February, 2000
Dear Shareholders,
This letter updates you on our financial performance through the fourth
quarter of 1999 and provides other news of Wintrust Financial Corporation. We
are truly pleased with the progress made in 1999 and think we have significant
momentum to carry us forward into the coming years.
SUMMARY OF RESULTS
o Wintrust generated record earnings for the year (up 51%) and for the
fourth quarter (up 35%);
o In 1999, our pre-tax operating earnings increased 201% over 1998 and
were over 13 times higher than our pre-tax earnings in 1997;
o During 1999, we grew our assets by 25% over a year ago and since the
inception of the first bank in December 1991, our annual compound
growth rate has been 54%.
o Accordingly, we continue to be one of the fastest growing de novo bank
groups in the country, not only in assets, but in earnings as well;
o Our return on average equity increased 33% for the year and it stood
at 12.66% for the fourth quarter;
o During 1999, all of our community banks reached record asset levels
and improved upon their profitability;
o First Insurance Funding had record growth in premium finance
receivables volume;
o Wintrust Asset Management, our trust and investment subsidiary,
increased its assets under management to $442 million from $273
million at the end of 1998;
o In October, we acquired Tricom, Inc. which adds another earning asset
niche, bolsters our fee revenue and is accretive to our earnings per
share;
o Our asset quality remains strong, as the level of non-performing
assets is very manageable and favorable compared to our peer group;
o We recently announced the commencement of dividend payments with our
first ever semi-annual cash dividend of $0.05 per common share payable
in February;
o We also announced the board's approval of a stock buyback program
authorizing the purchase of up to 300,000 shares of the Company's
common stock.
In summary, it was a very good performance year for Wintrust Financial
Corporation. While we feel that we have made excellent progress on our journey
to improve profitability and
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franchise value, we feel in some respect like a mountain climber. That is, after
climbing partially up the "mountain" we look down and realize how far we have
come in such a short period of time, but we look up and see that we've only
begun our climb and have many more lofty goals to reach.
DIVIDEND DECLARATION
We are pleased to announce that your Board of Directors recently
approved the first semi-annual cash dividend in the amount of $0.05 per share.
The dividend is payable on February 24, 2000 to shareholders of record as of
February 10, 2000. Given our increasing profitability levels and the fact that
some investors have been with us for eight years, we are pleased to be
commencing the payment of dividends. As a growing company, we still intend to
retain the majority of our earnings to fund future growth and continue to build
our franchise.
The commencement of a dividend payment follows through on our
commitment that dividends would be paid once we reached consistent levels of
profitability. Annualized, this dividend payment represents about 9% of 1999's
earnings. Most mature banking companies pay higher levels of dividends; however,
as a younger, growth oriented company, our higher level of retained earnings
will be utilized to support future growth.
STOCK BUYBACK AUTHORIZATION
Additionally, the Board approved a stock buyback program authorizing
the purchase of up to 300,000 shares of the Company's common stock, from time to
time, in open market or privately negotiated transactions. The shares authorized
to be repurchased represent approximately 3% of the Company's currently
outstanding shares. Shares repurchased, if any, would be available for issuance
under the Company's stock incentive plan, employee stock purchase plan and other
corporate purposes. Such purchases, at a time when our stock is statistically
cheap, would augment shareholder value.
FINANCIAL PROGRESS TO DATE
Wintrust's fourth quarter earnings of 1999 increased to $2.8 million,
up from $2.1 million during the same period in 1998, an increase of 35%. This
equates to $0.32 per diluted common share for the three months ended December
31, 1999, up from $0.25 for the year ago quarter. The fourth quarter 1999
earnings include a non-recurring after-tax charge of approximately $100,000, or
$0.01 per common share, for a severance payment related to the termination of a
former officer of one of our bank subsidiaries.
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For the year ended December 31, 1999, Wintrust generated net income of
$9.4 million compared to $6.2 million for the same period of 1998. Earnings per
common share, on a fully diluted basis, for the twelve months of 1999 increased
to $1.10 from $0.74 in 1998, a 49% increase.
On the basis of pre-tax operating earnings, our performance is even
better. As you are aware, prior to 1999 a large portion of our net income was a
result of recording prior net operating tax loss benefits. As such, the
comparison of pre-tax earnings is more illuminating as it relates to progress in
our core business. Specifically, pre-tax operating earnings reached $14.2
million for the twelve months of 1999, an increase of $9.4 million, or 201%,
over the same period a year ago and an increase of $13.1 million or 13 times
over the 1997 pre-tax earnings level.
