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 MARCH 31, 2003 Commission File Number 0-21923 WINTRUST FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Illinois 36-3873352 - ---------------------------------------- ------------------------------------ (State of incorporation or organization) (I.R.S. Employer Identification No.) 727 North Bank Lane Lake Forest, Illinois 60045 ------------------------------------------------------- (Address of principal executive offices) (847) 615-4096 ------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.) Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock - no par value, 17,398,580 shares, as of May 5, 2003
TABLE OF CONTENTS PART I. -- FINANCIAL INFORMATION Page ---- ITEM 1. Financial Statements.__________________________________________ 1-13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. ______________________________________ 14-35 ITEM 3. Quantitative and Qualitative Disclosures About Market Risks. __ 36-39 ITEM 4. Controls and Procedures. ______________________________________ 39 PART II. -- OTHER INFORMATION ITEM 1. Legal Proceedings. ____________________________________________ 39 ITEM 2. Changes in Securities and Use of Proceeds._____________________ 39 ITEM 3. Defaults Upon Senior Securities. ______________________________ 39 ITEM 4. Submission of Matters to a Vote of Security Holders. __________ 39 ITEM 5. Other Information. ____________________________________________ 40 ITEM 6. Exhibits and Reports on Form 8-K. _____________________________ 40 Signatures ____________________________________________________ 41 Certifications_________________________________________________ 42-43 Exhibit Index _________________________________________________ 44
PART I ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED) (Unaudited) MARCH 31, December 31, March 31, (In thousands) 2003 2002 2002 ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 78,858 $ 105,671 $ 55,793 Federal funds sold and securities purchased under resale agreements 331,640 151,251 97,287 Interest-bearing deposits with banks 4,870 4,418 1,028 Available-for-sale securities, at fair value 504,190 547,679 365,540 Trading account securities 5,777 5,558 5,298 Brokerage customer receivables 35,405 37,592 64,765 Mortgage loans held-for-sale 96,350 90,446 31,723 Loans, net of unearned income 2,628,480 2,556,086 2,167,550 Less: Allowance for loan losses 19,773 18,390 14,697 ---------------------------------------------------------------------------------------------------------------------------------- Net loans 2,608,707 2,537,696 2,152,853 Premises and equipment, net 121,068 118,961 104,780 Accrued interest receivable and other assets 95,939 95,852 50,059 Goodwill 29,515 25,266 25,935 Other intangible assets 2,676 1,165 92 ---------------------------------------------------------------------------------------------------------------------------------- Total assets $ 3,914,995 $ 3,721,555 $ 2,955,153 ================================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest bearing $ 313,207 $ 305,540 $ 242,966 Interest bearing 2,957,088 2,783,584 2,174,349 ---------------------------------------------------------------------------------------------------------------------------------- Total deposits 3,270,295 3,089,124 2,417,315 Notes payable 46,975 44,025 66,125 Federal Home Loan Bank advances 140,000 140,000 90,000 Subordinated note 25,000 25,000 -- Other borrowings 41,668 46,708 113,624 Long-term debt - trust preferred securities 51,004 50,894 51,050 Accrued interest payable and other liabilities 101,148 98,802 53,518 ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities 3,676,090 3,494,553 2,791,632 ---------------------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock -- -- -- Common stock 17,371 17,216 15,712 Surplus 157,499 153,614 116,201 Common stock warrants 1,031 81 98 Retained earnings 63,842 56,967 36,482 Accumulated other comprehensive loss (838) (876) (4,972) ---------------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 238,905 227,002 163,521 ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 3,914,995 $ 3,721,555 $ 2,955,153 ================================================================================================================================== See accompanying notes to unaudited consolidated financial statements. </TABLE> - 1 -
<TABLE> <CAPTION> WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31 -------------------------------------------- (In thousands, except per share data) 2003 2002 ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 40,591 $ 36,661 Interest bearing deposits with banks 29 3 Federal funds sold and securities purchased under resale agreements 389 293 Securities 5,835 4,500 Trading account securities 38 24 Brokerage customer receivables 357 490 ---------------------------------------------------------------------------------------------------------------------------------- Total interest income 47,239 41,971 ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 17,102 16,675 Interest on Federal Home Loan Bank advances 1,457 897 Interest on subordinated note 444 -- Interest on notes payable and other borrowings 704 943 Interest on long-term debt - trust preferred securities 928 1,288 ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 20,635 19,803 ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 26,604 22,168 Provision for loan losses 2,641 2,348 ---------------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 23,963 19,820 ---------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME Wealth management fees 5,951 4,570 Fees on mortgage loans sold 4,598 2,017 Service charges on deposit accounts 855 738 Gain on sale of premium finance receivables 1,162 766 Administrative services revenue 1,091 822 Net available-for-sale securities gains (losses) 386 (215) Other 3,700 4,054 ---------------------------------------------------------------------------------------------------------------------------------- Total non-interest income 17,743 12,752 ---------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST EXPENSE Salaries and employee benefits 17,450 13,362 Equipment expense 1,842 1,730 Occupancy, net 1,898 1,544 Data processing 1,053 1,014 Advertising and marketing 539 524 Professional fees 782 611 Amortization of other intangibles 139 17 Other 5,208 3,877 ---------------------------------------------------------------------------------------------------------------------------------- Total non-interest expense 28,911 22,679 ---------------------------------------------------------------------------------------------------------------------------------- Income before income taxes 12,795 9,893 Income tax expense 4,532 3,531 ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 8,263 $ 6,362 ================================================================================================================================== NET INCOME PER COMMON SHARE - BASIC $ 0.48 $ 0.42 ================================================================================================================================== NET INCOME PER COMMON SHARE - DILUTED $ 0.45 $ 0.40 ================================================================================================================================== CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.08 $ 0.06 ================================================================================================================================== Weighted average common shares outstanding 17,308 15,078 Dilutive potential common shares 1,124 913 ---------------------------------------------------------------------------------------------------------------------------------- Average common shares and dilutive common shares 18,432 15,991 ================================================================================================================================== See accompanying notes to unaudited consolidated financial statements. </TABLE> - 2 -
<TABLE> <CAPTION> WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) ACCUMULATED OTHER COMPRE- COMMON COMPRE- TOTAL HENSIVE COMMON STOCK TREASURY RETAINED HENSIVE SHAREHOLDERS' (In thousands) INCOME STOCK SURPLUS WARRANTS STOCK EARNINGS INCOME (LOSS) EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2001 $ 14,532 $ 97,956 $ 99 $ -- $ 30,995 $ (2,304) $ 141,278 Comprehensive income: Net income $6,362 -- -- -- -- 6,362 -- 6,362 Other comprehensive income, net of tax: Unrealized losses on securities, net of reclassification adjustment (2,795) -- -- -- -- -- (2,795) (2,795) Unrealized gains on derivative instruments 127 -- -- -- -- -- 127 127 ---------- Comprehensive income $3,694 Cash dividends declared on common stock -- -- -- -- (875) -- (875) Purchase of fractional shares resulting from stock split -- (10) -- -- -- -- (10) Common stock issued for: Acquisition of the Wayne Hummer Companies 763 14,237 -- -- -- -- 15,000 Director compensation plan 3 64 -- -- -- 67 Employee stock purchase plan -- 26 -- -- -- -- 26 Exercise of common stock warrants 1 8 (1) -- -- -- 8 Exercise of stock options 413 3,920 -- -- -- -- 4,333 - --------------------------------------- ------------------------------------------------------------------------------------- Balance at March 31, 2002 $ 15,712 $ 116,201 $ 98 $ -- $ 36,482 $ (4,972) $ 163,521 ======================================= ===================================================================================== BALANCE AT DECEMBER 31, 2002 $ 17,216 $ 153,614 $ 81 $ -- $ 56,967 $ (876) $ 227,002 COMPREHENSIVE INCOME: NET INCOME $8,263 -- -- -- -- 8,263 -- 8,263 OTHER COMPREHENSIVE INCOME, NET OF TAX: UNREALIZED LOSSES ON SECURITIES, NET OF RECLASSIFICATION ADJUSTMENT (41) -- -- -- -- -- (41) (41) UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS 79 -- -- -- -- -- 79 79 ---------- COMPREHENSIVE INCOME $8,301 CASH DIVIDENDS DECLARED ON COMMON STOCK -- -- -- -- (1,388) -- (1,388) PURCHASE OF TREASURY STOCK -- -- -- (17) -- -- (17) COMMON STOCK ISSUED FOR: ACQUISITION OF LAKE FOREST CAPITAL MANAGEMENT 82 2,418 950 -- -- -- 3,450 DIRECTOR COMPENSATION PLAN 5 121 -- -- -- -- 126 EMPLOYEE STOCK PURCHASE PLAN -- 5 -- -- -- -- 5 EXERCISE OF STOCK OPTIONS 31 509 -- 17 -- -- 557 RESTRICTED STOCK AWARDS 37 832 -- -- -- -- 869 - --------------------------------------- ------------------------------------------------------------------------------------- BALANCE AT MARCH 31, 2003 $ 17,371 $ 157,499 $ 1,031 $ -- $ 63,842 $ (838) $ 238,905 ======================================= ===================================================================================== THREE MONTHS ENDED MARCH 31, ---------------------------------- 2003 2002 -------------------- ----------- Disclosure of reclassification amount and income tax impact: Unrealized holding gains (losses) on available for sale securities during the period, net $ 319 $ (4,711) Unrealized holding gains on derivative instruments arising during the period 195 121 Less: Reclassification adjustment for gains (losses) included in net income, net 386 (215) Less: Income tax expense (benefit) 16 (1,633) -------------------- ------------- Net unrealized gains on available-for-sale securities and derivative instruments $ 38 $ (2,668) ==================== ============= </TABLE> See accompanying notes to unaudited consolidated financial statements. - 3 -
<TABLE> <CAPTION> WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, ------------------------------------------------------------------------------------------------------------------------------ (In thousands) 2003 2002 ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> OPERATING ACTIVITIES: Net income $ 8,263 $ 6,362 Adjustments to reconcile net income to net cash provided by, or used for, operating activities: Provision for loan losses 2,641 2,348 Depreciation and amortization 2,294 2,258 Net decrease in deferred income taxes 319 1,211 Tax benefit from exercises of stock options 390 2,239 Net amortization of securities 501 1,010 Originations of mortgage loans held for sale (350,234) (154,820) Proceeds from sales of mortgage loans held for sale 344,330 166,001 Net increase in trading securities (219) (487) Net decrease (increase) in brokerage customer receivables 2,187 (1,783) Gain on sale of premium finance receivables (1,162) (766) (Gain) loss on sale of available-for-sale securities, net (386) 215 Gain on sale of premises and equipment, net (3) (12) Decrease (increase) in accrued interest receivable and other assets, net 1,125 (4,126) Increase (decrease) in accrued interest payable and other liabilities, net 2,280 (1,589) ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 12,326 18,061 ------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Proceeds from maturities of available-for-sale securities 222,106 177,241 Proceeds from sales of available-for-sale securities 1,765,693 1,137,775 Purchases of available-for-sale securities (1,944,493) (1,300,622) Proceeds from sales of premium finance receivables 72,680 64,188 Cash paid for Lake Forest Capital Management Company, net of cash received (1,476) -- Cash paid for the Wayne Hummer Companies, net of cash received -- (7,560) Increase in interest-bearing deposits with banks (452) (44) Net increase in loans (146,078) (213,830) Purchase of premises and equipment, net (4,225) (7,032) ------------------------------------------------------------------------------------------------------------------------------ NET CASH USED FOR INVESTING ACTIVITIES (36,245) (149,884) ------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Increase in deposit accounts 181,171 102,679 (Decrease) Increase in other borrowings, net (5,560) 37,901 Increase in notes payable, net 2,950 19,550 Purchase of treasury stock (17) -- Issuance of common shares from stock options, restricted stock, employee stock purchase plan, common stock warrants and cash for stock split fractional shares 339 2,118 Dividends paid (1,388) (875) ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 177,495 161,373 ------------------------------------------------------------------------------------------------------------------------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 153,576 29,550 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 256,922 123,530 ------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 410,498 $ 153,080 ============================================================================================================================== </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. All share data and per share amounts reflect the 3-for-2 stock split, effected in the form of a 50% stock dividend, paid in March 2002. 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 March 31, 2003, Wintrust had seven wholly-owned bank subsidiaries (collectively, "Banks"), all of which started as de novo institutions, including Lake Forest Bank & Trust Company ("Lake Forest Bank"), Hinsdale Bank & Trust Company ("Hinsdale Bank"), North Shore Community Bank & Trust Company ("North Shore Bank"), Libertyville Bank & Trust Company ("Libertyville Bank"), Barrington Bank & Trust Company, N.A. ("Barrington Bank"), Crystal Lake Bank & Trust Company, N.A. ("Crystal Lake Bank") and Northbrook Bank & Trust Company ("Northbrook Bank"). The Company provides loans to businesses to finance the insurance premiums they pay on their commercial insurance policies ("premium finance receivables") on a national basis, through First Insurance Funding Corporation ("FIFC"). FIFC is a wholly-owned subsidiary of Crabtree Capital Corporation ("Crabtree") which is a wholly-owned subsidiary of Lake Forest Bank. Wintrust, through Tricom, Inc. of Milwaukee ("Tricom"), also provides high-yielding short-term accounts receivable financing ("Tricom finance receivables") and value-added out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to the temporary staffing industry, with clients located throughout the United States. Tricom is a wholly-owned subsidiary of Hinsdale Bank. The Company provides trust and investment services at each of its Banks through its wholly-owned subsidiary, Wayne Hummer Trust Company, N.A. ("WHTC"), formerly known as Wintrust Asset Management Company. Wayne Hummer Investments, LLC ("WHI") is a broker-dealer providing a full range of private client and securities brokerage services to clients located primarily in the Midwest and is a wholly-owned subsidiary of North Shore Bank. Focused Investments LLC ("Focused") is a broker-dealer that provides a full range of investment services to individuals through a network of relationships with community-based financial institutions primarily in Illinois. Focused is a wholly-owned subsidiary of WHI. Wayne Hummer Asset Management Company ("WHAMC") provides money management services and advisory services to individuals, institutions and municipal and tax-exempt organizations, as well as four proprietary mutual funds in addition to portfolio management and financial supervision for a wide range of pension and profit-sharing plans. WHAMC is a wholly-owned subsidiary of Wintrust. Collectively WHI, WHAMC and Focused are referred to as the "Wayne Hummer Companies" or "WHC". Wintrust Information Technology Services Company provides information technology support, item capture, imaging and statement preparation services to the Wintrust subsidiaries and is a wholly-owned subsidiary of Wintrust. The accompanying consolidated financial statements are unaudited and do not include information or footnotes necessary for a complete presentation of financial condition, results of operations or cash flows in accordance with generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report and Form 10-K for the year ended December 31, 2002. Operating results for the three-month 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. The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as information changes, the financial statements could reflect different estimates and assumptions. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a - 5 -
