 15 294,797 15 Brokerage customer deposits 14,631 1 -- -- -- -- Savings 130,247 5 128,410 6 92,449 5 Time certificate of deposits 1,407,602 57 1,330,648 57 1,203,898 61 --------------------------------------------------------- ----------------------------- Total deposits $ 2,444,427 100 % $ 2,339,400 100 % $ 1,967,780 100 % ========================================================= ============================= </TABLE> The percentage mix of average deposits for the first quarter of 2002 was relatively consistent with the deposit mix as of the prior period dates presented. Growth in both the number of accounts and balances has been primarily the result of newer bank and branch growth, and continued marketing efforts at the more established Banks to create additional deposit market share. As previously disclosed, following its acquisition of the Wayne Hummer Companies in February 2002, Wintrust has undertaken 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 ("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, 2002, $97.5 million had migrated into an insured bank deposit product at the various 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. As of July 31, 2002, a total of approximately $150 million was resident in this account and Wintrust estimates that approximately $200 to $300 million may migrate to the Banks by the end of 2002. 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, 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, increased by $60 million in the second quarter of 2002 to $321 million, compared to the first quarter of 2002 average balance of $261 million. These funding sources increased by $223 million compared to the second quarter of 2001 average total balance of $98 million. - 31 -
The following table sets forth, by category, the composition of average other funding sources for the periods presented: <TABLE> <CAPTION> Three Months Ended ---------------------------------------------------------- JUNE 30, March 31, June 30, (In thousands) 2002 2002 2001 ----------------------------------------------------------------------- --------------------------------------- ------------------ <S> <C> <C> <C> Notes payable $ 66,323 $ 55,384 $ 31,048 Federal Home Loan Bank advances 104,938 90,000 -- Federal funds purchased 24,386 4,760 121 Securities sold under repurchase agreements 19,230 28,704 15,746 Wayne Hummer Companies borrowings 49,648 28,628 -- Other 5,000 2,222 -- Long-term Debt - Trust Preferred Securities 51,050 51,050 51,050 --------------------------------------- ------------------ Total other funding sources $ 320,575 $ 260,748 $ 97,965 ======================================= ================== </TABLE> The Wayne Hummer Companies borrowings consist of demand obligations to third party banks primarily collateralized with customer assets at interest rates approximating the fed funds rate that are used to finance securities purchased by customers on margin and securities owned by WHI and demand obligations to brokers and clearing organizations at rates approximating fed funds. The increase in the average balance in the second quarter of 2002 compared to the first quarter of 2002 is a result of the amounts being included in the Company's results for the full quarter. 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. Other represents the Company's interest-bearing deferred portion of the purchase price of the Wayne Hummer Companies. SHAREHOLDERS' EQUITY Total shareholders' equity was $206.0 million at June 30, 2002 and increased $73.0 million since June 30, 2001 and $64.7 million since the end of 2001. The increase from year-end was the result of the Company's issuance of 762,742 shares, or $15.0 million, of its common stock in the acquisition of the Wayne Hummer Companies, issuance of 1,185,000 shares of common stock through a public offering completed in June 2002, realizing net proceeds in the second quarter of approximately $31.7 million, net income of $12.7 million, $5.4 million of proceeds from the issuance of the Company's common stock for stock options, warrants, employee stock purchase plan and director compensation plan, a $847,000 decrease in the unrealized loss on securities and derivative financial instruments offset by $875,000 of cash dividends paid on the Company's common stock. The annualized return on average equity for the six months ended June 30, 2002 increased to 15.85% as compared to 15.81% for the first six months of 2001. On June 14, 2002 Wintrust announced the closing of an underwritten offering of 1,185,000 shares of common stock at a price of $28.70 per share. Wintrust sold all 1,185,000 shares of common stock. In connection with the offering, Wintrust granted the underwriters of the offering a 30-day over-allotment option to purchase up to an additional 177,750 shares, which was exercised and closed in July, 2002. Net proceeds to the Company, including the over-allotment option and after deducting the underwriting discount and estimated offering expenses, were approximately $36.5 million. The net proceeds of this offering will be used to increase the capital at our existing Banks, to pursue growth opportunities (internal, additional de novo locations and possible acquisitions) and for general corporate purposes. - 32 -
