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 September 30, 2000
Commission File Number 0-21923
WINTRUST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Illinois 36-3873352
- ---------------------------------------- ------------------------------------
(State of incorporation of organization) (I.R.S. Employer Identification No.)
727 North Bank Lane
Lake Forest, Illinois 60045
-------------------------------------------------------
(Address of principal executive offices)
(847) 615-4096
------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of issuer's class of common
stock, as of the last practicable date.
Common Stock - no par value, 8,609,499 shares, as of November 10, 2000.
TABLE OF CONTENTS
PART I. -- FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements.____________________________________________ 1-8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. ______________________________________ 9-30
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks. ____ 31-33
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings. ______________________________________________ 34
ITEM 2. Changes in Securities. __________________________________________ 34
ITEM 3. Defaults Upon Senior Securities. ________________________________ 34
ITEM 4. Submission of Matters to a Vote of Security Holders._____________ 34
ITEM 5. Other Information. ______________________________________________ 34
ITEM 6. Exhibits and Reports on Form 8-K. _______________________________ 34
Signatures ______________________________________________________ 35
Exhibit Index ___________________________________________________ 36
PART I
ITEM 1 FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(In thousands)
September 30, December 31, September 30,
2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 52,097 $ 53,066 $ 38,391
Federal funds sold 16,624 28,231 59,161
Interest-bearing deposits with banks 180 2,547 3,746
Available-for-Sale securities, at fair value 318,585 205,795 164,747
Loans, net of unearned income 1,486,929 1,278,249 1,202,256
Less: Allowance for possible loan losses 10,231 8,783 8,200
- ----------------------------------------------------------------------------------------------------------------------------
Net loans 1,476,698 1,269,466 1,194,056
Premises and equipment, net 83,843 72,851 68,257
Accrued interest receivable and other assets 37,331 35,943 35,213
Goodwill and other intangible assets, net 10,948 11,483 1,308
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,996,306 $1,679,382 $1,564,879
============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 184,821 $ 154,034 $ 125,870
Interest bearing 1,541,071 1,309,588 1,262,572
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 1,725,892 1,463,622 1,388,442
Short-term borrowings 41,910 59,843 40,025
Notes payable 33,250 8,350 7,350
Long-term debt - trust preferred securities 51,050 31,050 31,050
Accrued interest payable and other liabilities 46,834 23,570 17,158
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,898,936 1,586,435 1,484,025
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock - - -
Common stock 8,850 8,771 8,174
Surplus 83,612 82,792 73,165
Common stock warrants 100 100 100
Treasury stock, at cost (3,863) - -
Retained earnings (deficit) 10,020 3,555 749
Accumulated other comprehensive loss (1,349) (2,271) (1,334)
- ----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 97,370 92,947 80,854
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,996,306 $ 1,679,382 $ 1,564,879
============================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
- 1 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $34,160 $24,990 $ 93,962 $69,993
Interest bearing deposits with banks 4 44 24 165
Federal funds sold 320 504 1,056 1,074
Securities 4,424 2,546 11,249 7,244
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 38,908 28,084 106,291 78,476
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 20,949 14,401 55,847 40,167
Interest on short-term borrowings and notes payable 1,032 727 3,232 1,470
Interest on long-term debt - trust preferred securities 1,287 734 2,855 2,203
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 23,268 15,862 61,934 43,840
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 15,640 12,222 44,357 34,636
Provision for possible loan losses 1,307 990 3,671 2,707
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 14,333 11,232 40,686 31,929
- ---------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Fees on mortgage loans sold 792 533 2,017 2,750
Service charges on deposit accounts 478 399 1,426 1,080
Trust fees 508 295 1,474 770
Gain on sale of premium finance receivables 640 377 2,877 640
Administrative services revenue 1,184 - 3,338 -
Net securities gains (losses) (69) 15 (94) 15
Other 960 398 2,237 1,188
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest income 4,493 2,017 13,275 6,443
- ---------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 7,139 4,984 20,267 15,256
Occupancy, net 961 743 3,111 2,088
Equipment expense 1,360 796 3,646 2,126
Data processing 735 551 2,114 1,544
Advertising and marketing 327 309 898 1,041
Professional fees 478 242 1,130 828
Amortization of intangibles 178 35 535 105
Premium finance defalcation 4,520 - 4,520 -
Other 2,428 1,770 6,903 5,506
- ---------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 18,126 9,430 43,124 28,494
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 700 3,819 10,837 9,878
Income tax expense (199) 1,292 3,497 3,257
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 899 $ 2,527 $ 7,340 $ 6,621
===========================================================================================================================
Net income per common share - Basic $ 0.10 $ 0.31 $ 0.84 $ 0.81
===========================================================================================================================
Net income per common share - Diluted $ 0.10 $ 0.30 $ 0.82 $ 0.78
===========================================================================================================================
Cash dividends declared per common share $ 0.05 $ 0.00 $ 0.10 $ 0.00
===========================================================================================================================
Weighted average common shares outstanding 8,671 8,173 8,743 8,166
Dilutive potential common shares 252 310 226 322
===========================================================================================================================
Average common shares and dilutive common shares 8,923 8,483 8,969 8,488
===========================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
- 2 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
Accumulated
other
Compre- Common Retained compre- Total
hensive Common stock earnings Treasury hensive shareholders'
income stock Surplus warrants (deficit) Stock income(loss) equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 8,150 $ 72,878 $ 100 $ (5,872) $ - $ (51) $ 75,205
Comprehensive Income:
Net income $ 6,621 - - - 6,621 - - 6,621
Other Comprehensive Income (Loss), net of tax:
Unrealized losses on securities, net of
reclassification adjustment (1,283) - - - - - (1,283) (1,283)
------------
Comprehensive Income $ 5,338
============
Common stock issued upon exercise
of stock options 19 221 - - - - 240
Common stock issued through
employee stock purchase plan 5 66 - - - - 71
- -------------------------------------------- ----------------------------------------------------------------------------
Balance at September 30, 1999 $ 8,174 $ 73,165 $ 100 $ 749 $ - $ (1,334) $ 80,854
============================================ ============================================================================
Balance at December 31, 1999 $ 8,771 $ 82,792 $ 100 $ 3,555 $ - $ (2,271) $ 92,947
Comprehensive Income:
Net income $ 7,340 - - - 7,340 - - 7,340
Other Comprehensive Income (Loss), net of tax:
Unrealized gains on securities, net of
reclassification adjustment 922 - - - - - 922 922
------------
Comprehensive Income $ 8,262
============
Cash dividends declared on common stock - - - (875) - - (875)
Purchase of treasury stock, 242,300 shares at cost - - - - (3,863) - (3,863)
Common stock issued upon exercise
of stock options 75 768 - - - - 843
Common stock issued through
employee stock purchase plan 4 52 - - - - 56
- -------------------------------------------- ----------------------------------------------------------------------------
Balance at September 30, 2000 $ 8,850 $ 83,612 $ 100 $ 10,020 $ (3,863) $ (1,349) $ 97,370
============================================ ============================================================================
Nine Months Ended September 30,
2000 1999
------------------------
Disclosure of reclassification amount:
Unrealized holding gains (losses) arising during the period $ 1,493 $ (2,021)
Less: Reclassification adjustment for gains (losses) included in net income (94) 15
Less: Income tax expense (benefit) 665 (753)
------------------------
Net unrealized gains (losses) on securities $ 922 $ (1,283)
========================
See accompanying notes to unaudited consolidated financial statements.