greater possibility of producing results that could be materially different than originally reported. The determination of the allowance for loan losses and the valuation of the retained interest in the premium finance receivables sold are the areas that require the most subjective and complex judgments. (2) SUPPLEMENTAL FINANCIAL MEASURES/RATIOS -------------------------------------- Certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company's performance. These include taxable-equivalent net interest income (including its individual components), net interest margin (including its individual components), core net interest margin and the efficiency ratio. Management believes that these measures and ratios provide users of the Company's financial information a more accurate view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company's operating efficiency for comparative purposes. Other financial holding companies may define or calculate these measures and ratios differently. See the table below for supplemental data and the corresponding reconciliation to GAAP financial measures for the three months ended March 31, 2003 and 2002. Management reviews yields on certain asset categories and the net interest margin of the Company, and its banking subsidiaries, on a fully taxable-equivalent basis ("FTE"). In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a taxable-equivalent basis is also used in the calculation of the Company's efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses), measures how much it costs to produce one dollar of revenue. Management also evaluates the net interest margin excluding the interest expense associated with the Company's Long-term Debt - Trust Preferred Securities ("Core Net Interest Margin"). Because these instruments are utilized by the Company primarily as capital instruments, management finds it useful to view the net interest margin excluding this expense and deems it to be a more accurate view of the operational net interest margin of the Company. <TABLE> <CAPTION> QUARTER ENDED MARCH 31, ------------------------------------------------- (Dollars in thousands) 2003 2002 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> (A) INTEREST INCOME (GAAP) $ 47,239 $ 41,971 Taxable-equivalent adjustment - Loans 141 188 Taxable-equivalent adjustment - Liquidity management assets 61 20 --------------------- --------------------- Interest income - FTE 47,441 42,179 (B) INTEREST EXPENSE (GAAP) 20,635 19,803 --------------------- --------------------- Net interest income - FTE $ 26,806 $ 22,376 --------------------- --------------------- (C) NET INTEREST INCOME (GAAP) (A MINUS B) $ 26,604 $ 22,168 Net interest income - FTE $ 26,806 $ 22,376 Add: Interest expense on long-term debt - trust preferred securities 928 1,288 --------------------- --------------------- Core net interest income - FTE (1) $ 27,734 $ 23,664 --------------------- --------------------- (D) NET INTEREST MARGIN (GAAP) 3.13 % 3.45 % Net interest margin - FTE 3.15 % 3.48 % Core net interest margin - FTE (1) 3.26 % 3.68 % (E) EFFICIENCY RATIO (GAAP) 65.76 % 64.55 % Efficiency ratio - FTE 65.46 % 64.17 % ================================================================================================================================ <FN> (1) Core net interest income and core net interest margin are by definition non-GAAP measures/ratios. The GAAP equivalents are the net interest income and net interest margin determined in accordance with GAAP (lines C and D in the table). </FN> </TABLE> - 6 -
(3) CASH AND CASH EQUIVALENTS ------------------------- For the purposes of the Consolidated Statements of Cash Flows, the Company considers cash and cash equivalents to include cash and due from banks, federal funds sold and securities purchased under resale agreements with original maturities of 90 days or less. (4) AVAILABLE-FOR-SALE SECURITIES ----------------------------- The following table is a summary of the available-for-sale securities portfolio as of the dates shown: <TABLE> <CAPTION> MARCH 31, 2003 December 31, 2002 March 31, 2002 ----------------------------------------------------------- ------------------------------ AMORTIZED FAIR Amortized Fair Amortized Fair (In thousands) COST VALUE Cost Value Cost Value ------------------------------------------------------- ------------------------------------------- ------------------------------ <S> <C> <C> <C> <C> <C> <C> U.S. Treasury $ 34,098 $ 33,852 $ 34,150 $ 34,022 $ 3,292 $ 3,291 U.S. Government agencies 241,145 242,280 139,707 140,752 131,175 131,117 Municipal 6,045 6,187 6,311 6,467 5,903 6,144 Corporate notes and other 72,347 72,258 76,809 75,193 26,688 25,846 Mortgage-backed 99,635 98,954 270,091 270,962 190,192 183,583 Federal Reserve/FHLB Stock and other equity securities 50,598 50,659 20,221 20,283 15,457 15,559 --------------- -------------------------------------------- ----------------------------- Total available-for-sale securities $ 503,868 $ 504,190 $ 547,289 $ 547,679 $ 372,707 $ 365,540 =============== ============================================ ============================= </TABLE> (5) LOANS ----- The following table is a summary of the loan portfolio as of the dates shown: <TABLE> <CAPTION> MARCH 31, December 31, March 31, (Dollars in thousands) 2003 2002 2002 - ------------------------------------------------------------------------------------ --------------------- --------------------- <S> <C> <C> <C> BALANCE: ------- Commercial and commercial real estate $ 1,314,493 $ 1,320,598 $ 1,066,326 Home equity 395,056 365,521 287,186 Residential real estate 135,940 156,213 142,554 Premium finance receivables 532,162 461,614 414,330 Indirect auto loans 169,311 178,234 184,385 Tricom finance receivables 24,416 21,048 17,558 Consumer and other loans 57,102 52,858 55,211 --------------------- --------------------- --------------------- Total loans, net of unearned income $ 2,628,480 $ 2,556,086 $ 2,167,550 ===================== ===================== ===================== MIX: --- Commercial and commercial real estate 50 % 52 % 49 % Home equity 15 14 13 Residential real estate 5 6 7 Premium finance receivables 20 18 19 Indirect auto loans 7 7 9 Tricom finance receivables 1 1 1 Consumer and other loans 2 2 2 ------------------------ ---------------------- ------------------- Total loans, net of unearned income 100 % 100 % 100 % ======================== ====================== =================== </TABLE> - 7 -
(6) DEPOSITS -------- The following is a summary of deposits as of the dates shown: <TABLE> <CAPTION> MARCH 31, December 31, March 31, (Dollars in thousands) 2003 2002 2002 ------------------------------------------------------------------------------ ------------------------------------------------- <S> <C> <C> <C> BALANCE: ------- Non-interest bearing $ 313,207 $ 305,540 $ 242,966 NOW accounts 347,938 354,499 290,120 NOW - Brokerage customer deposits 252,223 231,700 -- Money market accounts 416,698 399,441 368,240 Savings accounts 155,228 147,669 133,963 Time certificates of deposit 1,785,001 1,650,275 1,382,026 -------------------- ----------------------- ------------------- Total deposits $ 3,270,295 $ 3,089,124 $ 2,417,315 ==================== ======================= =================== MIX: --- Non-interest bearing 9 % 10 % 10 % NOW accounts 11 11 12 NOW - Brokerage customer deposits 8 8 -- Money market accounts 13 13 15 Savings accounts 5 5 6 Time certificates of deposit 54 53 57 --------------------- -------------------- ---------------- Total deposits 100 % 100 % 100 % ===================== ==================== ================ </TABLE> As previously disclosed, following its acquisition of the Wayne Hummer Companies in February 2002, Wintrust undertook an effort to migrate funds from the money market mutual fund managed by WHAMC into deposit accounts of the Wintrust Banks ("NOW - Brokerage customer deposits" in the table above). Consistent with reasonable interest rate risk parameters, the funds will generally be invested in excess loan production of the Banks as well as other investments suitable for banks. The migration of additional funds to the Banks is subject to the desire of the customers to make the transition of their funds into FDIC-insured bank accounts, capital capacity of the Company and the availability of suitable investments in which to deploy the funds. The net assets of the WHAMC money market mutual fund decreased $262 million from March 31, 2002 to March 31, 2003, of which $252 million migrated to deposit accounts at the Banks. (7) NOTES PAYABLE, FEDERAL HOME LOAN BANK ADVANCES, SUBORDINATED NOTE AND OTHER ---------------------------------------------------------------------------- BORROWINGS: - ---------- The following is a summary of notes payable, Federal Home Loan Bank advances, subordinated note and other borrowings as of the dates shown: <TABLE> <CAPTION> MARCH 31, December 31, March 31, (In thousands) 2003 2002 2002 ----------------------------------------------------------------------- --------------------------------------- ------------------ <S> <C> <C> <C> Notes payable $ 46,975 $ 44,025 $ 66,125 Federal Home Loan Bank advances 140,000 140,000 90,000 Subordinated note 25,000 25,000 -- Other borrowings: Federal funds purchased -- 2,000 43,500 Securities sold under repurchase agreements 20,604 24,560 17,193 Wayne Hummer Companies borrowings 16,064 15,148 47,931 Other 5,000 5,000 5,000 ------------------- ------------------- ------------------ Total other borrowings $ 41,668 $ 46,708 $ 113,624 ------------------- ------------------- ------------------ Total notes payable, Federal Home Loan Bank advances, subordinated note and other borrowings $ 253,643 $ 255,733 $ 269,749 =================== =================== ================== </TABLE> The Wayne Hummer Companies borrowings consist of collateralized demand obligations to third party brokers and 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 clearing organizations. Other represents the Company's interest-bearing deferred portion of the purchase price of the Wayne Hummer Companies. - 8 -
(8) LONG-TERM DEBT - TRUST PREFERRED SECURITIES ------------------------------------------- The Company issued a total of $51.1 million of Trust Preferred Securities through Wintrust Capital Trust I and Wintrust Capital Trust II ("Trusts"). The Company owns all of the common securities issued by the Trusts. 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 March 31, 2003 is as follows (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> <C> Wintrust Capital Trust I $ 31,050 10/98 Fixed 9.00% 09/30/28 09/30/03 Adjustment for fair value hedge (46) Wintrust Capital Trust II 20,000 06/00 Fixed 10.50% 06/30/30 06/30/05 ------------- Total $ 51,004 ============= </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 any time after the date shown above, and earlier at the discretion of the Company if certain conditions are met, and, in any event, only after the Company has obtained Federal Reserve approval, if then required under applicable guidelines or regulations. The Trust Preferred Securities, subject to certain limitations, qualify as Tier 1 capital of the Company for regulatory purposes. Interest expense on the Trust Preferred Securities is deductible for tax purposes. (9) EARNINGS PER SHARE ------------------ The following table shows the computation of basic and diluted earnings per share for the periods indicated (in thousands, except per share data): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED MARCH 31, --------------------------------- 2003 2002 - ------------------------------------------------------------------------------------------------- ---------------- --------------- <S> <C> <C> Net income $ 8,263 $ 6,362 ================ =============== Average common shares outstanding 17,308 15,078 Effect of dilutive common shares 1,124 913 ---------------- --------------- Weighted average common shares and effect of dilutive common shares 18,432 15,991 ================ =============== Net income per average common share: Basic $ 0.48 $ 0.42 ================ =============== Diluted $ 0.45 $ 0.40 ================ =============== </TABLE> The effect of dilutive common shares outstanding results from stock options, restricted stock unit awards, stock warrants, and shares to be issued under the Employee Stock Purchase Plan and the Directors Deferred Fee and Stock Plan, all being treated as if they had been either exercised or issued, computed by application of the treasury stock method. - 9 -