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: <TABLE> <CAPTION> JUNE 30, December 31, June 30, 2002 2001 2001 -------------------- ------------------- ----------------- <S> <C> <C> <C> Leverage ratio 7.8 % 7.1 % 7.6 % Tier 1 risk-based capital ratio 8.6 7.7 8.3 Total risk-based capital ratio 9.2 8.5 9.3 Dividend payout ratio 7.7 7.4 7.6 - ------------------------------------------------------------------- -------------------------------------------------------------- </TABLE> <TABLE> <CAPTION> Minimum Capital Adequately Well Requirements Capitalized Capitalized -------------------- ------------------- ----------------- <S> <C> <C> <C> 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 - ------------------------------------------------------------------- -------------------------------------------------------------- </TABLE> 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. On January 24, 2002, Wintrust declared a semi-annual cash dividend of $0.06 per common share. Subsequent to the end of the second quarter, the Company declared a semi-annual cash dividend of $0.06 per common share, payable August 20, 2002 to shareholders of record on August 6, 2002. Both 2002 semi-annual dividends represent a 29% increase over the comparable dividends per share paid in 2001. The Company has repurchased no shares of the Company's common stock since the third quarter of 2000. - 33 -
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: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, -------------------------------------- -------------------------------------- (Dollars in thousands) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------- -------------------------------------- <S> <C> <C> <C> <C> BALANCE AT BEGINNING OF PERIOD $ 14,697 $ 11,067 $ 13,686 $ 10,433 PROVISION FOR LOAN LOSSES 2,483 2,264 4,831 3,902 CHARGE-OFFS: Commercial and commercial real estate loans 178 278 403 375 Home equity loans -- -- -- -- Residential real estate loans -- 13 -- 13 Consumer and other loans 73 10 148 20 Premium finance receivables 977 836 1,844 1,548 Indirect automobile loans 187 203 475 490 Tricom finance receivables 9 -- 9 -- ---------------- --------------- ----------------- --------------- Total charge-offs 1,424 1,340 2,879 2,446 ---------------- --------------- ----------------- --------------- RECOVERIES: Commercial and commercial real estate loans 115 2 135 4 Home equity loans -- -- -- -- Residential real estate loans -- -- -- -- Consumer and other loans 12 -- 12 -- Premium finance receivables 66 83 129 129 Indirect automobile loans 40 35 70 89 Tricom finance receivables 20 -- 25 -- ---------------- --------------- ----------------- --------------- Total recoveries 253 120 371 222 ---------------- --------------- ----------------- --------------- NET CHARGE-OFFS (1,171) (1,220) (2,508) (2,224) ---------------- --------------- --------------- ----------------- BALANCE AT JUNE 30 $ 16,009 $ 12,111 $ 16,009 $ 12,111 ================ =============== ================= =============== Annualized net charge-offs as a percentage of average: Commercial and commercial real estate loans 0.02 % 0.15 % 0.05 % 0.11 % Home equity loans -- -- -- -- Residential real estate loans -- 0.03 -- 0.02 Consumer and other loans 0.41 0.06 0.44 0.06 Premium finance receivables 0.84 0.84 0.82 0.81 Indirect automobile loans 0.32 0.36 0.44 0.42 Tricom finance receivables (0.24) -- (0.18) -- -------------------------------------- -------------------------------------- Total loans 0.21 % 0.28 % 0.24 % 0.27 % ====================================== ====================================== Net charge-offs as a percentage of the provision for loan losses 47.16 % 53.89 % 51.91 % 57.00 % ====================================== ====================================== Loans at June 30 $ 2,308,945 $ 1,787,257 ====================================== Allowance as a percentage of loans at period-end 0.69 % 0.68 % ====================================== </TABLE> 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. The amount of additions to the allowance for loan losses, which is charged to earnings through - 34 -
the provision for loan losses, is determined based on management's assessment of the adequacy of the allowance for loans losses. Management evaluates on a quarterly basis a variety of factors, including actual charge-offs during the year, 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. The provision for loan losses totaled $2.5 million for the second quarter of 2002, an increase of $219,000 from a year earlier. For the quarter ended June 30, 2002, net charge-offs totaled $1.2 million, unchanged from the $1.2 million of net charge-offs recorded in the same period of 2001. On a ratio basis, annualized net charge-offs as a percentage of average loans decreased to 0.21% in the second quarter of 2002 from 0.28% in the same period in 2001. On a year-to-date basis, the provision for loan losses totaled $4.8 million for the first six months of 2002, an increase of $929,000 over the same period last year. Net charge-offs for the first six months of 2002 increased slightly to $2.5 million, a $284,000 or 13% increase over the $2.2 million recorded in the same period last year. On a ratio basis, annualized net charge-offs as a percentage of average loans decreased to 0.24% for the first six months of 2002 from 0.27% in the first six months of 2001. 