- 3 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Nine Months Ended
September 30,
- -------------------------------------------------------------------------------------------------------------
2000 1999
- -------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 7,340 $ 6,621
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 3,671 2,707
Depreciation and amortization 5,448 2,832
Deferred income tax benefit (521) (1,822)
Net accretion/amortization of securities 954 (637)
Originations of mortgage loans held for sale (114,328) (202,216)
Proceeds from sales of mortgage loans held for sale 108,480 212,394
Purchase of trading securities (2,940) -
Proceeds from sale of trading securities 2,945 -
Gain on sale of trading securities (5) -
Gain on sale of premium finance receivables (2,877) (640)
Gains (loss) on sale of Available-for-Sale securities 94 (15)
Increase (decrease) in other assets, net (1,345) (2,650)
Increase in other liabilities, net 23,264 4,519
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 30,180 21,093
- -------------------------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from maturities of Available-for-Sale securities 84,007 345,726
Proceeds from maturities of Held-to-Maturity securities - 5,000
Proceeds from sale of Available-for-Sale securities 581,458 8,078
Purchases of Available-for-Sale securities (777,903) (310,814)
Proceeds from sale of premium finance receivables 175,741 39,873
Net decrease in interest-bearing deposits with banks 2,367 4,117
Net increase in loans (377,919) (261,145)
Purchases of premises and equipment, net (15,905) (13,813)
- -------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (328,154) (182,978)
- -------------------------------------------------------------------------------------------------------------
Financing Activities:
Increase in deposit accounts 262,270 159,288
Increase (decrease) in short-term borrowings, net (17,933) 40,025
Proceeds from notes payable 34,900 7,350
Repayment of notes payable (10,000) -
Proceeds from trust preferred securities offering 20,000 -
Common stock issued upon exercise of stock options 843 240
Common stock issued through employee stock purchase plan 56 71
Purchase of treasury stock (3,863) -
Dividends paid (875) -
- -------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 285,398 206,974
- -------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents (12,576) 45,089
Cash and Cash Equivalents at Beginning of Period 81,297 52,463
- -------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $68,721 $ 97,552
=============================================================================================================
See accompanying notes to unaudited consolidated financial statements.
- 4 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The consolidated financial statements of Wintrust Financial Corporation and
Subsidiaries ("Wintrust" or "Company") presented herein are unaudited, but in
the opinion of management reflect all necessary adjustments of a normal or
recurring nature for a fair presentation of results as of the dates and for the
periods covered by the consolidated financial statements.
Wintrust is a bank holding company currently engaged in the business of
providing community banking services through its banking subsidiaries to
customers in the Chicago metropolitan area, trust and investment services,
financing of commercial insurance premiums, and financing and administrative
services to the temporary services industry.
As of September 30, 2000, Wintrust had six 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") and Crystal Lake Bank
& Trust Company, N.A. ("Crystal Lake Bank").
The Company provides financing of commercial insurance premiums ("premium
finance receivables") on a national basis, through its subsidiary, 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. On September 30, 1998, Wintrust began operating a wholly-owned
trust and investment subsidiary, Wintrust Asset Management Company, N.A.
("WAMC"), which currently provides trust and investment services at four of the
Wintrust banks. Previously, the Company provided trust services through the
trust department of Lake Forest Bank. In October 1999, Hinsdale Bank acquired
Tricom, Inc. of Milwaukee ("Tricom"), a provider of short-term accounts
receivable financing ("Tricom finance receivables") and value-added out-sourced
administrative services, such as data processing of payrolls, billing and cash
management services, to temporary staffing clients located throughout the United
States.
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, 1999. Operating results for the three-month and nine-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 with the current period presentation.
- 5 -
(2) Cash and Cash Equivalents
-------------------------
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers cash and cash equivalents to include cash and due from banks and
federal funds sold which have an original maturity of 90 days or less.
(3) Earnings Per Share
------------------
The following table shows the computation of basic and diluted earnings per
share (in thousands, except per share data):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------------------------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- --------------
Net income (A) $ 899 $ 2,527 $ 7,340 $ 6,621
================ =============== ================ ==============
Average common shares outstanding (B) 8,671 8,173 8,743 8,166
Effect of dilutive common shares 252 310 226 322
---------------- --------------- ---------------- --------------
Weighted average common shares and
effect of dilutive common shares (C) 8,923 8,483 8,969 8,488
================ =============== ================ ==============
Net income per average
common share - Basic (A/B) $ 0.10 $ 0.31 $ 0.84 $ 0.81
================ =============== ================ ==============
Net income per average
common share - Diluted (A/C) $ 0.10 $ 0.30 $ 0.82 $ 0.78
================ =============== ================ ==============
The effect of dilutive common shares outstanding results from stock options,
stock warrants and shares to be issued under the Employee Stock Purchase Plan,
all being treated as if they had been either exercised or issued, and are
computed by application of the treasury stock method.
(4) Long-term Debt - Trust Preferred Securities
-------------------------------------------
In October 1998, the Company completed an offering of $31.05 million of 9.00%
Cumulative Trust Preferred Securities. Also, in June 2000, the Company completed
an additional offering of $20 million of 10.50% Cumulative Trust Preferred
Securities. For purposes of generally accepted accounting principles, these
securities are considered to be debt securities and not a component of
shareholders' equity. The Trust Preferred Securities offerings have increased
Wintrust's regulatory capital under Federal Reserve guidelines. Interest expense
on the Trust Preferred Securities is also deductible for income tax purposes.
For further information on the first offering of Trust Preferred Securities,
please refer to Note 10 of the Company's Consolidated Financial Statements
included in the Annual Report and Form 10-K for the year ended December 31,
1999.