(10) SEGMENT INFORMATION ------------------- The segment financial information provided in the following tables has been derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. The Company evaluates segment performance based on after-tax profit or loss and other appropriate profitability measures common to each segment. Certain indirect expenses have been allocated based on actual volume measurements and other criteria, as appropriate. Inter-segment revenue and transfers are generally accounted for at current market prices. The other category, as shown in the following table, reflects parent company information. The net interest income and segment profit of the banking segment includes income and related interest costs from portfolio loans that were purchased from the premium finance and indirect auto segments. For purposes of internal segment profitability analysis, management reviews the results of its premium finance and indirect auto segments as if all loans originated and sold to the banking segment were retained within that segment's operations, thereby causing the inter-segment elimination amounts shown in the following table. The following table presents a summary of certain operating information for each reportable segment for three months ended for the periods shown: <TABLE> <CAPTION> Three Months Ended March 31, $ Change in % Change in --------------------------------------- (Dollars in thousands) 2003 2002 Contribution Contribution ----------------------------------------------- ------------------ ------------------ ------------------- ---------------------- <S> <C> <C> <C> <C> NET INTEREST INCOME: Banking $ 23,714 $ 20,773 $ 2,941 14.2 % Premium finance 9,244 8,117 1,127 13.9 Indirect auto 1,836 2,002 (166) (8.3) Tricom 854 913 (59) (6.5) Wealth management 1,556 588 968 164.6 Inter-segment eliminations (8,685) (8,301) (384) (4.6) Other (1,915) (1,924) 9 0.5 ------------------ ------------------ ------------------- ---------------------- Total net interest income $ 26,604 $ 22,168 $ 4,436 20.0 % ------------------ ------------------ ------------------- ---------------------- NON-INTEREST INCOME: Banking $ 9,319 $ 4,942 $ 4,377 88.6 % Premium finance 1,162 2,016 (854) (42.4) Indirect auto 17 8 9 112.5 Tricom 1,091 821 270 32.9 Wealth management 6,188 4,673 1,515 32.4 Inter-segment eliminations (53) (154) 101 65.6 Other 19 446 (427) (95.7) ------------------ ------------------ ------------------- ---------------------- Total non-interest income $ 17,743 $ 12,752 $ 4,991 39.1 % ------------------ ------------------ ------------------- ---------------------- SEGMENT PROFIT (LOSS): Banking $ 8,487 $ 6,193 $ 2,294 37.0 % Premium finance 4,192 4,087 105 2.6 Indirect auto 657 728 (71) (9.8) Tricom 397 271 126 46.5 Wealth management (281) (142) (139) (97.9) Inter-segment eliminations (3,435) (3,463) 28 0.8 Other (1,754) (1,312) (442) (33.7) ------------------ ------------------ ------------------- ---------------------- Total segment profit $ 8,263 $ 6,362 $ 1,901 29.9 % ------------------ ------------------ ------------------- ---------------------- SEGMENT ASSETS: Banking $ 3,834,507 $ 2,826,154 $ 1,008,353 35.7 % Premium finance 578,596 435,964 142,632 32.7 Indirect auto 174,854 190,244 (15,390) (8.1) Tricom 38,308 28,212 10,096 35.8 Wealth management 76,739 99,924 (23,185) (23.2) Inter-segment eliminations (798,208) (634,976) (163,232) (25.7) Other 10,199 9,631 568 5.9 ------------------ ------------------ ------------------- ---------------------- Total segment assets $ 3,914,995 $ 2,955,153 $ 959,842 32.5 % ------------------ ------------------ ------------------- ---------------------- <FN> N/M = not meaningful </FN> </TABLE> - 10 -
(11) DERIVATIVE FINANCIAL INSTRUMENTS -------------------------------- The Company enters into certain derivative financial instruments as part of its strategy to manage its exposure to market risk. Market risk is the possibility that, due to changes in interest rates or other economic conditions, the Company's net interest income will be adversely affected. The derivative financial instruments 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. In accordance with 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 Statements of Condition. Changes in the fair value of derivative financial instruments are either recognized periodically in income or in shareholders' equity as a component of comprehensive income depending on whether the derivative financial instrument qualifies for hedge accounting, and if so, whether it qualifies as a fair value hedge or cash flow hedge. Generally, changes in fair values of derivatives accounted for as fair value hedges are recorded in income in the same period and in the same income statement line as changes in the fair values of the hedged items that relate to the hedged risk(s). Changes in fair values of derivative financial instruments accounted for as cash flow hedges, to the extent they are effective hedges, are recorded as a component of other comprehensive income net of deferred taxes. Changes in fair values of derivative financial instruments not qualifying as hedges are reported in income. During the first quarter of 2003, $75 million notional principal amount of interest rate cap contracts matured. These contracts were purchased to mitigate the effect of rising rates on certain floating rate deposit products and provided for the receipt of payments when the 91-day Treasury bill rate exceeded the predetermined strike rates. At March 31, 2003, the Company had no interest rate cap contracts. At March 31, 2003, the Company had $81.05 million notional principal amount of interest rate swap contracts outstanding, all of which qualified for hedge accounting. The following table presents a summary of these derivative instruments and whether the contracts were cash flow (CF) hedges with changes in fair values reported as other comprehensive income (OCI) or fair value (FV) hedges with changes in fair values reported in the income statement (IS): <TABLE> <CAPTION> MARCH 31, 2003 December 31, 2002 -------------------------- ------------------------ (In thousands) Type of Change in Maturity NOTIONAL FAIR Notional Fair hedge market value Date AMOUNT VALUE Amount Value - ----------------------------- ------------- ---------------- ----------------- -------------------------- ------------------------ <S> <C> <C> <C> <C> <C> <C> <C> Interest rate swap CF OCI 2/27/04 $25,000 $ (953) $25,000 $ (1,125) Interest rate swap CF OCI 10/29/12 25,000 (808) 25,000 ( 723) Interest rate swap (callable) FV IS 9/30/28 (03) 31,050 ( 46) 31,050 ( 156) </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. There were no call options outstanding as of March 31, 2003, December 31, 2002 or March 31, 2002. (12) BUSINESS COMBINATIONS --------------------- In February 2003, Wintrust completed the acquisition of Lake Forest Capital Management Company ("LFCM") based in Lake Forest, Illinois. Lake Forest Capital Management is operating as a separate division of Wayne Hummer Asset Management Company, Wintrust's existing asset management subsidiary. Accounted for as a purchase, LFCM's results of operations are included in Wintrust's 2003 results since the effective date of acquisition (February 1, 2003). In February, 2002, Wintrust completed its acquisition of 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 since the effective date (February 1, 2002) of the acquisition. - 11 -
(13) GOODWILL AND OTHER INTANGIBLE ASSETS ------------------------------------ Wintrust adopted the provisions of SFAS 142, "Goodwill and Other Intangible Assets" effective January 1, 2002. SFAS 142 requires companies to no longer amortize goodwill and intangible assets with indefinite useful lives, but instead test these assets for impairment at least annually in accordance with the provisions of SFAS 142. Under SFAS 142, intangible assets with definite useful lives continue to be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with the FASB's Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). A summary of the Company's goodwill assets by business segment is presented in the following table: <TABLE> <CAPTION> January 1, Goodwill Impairment MARCH 31, (In thousands) 2003 Acquired Losses 2003 ------------------------------------------------ ------------------ ----------------- --------------------- ----------------- <S> <C> <C> <C> <C> Banking $ 1,018 $ -- $ -- $ 1,018 Premium finance -- -- -- -- Indirect auto -- -- -- -- Tricom 8,958 -- -- 8,958 Wealth management 15,290 4,249 -- 19,539 Parent and other -- -- -- -- ------------------ ----------------- --------------------- ----------------- Total $ 25,266 $ 4,249 $ -- $ 29,515 ================== ================= ===================== ================= </TABLE> At March 31, 2003 and 2002, Wintrust had $2.7 million and $92,000, respectively, in unamortized finite-lived intangible assets. As a result of the acquisitions of WHAMC and LFCM, $1.38 million $1.65 million, respectively, were assigned to the customer lists of the acquired companies. These intangible assets are being amortized over 7-year periods on an accelerated basis. Total amortization expense associated with these intangible assets in the first three months of 2003 was $122,000. Estimated amortization expense on finite-lived intangible assets for the years ended 2003 through 2007 is as follows: (In thousands) -------------------------------------- 2003 $ 614 2004 552 2005 476 2006 410 2007 341 (14) STOCK-BASED COMPENSATION PLANS ------------------------------ The Company follows Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. APB 25 uses the intrinsic value method and provides that compensation expense for employee stock options is generally not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant. The Company follows the disclosure requirements of SFAS 123, "Accounting for Stock-Based Compensation" (as amended by SFAS 148), rather than the recognition provisions of SFAS 123, as allowed by the statement. Compensation expense for restricted share awards is ratably recognized over the period of service, usually the restricted period, based on the fair value of the stock on the date of grant. - 12 -
The following table reflects the Company's pro forma net income and earnings per share as if compensation expense for the Company's stock options, determined based on the fair value at the date of grant consistent with the method of SFAS 123, had been included in the determination of the Company's net income (in thousands, except per share data): <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED MARCH 31, --------------------------------- 2003 2002 - ------------------------------------------------------------------------------------------------- ---------------- --------------- <S> <C> <C> Net income As reported $ 8,263 $ 6,362 Compensation cost of stock options based on fair value, net of related tax effect (328) (267) ---------------- --------------- Pro forma $ 7,935 $ 6,095 ---------------- --------------- Earnings per share - Basic As reported $ 0.48 $ 0.42 Compensation cost of stock options based on fair value, net of related tax effect (0.02) (0.02) ---------------- --------------- Pro forma $ 0.46 $ 0.40 ---------------- --------------- Earnings per share - Diluted As reported $ 0.45 $ 0.40 Compensation cost of stock options based on fair value, net of related tax effect (0.02) (0.02) ---------------- --------------- Pro forma $ 0.43 $ 0.38 ---------------- --------------- </TABLE> The fair values of stock options granted were estimated at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes model is sensitive to changes in the subjective assumptions, which can materially affect the fair value estimates. As a result, the pro forma amounts indicated above may not be representative of the effects on reported net income for future years. Included in the determination of net income as reported is compensation expense related to restricted share awards of $191,000 ($118,000 net of tax) in the first quarter of 2003 and $130,000 ($80,000 net of tax) in the first quarter of 2002. (15) RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- In November 2002, the FASB issued FASB interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This interpretation expands the disclosure to be made by a guarantor in its financial statements about its obligations under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantor's obligation under the guarantee. The recognition requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002. The Company does not expect the requirements of FIN 45 to have a material impact on the results of operations, financial position, or liquidity. In January 2003, the FASB issued FASB interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities". The objective of this interpretation is to provide guidance on how to identify a variable interest entity (VIE) and determine when the assets, liabilities, noncontrolling interest, and results of operations of a VIE need to be included in a company's consolidated financial statements. Because the Company does not have an interest in any VIEs, the Company does not expect the adoption of FIN 46 to have material impact on its results of operations, financial position, or liquidity. - 13 -
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition as of March 31, 2003, compared with December 31, 2002, and March 31, 2002, and the results of operations for the three-month periods ended March 31, 2003 and 2002 should be read in conjunction with the Company's unaudited consolidated financial statements and notes contained in this report. This discussion contains forward-looking statements that involve risks and uncertainties and, as such, future results could differ significantly from management's current expectations. See the last section of this discussion for further information on forward-looking statements. OVERVIEW AND STRATEGY Wintrust's bank subsidiaries were organized within approximately the last twelve years. We have grown to $3.91 billion in total assets at March 31, 2003 from $2.96 billion in total assets at March 31, 2002, an increase of 32%. The historical financial performance of the Company has been affected by costs associated with growing market share in deposits and loans, establishing new banks and opening new branch facilities, and building an experienced management team. The Company's financial performance generally reflects the improved profitability of our operating subsidiaries as they mature, offset by the costs of establishing new banks and opening new branch facilities. The Company's experience has been that it generally takes 13 to 24 months for new banks to first achieve operational profitability depending on the number and timing of branch facilities added. The Banks began operations during the period indicated in the table below: <TABLE> <CAPTION> Operations began 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 March 31, 2003, the Banks had 32 banking facilities. Since March 31, 2002, Lake Forest Bank opened a new branch in Highland Park (May 2002) and Crystal Lake Bank opened a new temporary facility in Cary. In addition, in June 2002 and July 2002, respectively, we opened a new permanent facility for our Wauconda branch of Libertyville Bank and our McHenry branch of Crystal Lake Bank. Construction is currently underway on a new larger facility in South Libertyville (a branch of Libertyville Bank). North Shore Bank opened an additional Skokie branch in April 2003 and has purchased property for another new branch. In addition, the Company has purchased property for a permanent facility in Highland Park. While committed to a continuing growth strategy, management's ongoing focus is also to balance further asset growth with earnings growth by seeking to more fully leverage the existing capacity within each of the operating subsidiaries. One aspect of this strategy is to continue to pursue specialized earning asset niches in order to maintain the mix of earning assets in higher-yielding loans as well as diversify the loan portfolio. Another aspect of this strategy is a continued focus on less aggressive deposit pricing at the Banks with significant market share and more established customer bases. FIFC is the Company's most significant specialized earning asset niche, originating $543 million in loan (premium finance receivables) volume in the first quarter of 2003. 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 - 14 -