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 increase in the allowance for loan losses of $2.3 million from December 31, 2001 to June 30, 2002 is primarily related to growth in the commercial and commercial real estate portfolio of $126.5 million, or 25% on an annualized basis, growth in the premium finance receivables portfolio of $111.4 million, or 65% on an annualized basis, and the increase in potential problem loans. The allowance for loan losses as a percentage of total loans was 0.69% at June 30, 2002 compared to 0.68% at June 30, 2001. 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 $354,000 from the prior year and the allocated loss has been reduced due to improvement in the delinquencies, underwriting standards and collection routines. - 35 -
PAST DUE LOANS AND NON-PERFORMING ASSETS The following table sets forth the Company's non-performing assets as of the dates presented: <TABLE> <CAPTION> JUNE 30, March 31, December 31, June 30, (Dollars in thousands) 2002 2002 2001 2001 - --------------------------------------------------------------- ----------------- --------------- ----------------- ------------- <S> <C> <C> <C> <C> PAST DUE GREATER THAN 90 DAYS AND STILL ACCRUING: Residential real estate and home equity $ 16 $ 136 $ 168 $ 389 Commercial, consumer and other 1,055 208 1,059 866 Premium finance receivables 2,141 1,582 2,402 2,982 Indirect automobile loans 340 249 361 372 Tricom finance receivables -- -- -- -- ----------------- --------------- ----------------- ------------- Total past due greater than 90 days and still accruing 3,552 2,175 3,990 4,609 ----------------- --------------- ----------------- ------------- NON-ACCRUAL LOANS: Residential real estate and home equity 401 1,912 1,385 411 Commercial, consumer and other 1,528 742 1,180 978 Premium finance receivables 5,417 6,277 5,802 6,392 Indirect automobile loans 163 266 496 274 Tricom finance receivables 104 104 104 112 ----------------- --------------- ----------------- ------------- Total non-accrual 7,613 9,301 8,967 8,167 ----------------- --------------- ----------------- ------------- TOTAL NON-PERFORMING LOANS: Residential real estate and home equity 417 2,048 1,553 800 Commercial, consumer and other 2,583 950 2,239 1,844 Premium finance receivables 7,558 7,859 8,204 9,374 Indirect automobile loans 503 515 857 646 Tricom finance receivables 104 104 104 112 ----------------- --------------- ----------------- ------------- Total non-performing loans 11,165 11,476 12,957 12,776 ----------------- --------------- ----------------- ------------- OTHER REAL ESTATE OWNED 756 100 100 100 ----------------- --------------- ----------------- ------------- TOTAL NON-PERFORMING ASSETS $ 11,921 $ 11,576 $ 13,057 $ 12,876 ================= =============== ================= ============= Total non-performing loans by category as a percent of its own respective category: Residential real estate and home equity 0.09 % 0.48 % 0.39 % 0.23 % Commercial, consumer and other 0.22 0.08 0.21 0.21 Premium finance receivables 1.64 1.90 2.36 2.71 Indirect automobile loans 0.27 0.28 0.47 0.34 Tricom finance receivables 0.54 0.59 0.57 0.67 ----------------- --------------- ----------------- -------------- Total non-performing loans 0.48 % 0.53 % 0.64 % 0.71 % ================= =============== ================= ============== Total non-performing assets as a percentage of total assets 0.37 % 0.39 % 0.48 % 0.55 % ================= =============== ================= ============== Allowance for loan losses as a percentage of non-performing loans 143.39 % 128.07 % 105.63 % 94.79 % ================= =============== ================= ============== </TABLE> The information in the table should be read in conjunction with the detailed discussion following the table. - 36 -
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 $3.0 million, unchanged from the $3.0 million reported at March 31, 2002, but down from the $3.8 million reported at December 31, 2001. 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. Non-performing Premium Finance Receivables The table below presents the level of non-performing premium finance receivables as of June 30, 2002 and 2001, and the amount of net charge-offs for the six months then ended. <TABLE> <CAPTION> (Dollars in thousands) JUNE 30, 2002 June 30, 2001 - ---------------------------------------------------------------------------------- ---------------------- ----------------------- <S> <C> <C> Non-performing premium finance receivables $ 7,558 $ 9,374 - as a percent of premium finance receivables 1.64% 2.71% Net charge-offs of premium finance receivables $ 1,715 $ 1,419 - - annualized as a percent of premium finance receivables 0.82% 0.81% - ---------------------------------------------------------------------------------- ---------------------- ----------------------- </TABLE> The improvement in the level of non-performing premium finance receivables since June 30, 2001 is indicative of actions taken by management. As noted in Wintrust's prior quarterly earnings releases in 2001, Wintrust has eliminated more than 1,300 relationships with certain insurance agents that were referring new business to our premium finance subsidiary that had relatively small balances and higher than normal delinquency rates. The business associated with those accounts has become a less significant percent of the entire portfolio and is nearly extinguished. 