Our strategy of investing heavily in the start-up of our de novo banks
continues to pay off. The continuing maturation of our banks should lead to
accelerated growth in our core earnings. Also, our Tricom acquisition has been
immediately accretive to our bottom line since its addition in the fourth
quarter of 1999.
Growth in our major balance sheet categories also continues to look
good. As of December 31, 1999, consolidated assets increased to $1.68 billion,
or 25%, from $1.35 billion as of December 31, 1998. And since December 31, 1997,
our consolidated assets have grown $626 million, or 59%. Our compound growth
rate in assets over the past five years has averaged 37%.
Loan demand continues to be strong. Consolidated net loans reached
$1.28 billion as of December 31, 1999, an increase of $286 million, or 29% over
the prior year. This is a result of steady loan origination in our core
commercial loan portfolio, strong growth in our insurance premium finance
business and the receivables generated by Tricom, Inc. since the October 1999
acquisition. Also, as of year-end 1999, consolidated deposits increased to $1.46
billion from $1.23 billion a year ago, a 19% increase.
In our third quarter update letter, we stated that we had achieved our
objective of being an "asset driven" organization. That is, the generation of
loans is outpacing our growth in deposits. This is beneficial to the Company
because it allows us to invest new deposit dollars in loans which bear higher
interest rates than the alternative short-term investments. Being asset driven
also allows us to be more competitive in designated markets where we want to
increase market share because we are generating sufficient higher yielding
assets to invest the new deposits. Through the fourth quarter of 1999, this
trend has continued. Because of our strong loan generation during the past three
quarters, we were able to provide the banks with additional liquidity by selling
approximately $70 million of premium finance receivables to an unrelated
financial institution at a pre-tax gain of over $1.0 million. We anticipate
continuing this practice in the future as we balance growth and earnings.
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PERFORMANCE VERSUS GOALS
Your Board of Directors and management set high standards for ourselves
and we want to be held accountable to you, the shareholders, for our performance
and the attainment of our goals. Accordingly, we continue to publish the
following goals for you to measure us by:
o Core Net Interest Margin of 4 - 4 1/2 % o Net Overhead Ratio of 1 1/2 - 2
% o Return on Assets of 1 1/2 % o Return on Equity of 20 - 25 %
The following table tracks the performance of these goals and our asset
quality position for each of the quarters in 1999 as well as the fourth quarter
of 1998. We have generally experienced improvement in these performance measures
and have actually surpassed some of our goals already.
Quarter Ended
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December 31, September 30, June 30, March 31, December 31,
1999 1999 1999 1999 1998
---- ---- ---- ---- ----
Core Net Interest Margin (1) 3.65% 3.59% 3.62% 3.66% 3.41%
Net Overhead Ratio 1.89% 1.91% 2.04% 2.17% 2.24%
Return on Average Equity 12.66% 12.46% 11.55% 9.75% 11.09%
Return on Average Assets 0.68% 0.65% 0.62% 0.55% 0.63%
Non-Performing Assets
as a percent of total assets 0.41% 0.38% 0.33% 0.37% 0.45%
------------------------
<FN>
(1) By definition, our Core Net Interest Margin excludes certain discretionary
investment leveraging transactions and the net impact of the Company's 9.00%
Cumulative Trust Preferred Securities offering.
</FN>
Our cost control and asset quality ratios continue to improve. During
the third quarter of 1999, we attained our goal of operating at a net overhead
ratio of less than 2%. And in the fourth quarter we made further improvement on
that performance measure. As we continue to grow into our existing overhead, we
are able to more efficiently leverage our facilities and staff. We are also
pleased with the low level of problem loans, which results from carefully
monitoring and diversifying our credit risks.
In a period of rising rates, growing the net interest margin continues
to be our biggest challenge. During the fourth quarter of 1999, the prime rate
increased again (that makes three times in 1999) and yields on U.S. Treasury
bills steadily increased necessitating the need to raise certain deposit rates.
This put increasing pressure on our net interest margin as our portfolio of
assets generally takes longer to re-price than our deposit base. However, over
time we believe that higher interest rates will be helpful to us in creating a
higher net interest margin. Achieving our goal is primarily dependent upon
controlling our funding costs and continuing to be a strong
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originator of a diversified loan portfolio. The Company's new specialty asset
generation program (Community Advantage(TM)) that provides lending and deposit
services to condominium, homeowner and community associations and our purchase
of Tricom, Inc. will assist in improving our net interest margin. These new
sources of business will provide good growth for our organization and diversify
our loan portfolio.