premiums financed are primarily for commercial customers' purchases of liability, property and casualty and other commercial insurance. This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature of this lending and because the borrowers are located nationwide, this segment may be more susceptible to third party fraud. The majority of these loans are purchased by the Banks in order to more fully utilize their lending capacity. These loans generally provide the Banks higher yields than alternative investments. However, as a result of continued growth in origination volume in 2003, FIFC sold approximately $72.7 million, or 13%, of the receivables generated in the first quarter of 2003 to an unrelated third party with servicing retained. The Company began selling the excess of FIFC's originations over the capacity to retain such loans within the Banks' loan portfolios during 1999. In addition to recognizing gains on the sale of these receivables, the proceeds provide the Company with additional liquidity. Consistent with the Company's strategy to be asset-driven, it is probable that similar sales of these receivables will occur in the future; however, future sales of these receivables depends on the level of new volume growth in relation to the capacity to retain such loans within the Banks' loan portfolios. In October 1999, the Company acquired Tricom as part of its continuing strategy to pursue specialized earning asset niches. Based in the Milwaukee area, Tricom has been in business for more than eleven years and specializes in providing high yielding, short-term accounts receivable financing and value-added, out-sourced administrative services, such as data processing of payrolls, billing and cash management services, to clients in the temporary staffing industry. Tricom's clients, located throughout the United States, provide staffing services to businesses in diversified industries. These receivables may involve greater credit risks than generally associated with the loan portfolios of more traditional community banks depending on the marketability of the collateral. The principal sources of repayments on the receivables are payments to borrowers from their customers who are located throughout the United States. The Company mitigates this risk by employing lockboxes and other cash management techniques to protect their interests. By virtue of the Company's funding resources, this acquisition has provided Tricom with additional capital necessary to expand its financing services in a national market. Tricom's revenue principally consists of interest income from financing activities and fee-based revenues from administrative services. In addition to the earning asset niches provided by the Company's non-bank subsidiaries, several earning asset niches operate within the Banks, including our indirect auto lending which is conducted through a division of Hinsdale Bank, Lake Forest Bank's equipment leasing division and Barrington Bank's Community Advantage program that provides lending, deposit and cash management services to condominium, homeowner and community associations. In addition, Hinsdale Bank operates a mortgage warehouse lending program that provides loan and deposit services to mortgage brokerage companies located predominantly in the Chicago metropolitan area, and Crystal Lake Bank has recently developed a specialty in small aircraft lending. The Company plans to continue pursuing the development or acquisition of other specialty lending businesses that generate assets suitable for bank investment and/or secondary market sales. The Company is not pursuing growth in the indirect auto segment, however, and anticipates that the indirect auto loan portfolio will comprise a smaller portion of the net loan portfolio in the future. Wintrust's strategy also includes building and growing its wealth management business, including trust, asset management and brokerage services. On February 20, 2002, the Company completed its acquisition of the Wayne Hummer Companies, comprising Wayne Hummer Investments LLC ("WHI"), Wayne Hummer Management Company (subsequently renamed Wayne Hummer Asset Management Company "WHAMC") and Focused Investments LLC ("FI"), each based in the Chicago area. WHI, established in 1931, provides a full-range of investment products and services tailored to meet the specific needs of individual investors throughout the country, primarily in the Midwest. Although headquartered in Chicago, WHI also operates an office in Appleton, Wisconsin that opened in 1936 that serves the greater Appleton area. WHI has established branch locations in offices at Lake Forest Bank and Hinsdale Bank and plans to open offices at each of the Banks. WHI is a member of the New York Stock Exchange, the American Stock Exchange and the National Association of Securities Dealers, and has approximately $3.7 billion in customer assets in custody at March 31, 2003. 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. 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 - 15 -
Core Portfolio Fund, the Wayne Hummer Income Fund, and the Wayne Hummer Money Market Fund. WHAMC also provides money management and advisory services to individuals and institutional, municipal and tax-exempt organizations and portfolio management and financial supervision for a wide-range of pension and profit sharing plans. To further expand the Company's wealth management business in the Chicago metropolitan area, on February 4, 2003, the Company acquired Lake Forest Capital Management Company, a registered investment advisor, with approximately $282 million of assets under management. LFCM is operating as a division of WHAMC. At March 31, 2003, individual accounts managed by WHAMC (including the accounts of LFCM) totaled approximately $658 million while the four managed mutual funds had approximately $312 million in total assets. 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. Assets under administration by WHTC as of March 31, 2003 were approximately $464 million. - 16 -
RESULTS OF OPERATIONS EARNINGS SUMMARY The Company's key operating measures, as compared to the same period last year, are shown below: <TABLE> <CAPTION> THREE MONTHS ENDED Percentage (%)/ ------------------------------------------- MARCH 31, March 31, Basis Point (bp) (Dollars in thousands, except per share data) 2003 2002 Change - ------------------------------------------------------------------- --------------------- ---------------------------------------- <S> <C> <C> <C> Net income $ 8,263 $ 6,362 30 % Net income per common share - Basic 0.48 0.42 14 Net income per common share - Diluted 0.45 0.40 13 Net revenue (1) 44,347 34,920 27 Net interest income 26,604 22,168 20 Net interest margin (5) 3.15 % 3.48 % (33) bp Core net interest margin(2) (5) 3.26 3.68 (42) Net overhead ratio (3) 1.21 1.43 (22) Efficiency ratio (4) (5) 65.46 64.17 129 Return on average assets 0.89 0.92 (3) Return on average equity 14.51 17.12 (261) AT END OF PERIOD: Total assets $ 3,914,995 $ 2,955,153 32 % Total loans 2,628,480 2,167,550 21 Total deposits 3,270,295 2,417,315 35 Total shareholders' equity 238,905 163,521 46 Book value per common share 13.75 10.41 32 Market price per common share 28.60 22.97 25 Non-performing assets to total assets 0.34 % 0.39 % (5)bp - ---------------------------------------------------------------------- <FN> (1) Net revenue includes net interest income and non-interest income. (2) The core net interest margin excludes the interest expense associated with Wintrust's Long-term Debt - Trust Preferred Securities. (3) The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period's total average assets. A lower ratio indicates a higher degree of efficiency. (4) The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenue (less securities gains or losses). A lower ratio indicates more efficient revenue generation. (5) See "Supplemental Financial Measures/Ratios" for additional information on this performance measure/ratio. </FN> </TABLE> The Company analyzes its performance on a net income basis in accordance with accounting principles generally accepted in the United States, as well as other ratios such as the net overhead ratio, efficiency ratio and core net interest margin. These performance measures are presented as supplemental information to enhance the readers' understanding of, and highlight trends in, the Company's financial results. These measures should not be viewed as a substitute for net income and earnings per share as determined in accordance with accounting principles generally accepted in the United States. The calculations used by the Company to derive core net interest margin, net overhead ratio and the efficiency ratio may vary from, and not be comparable to, other companies. See Note 2 "Supplemental Measures/Ratios" on page 6 for additional information. - 17 -
The preparation of the financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as information changes, the financial statements could reflect different estimates and assumptions. Certain policies and accounting principles inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. The determination of the allowance for loan losses and the valuation of the retained interest in the premium finance receivables sold are the areas that require the most subjective and complex judgments. For a more detailed discussion on these critical accounting policies, see "Summary of Critical Accounting Policies" on page 62 of the Company's Annual Report to shareholders for the year ended December 31, 2002. Net income for the quarter ended March 31, 2003 totaled $8.3 million, an increase of $1.9 million, or 30%, over the $6.4 million recorded in the first quarter of 2002. On a per share basis, net income for the first quarter of 2003 totaled $0.45 per diluted common share, a $0.05 per share, or 13%, increase as compared to the 2002 first quarter total of $0.40 per diluted common share. The lower growth rate in the earnings per share as compared to net income was primarily due to the issuance of 1,362,750 additional shares of common stock in June and July of 2002. The return on average equity for the first quarter of 2003 was 14.51%, compared to 17.12% for the prior year quarter. The results for the first quarter of 2002 include pre-tax income of $1.25 million ($754,000 after-tax), or $0.05 per diluted share, for a partial settlement related to the premium finance defalcation recorded by the Company in 2000. In February 2003, Wintrust completed its acquisition of Lake Forest Capital Management Company. LFCM is operating as a division of WHAMC, the Company's existing asset management subsidiary. LFCM's results of operations are included in Wintrust's 2003 results since the effective date of the acquisition (February 1, 2003). NET INTEREST INCOME Net interest income, which is the difference between interest income and fees on earning assets and interest expense on deposits and borrowings, is the major source of earnings for Wintrust. Tax-equivalent net interest income for the quarter ended March 31, 2003 totaled $26.8 million, an increase of $4.4 million, or 20%, as compared to the $22.4 million recorded in the same quarter of 2002. This increase mainly resulted from loan growth offsetting the effect of narrower spreads. Average loans in the first quarter of 2003 represented 78% of total earning assets and increased $593 million, or 28%, over the first quarter of 2002, while the interest rate spread (the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities) decreased to 2.92% in the first quarter of 2003, compared to 3.15% in the same period of 2002. - 18 -
Net interest margin represents tax-equivalent net interest income as a percentage of the average earning assets during the period. For the first quarter of 2003 the net interest margin was 3.15%, representing a decrease of 33 basis points when compared to the net interest margin of 3.48% in the prior year first quarter, and an increase of 2 basis points when compared to the fourth quarter 2002 net interest margin of 3.13%. The core net interest margin, which excludes the interest expense related to Wintrust's Long-term Debt - Trust Preferred Securities, was 3.26% for the first quarter of 2003, and decreased 42 basis points when compared to the prior year first quarter's core margin of 3.68%. The net interest margin contracted due to compression caused by lower interest rates, the Company's preference for variable rate commercial and commercial real estate loans and agency securities with call options written against them being called with the proceeds being invested in lower yielding liquid assets, combined with the asset sensitivity of the balance sheet. 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 THREE MONTHS ENDED ---------------------------------------------------------------------------------- MARCH 31, 2003 March 31, 2002 ---------------------------------------- --------------------------------------- (Dollars in thousands) YIELD/ Yield/ ---------------------- AVERAGE INTEREST RATE Average Interest Rate ---------------------------------------- --------------------------------------- <S> <C> <C> <C> <C> <C> <C> Liquidity management assets (1) (2) (8) $ 715,338 $ 6,314 3.58 % $ 458,922 $ 4,816 4.26 % Other earning assets (3) 41,221 395 3.89 44,920 514 4.64 Loans, net of unearned income (2) (4) (8) 2,695,146 40,732 6.13 2,101,802 36,849 7.11 ---------------------------------------- --------------------------------------- Total earning assets (8) $ 3,451,705 $ 47,441 5.57 % $ 2,605,644 $ 42,179 6.56 % ---------------------------------------- --------------------------------------- Interest-bearing deposits $ 2,851,643 $ 17,102 2.43 % $ 2,097,388 $ 16,675 3.22 % Federal Home Loan Bank advances 140,000 1,457 4.22 90,000 897 4.04 Notes payable and other borrowings 92,018 704 3.10 119,698 943 3.20 Subordinated note 25,000 444 7.10 -- -- -- Long-term debt - trust preferred securities 50,894 928 7.29 51,050 1,288 10.09 ---------------------------------------- --------------------------------------- Total interest-bearing liabilities $ 3,159,555 $ 20,635 2.65 % $ 2,358,136 $ 19,803 3.41 % ---------------------------------------- --------------------------------------- Interest rate spread (5) (8) 2.92 % 3.15 % Net free funds/contribution (6) $ 292,150 0.23 $ 247,508 0.33 =============== ============ =============== ============ Net interest income/Net interest margin (8) $ 26,806 3.15 % $ 22,376 3.48 % =============== ============== ============ ============ Core net interest margin (7) (8) 3.26 % 3.68 % ============ ============ - ------------------------------------------------------------------------------------------------------------------------------------ <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 March 31, 2003 and 2002 were $202,000 and $208,000, 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. (8) See Note 2, Supplemental Financial Measures/Ratios, on page 6 for additional information on this performance measure/ratio. </FN> </TABLE> - 19 -
The yield on total earning assets for the first quarter of 2003 was 5.57% as compared to 6.56% in 2002, a decrease of 99 basis points, resulting primarily from the effect of decreases in general market rates of interest on liquidity management assets and loans. The yield on earning assets is heavily dependent on the yield earned on loans since average loans comprised 78% of total average earning assets in the first quarter of 2003 and 81% of average earning assets in the same period of 2002. The first quarter 2003 yield on loans was 6.13%, a 98 basis point decrease compared to the prior year first quarter yield of 7.11%. Wintrust's loan portfolio does not re-price in a parallel fashion to decreases or increases in the prime lending rate; however, it is impacted by changes in the prime lending rate. The average prime lending rate was 4.25% during the first quarter of 2003 versus 4.75% during the first quarter of 2002, reflecting a decrease of 50 basis points. The rate paid on interest-bearing liabilities for the first quarter of 2003 was 2.65%, compared to 3.41% in the first quarter of 2002, a decline of 76 basis points. Interest-bearing deposits accounted for 90% of total interest-bearing funding in the first quarter of 2003, compared to 89% in the same period of 2002. The rate paid on interest-bearing deposits averaged 2.43% for the first quarter of 2003 versus 3.22% for the same quarter of 2002, a decrease of 79 basis points. Since the first quarter of 2002, Wintrust borrowed an additional $50 million from the Federal Home Loan Bank, issued $25 million of subordinated debt and hedged the interest payments on $31.05 million of its trust-preferred securities with an interest rate swap. The average rate paid on Company's interest-bearing liabilities, excluding deposits, was 4.65% in the first quarter of 2003, a decrease of 22 basis points, compared to 4.87% in the first quarter of 2002. The following table presents a reconciliation of the Company's tax-equivalent net interest income between the three-month periods ended March 31, 2003 and March 31, 2002 and between the three-month periods ended March 31, 2003 and December 31, 2002. The reconciliation sets forth the change in the tax-equivalent net interest income as a result of changes in volumes, the change in rates and the change due to the combination of volume and rate and the differing number of days in each quarter. <TABLE> <CAPTION> First Quarter First Quarter of 2003 of 2003 Compared to Compared to First Quarter Fourth Quarter (Dollars in thousands) of 2002 of 2002 - ---------------------------------------------------------------------- ------------------------------------------- <S> <C> <C> Tax-equivalent net interest income for comparative period $ 22,376 $ 26,396 Change due to mix and growth of earning assets and interest-bearing liabilities (volume) 6,566 725 Change due to interest rate fluctuations (rate) (1,727) 100 Change due to rate and volume fluctuations (rate/volume) (409) (32) Change due to number of days in each quarter (days) -- (383) ------------------------------------------- Tax-equivalent net interest income for the period ended March 31, $ $ 2003 26,806 26,806 =========================================== </TABLE> - 20 -