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 $503,000 at June 30, 2002, decreasing from $857,000 at December 31, 2001 and $646,000 at June 30, 2001. The ratio of these non-performing loans to total indirect automobile loans decreased to 0.27% of total indirect automobile loans at June 30, 2002 from 0.47% at December 31, 2001 and 0.34% at June 30, 2001. As noted in the Allowance for Loan Losses table, net charge-offs as a percent of total indirect automobile loans has decreased from 0.36% in the second quarter of 2001 to 0.32% in the second quarter of 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, 2002 were $184 million, unchanged from December 31, 2001 but down $6 million, or 3% from June 30, 2001. - 37 -
Potential Problem Loans 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") 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. However, these loans which the Company defines as "potential problem 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. As evidence of this conservative posture, over 75% of all loans identified as potential problem loans were current as to principal and interest at June 30, 2002. Examples of these potential problem loans include certain loans that are in a past-due status, loans with borrowers that have recent adverse operating cash flow or balance sheet trends, or loans with general risk characteristics that the loan officer feels might jeopardize the future timely collection of principal and interest payments. Management's review of the total loan portfolio to identify loans where there is concern that the borrower might not be able to continue to satisfy present loan repayment terms includes factors such as review of individual loans, recent loss experience and current economic conditions. The principal amount of potential problem loans as of June 30, 2002 and December 31, 2001 was approximately $48.8 million and $23.8 million, respectively. In excess of $38 million of the potential problem loans as of June 30, 2002 were current as to principal and interest payments and, accordingly, we believe the loans identified as potential problem loans to quite conservative in nature. The increase in potential problem loans relates primarily to a few larger credits that management believes have no current loss exposure but for which additional proactive monitoring is prudent given the current economic and business climate. 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 on pages 29-33 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 40. - 38 -
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. 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 that may develop in the existing portfolio of loans and leases, there can be no assurance that the allowance will prove sufficient to cover actual future loan or lease losses. o If market interest rates should move contrary to the Company's gap position on interest earning assets and interest bearing liabilities, the "gap" will work against the Company and its net interest income may be negatively affected. o The financial services business is highly competitive which may affect the pricing of the Company's loan and deposit products as well as its services. o The Company 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 Unforeseen future events surrounding the trust, asset management and brokerage business, including competition and related pricing of brokerage and asset management products, or difficulties integrating the acquisition of the Wayne Hummer Companies. - 39 -
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. 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 for further discussion of the net interest margin. Since the Company's primary source of interest bearing liabilities is customer deposits, the Company's ability to manage the types and terms of such deposits may be somewhat limited by customer preferences and local competition in the market areas in which the Company operates. The rates, terms and interest rate indices of the Company's interest earning assets result primarily from the Company's strategy of investing in loans and short-term securities that permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving an acceptable interest rate spread. One method utilized by financial institutions to manage interest rate risk is to enter into derivative financial instruments. A derivative financial instrument includes interest rate swaps, interest rate caps and