As a result of this progress, for the year of 1999, we have improved
our earnings and have increased our return on equity to 11.6%, up from 8.7% in
1998. By balancing our growth and profitability, we should continue to make
progress towards attaining our financial goals.
OUR 4TH QUARTER "RUN RATE" PROJECTS CONTINUED EARNINGS GROWTH
Our core earnings trend through the fourth quarter of 1999 continues to
improve. If we were to annualize the fourth quarter's net income and earnings
per share, here's where we stand before any improvement in performance:
o Net income of $11.2 million
o Diluted earnings per share of $1.28
This represents a 19% increase in net income and a 16% increase in earnings per
share over 1999 results, before any improvement. Most companies would be happy
with these increases in year-over-year results but we have plans to continue to
grow the earnings at a higher rate. If we were to factor in growth, which is
reasonable given our track record, the continued maturation of our young
franchise and the positive impact that the Tricom acquisition will have on our
results, we conclude that Wintrust Financial Corporation should have another
impressive year in 2000.
GROWTH STRATEGIES
You have seen these strategies before, but they are worth
repeating--future growth will come from a variety of current and new strategies:
o Growing our current franchises by adding new customers (increased
market share) and new branches (new markets);
o Introducing new de novo banks in high opportunity markets that contain
the right mix of demographic and competitive variables (high wealth,
high big bank competition, low community bank competition);
o Acquiring existing community banks in high opportunity markets and
acquiring financial services firms to expand our portfolio of asset
niches and fee revenues; and,
o Utilizing the internet as a new distribution vehicle for current
products and a portal to marketing and distributing new products;
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In 2000, we have plans for new branch openings for Lake Forest Bank &
Trust, Hinsdale Bank & Trust, Libertyville Bank & Trust, and Barrington Bank &
Trust. Lake Forest Bank & Trust's newest branch in Highwood serving Highwood,
Fort Sheridan and Highland Park, should open during the first quarter of 2000 in
a temporary facility while we begin construction on a permanent location. We
also have an option to purchase a site for our seventh separately chartered de
novo bank. Not wanting to give the competition any forewarning, we will keep
that location a secret for the time being.
Your management team and Board of Directors are dedicated to being
disciplined with regard to pricing potential acquisitions so that they will be
accretive to earnings per share. We will not acquire financial institutions just
for the sake of growth through acquisition. Acquisition growth will need to fill
strategic goals as to franchise location, additional diversified earning asset
niches, fee-based business niches to supplement Wintrust's banking revenues or
other meaningful objectives.
INTERNET INITIATIVE
We are pleased to announce that considerable progress has been made on our
internet initiative. We believe that we will offer the most sophisticated
internet banking service of any community bank. We also have a unique
three-pronged internet strategy that is feasible given our asset-driven
operating philosophy:
1. Offer community banking financial products and services to existing
and new bank customers via each bank's internet web site.
2. Offer "private label" banking and financial products via the internet
to participating affinity groups. Our first such program is to offer
First Insurance Funding Corp.'s network of independent insurance
agents financial products for themselves and their customers.
3. Introduce a free-standing internet bank - i-netbank.com - to offer
banking products outside of our market area. This should allow us to
obtain deposit funding at targeted rates that will assist us in
managing our asset/liability position, as well as offer products
through strategic alliances where we would receive fee income.
We have made good progress in the development of our internet financial services
web sites. New web sites for our community banks and First Insurance Funding
will be completed shortly and on-line banking and bill pay are in the final
stages of testing. A recent financial services web site article indicates that
the three major complaints about current banks' web sites are "difficulty to
navigate", "having to click through too many pages" and "confusing and
distracting materials". We believe our new community bank sites'
state-of-the-art navigation system allows users to "get where they want to go"
quickly. First Insurance Funding's new web site also offers products and
services that are unmatched in the industry.
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We are also dedicated to developing a top-notch operations and customer
service group that will be responsible for servicing our new bank web sites.
Since superior customer service is our mission, we believe providing unsurpassed
back office customer service support is also critical to making our internet
banking a success.
This internet banking technology is the portal for future high tech
distribution initiatives by Wintrust's community banks, First Insurance Funding,
Wintrust Asset Management and Tricom. While most of our customers want the
benefits of our old-fashioned banking service, there is a growing demand to
provide these same services via the convenience of the internet. Our banks and
other subsidiaries will be leaders in this area as well.