NON-INTEREST INCOME For the first quarter of 2003, non-interest income totaled $17.7 million, an increase of $5.0 million, or 39%, over the prior year quarter. The first quarter of 2002 includes a $1.25 million partial settlement related to a non-recurring charge recorded by the Company in 2000. All categories of non-interest income (excluding the non-recurring settlement) increased over the first quarter of 2002. Wealth management fees and fees on mortgage loans sold accounted for the majority of the increase in non-interest income. Non-interest income as a percentage of net revenue increased to 40% in the first quarter of 2003, compared to 37% in the first quarter of 2002. The following table presents non-interest income by category for the periods presented: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ------------------------------------- $ % ------------------------------------- (Dollars in thousands) 2003 2002 Change Change - --------------------------------------------------------------- ------------------ ------------------ --------------- ------------- <S> <C> <C> <C> <C> Trust and asset management fees $ 1,614 $ 1,409 $ 205 15 % Brokerage fees 4,337 3,161 1,176 37 ------------------ ------------------ --------------- ------------- Total wealth management fees 5,951 4,570 1,381 30 Fees on mortgage loans sold 4,598 2,017 2,581 128 Service charges on deposit accounts 855 738 117 16 Gain on sale of premium finance receivables 1,162 766 396 52 Administrative services revenue 1,091 822 269 33 Fees from covered call options 2,144 1,568 576 37 Net available-for-sale securities gains (losses) 386 (215) 601 NM Premium finance defalcation-partial settlement -- 1,250 (1,250) NM Other 1,556 1,236 320 26 ------------------ ------------------ --------------- ------------- Total non-interest income $ 17,743 $ 12,752 $ 4,991 39 % ------------------ ------------------ --------------- ------------- <FN> N/M = calculation not meaningful </FN> </TABLE> Trust and asset management fees represent the revenue streams generated by Wayne Hummer Trust Company ("WHTC") and Wayne Hummer Asset Management Company ("WHAMC"), which includes the fees generated by Lake Forest Capital Management Company ("LFCM") since its acquisition in February 2003. WHTC generates fees for assets under management, custody fees and other trust related fees and WHAMC fees include fees for advisory services to individuals and institutions, municipal and tax-exempt organizations, including the management of the Wayne Hummer Mutual Funds. WHAMC was acquired effective February 1, 2002 and LFCM was acquired effective February 1, 2003 and the results of operations of each of these acquisitions are included in the Company's financials from the effective dates of the respective acquisitions. Brokerage fees include brokerage commissions, trading commissions and insurance product commissions generated by Wayne Hummer Investments ("WHI") and Focused Investments ("FI"). WHI and FI were also acquired effective February 1, 2002 and the revenue from these entities are included in the first quarter 2002 results from that date. The increase in wealth management fees of $1.4 million, or 30%, over the first quarter of 2002, is primarily attributable to the additional month of revenues from WHAMC, WHI and FI included in the 2003 results and the two months of revenue generated by LFCM in 2003. Recent equity market declines and weaker economic conditions have negatively impacted wealth management fees. Lower valuations of the equity securities under management affect the fees earned thereon and lower trading volumes affect brokerage fees. Wintrust is committed to growing the wealth management business in order to better service its customers and create a more diversified revenue stream, as evidenced by its acquisition of LFCM in February 2003. Fees on mortgage loans sold include fees from originating and selling residential real estate loans into the secondary market. For the quarter ended March 31, 2003, these fees totaled $4.6 million, an increase of $2.6 million, or 128%, from the prior year first quarter and an increase of $84,000 from the $4.5 million recorded in the fourth quarter of 2002. Although these fees are a continuous source of revenue, these fees continue to increase due to higher levels of mortgage origination volumes, particularly refinancing activity caused by the historically low level of mortgage interest rates. Management anticipates that the levels of refinancing activity may taper off in 2003, barring any further reductions in mortgage interest rates. - 21 -
Service charges on deposit accounts totaled $855,000 for the first quarter of 2003, an increase of $117,000, or 16%, when compared to the same quarter of 2002. 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 the philosophy of providing high quality service without encumbering that service with numerous activity charges. The administrative services revenue contributed by Tricom added $1.1 million to total non-interest income in the first quarter of 2003, an increase of $269,000 from the first quarter of 2002 and an increase of $284,000 from the fourth quarter of 2002. This revenue comprises income from administrative services, such as data processing of payrolls, billing and cash management services, to temporary staffing service clients located throughout the United States. The revenue increase in the first quarter of 2003 is attributable to the acquisition of a competitor's customer base in early January 2003. The revenue at Tricom had declined in 2002 and 2001 due to the general slowdown in the United States economy and the reduction in the placement of temporary staffing individuals by Tricom's customers. 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 first quarter of 2003 increased by $576,000 to $2.1 million, compared to $1.6 million in the same quarter last year. During the first three months of 2003, call option contracts were written against $488 million of underlying securities, compared to $382 million in the first three 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. In the first three months of both years, the Company wrote call options with terms of less than three months against certain U.S. Treasury and agency securities held in its portfolio for liquidity and other purposes. The call option transactions are designed to increase the total return associated with holding certain investment securities and do not qualify as hedges pursuant to SFAS 133. There were no outstanding call options at March 31, 2003, December 31, 2002 or March 31, 2002. As a result of continued strong loan originations of premium finance receivables, Wintrust sold premium finance receivables to an unrelated third party financial institution in the first quarter of 2003 and recognized gains totaling $1.2 million related to this activity on sales of $72.7 million of net receivables, compared with $766,000 of recognized gains in the first quarter of 2002 on sales of $61.8 million. Recognized gains related to this activity are significantly influenced by the spread between the net yield on the loans sold and the rate passed on to the purchaser. The net yield on the loans sold and the rate passed on to the purchaser typically do not react in a parallel fashion, therefore causing the spreads to vary from period to period. This spread averaged 4.52% in the first three months of 2003 compared to a range of 5.17% to 5.61% in the same period last year. The higher amount of gain recognized in the first quarter of 2003 compared to the prior year, despite lower interest spreads, was due to a higher volume of loans sold, lower estimated credit losses and adjustments from clean up calls during the periods. FIFC continues to maintain an interest in the loans sold and establishes a servicing asset, interest only strip and a recourse obligation upon each sale. Recognized gains as well as the Company's retained interests in these loans are based on the Company's projection of cash flows that will be generated from the loans. The cash flow model incorporates the amounts FIFC is contractually entitled to receive from the customers, including an estimate of late fees, the amounts due to the purchaser of the loans, commissions paid to agents as well as estimates of the term of the loans and credit losses. Significant differences in actual cash flows and the projected cash flows can cause impairment to the servicing asset and interest only strip as well as the recourse obligation. The Company typically makes a clean up call by repurchasing the remaining loans in the pools sold after approximately 10 months from the sale date. Upon repurchase, the loans are recorded in the Company's premium finance receivables portfolio and any remaining balance of the Company's retained interest is recorded as an adjustment to the gain on sale of premium finance receivables. Clean up calls made during the first quarter of 2002 resulted in charges of approximately $281,000. The Company continuously monitors the performance of the loan pools to the projections and adjusts the assumptions in its cash flow model when warranted. In the first quarter of 2003, clean up calls resulted in increased gains of approximately $111,000. In addition, estimated credit losses were reduced to 0.50% of the estimated average balances in the first quarter of 2003, compared to 0.75% in the first three months of 2002. The average terms of the loans during the first quarter of 2003 and 2002 were estimated at approximately 8 months. The applicable discount rate used in determining gains related to this activity was unchanged from the discount rate used in 2002. - 22 -
At March 31, 2003, premium finance loans sold and serviced for others for which a recourse obligation related to credit losses is retained totaled approximately $135.0 million. The recourse obligation is considered in computing the net gain on the sale of the premium finance receivables. At March 31, 2003, the remaining estimated recourse obligation carried in other liabilities is approximately $716,000. Credit losses incurred on loans sold are applied against the recourse obligation liability that is established at the date of sale. Credit losses, net of recoveries, in the first three months of 2003 for premium finance receivables sold and serviced for others totaled $48,000. At March 31, 2003, non-performing loans related to this sold portfolio were approximately $1.2 million, or 0.87%, 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. Wintrust has a philosophy of maintaining its average loan-to-deposit ratio in the range of 85-90%. During the first quarter of 2003, the ratio was approximately 86%. 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. Other non-interest income for the first quarter of 2003 includes $410,000 of income from Bank Owned Life Insurance ("BOLI"). During the third quarter of 2002, the Company purchased $41.1 million of BOLI. The BOLI policies were purchased to consolidate existing term life insurance contracts of executive officers and to mitigate the mortality risk associated with death benefits provided for in the executives' employment contracts. Adjustments to the cash surrender value of the BOLI policies are recorded as non-interest income. NON-INTEREST EXPENSE Non-interest expense for the first quarter of 2003 totaled $28.9 million, an increase of $6.2 million, or 27%, from the first quarter 2002 total of $22.7 million. All categories of non-interest expense increased over the first quarter of 2002, reflecting the continued growth and expansion of the Banks, the growth in the premium finance business, the addition of LFCM in the first quarter of 2003 and a full quarter's operating expenses attributable to the Wayne Hummer Companies (which were acquired effective February 1, 2002). The following table presents non-interest expense by category for the periods presented: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, -------------------------------------- $ % -------------------------------------- (Dollars in thousands) 2003 2002 Change Change ------------------------------------------------------------ ------------------ ------------------ --------------- ------------- <S> <C> <C> <C> <C> Salaries and employee benefits $ 17,450 $ 13,362 4,088 31 % Equipment 1,842 1,730 112 6 Occupancy, net 1,898 1,544 354 23 Data processing 1,053 1,014 39 4 Advertising and marketing 539 524 15 3 Professional fees 782 611 171 28 Amortization of other intangibles 139 17 122 718 Other 5,208 3,877 1,331 34 ------------------ ------------------ --------------- ------------- Total non-interest expense $ 28,911 $ 22,679 6,232 27 % ------------------ ------------------ --------------- ------------- </TABLE> Salaries and employee benefits totaled $17.5 million for the first quarter of 2003, an increase of $4.1 million, or 31%, as compared to the prior year's first quarter total of $13.4 million. This increase was primarily due to an additional month in the first quarter of 2003 of employee costs associated with the Wayne Hummer Companies and the salary and benefit costs of Lake Forest Capital Management Company (increasing $2.0 million), commissions associated with increased mortgage loan origination activity (increasing $697,000) and increases in salaries and employee benefit costs as a result of continued growth and expansion of the banking franchise and normal annual increases in salaries and the employee benefit costs (increasing $1.4 million). - 23 -
Other categories of non-interest expense, such as occupancy costs, equipment expense, data processing, advertising and marketing, professional fees and other increased by $2.1 million over the prior year first quarter due to the acquisition of the Wayne Hummer Companies, the acquisition of Lake Forest Capital Management Company and the general growth and expansion of the Banks. INCOME TAXES The Company recorded income tax expense of $4.5 million for the three months ended March 31, 2003, versus $3.5 million for the same period of 2002. The effective tax rate was 35.4% and 35.7%, in the first quarter of 2003 and 2002, respectively. OPERATING SEGMENT RESULTS As shown in Note 10 to the unaudited consolidated financial statements, the Company's operations consist of five primary segments: banking, premium finance, indirect auto, Tricom and wealth management. The Company's profitability is primarily dependent on the net interest income, provision for loan losses, non-interest income and operating expenses of its banking segment. For the first quarter of 2003, the banking segment's net interest income totaled $23.7 million, an increase of $2.9 million, or 14%, as compared to $20.8 million recorded in the same quarter of 2002. This increase was the direct result of earning asset growth, particularly in the loan portfolio. The banking segment's non-interest income totaled $9.3 million for the first quarter of 2003 and increased $4.4 million, or 89%, when compared to the prior year quarterly total of $4.9 million. Contributing to this increase were a $2.6 million increase in fees on mortgage loans sold, a $576,000 increase in premium income from certain covered call option transactions, a $601,000 increase in net securities gains and $385,000 from BOLI. The banking segment's after-tax profit for the quarter ended March 31, 2003, totaled $8.5 million, an increase of $2.3 million, or 37%, as compared to the prior year quarterly total of $6.2 million. Net interest income from the premium finance segment totaled $9.2 million for the quarter ended March 31, 2003, an increase of $1.2 million, or 14%, over the $8.1 million recorded in the same quarter of 2002. This improvement was due to an increase in average premium finance receivables of approximately 33%. Non-interest income for the three months ended March 31, 2003 totaled $1.1 million, compared to $2.0 million in the same quarter of 2002. Gains from the sale of premium finance receivables increased by $396,000 compared to the same period last year. The first quarter of 2002 included pretax income of $1.25 million for a partial settlement related to a non-recurring charge recorded in 2000. After-tax profit for the premium finance segment totaled $4.2 million for the three-month period ended March 31, 2003, an increase of $105,000, or 2.6%, over the same period of 2002, which included $754,000 after-tax from the partial settlement described earlier. This increase was due to higher levels of premium finance receivables resulting from market increases in insurance premiums charged by insurance carriers and continued targeted marketing programs. The indirect auto segment recorded $1.8 million of net interest income for the first quarter of 2003, a decrease of $166,000, or 8%, as compared to the 2002 quarterly total. Average outstanding loans decreased 6% in the first quarter of 2003, compared to the same quarter of 2002. After-tax segment profit totaled $657,000 for the three-month period ended March 31, 2003, a decrease of $71,000, or 10%, when compared to the same period of 2002. The decrease in this segment's profitability was caused mainly by the lower volume of outstanding loans compared to the first quarter of 2002, contributing to the lower levels of net interest income. 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 $854,000 for the first quarter of 2003, a decrease of $59,000, or 7%, compared to - 24 -