- 6 -
(5) Segment Information
-------------------
The segment financial information provided in the following tables has been
derived from the internal profitability reporting system used by management and
the chief decision makers to monitor and manage the financial performance of the
Company. The 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 is a summary of certain operating information for reportable
segments for the three-month and nine-month periods ended September 30, 2000 and
1999 (in thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
Net Interest Income:
Banking $ 14,931 $ 11,552 $ 41,339 $ 32,573
Premium Finance 3,657 3,117 10,049 9,417
Indirect Auto 1,498 2,096 5,151 5,993
Tricom 968 - 2,601 -
Trust 118 106 359 338
Inter-segment eliminations (4,103) (3,829) (11,746) (11,363)
Other (1,429) (820) (3,396) (2,322)
---------------- ---------------- ---------------- ----------------
Total $ 15,640 $ 12,222 $ 44,357 $ 34,636
================ ================ ================ ================
Non-interest Income:
Banking $ 2,275 $ 1,512 $ 6,015 $ 5,413
Premium Finance 640 377 2,877 640
Indirect Auto - 1 - 1
Tricom 1,201 - 3,368 -
Trust 508 295 1,474 770
Inter-segment eliminations (131) (168) (459) (381)
---------------- ---------------- ---------------- ----------------
Total $ 4,493 $ 2,017 $ 13,275 $ 6,443
================ ================ ================ ================
- 7 -
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- ----------------
Segment Profit (Loss):
Banking $ 4,222 $ 2,712 $ 10,476 $ 7,600
Premium Finance (1,664) 1,206 933 3,240
Indirect Auto 293 775 1,330 2,184
Tricom 510 - 1,180 -
Trust (93) (134) (308) (546)
Inter-segment eliminations (1,120) (1,294) (3,310) (3,705)
Other (1,249) (738) (2,961) (2,152)
---------------- ---------------- ---------------- ----------------
Total $ 899 $ 2,527 $ 7,340 $ 6,621
================ ================ ================ ================
Segment Assets:
Banking $2,002,570 $1,597,087
Premium Finance 372,459 277,022
Indirect Auto 227,437 268,063
Tricom 32,741 -
Trust 2,431 2,354
Inter-segment eliminations (649,478) (583,550)
Other 8,146 3,903
---------------- ----------------
Total $1,996,306 $1,564,879
================ ================
- 8 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition as of September 30,
2000, compared with December 31, 1999, and September 30, 1999, and the results
of operations for the three-month and nine-month periods ended September 30,
2000 and 1999 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
The Company's operating subsidiaries were organized within the last nine years,
with an average life of its six subsidiary banks of approximately five years.
Wintrust has grown rapidly during the past few years and its Banks have been
among the fastest growing community-oriented de novo banking operations in
Illinois and the country. Because of the rapid growth, the historical
performance of the Banks, FIFC and WAMC has been affected by costs associated
with growing market share, establishing new de novo banks, opening new branch
facilities, and building an experienced management team. The Company's financial
performance over the past several years generally reflects improving
profitability of the operating subsidiaries as they mature, offset by the
significant costs of opening new banks and branch facilities. The Company's
experience has been that it generally takes 13-24 months for new banking offices
to first achieve operational profitability. Similarly, management currently
expects a start-up phase for WAMC to continue for up to two more years before
its operations become profitable.
Lake Forest Bank, Hinsdale Bank, North Shore Bank, Libertyville Bank, Barrington
Bank and Crystal Lake Bank began operations in December 1991, October 1993,
September 1994, October 1995, December 1996 and December 1997, respectively.
Subsequent to those initial dates of operations, each of the Banks, except
Barrington Bank, has established additional full-service banking facilities.
FIFC began operations in 1990 and is primarily engaged in the business of
financing insurance premiums written through independent insurance agents or
brokers on a national basis for commercial customers. On September 30, 1998,
WAMC began operations and offers a full range of trust and investment services
at many of the Wintrust banks.
Crystal Lake Bank, since moving into its permanent location in downtown Crystal
Lake in September 1998, opened a new drive-thru facility in March 1999 and a new
full-service branch facility in south Crystal Lake in September 1999. In October
1999, North Shore Bank opened a new full-service branch facility in Skokie,
Illinois. In February 2000, the Lake Forest Bank opened a new temporary branch
facility in Highwood, Illinois and in September 2000 moved to its permanent
facility in Highwood. In July 2000 Libertyville Bank opened a second facility
for its Wauconda Community Bank branch in Wauconda, Illinois. In addition, the
Company anticipates opening its seventh de novo bank in Northbrook, Illinois
later this year. Expenses related to these new banking operations predominantly
impact only the 2000 operating results presented in this discussion and
analysis.
- 9 -
While committed to a continuing growth strategy, management's current focus is
to balance further asset growth with earnings growth by seeking to more fully
leverage the existing lending capacity within each of the Banks, FIFC, WAMC and
Tricom. One aspect of this strategy is to continue to pursue specialized earning
asset niches, and to maintain the mix of earning assets such that loans, which
are higher-yielding, are kept at a level of between 85% and 90% of our deposit
funds. Another aspect of this strategy is a continued focus on less aggressive
deposit pricing at those Banks with significant market share and more
established customer bases.
FIFC has been the Company's most significant specialized earning asset niche and
is expected to reach approximately $1 billion in premium finance receivable
volume during 2000. The majority of these receivables have been retained within
the Banks' loan portfolios as part of the strategy noted above. However, since
the second quarter of 1999, as a result of the continued solid growth in loan
originations, FIFC has, from time to time, sold a portion of new receivables to
an unrelated third party. In addition to recognizing gains on the sale of these
receivables, the proceeds have provided the Company with additional liquidity.
It is possible that similar future sales may occur depending on the level of new
volume growth in relation to the desired capacity within the Banks' loan
portfolios.
The October 1999 acquisition of Tricom is another significant step in the
Company's strategy to pursue specialized earning asset niches. Tricom is a
Milwaukee-based company that has been in business for approximately ten years
and specializes in providing, on a national basis, short-term accounts
receivable financing and value-added out-sourced administrative services, such
as data processing of payrolls, billing and cash management services, to clients
in the temporary staffing industry. By virtue of the Company's funding
resources, this acquisition provides Tricom with additional capital necessary to
expand its financing services in a national market. Tricom's revenue principally
consists of interest income from financing activities and fee-based revenues
from administrative services. In addition to expanding the Company's earning
asset niches, this acquisition has added to the level of fee-based income and
augmented its community-based banking revenues.
Other newer specialized earning asset niches include Lake Forest Bank's MMF
Leasing Services equipment leasing division, a previously established small
business that was acquired in July 1998, and Barrington Bank's recently
established program that provides lending and deposit services to condominium,
homeowner and community associations. In addition, Hinsdale Bank's mortgage
warehouse lending program provides loan and deposit services to approximately
thirty mortgage brokerage companies located predominantly in the Chicago
metropolitan area. The Company plans to continue pursuing the development or
acquisition of other specialty finance businesses that generate assets suitable
for bank investment and/or secondary market sales.
With the formation of WAMC, the Company is expanding the trust and investment
management services that had already been provided prior to October 1998 through
the trust department of the Lake Forest Bank. With a separately chartered trust
subsidiary, the Company is now better able to offer trust and investment
management services to all communities served by Wintrust banks, which
management believes are some of the best trust markets in Illinois. In addition
to offering these services to existing bank customers at each of the Banks, the
Company believes WAMC can successfully compete for trust business by targeting
small to mid-size businesses and newly affluent individuals whose needs command
the personalized attention that is offered by WAMC's experienced trust
professionals. Since the fourth quarter of 1998, WAMC has provided the services
of experienced trust professionals at North Shore Bank, Hinsdale Bank and
Barrington Bank. As in the past, a full complement of trust professionals
continues to operate from offices at the Lake Forest Bank. Prospective trust and
investment customers at Libertyville Bank and Crystal Lake Bank are currently
being served on an appointment basis, as the need arises. Services offered by
WAMC typically will include traditional trust products and services, as well as
investment management, financial planning and 401(k) management services.