floors, futures, forwards, option contracts and other financial instruments with similar characteristics. As of June 30, 2002, the Company had $125 million notional principal amount of interest rate cap contracts outstanding that mature between July 2002 and February 2003. These contracts were purchased to mitigate the effect of rising rates on certain floating rate deposit products. Additionally, during 2001, the Company entered into a $25 million notional principal amount interest rate swap contract that matures in February 2004. This contract effectively 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 first six months of 2002, the Company also entered into certain covered call option transactions related to certain securities held by the Company. These transactions are designed to increase the total return associated with holding these securities as earning assets and are not used to manage exposure to changing market interest rates. However, the Company's exposure to interest rate risk may be 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, 2002. The Company's exposure to market 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 interest income and to adjust balance sheet and off-balance sheet instruments to minimize the inherent risk while at the same time maximize income. Tools used by management include a standard gap report and a rate simulation model whereby changes in net 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. - 40 -
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. The following table illustrates the Company's estimated interest rate sensitivity and periodic and cumulative gap positions as of June 30, 2002: <TABLE> <CAPTION> TIME TO MATURITY OR REPRICING ----------------------------------------------------------------------- 0-90 91-365 1-5 Over 5 (Dollars in thousands) Days Days Years Years Total - --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> ASSETS: Liquidity management assets $ 263,225 $ 64,508 $ 95,263 $ 156,469 $ 579,465 Loans, net of unearned income (1) 1,390,909 435,528 469,743 40,500 2,336,680 Other earning assets 73,462 -- -- -- 73,462 ----------------------------------------------------------------------- Total earning assets 1,727,596 500,036 565,006 196,969 2,989,607 Other non-earning assets -- -- -- 229,793 229,793 ----------------------------------------------------------------------- Total assets (RSA) $ 1,727,596 $ 500,036 $565,006 $ 426,762 $ 3,219,400 ======================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits (2) $ 1,300,164 $ 648,508 $385,819 $ 16,718 $ 2,351,209 Federal Home Loan Bank advances -- -- 115,000 25,000 140,000 Notes payable and other borrowings 130,362 -- -- -- 130,362 Long-term Debt - Trust Preferred Securities -- -- -- 51,050 51,050 ----------------------------------------------------------------------- Total interest-bearing liabilities Demand deposits -- -- -- 257,298 257,298 Other liabilities -- -- -- 83,482 83,482 Shareholders' equity -- -- -- 205,999 205,999 EFFECT OF DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swap (Company pays fixed, receives floating) (25,000) -- 25,000 -- -- ----------------------------------------------------------------------- Total liabilities and shareholders' equity including effect of derivative financial instruments (RSL) $ 1,405,526 $ 648,508 $525,819 $ 639,547 $ 3,219,400 ======================================================================= Repricing gap (RSA - RSL) $ 322,070 $ (148,472) $ 39,187 $(212,785) Cumulative repricing gap $ 322,070 $ 173,598 $212,785 $ -- Cumulative RSA/Cumulative RSL 123% 108% 108% Cumulative RSA/Total assets 54% 69% 87% Cumulative RSL/Total assets 44% 64% 80% Cumulative GAP/Total assets 10% 5% 7% Cumulative GAP/Cumulative RSA 19% 8% 8% - --------------------------------------------------------------------------------------------------------------------------------- <FN> (1) Loans, net of unearned income includes 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. </FN> </TABLE> While the gap position and related ratios illustrated in the table are useful tools that management can use to assess the general positioning of the Company's and its subsidiaries' balance sheets, it is only as of a point in time. Additionally, the gap position does not reflect the impact of the interest rate cap contracts that may mitigate the effect of rising rates on certain floating rate deposit products. See Note 10-Derivative Financial Instruments to the unaudited consolidated financial statements for further information on the interest rate cap contracts. - 41 -