$913,000 reported in the same period of 2002. Non-interest income was $1.1 million in the first quarter of 2003, an increase of $270,000, or 33%, compared to $821,000 in the first quarter of 2002. The increase in non-interest income in the first quarter of 2003 is attributable to the acquisition of a competitor's customer base in early January 2003. The segment's after-tax profit was $397,000 in the first quarter of 2003, an increase of $126,000, or 47%, as compared to the prior year first quarter of $271,000. The wealth management segment reported net interest income of $1.6 million for the first quarter of 2003 compared to $588,000 for the same period last year. The rise in net interest income reported is due to the net interest allocated to the segment from non-interest bearing and interest-bearing account balances on deposit at the Banks offsetting a decrease in the segment's earning assets, primarily the interest-bearing brokerage customer receivables at WHI. This segment recorded non-interest income of $6.2 million for the first quarter of 2003 as compared to $4.7 for the same quarter of 2002, an increase of $1.5 million. The increase is attributable to the additional month of revenues from the Wayne Hummer Companies included in the 2003 results and the two months of revenue from Lake Forest Capital Management Company. The acquisition of Lake Forest Capital Management Company demonstrates Wintrust's commitment to growing the trust and investment business in order to better service its customers and create a more diversified revenue stream. The wealth management segment's after-tax loss totaled $281,000 for the three-month period ended March 31, 2003, as compared to an after-tax loss of $142,000 for the same period of 2002. FINANCIAL CONDITION Total assets were $3.91 billion at March 31, 2003, representing an increase of $960 million, or 32%, over $2.96 billion at March 31, 2002, and $193 million, or 21% on an annualized basis, over $3.72 billion at December 31, 2002. Growth at the newer Banks and branches along with market share increases at the more mature Banks were the primary factors for the increases during these periods. Total funding, which includes retail deposits, wholesale borrowings and Long-term Debt-Trust Preferred Securities, was $3.57 billion at March 31, 2003, representing an increase of $837 million, or 31%, over the March 31, 2002 reported amounts, and $179 million, or 21% on an annualized basis, since December 31, 2002. The increased funding was primarily utilized to fund growth in the loan portfolio of $461 million since March 31, 2002 and $72 million since year-end and to provide liquidity to the Company on a temporary basis. See Notes 4-8 of the Company's unaudited consolidated financial statements on pages 7-9 for additional period-end detail. During the third quarter of 2002, the Company purchased $41.1 million of Bank Owned Life Insurance ("BOLI"). The BOLI policies were purchased to consolidate existing term life insurance contracts of executive officers to mitigate the mortality risk associated with death benefits provided for in the executives' employment contracts. The BOLI balances as of March 31, 2003 are $41.7 million and are included in "Accrued interest receivable and other assets" on the Company's consolidated statement of condition. Adjustments to the cash surrender value of the BOLI policies are recorded as non-interest income. - 25 -
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 ----------------------------------------------------------------------------------- MARCH 31, 2003 December 31, 2002 March 31, 2002 ---------------------------- ------------------------------------------------------ (Dollars in thousands) BALANCE PERCENT Balance Percent Balance Percent - ----------------------------------------------------------------------------- ------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Loans: Commercial and commercial real estate $ 1,283,931 37 % $ 1,285,811 38 % $ 982,902 38 % Home equity 378,320 11 357,517 11 274,076 11 Residential real estate (1) 234,737 7 223,282 7 168,443 6 Premium finance receivables 544,114 15 495,015 15 408,869 16 Indirect auto loans 174,387 5 182,231 5 184,993 7 Tricom finance receivables 22,285 1 22,302 1 18,153 1 Consumer and other loans 57,372 2 62,345 2 64,366 2 ---------------------------- ------------------------------------------------------ Total loans, net of unearned income $ 2,695,146 78 % $ 2,628,503 79 % $ 2,101,802 81 % Liquidity management assets (2) 715,338 21 671,887 20 458,922 17 Other earning assets (3) 41,221 1 44,431 1 44,920 2 ---------------------------- ------------------------------------------------------ Total earning assets $ 3,451,705 100 % $ 3,344,821 100 % $ 2,605,644 100 % ---------------------------- ------------------------------------------------------ Total assets $ 3,757,564 $ 3,637,851 $ 2,805,594 ---------------- ---------------- --------------- Total earning assets to total assets 92 % 92 % 93 % ------------ ------------ ----------- - ------------------------------------------ <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 and securities purchased under resale agreements. (3) Other earning assets include brokerage customer receivables and trading account securities. </FN> </TABLE> Average earning assets for the first quarter of 2003 increased $846 million, or 32%, over the prior year first quarter and $107 million, or 13% on an annualized basis, over the fourth quarter of 2002. The ratio of average earning assets as a percent of total average assets remained consistent at approximately 92% - 93% for each of the quarterly periods shown in the above table. Total average loans increased $593 million, or 28%, over the previous year first quarter. Commercial and commercial real estate loans grew on average by 31%, home equity by 38%, residential real estate by 39% and premium finance receivables by 33%, compared to the first quarter of 2002. Average loans increased $66.6 million, or 10% on an annualized basis, over the fourth quarter of 2002. The slower growth rate in the first quarter of 2003 in average loans over the previous quarter was due in large part to the reduction in usage of mortgage warehouse lines, declining $65.5 million on average. This resulted in average commercial and commercial real estate loan balances remaining flat compared to the fourth quarter of 2002. Home equity loans increased 24%, residential real estate loans increased 21% and premium finance receivables increased 40%, all on an annualized basis, from the fourth quarter of 2002. Other earning assets in the table include brokerage customer receivables and trading account securities from the Wayne Hummer Companies. In the normal course of business, WHI activities involve the execution, settlement, and financing of various securities transactions. These activities may expose WHI to risk in the event the customer is unable to fulfill its contractual obligations. WHI maintains cash and margin accounts for its customers generally located in the Chicago, Illinois and Appleton, Wisconsin metropolitan areas of the Midwest. WHI's customer securities activities are transacted on either a cash or margin basis. In margin transactions, WHI extends credit to its customers, subject to various regulatory and internal margin requirements, collateralized by cash and securities in customer's accounts. In connection with these activities, WHI executes and clears customer transactions relating to the sale of securities not yet purchased, substantially all of which are transacted on a margin basis subject to - 26 -
individual exchange regulations. Such transactions may expose WHI to off-balance-sheet risk, particularly in volatile trading markets, in the event margin requirements are not sufficient to fully cover losses that customers may incur. In the event the customer fails to satisfy its obligations, WHI may be required to purchase or sell financial instruments at prevailing market prices to fulfill the customer's obligations. WHI seeks to control the risks associated with its customers' activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. WHI monitors required margin levels daily and, pursuant to such guidelines, requires the customer to deposit additional collateral or to reduce positions when necessary. 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. DEPOSITS The following table sets forth, by category, the composition of average deposit balances and the relative percentage of total average deposits for the periods presented: <TABLE> <CAPTION> THREE MONTHS ENDED ------------------------------------------------------------------------------------------ MARCH 31, 2003 December 31, 2002 March 31, 2002 ---------------------------------------------------------------------------------------- (Dollars in thousands) BALANCE PERCENT Balance Percent Balance Percent ----------------------------------------- ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Non-interest bearing $ 298,977 9 % $ 294,152 10 % $ 242,012 10 % NOW 345,299 11 351,789 11 285,756 12 NOW-Brokerage customer deposits 243,973 8 208,265 7 -- -- Money market 406,229 13 392,413 13 352,574 15 Savings 151,218 5 141,906 5 128,410 6 Time certificate of deposits 1,704,924 54 1,632,566 54 1,330,648 57 --------------------------------------------- ------------------------------------------ Total deposits $ 3,150,620 100 % $ 3,021,091 100 % $ 2,339,400 100 % ============================================= ========================================== </TABLE> Total average deposits for the first quarter of 2003 were $3.15 billion, an increase of $811 million, or 35%, over the first quarter of 2002 and an increase of $130 million, or 17% on an annualized basis, over the fourth quarter of 2002. As previously disclosed, following its acquisition of the Wayne Hummer Companies in February 2002, Wintrust undertook efforts to migrate funds from the money market mutual fund balances managed by Wayne Hummer Asset Management Company into deposit accounts of the Wintrust Banks ("NOW - Brokerage customer deposits" in table above). Consistent with reasonable interest rate risk parameters, the funds will generally be invested in excess loan production of the Banks as well as other investments suitable for banks. As of March 31, 2003, $252 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. OTHER FUNDING SOURCES Although deposits are the Company's main source of funding its interest-earning asset growth, the Company's ability to manage the types and terms of deposits is somewhat limited by customer preferences and market competition. As a result, the Company uses several other funding sources to support its interest-earning asset growth. These sources include short-term borrowings, notes payable, FHLB advances, subordinated debt, trust preferred securities, the issuance of equity securities as well as the retention of earnings. - 27 -
Average total interest-bearing funding, from sources other than deposits and including trust preferred securities, decreased by $20 million in the first quarter of 2003 to $308 million, compared to the fourth quarter of 2002 average balance of $328 million. These funding sources increased by $47 million compared to the first quarter of 2002 average total balance of $261 million. The following table sets forth, by category, the composition of average other funding sources for the periods presented: <TABLE> <CAPTION> THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31, December 31, March 31, (In thousands) 2003 2002 2002 ----------------------------------------------------------------------- --------------------------------------- ------------------ <S> <C> <C> <C> Notes payable $ 42,837 $ 48,522 $ 55,384 Federal Home Loan Bank advances 140,000 140,000 90,000 Federal funds purchased 2,162 4,347 4,760 Securities sold under repurchase agreements 23,623 39,628 28,704 Wayne Hummer Companies borrowings 18,397 21,608 28,628 Other 5,000 5,000 2,222 Subordinated note 25,000 17,391 -- Long-term Debt - Trust Preferred Securities 50,894 51,050 51,050 --------------------------------------- ------------------ Total other funding sources $ 307,913 $ 327,546 $ 260,748 --------------------------------------- ------------------ </TABLE> During 2001, Wintrust initiated borrowing from the Federal Home Loan Bank ("FHLB"). The Company initially borrowed from the FHLB in the third and fourth quarters of 2001 and borrowed an additional $50 million in the second quarter of 2002 as part of the Company's interest rate risk management. The Wayne Hummer Companies borrowings consist of demand obligations to third party banks primarily collateralized with customer assets 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 decrease in the average balance in the first quarter of 2003 compared to the fourth quarter of 2002 and the first quarter of 2002 is a result of lower balances required to finance securities purchased by customers on margin. Other represents the Company's interest-bearing deferred portion of the purchase price of the Wayne Hummer Companies. During the fourth quarter of 2002, the Company completed a $25 million subordinated debt agreement with an unaffiliated bank. Subsequent to the first quarter of 2003, the Company completed an additional $25 million subordinated debt agreement with the same unaffiliated bank and issued $25 million of floating rate trust preferred securities in a private placement offering. Proceeds will primarily be used to support the continued growth of the Company and to reduce other indebtedness in the near-term. - 28 -