- 10 -
Similar to starting a de novo bank, the introduction of expanded trust services
has caused relatively high overhead levels when compared to initial fee income
generated to date. The overhead consists primarily of the salaries and benefits
of experienced trust professionals. Management currently anticipates that WAMC's
efforts to attract trust business will begin to generate sufficient trust fees
to absorb the overhead of WAMC and make that entity a contributor to the
Company's profits within the next two years.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for the quarter ended September 30, 2000 totaled $0.9 million, a
decrease of $1.6 million, or 64%, from the third quarter of 1999. On a per share
basis, net income for the third quarter of 2000 totaled $0.10 per diluted common
share, a $0.20 per share, or 67%, decrease from the third quarter of 1999. The
return on average equity for the third quarter of 2000 decreased to 3.66% from
12.46% for the prior year quarter. The third quarter 2000 results were impacted
by a non-recurring pre-tax charge of $4.5 million related to a fraudulent loan
scheme perpetrated by one independent insurance agency against the Company's
premium finance subsidiary. Excluding the charge, net income for the current
quarter would have been $3.6 million or $0.41 per diluted common share, an
increase of 44% over the third quarter of 1999.
For the nine months ended September 30, 2000, net income totaled $7.3 million,
or $0.82 per diluted common share, an increase of $0.7 million, or 11%, and
$0.03 per diluted share, when compared to the same period in 1999. On a year
to-date-basis, net income, excluding the charge, totaled $10.1 million, or $1.12
per diluted common share, an increase of $3.4 million, or 52%, compared to the
$6.6 million, or $0.78 per diluted common share reported in the same period in
1999.
The Company has commenced legal action against the parties involved in the fraud
and is vigorously pursuing all avenues of recovery. This includes reimbursement
under its insurance bond. The Company remains optimistic about its recovery
prospects; however the amount and timing of a recovery, if any, are not known at
this time.
- 11 -
NET INTEREST INCOME
The following tables present a summary of the Company's net interest income and
related net interest margins, calculated on a fully taxable equivalent basis,
for the three-month and nine-month periods ended September 30, 2000 and 1999:
For the Quarter Ended For the Quarter Ended
September 30, 2000 September 30, 1999
----------------------------------------- ---------------------------------------
(dollars in thousands) Average Interest Rate Average Interest Rate
- ---------------------- ---------------- ------------- ---------- --------------- ------------- ---------
Liquidity management assets (1) (2) $ 280,801 $ 4,766 6.75% $ 231,273 $ 3,096 5.31%
Loans, net of unearned income (2) 1,452,769 34,292 9.39 1,173,278 25,065 8.48
---------------- ------------- ---------- --------------- ------------- ---------
Total earning assets 1,733,570 39,058 8.96% 1,404,551 28,161 7.95%
---------------- ------------- ---------- --------------- ------------- ---------
Interest-bearing deposits 1,494,168 20,949 5.58% 1,225,090 14,401 4.66%
Short-term borrowings and notes payable 63,774 1,032 6.44 59,315 727 4.86
Long-term debt - trust preferred securities 51,050 1,287 10.08 31,050 734 9.46
---------------- ------------- ---------- --------------- ------------- ---------
Total interest-bearing liabilities 1,608,992 23,268 5.75% 1,315,453 15,862 4.78%
---------------- ------------- ---------- --------------- ------------- ---------
Tax equivalent net interest income $ 15,790 $ 12,299
============= =============
Net interest margin 3.62% 3.47%
========== =========
Core net interest margin(3) 3.92% 3.68%
========== =========
- -------------------------------
<FN>
(1) Liquidity management assets include 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% and 34% in 2000 and 1999, respectively. This total adjustment is $150,000 and $77,000 for the
quarters ended September 30, 2000 and 1999, respectively.
(3) The core net interest margin excludes the interest expense associated with the Company's Trust Preferred Securities.
</FN>
For the Nine Months Ended For the Nine Months Ended
September 30, 2000 September 30, 1999
----------------------------------------- ---------------------------------------
(dollars in thousands) Average Interest Rate Average Interest Rate
- ---------------------- ---------------- ------------- ---------- --------------- ------------- ---------
Liquidity management assets (1) (2) $ 253,279 $ 12,386 6.53% $ 216,047 $ 8,490 5.25%
Loans, net of unearned income (2) 1,378,206 94,317 9.14 1,103,881 70,154 8.50
---------------- ------------- ---------- --------------- ------------- ---------
Total earning assets 1,631,485 67,644 8.74% 1,319,928 78,644 7.97%
---------------- ------------- ---------- --------------- ------------- ---------
Interest-bearing deposits 1,409,148 55,847 5.29% 1,157,076 40,167 4.64%
Short-term borrowings and notes payable 69,273 3,232 6.23 44,439 1,470 4.42
Long-term debt - trust preferred securities 38,948 2,855 9.77 31,050 2,203 9.46
---------------- ------------- ---------- --------------- ------------- ---------
Total interest-bearing liabilities 1,517,369 61,934 5.45% 1,232,565 43,840 4.76%
---------------- ------------- ---------- --------------- ------------- ---------
Tax equivalent net interest income $ 44,769 $ 34,804
============= =============
Net interest margin 3.67% 3.53%
========== =========
Core net interest margin(3) 3.90% 3.75%
========== =========
- -------------------------------
<FN>
(1) Liquidity management assets include 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% and 34% in 2000 and 1999, respectively. This total adjustment is $412,000 and $168,000 for the
nine-month periods ended September 30, 2000and 1999, respectively.
(3) The core net interest margin excludes the interest expense associated with the Company's Trust Preferred Securities.
</FN>
- 12 -
Net interest income is defined as the difference between interest income and
fees on earning assets and interest expense on deposits, borrowings and
long-term debt. The related net interest margin represents the net interest
income on a tax-equivalent basis as a percentage of average earning assets
during the period.
Tax-equivalent net interest income for the quarter ended September 30, 2000
totaled $15.8 million, an increase of $3.5 million, or 28%, as compared to the
$12.3 million recorded in the same quarter of 1999. This increase mainly
resulted from loan growth, the October 1999 acquisition of Tricom, Inc.
("Tricom") and management's ability to control funding costs in the current
interest rate environment and was somewhat offset by the issuance of $20.0
million of the Company's 10.5% trust preferred securities in June 2000.
Tax-equivalent interest and fees on loans for the quarter ended September 30,
2000 totaled $34.3 million, an increase of $9.2 million, or 37%, over the prior
year quarterly total of $25.1 million. This growth was predominantly due to a
$279 million, or 24%, increase in average total loans.
For the third quarter of 2000, the net interest margin was 3.62%, an increase of
15 basis points when compared to the margin of 3.47% in the prior year quarter.
This increase resulted primarily from higher yields on both loans and securities
coupled with solid loan growth, including the addition of Tricom as well as
continued control of funding costs. The net interest margin for the second
quarter of 2000 was 3.73%. The decrease in margin from the previous quarter was
due in part to the issuance of $20.0 million of the Company's 10.5% trust
preferred securities in June 2000. The core net interest margin, which excludes
the interest expense associated with the Company's trust preferred securities,
was 3.92% in the third quarter, compared to 3.68% in the third quarter of 1999,
and 3.94% in the second quarter of 2000.