FIRST INSURANCE FUNDING CORP.
First Insurance Funding Corp. (FIRST) generated record volume in 1999.
With approximately $690 million in volume for the twelve months ending December
31, 1999, First Insurance Funding's volume grew by 40% over 1998. This
unprecedented growth comes as a result of continued investments in technology,
improved efficiency, and targeted sales and marketing. In 2000, we expect
continued portfolio growth to come from internal growth and from our alliance
with Premium Finance Holdings, a sales organization with which FIRST recently
entered into joint marketing agreement.
FIRST's new internet initiative will bring its customers a host of
services currently unavailable in the premium finance industry, including
on-line quoting, account information, sales and marketing materials and
portfolio analysis. The improved service and accessibility offered by this new
web site will allow FIRST's customers to more easily and efficiently quote,
process and record loans, helping FIRST maintain its low overhead costs while
growing its business. And providing financial services to the agents and the
agent's customers is a value-added benefit that only FIRST can offer.
ASSET MANAGEMENT AND TRUST UPDATE
Our trust and investment subsidiary, Wintrust Asset Management Company,
continues to increase its assets under management and its march towards
profitability. By the end of the fourth quarter, assets under management were
just over $440 million. For the year, we have generated approximately $1.2
million in fee income and are now generating in excess of $120,000 in monthly
fee income. We have assembled a very qualified staff of experienced trust and
investment professionals at Wintrust Asset Management Company and they are
poised to move the company to a higher level of growth in assets under
management. Income generated from our trust and investment activities is an
important source of fee income that will help Wintrust diversify its revenue
base.
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TRICOM, INC.
Our newest member of the Wintrust family, Tricom, Inc., finances
temporary help companies and administers their payrolls. This has been a growing
business throughout the economic cycle, and the potential for further growth is
outstanding. The credit loss experience of Tricom's strong management team has
been excellent. We are very pleased to welcome the Tricom team aboard and look
forward to their contributions to Wintrust's success.
STOCK PRICE PERFORMANCE
The following graph depicts the significant annual growth in net
income, net revenues and assets achieved by Wintrust Financial Corporation over
the course of the past two years. Couple these growth results with solid credit
quality, improving cost efficiencies and the unique story of our young company,
and you would expect that our stock price would be ahead of its level of one
year ago. Unfortunately, it is not. As the graph also shows, our stock price has
performed in line with the composite Nasdaq Bank Index over the course of the
last two years in spite of our well above average growth record. Wintrust, like
other financial and small-cap stocks, has been left behind in this market which
has favored high technology, internet, and ".com" companies.
Companies historically are rewarded for consistent growth in profits
and we think the market will recognize our performance as we continue to post
positive trends. Our management, bank directors and their families own over 25%
of our outstanding stock, so making Wintrust a rewarding investment is a high
priority.
The graph included in this section portrays the percentage change of certain key
performance data over a two year period from December 31, 1997 to December 31,
1999, as follows:
Net Income - growth of 95 percent
Net Revenues - growth of 81 percent
Assets - growth of 59 percent
WTFC Stock Price - decline of 10 percent
Nasdaq Bank Index - decline of 19 percent
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SUMMARY
We are grateful for your support of our organization and are
enthusiastic about making the year 2000 another good year in terms of growth in
earnings and assets.
Yours truly,
John S. Lillard Edward J. Wehmer
Chairman President and CEO
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FORWARD-LOOKING STATEMENTS
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This letter contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the Company's
projected growth, anticipated earnings, earnings per share and other financial
measure improvements, and stock price performance, all of which are based on
estimates. Actual results could differ materially from those addressed in the
forward-looking statements due to factors such as changes in economic
conditions, unanticipated changes in interest rates that negatively impact loan
growth, net interest income and the net interest margin, competition and the
related pricing of loan and deposit products, future events that may cause
unforeseen loan or lease losses, slower than anticipated growth of the
loan/receivables portfolios and the deposit base, slower than anticipated
development and growth of Tricom's business and of the new trust and investment
business, unforeseen difficulties in integrating the Tricom acquisition,
unforeseen changes in the temporary staffing industry, difficulties in adapting
successfully to technological changes as needed to compete effectively in the
marketplace, effectiveness of the Company's and its vendors' preparedness
efforts toward processing date sensitive data associated with the Year 2000, and
the ability to attract and retain experienced senior management. Therefore,
there can be no assurances that future actual results will correspond to these
forward-looking statements.
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