SHAREHOLDERS' EQUITY Total shareholders' equity was $238.9 million at March 31, 2003 and increased $75.4 million since March 31, 2002 and $11.9 million since the end of 2002. Significant changes from the prior year first quarter resulted from the issuance of 1,362,750 shares of common stock through an underwritten public offering completed in July 2002 (including the sale of shares subject to the underwriters' over-allotment option), through which the Company realized net proceeds of approximately $36.5 million and the retention of earnings of approximately $27.4 million. The increase in shareholders' equity from year-end 2002 was the result of the retention of earnings of $6.9 million, the issuance of shares in connection with the acquisition of LFCM in February 2003 valued at $3.5 million, and $1.6 million from the issuance of stock pursuant to the Company's various stock incentive compensation plans. The annualized return on average equity for the three months ended March 31, 2003 decreased to 14.51% as compared to 17.12% for the first three months of 2002. The following tables reflect various consolidated measures of capital as of the dates presented and the capital guidelines established by the Federal Reserve Bank for a bank holding company: <TABLE> <CAPTION> MARCH 31, December 31, March 31, 2003 2002 2002 ---------------------- --------------------- ------------------ <S> <C> <C> <C> Leverage ratio 6.9 % 7.0 % 7.0 % Tier 1 risk-based capital ratio 8.0 8.0 7.6 Total risk-based capital ratio 9.3 9.4 8.2 Dividend payout ratio 8.9 7.5 7.5 - ---------------------------------------------------------------- ----------------------------------------------------------------- Minimum Capital Well Requirements Capitalized --------------------- ------------------ Leverage ratio 4.0 % 5.0 % Tier 1 risk-based capital ratio 4.0 6.0 Total risk-based capital ratio 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. As previously discussed, subsequent to the end of the first quarter, the Company completed an additional $25 million subordinated debt agreement with an unaffiliated bank that qualifies as Tier II regulatory capital. Additionally, the Company issued $25 million of trust preferred securities that qualify as Tier II regulatory capital and may qualify as Tier I regulatory capital subject to certain regulatory capital limitations. The Company's goal is to support the continued growth of the Company and to meet the well-capitalized total risk-based capital ratio as a result of these new issuances of regulatory capital. On January 23, 2003, Wintrust declared a semi-annual cash dividend of $0.08 per common share. In January and July 2002, the Company declared semi-annual cash dividends of $0.06 per common share. - 29 -
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 March 31, ------------------------------------- (Dollars in thousands) 2003 2002 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> BALANCE AT BEGINNING OF PERIOD $ 18,390 $ 13,686 PROVISION FOR LOAN LOSSES 2,641 2,348 CHARGE-OFFS: Commercial and commercial real estate loans 445 225 Home equity loans -- -- Residential real estate loans -- -- Consumer and other loans 103 76 Premium finance receivables 673 867 Indirect automobile loans 216 287 Tricom finance receivables -- -- --------------- --------------- Total charge-offs 1,437 1,455 --------------- --------------- RECOVERIES: Commercial and commercial real estate loans 43 20 Home equity loans -- -- Residential real estate loans -- -- Consumer and other loans 23 -- Premium finance receivables 67 63 Indirect automobile loans 42 30 Tricom finance receivables 4 5 --------------- --------------- Total recoveries 179 118 --------------- --------------- NET CHARGE-OFFS (1,258) (1,337) --------------- --------------- BALANCE AT MARCH 31 $ 19,773 $ 14,697 =============== =============== Annualized net charge-offs as a percentage of average: Commercial and commercial real estate loans 0.13 % 0.08 % Home equity loans -- -- Residential real estate loans -- -- Consumer and other loans 0.57 0.48 Premium finance receivables 0.45 0.80 Indirect automobile loans 0.40 0.56 Tricom finance receivables (0.07) (0.11) --------------- --------------- Total loans 0.19 % 0.26 % =============== =============== Net charge-offs as a percentage of the provision for loan losses 47.63 % 56.94 % =============== =============== Loans at March 31 $ 2,628,480 $ 2,167,550 Allowance as a percentage of loans at period-end 0.75 % 0.68 % </TABLE> - 30 -
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 the provision for loan losses, is determined based on management's assessment of the adequacy of the allowance for loan 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 $2.6 million for the first quarter of 2003, an increase of $293,000 from a year earlier. For the quarter ended March 31, 2003, net charge-offs totaled $1.3 million, down $79,000 from the $1.3 million of net charge-offs recorded in the same period of 2002. On a ratio basis, annualized net charge-offs as a percentage of average loans decreased to 0.19% in the first quarter of 2003 from 0.26% in the same period in 2002. 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 including an analysis of the lack of maturity in the loan portfolio, 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 $1.4 million from December 31, 2002 to March 31, 2003, is primarily related to growth in the premium finance receivables portfolio of $70.5 million, or 62% on an annualized basis, as well as the increase in the performing loans on the Company's Watch List from $34.3 million at December 31, 2002 to $42.3 million at March 31, 2003. The allowance for loan losses as a percentage of total loans was 0.75% at March 31, 2003, compared to 0.68% at March 31, 2002. The commercial and commercial real estate portfolios and the premium finance portfolio have traditionally experienced the highest levels of charge-offs by the Company, along with losses related to the indirect automobile portfolio. The level of the allowance for loan losses was not impacted significantly by changes in the amount or credit risk associated with the indirect automobile loan portfolio as that portfolio has decreased by $8.9 million, or 20% on an annualized basis, from December 31, 2002, and improvements have been made in the delinquencies, underwriting standards and collection routines. - 31 -
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> MARCH 31, December 31, March 31 (Dollars in thousands) 2003 2002 2002 - -------------------------------------------------------------------------- --------------- ----------------- ----------------- <S> <C> <C> <C> PAST DUE GREATER THAN 90 DAYS AND STILL ACCRUING: Residential real estate and home equity $ 13 $ 32 $ 136 Commercial, consumer and other 2,053 3,047 208 Premium finance receivables 1,574 2,198 1,582 Indirect automobile loans 399 423 249 Tricom finance receivables -- -- -- --------------- ----------------- ----------------- Total past due greater than 90 days and still accruing 4,039 5,700 2,175 --------------- ----------------- ----------------- NON-ACCRUAL LOANS: Residential real estate and home equity 375 711 1,912 Commercial, consumer and other 2,053 1,132 742 Premium finance receivables 5,694 4,725 6,277 Indirect automobile loans 246 254 266 Tricom finance receivables 14 20 104 --------------- ----------------- ----------------- Total non-accrual 8,382 6,842 9,301 --------------- ----------------- ----------------- TOTAL NON-PERFORMING LOANS: Residential real estate and home equity 388 743 2,048 Commercial, consumer and other 4,106 4,179 950 Premium finance receivables 7,268 6,923 7,859 Indirect automobile loans 645 677 515 Tricom finance receivables 14 20 104 --------------- ----------------- ----------------- Total non-performing loans 12,421 12,542 11,476 --------------- ----------------- ----------------- OTHER REAL ESTATE OWNED 984 76 100 --------------- ----------------- ----------------- TOTAL NON-PERFORMING ASSETS $ 13,405 $ 12,618 $ 11,576 =============== ================= ================= Total non-performing loans by category as a percent of its own respective category: Residential real estate and home equity 0.07 % 0.14 % 0.48 % Commercial, consumer and other 0.30 0.30 0.08 Premium finance receivables 1.37 1.50 1.90 Indirect automobile loans 0.38 0.38 0.28 Tricom finance receivables 0.06 0.10 0.59 ------------- ------------- --------------- Total non-performing loans 0.47 % 0.49 % 0.53 % ------------- ------------- --------------- Total non-performing assets as a percentage of total assets 0.34 % 0.34 % 0.39 % ------------- ------------- --------------- Allowance for loan losses as a percentage of non-performing loans 159.19 % 146.63 % 128.07 % ============= ============= =============== </TABLE> The information in the table should be read in conjunction with the detailed discussion following the table. - 32 -
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 $4.5 million, up from the $3.0 million reported at March 31, 2002, and down from the $4.9 million reported at December 31, 2002. These loans consist primarily of a small number of commercial, residential real estate and home equity loans, which management believes are well secured and in the process of collection. The small number of such non-performing loans allows management to monitor the status of these credits and work with the borrowers to resolve these problems effectively. Non-performing Premium Finance Receivables The table below presents the level of non-performing premium finance receivables as of March 31, 2003 and 2002, and the amount of net charge-offs for the quarters then ended. <TABLE> <CAPTION> MARCH 31, March 31, (Dollars in thousands) 2003 2002 - ------------------------------------------------------------------------- ------------------------- ----------------------- <S> <C> <C> Non-performing premium finance receivables $ 7,268 $ 7,859 - as a percent of premium finance receivables 1.37% 1.90% Net charge-offs of premium finance receivables $ 606 $ 804 - as a percent of premium finance receivables 0.45% 0.80% - ------------------------------------------------------------------------- ------------------------- ----------------------- </TABLE> 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 $645,000 at March 31, 2003, increasing from $515,000 at March 31, 2002 and decreasing from $677,000 at December 31, 2002. The ratio of these non-performing loans to total indirect automobile loans stood at 0.38% of total indirect automobile loans at March 31, 2003, 0.28% at March 31, 2002 and 0.38% at December 31, 2002. As noted in the Allowance for Loan Losses table, net charge-offs as a percent of total indirect automobile loans has decreased from 0.56% in the first quarter of 2002 to 0.40% in the first quarter of 2003. 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 March 31, 2003 were $169.3 million, down from $178.2 million at December 31, 2002 and $184.4 million at March 31, 2002. Potential Problem Loans Management believes that any loan where there are serious doubts as to the ability of such borrowers to comply with the present loan repayment terms should be identified as a non-performing loan and should be included in the disclosure of "Past Due Loans and Non-performing Assets" on page 32. Accordingly, at the periods presented in this report, the Company has no potential problem loans as defined by Securities and Exchange Commission regulations. - 33 -
Credit Quality Review Procedures The Company utilizes a loan rating system to assign risk to loans and utilizes that risk rating system to assist in developing an internal problem loan identification system ("Watch List"). The Watch List is used to monitor the credits as well as a means of reporting non-performing and potential problem loans. At each scheduled meeting of the Boards of Directors of the Banks and the Wintrust Board, a Watch List is presented, showing all loans that are non-performing and loans that may warrant additional monitoring. Accordingly, in addition to those loans disclosed under "Past Due Loans and Non-performing Assets," there are certain loans in the portfolio which management has identified, through its Watch List, which exhibit a higher than normal credit risk. These credits are reviewed individually by management to determine whether any specific reserve amount should be allocated for each respective credit. However, these loans are still performing and, accordingly, are not included in non-performing loans. Management's philosophy is to be proactive and conservative in assigning risk ratings to loans and identifying loans to be included on the Watch List. The principal amount of loans on the Company's Watch List (exclusive of those loans reported as non-performing) as of March 31, 2003, December 31, 2002 and March 31, 2002 were $42.3 million, $34.3 million and $30.2 million, respectively. We believe these loans are performing and, accordingly, do not cause management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. LIQUIDITY Wintrust manages the liquidity position of its banking operations to ensure that sufficient funds are available to meet customers' needs for loans and deposit withdrawals. The liquidity to meet the demand is provided by maturing assets, sales of premium finance receivables, liquid assets that can be converted to cash, and the ability to attract funds from external sources. Liquid assets refer to federal funds sold and to marketable, unpledged securities, which can be quickly sold without material loss of principal. Please refer to the Interest-Earning Assets, Deposits, Other Funding Sources and Shareholders' Equity discussions on pages 26-29 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 36. - 34 -
FORWARD-LOOKING STATEMENTS This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements may be deemed to include, among other things, statements relating to anticipated improvements in financial performance and management's long-term performance goals, as well as statements relating to the anticipated effects on results of operations and financial condition from expected development or events, the Company's business and growth strategies, including anticipated internal growth, plans to form additional de novo banks and to open new branch offices, and to pursue additional potential development or the acquisition of banks, specialty finance or fee-related businesses. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following: o The level of reported net income, return on average assets and return on average equity for the Company will in the near term continue to be impacted by start-up costs associated with de novo bank formations, branch openings, and expanded trust and investment operations. De novo banks may typically require 13 to 24 months of operations before becoming profitable, due to the impact of organizational and overhead expenses, the start-up phase of generating deposits and the time lag typically involved in redeploying deposits into attractively priced loans and other higher yielding earning assets. Similarly the expansion of wealth management services through the Company's acquisitions of the Wayne Hummer Companies and Lake Forest Capital Management will depend on the successful integration of these businesses. o The Company's success to date has been and will continue to be strongly influenced by its ability to attract and retain senior management experienced in banking and financial services. o Although management believes the allowance for loan losses is adequate to absorb losses 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 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 Unforeseen future events that may cause slower than anticipated development and growth of the Tricom business and/or changes in the temporary staffing industry. o Changes in the economic environment, competition, or other factors, may influence the anticipated growth rate of loans and deposits, the quality of the loan portfolio and the pricing of loans and deposits and may affect the Company's ability to successfully pursue acquisition and expansion strategies. o The conditions in the financial markets and economic conditions generally, as well as unforeseen future events surrounding the wealth management business, including competition and related pricing of brokerage, trust and asset management products. - 35 -