The yield on total earning assets for the third quarter of 2000 was 8.96% as
compared to 7.95% in 1999, an increase of 101 basis points resulting primarily
from increases in the prime lending rate, general market rate increases on
liquidity management assets, and the acquisition of Tricom. The yield on
interest earning assets also increased 20 basis points from the previous
quarter's yield of 8.76%. The third quarter 2000 loan yield of 9.39% increased
91 basis points when compared to the prior year quarterly yield of 8.48% and was
due primarily to a higher average prime lending rate of 9.50% during the third
quarter of 2000 versus an average prime lending rate of 8.10% for the third
quarter of 1999. The Company's loan portfolio does not re-price in a parallel
fashion to increases in the prime rate due to a portion of the portfolio being
longer-term fixed rate loans.
The rate paid on interest-bearing deposits averaged 5.58% for the third quarter
of 2000 versus 4.66% for the same quarter of 1999, an increase of 92 basis
points. This increase was caused by continued increases in market rates, which
was somewhat offset by management's decision to be less aggressive on its
deposit pricing. The rate paid on short-term borrowings and notes payable
increased to 6.44% in the third quarter of 2000 as compared to 4.86% in the same
quarter of 1999, due primarily to a higher outstanding balance under the
company's revolving credit agreement with an unaffiliated bank and a higher rate
environment for the Company's short-term funding sources.
For the first nine months of 2000, tax-equivalent net interest income totaled
$44.8 million and increased $10.0 million, or 29%, over the $34.8 million
recorded in the same period of 1999. This increase was also mainly due to a
combination of loan growth and the addition of Tricom and somewhat offset by the
issuance of $20.0 million of the Company's 10.5% trust preferred securities in
June 2000. Interest and fees on loans, on a tax equivalent basis, totaled $94.3
million for the first nine months of 2000, and increased $24.2 million, or 34%,
over the same period of 1999. Average loans for the first nine months of 2000
grew $274 million, or 25%, over the average for the first nine months of 1999.
The net interest margin for the first nine months of 2000 was 3.67%, an increase
of 14 basis points when compared to the same period in 1999. The core net
interest margin was 3.90% on a year-to-date basis in 2000 compared to 3.75% for
the same period in 1999. Consistent with the third quarter margin improvement as
noted above, the year-to-date margin increase was mainly the result of loan
growth, the addition of Tricom and the ability to control funding costs in a
rising rate environment and somewhat offset by the issuance of the $20.0 million
of the Company's 10.5% trust preferred securities in June 2000.
- 13 -
The following table presents a reconciliation of the Company's tax-equivalent
net interest income, calculated on a tax equivalent basis, between the three and
nine-month periods ended September 30, 1999 and September 30, 2000. The
reconciliation sets forth the change in the tax-equivalent net interest income
as a result of changes in volumes, changes in rates and the change due to the
combination of volume and rate changes (in thousands):
Three Month Nine Month
Period Period
------ ------
Tax-equivalent net interest income for the period ended Sept. 30, 1999................ $ 12,299 $ 34,804
Change due to average earning assets fluctuations (volume)........................ 2,783 8,407
Change due to interest rate fluctuations (rate)................................... 560 1,326
Change due to rate/volume fluctuations mix)....................................... 148 232
-------------------- -------------------
Tax equivalent net interest income for the period ended Sept. 30, 2000 .... $ 15,790 $ 44,769
==================== ===================
NON-INTEREST INCOME
For the third quarter of 2000, non-interest income totaled $4.5 million and
increased $2.5 million, or 123%, over the prior year quarter. For the first nine
months of 2000, non-interest income totaled $13.3 million and increased $6.8
million, or 106%, when compared to the same period in 1999. Gains from the sale
of premium finance receivables, revenues from Tricom and increases in trust
fees, deposit services charges and leased equipment rental income were partially
offset by a lower level of fees from the sale of mortgage loans. The following
table presents non-interest income by category (in thousands):
Three Months Ended Nine Months Ended
----------------------------------- ----------------------------------
September 30, September 30,
2000 1999 2000 1999
----------------- ---------------- ---------------- ---------------
Fees on mortgage loans sold $ 792 $ 533 $ 2,017 $ 2,750
Service charges on deposit accounts 478 399 1,426 1,080
Trust fees 508 295 1,474 770
Administrative services revenue 1,184 - 3,338 -
Gain on sale of premium finance receivables 640 377 2,877 640
Securities gains (losses), net (69) 15 (94) 15
Other income 960 398 2,237 1,188
----------------- ---------------- ---------------- ---------------
Total non-interest income $ 4,493 $ 2,017 $ 13,275 $ 6,443
================= ================ ================ ===============
Fees on mortgage loans sold include income from originating and selling
residential real estate loans into the secondary market. For the quarter ended
September 30, 2000, these fees totaled $792,000, an increase of $259,000, or
49%, from the prior year quarter. For the first nine months of 2000, fees on
mortgage loans sold totaled $2.0 million and declined $733,000, or 27%, when
compared to the same period of 1999. In the third quarter of 1999, mortgage
rates rose causing a sharp decrease in mortgage origination volumes,
particularly refinancing activity. Since then mortgage origination volumes have
recovered slightly and stabilized.
- 14 -
Service charges on deposit accounts totaled $478,000 for the third quarter of
2000, an increase of $79,000 when compared to the same quarter of 1999. For the
first nine months of 2000, deposit service charges totaled $1.4 million and
increased $346,000 when compared to the same period of 1999. These increases
were due to a higher deposit base and a larger 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.
Trust fees totaled $508,000 for the third quarter of 2000, a $213,000, or 72%,
increase over the same quarter of 1999. For the first nine months of 2000, trust
fees totaled $1.5 million and increased $704,000, or 91%, over the same period
of 1999. The increases were mainly the result of new business development
efforts from the staff of experienced trust officers added since late 1998 with
the formation of Wintrust Asset Management Company. Wintrust is committed to
growing the trust and investment business in order to better service its
customers and create a more diversified revenue stream. However, as the
introduction of expanded trust and investment services continues to unfold, it
is expected that overhead levels will be high when compared to the initial fee
income that is generated. It is anticipated that trust fees will eventually
increase to a level sufficient to absorb this overhead within the next two
years.
The administrative services revenue contributed by Tricom, which was acquired in
October 1999, added $1.2 million to total non-interest income in the third
quarter of 2000 and $3.3 million for the first nine months of 2000. This revenue
comprises income from administrative services, such as data processing of
payrolls, billing and cash management services, to temporary staffing service
clients located throughout the United States. Tricom also earns interest and fee
income from providing short-term accounts receivable financing to this same
client base, which is included in the net interest income category.
As a result of strong loan originations during the third quarter of 2000,
approximately $39 million of premium finance receivables were sold to an
unrelated third party and resulted in the recognition of a $640,000 gain.