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 immediate permanent parallel shift in the yield curve of 200 basis points, both upward and downward. This analysis also includes the impact of both interest rate cap agreements mentioned above. Utilizing this measurement concept, the interest rate risk of the Company, expressed as a percentage change in net interest income over a two-year time horizon due to changes in interest rates as of the dates shown is as follows: <TABLE> <CAPTION> + 200 BASIS - 200 BASIS POINTS POINTS --------------- -------------- <S> <C> <C> Percentage change in net interest income due to an immediate permanent 200 basis point parallel shift in the yield curve: (1) JUNE 30, 2002 7.4 % (16.4) % December 31, 2001 7.2 % (11.4) % June 30, 2001 4.7 % (7.0) % - ------------------------------------------------------------------------------------------------- <FN> (1) The June 30, 2002 and the December 31, 2001 200 basis point immediate permanent downward parallel shift in the yield curve impacted a majority of rate sensitive assets by the entire 200 basis points, while certain interest-bearing deposits may already be at their floor, or reprice significantly less than 200 basis points. This caused 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, 2002 and December 31, 2001 compared to June 30, 2001. </FN> </TABLE> These results are based solely on an immediate 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. No management actions to mitigate potential changes in net interest income are included in this simulation. These management actions could include, but would not be limited to, delaying a change in deposit rates, extending the maturity 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. - 42 -
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. None. 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 23, 2002. (b) At the Annual Meeting of Shareholders, the following matters were submitted to and approved by a vote of the shareholders: (1) The election of eight Class III directors to the Board of Directors to hold office for a three-year term expiring in 2005. <TABLE> <CAPTION> Votes Withheld Director Nominees For Authority ------------------------------------------------------ ----------------- ---------------- <S> <C> <C> Joseph Alaimo 13,771,661 275,568 Peter D. Crist 13,777,966 269,263 Philip W. Hummer 13,775,917 271,312 John S. Lillard 13,776,217 271,012 Hollis W. Rademacher 13,777,123 270,106 John N. Schaper 13,694,928 352,301 John J. Schornack 13,773,270 273,959 Larry V. Wright 13,777,072 270,187 </TABLE> All director nominees were re-elected at the Annual Meeting. The following directors continued to serve after the Annual Meeting: <TABLE> <CAPTION> Continuing Director Term Expires ------------------------------------------------------ ----------------- <S> <C> James B. McCarthy 2003 Raymond L. Kratzer 2003 Dorothy M. Mueller 2003 Thomas J. Neis 2003 Penelope J. Randel 2003 J. Christopher Reyes 2003 Peter R. Rusin 2003 Edward J. Wehmer 2003 Bruce K. Crowther 2004 Bert A. Getz, Jr. 2004 William C. Graft 2004 Marguerite Savard McKenna 2004 Albin F. Moschner 2004 Christopher J. Perry 2004 Ingird S. Stafford 2004 Katharine V. Sylvester 2004 </TABLE> - 43 -
(2) A proposal to amend the Wintrust Financial Corporation 1997 Stock Incentive Plan to increase the number of shares authorized under the Plan. Votes For Votes Against Abstentions -------------------- --------------------------- ------------------------ 8,242,833 3,272,449 64,231 ITEM 5: OTHER INFORMATION. None. - 44 -
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 By-laws of Wintrust Financial Corporation (incorporated by reference to Exhibit 3(i) of the Company's Form 10-Q for the quarter ended June 30, 1998). 4.1 Rights Agreement between Wintrust Financial Corporation and Illinois Stock Transfer Company, as Rights Agent, dated July 28, 1998 (incorporated by reference to Exhibit 4.1 of the Company's Form 8-A Registration Statement (No. 000-21923) filed with the Securities 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. 99.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Senior Executive Vice President, Chief Operating Officer & 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 dated April 19, 2002, filed with the SEC on May 3, 2002, provided the Company's first quarter 2002 earnings release dated April 19, 2002 and included a copy of the Company's letter to shareholders mailed in May 2002. - 45 -
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, 2002 /s/ EDWARD J. WEHMER ----------------------------------- President & Chief Executive Officer Date: August 14, 2002 /s/ DAVID A. DYKSTRA ----------------------------------- Senior Executive Vice President Chief Operating Officer & Chief Financial Officer (Principal Financial Officer) Date: August 14, 2002 /s/ DAVID L. STOEHR ----------------------------------- Senior Vice President - Finance (Principal Accounting Officer) - 46 -
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 By-laws of Wintrust Financial Corporation (incorporated by reference to Exhibit 3(i) of the Company's Form 10-Q for the quarter ended June 30, 1998). 4.1 Rights Agreement between Wintrust Financial Corporation and Illinois Stock Transfer Company, as Rights Agent, dated July 28, 1998 (incorporated by reference to Exhibit 4.1 of the Company's Form 8-A Registration Statement (No. 000-21923) filed with the Securities 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. 99.1 Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of Senior Executive Vice President, Chief Operating Officer & Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - 47 -