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS As a continuing part of its financial strategy, the Company attempts to manage the impact of fluctuations in market interest rates on net interest income. This effort entails providing a reasonable balance between interest rate risk, credit risk, liquidity risk and maintenance of yield. Asset-liability management policies are established and monitored by management in conjunction with the boards of directors of the Banks, subject to general oversight by the Company's Board of Directors. The policy establishes guidelines for acceptable limits on the sensitivity of the market value of assets and liabilities to changes in interest rates. Interest rate risk arises when the maturity or repricing periods and interest rate indices of the interest earning assets, interest bearing liabilities, and derivative financial instruments are different. It is the risk that changes in the level of market interest rates will result in disproportionate changes in the value of, and the net earnings generated from, the Company's interest earning assets, interest bearing liabilities and derivative financial instruments. The Company continuously monitors not only the organization's current net interest margin, but also the historical trends of these margins. In addition, management attempts to identify potential adverse swings in net interest income in future years, as a result of interest rate movements, by performing simulation analysis of potential interest rate environments. If a potential adverse swing in net interest margin and/or net income is identified, management then would take appropriate actions with its asset-liability structure to counter these potentially adverse situations. Please refer to earlier sections of this discussion and analysis for further discussion of the net interest margin. As the Company's primary source of interest bearing liabilities is customer deposits, the Company's ability to manage the types and terms of such deposits may be somewhat limited by customer preferences and local competition in the market areas in which the Company operates. The rates, terms and interest rate indices of the Company's interest earning assets result primarily from the Company's strategy of investing in loans and short-term securities that permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same time achieving an acceptable interest rate spread. The Company's exposure to interest rate risk is reviewed on a regular basis by management and the boards of directors of the Banks and the Company. The objective is to measure the effect on net income and to adjust balance sheet and derivative financial instruments to minimize the inherent risk while at the same time maximizing net interest income. Tools used by management include a standard gap analysis and a rate simulation model whereby changes in net interest income are measured in the event of various changes in interest rate indices. An institution with more assets than liabilities repricing over a given time frame is considered asset sensitive and will generally benefit from rising rates, and conversely, a higher level of repricing liabilities versus assets would be beneficial in a declining rate environment. Standard gap analysis starts with contractual repricing information for assets, liabilities and derivative financial instruments. These items are then combined with repricing estimations for administered rate (NOW, savings and money market accounts) and non-rate related products (demand deposit accounts, other assets, other liabilities). These estimations recognize the relative insensitivity of these accounts to changes in market interest rates, as demonstrated through current and historical experiences. Also included are estimates for those items that are likely to materially change their payment structures in different rate environments, including residential loan products, certain commercial and commercial real estate loans and certain mortgage-related securities. Estimates for these sensitivities are based on industry assessments and are substantially driven by the differential between the contractual coupon of the item and current market rates for similar products. - 36 -
The following table illustrates the Company's estimated interest rate sensitivity and periodic and cumulative gap positions as of March 31, 2003: <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: Federal funds sold and securities purchased under resale agreements $ 331,640 $ -- $ -- $ -- $ 331,640 Interest-bearing deposits with banks 4,870 -- -- -- 4,870 Available-for-sale securities 280,496 80,839 45,879 96,976 504,190 -------------------------------------------------------------------- Total liquidity management assets 617,006 80,839 45,879 96,976 840,700 Loans, net of unearned income (1) 1,750,714 482,465 448,342 43,309 2,724,830 Other earning assets 41,182 -- -- -- 41,182 -------------------------------------------------------------------- Total earning assets 2,408,902 563,304 494,221 140,285 3,606,712 Other non-earning assets -- -- -- 308,283 308,283 -------------------------------------------------------------------- Total assets (RSA) $ 2,408,902 $563,304 $494,221 $ 448,568 $ 3,914,995 -------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY: Interest-bearing deposits (2) $ 1,610,010 $654,511 $683,267 $ 9,300 $ 2,957,088 Federal Home Loan Bank advances -- -- 121,000 19,000 140,000 Notes payable and other borrowings 88,643 -- -- -- 88,643 Subordinated note 25,000 -- -- -- 25,000 Long-term Debt - Trust Preferred Securities -- -- -- 51,004 51,004 -------------------------------------------------------------------- Total interest-bearing liabilities 1,723,653 654,511 804,267 79,304 3,261,735 Demand deposits -- -- -- 313,207 313,207 Other liabilities -- -- -- 101,148 101,148 Shareholders' equity -- -- -- 238,905 238,905 EFFECT OF DERIVATIVE FINANCIAL INSTRUMENTS: Interest rate swap (Company pays fixed, receives floating) (50,000) 25,000 -- 25,000 -- Interest rate swap (Company pays floating, receives fixed) 31,050 (31,050) -- -- -- -------------------------------------------------------------------- Total liabilities and shareholders' equity including effect of derivative financial instruments (RSL) $ 1,704,703 $648,461 $804,267 $ 757,564 $ 3,914,995 -------------------------------------------------------------------- Repricing gap (RSA - RSL) $ 704,199 $ (85,157) $ (310,046) $(308,996) Cumulative repricing gap $ 704,199 $619,042 $308,996 $ -- Cumulative RSA/Cumulative RSL 141% 126% 110% Cumulative RSA/Total assets 62% 76% 89% Cumulative RSL/Total assets 44% 60% 81% Cumulative GAP/Total assets 18% 16% 8% Cumulative GAP/Cumulative RSA 29% 21% 9% - ------------------------------------------------------------------------------------------------------------------------------------ <FN> (1) Loans, net of unearned income, include mortgages held for sale and nonaccrual loans. (2) Non-contractual interest-bearing deposits are subject to immediate withdrawal and, therefore, are included in 0-90 days. </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. - 37 -
Management uses an additional measurement tool to evaluate its asset-liability sensitivity that determines exposure to changes in interest rates by measuring the percentage change in net interest income due to changes in interest rates over a two-year time horizon. Management measures its exposure to changes in interest rates using many different interest rate scenarios. One interest rate scenario utilized is to measure the percentage change in net interest income assuming an instantaneous permanent parallel shift in the yield curve of 200 basis points, both upward and downward. Utilizing this measurement concept, the interest rate risk of the Company, expressed as a percentage change in net interest income over a two-year time horizon due to changes in interest rates, at March 31, 2003, December 31, 2002 and March 31, 2002, is as follows: <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ + 200 Basis - 200 Basis Points Points --------------------- -------------------- <S> <C> <C> Percentage change in net interest income due to an immediate 200 basis point shift in the yield curve: MARCH 31, 2003 6.9% (25.9)% December 31, 2002 7.5% (26.4)% March 31, 2002 6.9% (12.3)% - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> These results are based solely on a permanent parallel shift in the yield curve and do not reflect the net interest income sensitivity that may arise from other factors, such as changes in the shape of the yield curve or the change in spread between key market rates. The above results are conservative estimates due to the fact that no management action to mitigate potential changes in net interest income are included in this simulation process. These management actions could include, but would not be limited to, delaying a change in deposit rates, extending the maturities of liabilities, the use of derivative financial instruments, changing the pricing characteristics of loans or modifying the growth rate of certain types of assets or liabilities. As the table above shows, management has positioned the balance sheet so that the Company benefits from a rise in interest rates and believes this is a prudent position. Until a rise in rates occurs, the Company is fortunate that the business strategy provides a solid base to grow the deposit and loan portfolios. This growth in the balance sheet has helped fuel earnings growth despite the lower net interest margins. The Company also mitigates the net interest margin pressure by realizing income from strong residential real estate lending activity and by using income from covered call option transactions to, in effect, hedge a portion of the reduced net interest income. Management actively monitors the relationships between growth, net interest income and other income to provide for earnings growth in a tough interest rate environment. One method utilized by financial institutions to manage interest rate risk is to enter into derivative financial instruments. A derivative financial instrument includes interest rate swaps, interest rate caps and floors, futures, forwards, option contracts and other financial instruments with similar characteristics. During 2001, the Company entered into a $25 million notional principal amount interest rate swap contract that matures in February 2004. This contract effectively converts a portion of the Company's floating-rate notes payable to a fixed-rate basis, thus reducing the impact of rising interest rates on future interest expense. During the fourth quarter of 2002, the Company renewed and increased its revolving loan agreement, and completed a $25 million subordinated debt agreement with an unaffiliated bank that qualifies as Tier II regulatory capital. The Company also entered into two interest rate swap contracts in 2002. A $25 million notional principal amount swap was entered into to convert the newly issued subordinated note from variable-rate to fixed-rate. The swap matures in 2012, and the notional principal amount is reduced $5 million annually, beginning in 2008, to match the principal reductions on the subordinated note. Additionally, a $31.05 million interest rate swap contract was entered into to convert the Company's 9% Trust Preferred Securities from fixed-rate to variable-rate. This swap has a termination date of September 30, 2028, and provides the counterparty with a call option on any date on or after September 30, 2003. The call option in the swap coincides with the Company's call option in the trust preferred securities. All of the Company's interest rate swap contracts qualify as perfect hedges pursuant to SFAS 133. During the first quarter of 2003, the Company also entered into certain covered call option transactions related to certain securities held by the Company. The Company uses these covered call option transactions (rather than entering into other derivative interest rate contracts, such as interest rate floors), to mitigate the effects of an asset-sensitive balance sheet in a falling rate environment and increase the total return associated with the related securities. Although the revenue from these covered call option transactions is recorded as non-interest income rather than interest income, the increased return - 38 -
attributable to the related securities from these transactions contributes to the Company's overall profitability. The Company's exposure to interest rate risk may be effected by these transactions. To mitigate this risk, the Company may acquire fixed rate term debt or use financial derivative instruments. There were no call options outstanding as of March 31, 2003. ITEM 4 CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, the Company's Chief Executive Officer and Chief Financial Officer carried out an evaluation under their supervision, with the participation of other members of management as they deemed appropriate, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as contemplated by Exchange Act Rule 13a-15. Based upon, and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective, in all material respects, in timely alerting them to material information relating to the Company (and its consolidated subsidiaries) required to be included in the periodic reports the Company is required to file and submit to the SEC under the Exchange Act. There have been no significant changes to the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date that the internal controls were most recently evaluated. There were no significant deficiencies or material weaknesses identified in that evaluation and, therefore, no corrective actions were taken. PART II - OTHER INFORMATION 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 AND USE OF PROCEEDS. None. ITEM 3: DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None - 39 -
ITEM 5: OTHER INFORMATION. None. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits -------- 3.1 Amended and Restated Articles of Incorporation of Wintrust Financial Corporation (incorporated by reference to Exhibit 3.1 of the Company's Form S-1 Registration Statement (No. 333-18699) filed with the Securities and Exchange Commission on December 24, 1996). 3.2 Statement of Resolution Establishing Series of Junior Serial Preferred Stock A of Wintrust Financial Corporation (incorporated by reference to Exhibit 3.2 of the Company's Form 10-K for the year ended December 31, 1998). 3.3 Amended and Restated By-laws of Wintrust Financial Corporation 4.1 Rights Agreement between Wintrust Financial Corporation and Illinois Stock Transfer Company, as Rights Agent, dated July 28, 1998 (incorporated by reference to Exhibit 4.1 of the Company's Form 8-A Registration Statement (No. 000-21923) filed with the Securities and Exchange Commission on August 28, 1998). 4.2 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 and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Reports on Form 8-K. - ------------------- - Form 8-K report filed with the SEC on January 16, 2003, provided the Company's first quarter 2003 earnings release dated January 16, 2003. - Form 8-K report filed with the SEC on February 4, 2003, provided the Company's press release dated February 4, 2003 announcing the consummation of the previously announced acquisition of Lake Forest Capital Management Company. - 40 -
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: May 14, 2003 /s/ DAVID L. STOEHR ------------------- Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) - 41 -
CERTIFICATIONS - -------------- I, Edward J. Wehmer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wintrust Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ EDWARD J. WEHMER -------------------------------------------- Name: Edward J. Wehmer Title: President and Chief Executive Officer - 42 -
CERTIFICATIONS - -------------- I, David L. Stoehr, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wintrust Financial Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ DAVID L. STOEHR --------------------------------- Name: David L. Stoehr Title: Executive Vice President and Chief Financial Officer - 43 -
EXHIBIT INDEX ------------- 3.1 Amended and Restated Articles of Incorporation of Wintrust Financial Corporation (incorporated by reference to Exhibit 3.1 of the Company's Form S-1 Registration Statement (No. 333-18699) filed with the Securities and Exchange Commission on December 24, 1996). 3.2 Statement of Resolution Establishing Series of Junior Serial Preferred Stock A of Wintrust Financial Corporation (incorporated by reference to Exhibit 3.2 of the Company's Form 10-K for the year ended December 31, 1998). 3.3 Amended and Restated By-laws of Wintrust Financial Corporation. 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 and Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - 44 -