Through the first nine months of 2000, approximately $172 million of premium
finance receivables have been sold resulting in a year-to-date gain of $2.9
million. The Company currently has a philosophy of maintaining its average
loan-to-deposit ratio in the range of 85-90%. During the third quarter of 2000,
the ratio was approximately 87%. At September 30, 2000 loans accounted for 86%
of deposits. Accordingly, the Company sold excess premium finance receivables
volume to an unrelated third party financial institution. 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 third quarter totaled $960,000 and increased
$562,000 over the prior year quarterly total of $398,000. For the first nine
months of 2000, other non-interest income totaled $2.2 million and increased
$1.0 million or 88%, over the same period of 1999. These increases were due
primarily to increases in rental income from equipment leased through the MMF
Leasing Services division of the Lake Forest Bank of $231,000 and $648,000,
respectively, for the three and nine months periods of 2000 compared with 1999.
- 15 -
NON-INTEREST EXPENSE
Non-interest expense for the third quarter of 2000 totaled $18.1 million and
increased $8.7 million, or 92%, from the third quarter 1999 total of $9.4
million. Excluding the non-recurring charge of $4.5 million recorded in the
third quarter attributable to the fraud perpetrated against the Company's
premium finance subsidiary, non-interest expense increased $4.2 million, or 44%,
from the prior year quarter. For the first nine months of 2000, non-interest
expense totaled $43.1 million and increased $14.6 million, or 51%, when compared
to the prior year period. Excluding the non-recurring charge, non-interest
expense increased $10.1 million, or 35%, from the same period in 1999. The
continued growth and expansion of the de novo banks, the development of the
trust and investment business, and the October 1999 acquisition of Tricom were
the primary causes for this increase. Since September 30, 1999, total deposits
and total loan balances each increased 24%, requiring higher levels of staffing
and other costs to both attract and service the larger customer base. The
following table presents non-interest expense by category (in thousands):
Three Months Nine Months
------------------------------------ -----------------------------------
Ended September 30, Ended September 30,
2000 1999 2000 1999
------------------- ---------------- ------------------------------------
Salaries and employee benefits $ 7,139 $ 4,984 $ 20,267 $ 15,256
Occupancy, net 961 743 3,111 2,088
Equipment expense 1,360 796 3,646 2,126
Data processing 735 551 2,114 1,544
Advertising and marketing 327 309 898 1,041
Professional fees 478 242 1,130 828
Premium finance defalcation 4,520 - 4,520 -
Other 2,606 1,805 7,438 5,611
------------------- ---------------- ------------------------------------
Total non-interest expense $ 18,126 $ 9,430 $ 43,124 $ 28,494
=================== ================ ====================================
Salaries and employee benefits expense totaled $7.1 million for the third
quarter of 2000, an increase of $2.2 million, or 43%, as compared to the prior
year quarter total of $5.0 million. For the first nine months of 2000, salaries
and employee benefits expense totaled $20.3 million and increased $5.0 million,
or 33%, when compared to the first nine months of 1999. These increases were
primarily due to the acquisition of Tricom, the expansion of the trust and
investment business, four additional banking offices and the salaries of staff
hired to organize the Company's seventh de novo bank in Northbrook, Illinois. As
a percent of average total assets, on an annualized basis, salaries and employee
benefits were 1.50% and 1.41% for the first nine months of 2000 and 1999,
respectively. The increase in this ratio is primarily a result of the
administrative services staffing at Tricom in 2000. Since Tricom was not
acquired until the fourth quarter of 1999, the 1999 ratio does not reflect those
salaries and employee benefits.
For the third quarter of 2000, occupancy costs, equipment expense and data
processing increased $218,000 (29%), $564,000 (71%) and $184,000 (33%),
respectively, over the prior year third quarter. For the first nine months of
2000, the respective increases were $1.0 million (49%), $1.5 million (71%) and
$570,000 (37%). These increases were due to the general growth of the Company
including the opening of several new banking facilities as discussed in the
Overview and Strategy section, the acquisition of Tricom and the development of
the trust and investment business.
The $4.5 million charge recorded in the third quarter of 2000 for the fraud
perpetrated against the Company's premium finance subsidiary includes
approximately $300,000 of professional fees associated with the Company's
pursuit of recovery of the loss. The Company has commenced legal action against
the parties involved and is vigorously pursuing all avenues of recovery. This
includes reimbursement under our insurance bond. The Company remains optimistic
about its recovery prospects; however the amount and timing of a recovery, if
any, are not known at this time.
- 16 -
Other non-interest expense, for the nine months ended September 30, 2000,
totaled $7.4 million and increased $1.8 million, or 33%, due mainly to the
factors mentioned earlier. This category of expense includes loan expenses,
correspondent bank service charges, postage, insurance, stationery and supplies,
goodwill amortization and other sundry expenses. Goodwill and other intangibles
amortization expense totaled $178,000 and $535,000 for the three and nine month
periods of 2000, respectively, compared to $35,000 and $105,000 for the same
periods of 1999, respectively. The increases in goodwill and other intangibles
amortization expense is a result of the acquisition of Tricom in October 1999.
Despite the Company's growth and the related increases in many of the
non-interest expense categories, the net overhead ratio for the first nine
months of 2000, excluding the non-recurring charge of $4.5 million, declined to
1.88% as compared to the first nine months of 1999 ratio of 2.03%. The overhead
ratio is within management's stated performance goal range of 1.50% - 2.00%.
INCOME TAXES
The Company recorded an income tax benefit of $199,000 for the three months
ended September 30, 2000 versus income tax expense $1.3 million for the same
period of 1999. For the first nine months of 2000, approximately $3.5 million of
income tax expense was recorded versus approximately $3.3 million in the prior
year period. The decrease was due primarily to the non-recurring charge of $4.5
million, which generated a tax benefit of approximately $1.8 million.
OPERATING SEGMENT RESULTS
As shown in Note 5 to the Unaudited Consolidated Financial Statements, the
Company's operations consist of five primary segments: banking, premium finance,
indirect auto, Tricom and trust. The Company's profitability is primarily
dependent on the net interest income, provision for possible loan losses,
non-interest income and operating expenses of its banking segment.
For the third quarter of 2000, the banking segment's net interest income totaled
$14.9 million, an increase of $3.4 million, or 29%, as compared to the $11.6
million recorded in the same quarter of 1999. On a year-to-date basis, the
banking segment net interest income totaled $41.3 million and increased $8.8
million, or 27%, as compared to the 1999 period. These increases were the direct
result of earning asset growth of approximately 23% for the periods,
particularly in the loan portfolio, as earlier discussed in the Net Interest
Income section. The banking segment's non-interest income totaled $2.3 million
for the third quarter of 2000 and increased $763,000 or 50%, when compared to
the prior year quarter. The increase was due primarily to a $259,000 increase
from fees on mortgage loans sold, a $231,000 increase in rental income from
operating equipment leases and a $79,000 increase in service charges on a higher
level of deposit accounts. Fees on mortgage loans sold increased from the prior
year quarter due to a sharp reduction in mortgage origination volumes,
particularly refinancing activity, in the third quarter of 1999 as mortgage
rates rose. The increase in rental income is the result of a higher level of
outstanding leases from the Company's MMF Leasing division. On a year-to-date
- 17 -
basis, non-interest income totaled $6.0 million and increased $602,000, or 11%,
as compared to the first nine months of 1999. This increase was due primarily to
a $346,000 increase in deposit service charges and a $733,000 increase in rental
income from lease equipment and was partially offset by a $733,000 decline in
fees from the sale of mortgage loans. The banking segment's after-tax profit for
the quarter ended September 30, 2000, totaled $4.2 million, an increase of $1.5
million, or 56%, as compared to the prior year quarterly total of $2.7 million.
For the first nine months of 2000, after-tax operating profit for the banking
segment totaled $10.5 million and increased $2.9 million, or 38%, over the same
period of 1999. This improved profitability resulted mainly from higher levels
of net interest income created from the continued growth and maturation of the
Company's de novo banks and branches.
Net interest income from the premium finance segment totaled $3.7 million for
the quarter ended September 30, 2000 compared to $3.1 million for the same
quarter of 1999. On a year-to-date basis, the premium finance segment net
interest income totaled $10.0 million compared to $9.4 million recorded for the
first nine months of 1999. The increases in net interest income are a result of
higher levels of outstanding receivables offset slightly by a higher funding
costs associated with this portfolio in 2000. Non-interest income for the three
months ended September 30, 2000 totaled $640,000 compared to $377,000 for the
same period of 1999. For the first nine months of 2000, non-interest income for
the premium finance segment totaled $2.9 million compared to the $640,000
recorded in the same period of 1999. The increases are a result of gains from
the sale of additional premium finance receivables in 2000, as mentioned earlier
in this report. For the three month period ended September 30, 2000 the premium
finance segment recorded an after tax loss of $1.7 million compared to an after
tax profit of $1.2 million for the same period in 1999, a decrease of $2.9
million. Excluding the $4.5 million pre-tax non-recurring charge, as mentioned
earlier in this report, the after-tax net operating profit for the premium
finance segment would have totaled $1.1 million and $3.7 million for the three
and nine month periods ended September 30, 2000, respectively. Excluding the
non-recurring charge, net income for the premium finance segment would have
decreased $143,000 when comparing the third quarter 2000 results to the same
period in 1999, and increased $420,000 when comparing the year to date period
ending September 30, 2000 to the same period in 1999.
The indirect auto segment recorded $1.5 million of net interest income for the
third quarter of 2000, a decline of $598,000, or 29%, as compared to the 1999
quarterly total. On a year-to-date basis, net interest income declined $842,000,
or 14%, to $5.2 million from the comparable period of 1999. The decline is due
to management's efforts to reduce the level of outstanding loans in this
portfolio and higher funding costs in 2000 compared to 1999. After-tax segment
profit totaled $293,000 for the three-month period ended September 30, 2000, a
decline of $482,000 when compared to the same period of 1999. For the first nine
months of 2000, after-tax operating profits were $1.3 million in 2000 compared
to $2.2 million in the first nine months of 1999. The decline in this segment's
profitability was caused mainly by a higher level of credit losses, lower
outstanding loan balances and compressed margins in 2000 versus 1999. See
further discussion of credit quality information in the "ASSET QUALITY" section
of this report.
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. For the quarter and nine months
ended September 30, 2000, the Tricom segment added $968,000 and $2.6 million,
respectively, to the Company's net interest income, $1.2 million and $3.4
million, respectively, to the Company's non-interest income, and $510,000 and
$1.2 million, respectively, to the Company's net income. No results are included
for the third quarter of 1999 because Tricom was acquired in October 1999 using
the purchase method of accounting.
- 18 -
The trust segment recorded non-interest income of $508,000 for the third quarter
of 2000 as compared to $295,000 for the same quarter of 1999, an increase of
$213,000, or 72%. On a year-to-date basis, non-interest income for the trust
segment increased to $1.5 million from $770,000 in the prior year period, an
increase of $704,000 or 91%. The increase was the result of continued new
business development efforts by a larger staff of experienced trust
professionals that were hired in connection with the October 1998 start-up of
WAMC. The trust segment's after-tax loss totaled $93,000 for the three-month
period ended September 30, 2000, as compared to an after-tax loss of $134,000
for the same period of 1999. For the first nine months of 2000 and 1999,
after-tax losses for this segment were $308,000 and $546,000, respectively. The
decline in after-tax segment losses was a direct result of the increased asset
base managed by WAMC and the associated fees. As more fully discussed in the
Overview and Strategy section of this analysis, management expects the start-up
phase for the trust segment to continue for up to two years before its
operations become profitable.
FINANCIAL CONDITION
Total assets were $2.00 billion at September 30, 2000, an increase of $431
million, or 28%, over the $1.56 billion a year earlier, and $317 million, or
19%, over the $1.68 billion at December 31, 1999. Growth at the newer banks and
branches coupled with continued market share growth at the more mature banks
were the primary factors for these increases. Total funding liabilities, which
include deposits, short-term borrowings, notes payable and long-term debt, were
$1.85 billion at September 30, 2000, and increased $385 million, or 26%, over
the prior year, and $289 million, or 19%, since December 31, 1999. These
increases were primarily utilized to fund growth in the loan portfolio and
certain discretionary investment leveraging transactions.
INTEREST-EARNING ASSETS
The following table sets forth, by category, the composition of earning asset
balances and the relative percentage of total earning assets as of the date
specified (dollars in thousands):
September 30, 2000 December 31, 1999 September 30, 1999
------------------------------- ------------------------------ -----------------------------
Loans: Balance Percent Balance Percent Balance Percent
------------------ ------------ ------------------ ----------- ----------------- ----------
Commercial and commercial
real estate $ 592,553 33% $ 485,776 32% $ 447,365 31%
Premium finance, net 289,050 16 219,341 15 215,948 15
Indirect auto, net 219,026 12 255,410 17 257,030 18
Home equity 171,437 9 139,194 9 126,467 9
Residential real estate 143,819 8 111,026 7 108,220 8
Tricom finance receivables 22,609 1 17,577 1 - -
Installment and other 48,435 3 49,925 3 47,226 3
------------------ ------------ ------------------ ----------- ----------------- ----------
Total loans, net of
unearned income 1,486,929 82 1,278,249 84 1,202,256 84
------------------ ------------ ------------------ ----------- ----------------- ----------
Securities and money
market investments 335,389 18 236,573 16 227,654 16
------------------ ------------ ------------------ ----------- ----------------- ----------
Total earning assets $ 1,822,318 100% $ 1,514,822 100% $ 1,429,910 100%
================== ============ ================== =========== ================= ==========
- 19 -
Earning assets as of September 30, 2000, increased $392 million, or 27%, over
the balance a year earlier, and $307 million, or 20%, over the balance at the
end of 1999. The ratio of earning assets as a percent of total assets remained
consistent at approximately 90% - 91% as of each reporting period date shown in
the above table.
Total net loans were $1.49 billion at September 30, 2000, an increase of $209
million, or 16%, since December 31, 1999, and an increase of $285 million, or
24%, since September 30, 1999. Solid loan growth in the core commercial loan,
home equity and residential real estate portfolios was the main factor for these
increases. Also, showing increases were the specialty premium finance and Tricom
finance receivable segments, the latter category which was added as a result of
the October 1999 acquisition of Tricom. Offsetting the increases in all of these
loan categories was a decline in the balance of indirect auto loans. Because of
the impact of the current economic and competitive environment on interest rates
surrounding this portfolio, management has begun to reduce the level of new
indirect auto loans originated and is dedicating additional resources to
optimize the profitability of this loan segment at slightly reduced levels of
outstanding receivables. Total net loans comprised 82% of total earning assets
at September 30, 2000 as compared to 84% a year earlier and at the end of 1999.
Commercial and commercial real estate loans, the largest loan category, totaled
$593 million at September 30, 2000, and comprised 33% of total earning assets
and 40% of total loans. This category has increased $145 million, or 32%, since
September 30, 1999 and $107 million, or 22%, since the end of 1999. The strong
growth experienced over the past year has resulted mainly from a healthy local
economy and the hiring of additional experienced lending officers.
Net premium finance receivables totaled $289 million at September 30, 2000 and
comprised 19% of the total loan portfolio. This portfolio increased $73 million,
or 34%, since September 30, 1999 and $70 million, or 32%, since the end of 1999.
This growth was primarily the result of increased market penetration from new
product offerings and marketing programs. Over the past few years, the majority
of premium finance receivables originated by FIFC were being sold to the Banks
and consequently remained an asset of the Company. However, since the second
quarter of 1999, as a result of the continued solid growth in loan originations,
FIFC has been selling a portion of new receivables to an unrelated third party.
During the third quarter of 2000 the Company sold approximately $39 million of
premium finance receivables to an unrelated third party at a gain of $640,000.
For the first nine months of 2000, approximately $172 million of premium finance
receivables were sold at a gain of $2.9 million. In addition to recognizing
gains on the sale of these receivables, the proceeds provided the Company with
additional liquidity. It is possible that similar future sales may occur
depending on the level of new volume growth in relation to the desired capacity
within the Banks' loan portfolios.
Net indirect auto loans comprised 12% of total earning assets and 15% of total
loans as of September 30, 2000. This portfolio decreased $38 million, or 15%,
from a year ago, and $36 million, or 14%, since the end of 1999. The decrease in
the balance is the result of a higher interest rate environment experienced
during the first nine months of 2000 coupled with a decision by management to
reduce its reliance upon indirect automobile lending as a percent of the overall
earning asset portfolio due to competitive pricing and margin concerns. As such,
management intends to maintain the outstanding level of the portfolio near or
slightly below the existing level. The Company utilizes credit underwriting
routines that management believes result in a high quality new and used auto
loan portfolio. The Company does not currently originate any significant level
of sub-prime loans, which are made to individuals with impaired credit histories
at generally higher interest rates, and accordingly, with higher levels of
credit risk. Management continually monitors the dealer relationships and the
Banks are not dependent on any one dealer as a source of such loans.
- 20 -
The October 1999 acquisition of Tricom added a new category of specialty finance
receivables to the Company's earning asset portfolio. These receivables consist
of high-yielding short-term accounts receivable financing to clients in the
temporary staffing industry located throughout the United States. At September
30, 2000, outstanding finance receivables totaled $23 million, an increase of $5
million, or 29%, from the December 31, 1999 balance.
Home equity loans totaled $171 million at September 30, 2000 and increased $45
million, or 36%, since a year earlier and $32 million, or 23%, as compared to
the end of 1999. This category of loans continues to represent approximately 9%
of total earning assets and has grown in proportion to the entire growth of the
Company. The growth is due mainly to targeted marketing programs over the past
year and higher usage of existing lines than in the past. The marketing programs
generally use a short-term low initial interest rate as an incentive to the
borrower. Unused commitments on home equity lines of credit have increased $40
million, or 23%, over the $173 million balance at September 30, 1999 and totaled
$213 million at September 30, 2000.
Residential real estate loans totaled $144 million as of September 30, 2000 and
increased $36 million, or 33%, over a year ago and $33 million, or 30%, since
December 31, 1999. Mortgage loans held for sale are included in this category
and totaled $14 million as of September 30, 2000, and $8 million as of December
31, 1999 and September 30, 1999. The Company collects a fee on the sale of these
loans into the secondary market, as discussed earlier in the Non-interest Income
section of this analysis. As these loans are predominantly long-term fixed rate
loans, the Company eliminates the interest rate risk associated with these loans
by selling them into the secondary market. The remaining residential real estate
loans in this category are maintained within the Banks' portfolios and include
mostly adjustable rate mortgage loans and shorter-term fixed rate mortgage
loans. The growth in this loan category has been due mainly to the relatively
low mortgage interest rate environment experienced until recently and a
continued strong local housing market.
Securities and money market investments (i.e. federal funds sold and
interest-bearing deposits with banks) totaled $335 million at September 30,
2000, an increase of $99 million, or 42%, since December 31, 1999 and $108
million, or 47%, since a year earlier. This category as a percent of total
earning assets was 18% at September 30, 2000 versus 16% at December 31, 1999 and
September 30, 1999.
The Company maintained no trading account securities at September 30, 2000 or as
of any of the other previous reporting dates. The balances of securities and
money market investments fluctuate frequently based upon deposit inflows, loan
demand and proceeds from loan sales. As a result of anticipated growth in the
development of the de novo banks, it has been Wintrust's policy to generally
maintain its securities and money market portfolio in short-term, liquid, and
diversified high credit quality securities in order to facilitate the funding of
quality loan demand as it emerges and to keep the Banks in a liquid condition in
the event that deposit levels fluctuate.
- 21 -
DEPOSITS
Total deposits at September 30, 2000 were $1.73 billion, an increase of $337
million, or 24%, over the September 30, 1999 total and an increase of $262
million, or 18%, since December 31, 1999. The following table sets forth, by
category, the composition of deposit balances and the relative percentage of
total deposits as of the date specified (dollars in thousands):
September 30, 2000 December 31, 1999 September 30, 1999
--------------------------------- --------------------------------- --------------------------------
Percent Percent Percent
Balance of Total Balance of Total Balance of Total
----------------- -------------- ------------------ -------------- ------------------ -------------
Demand $ 184,821 11% $ 154,034 11% $ 125,870 9%
NOW 179,281 10 130,625 9 140,160 10
Money market 286,727 17 252,483 17 248,602 18
Savings 72,815 4 72,718 5 71,710 5
Certificates of deposit 1,002,248 58 853,762 58 802,100 58
----------------- -------------- ------------------ -------------- ------------------ -------------
Total $ 1,725,892 100% $ 1,463,622 100% $ 1,388,442 100%
================= ============== ================== ============== ================== =============
The percentage mix of deposits as of September 30, 2000 was relatively
consistent with the deposit mix as of the prior year dates. Growth in both the
number of accounts and balances has been primarily the result of newer bank and
branch growth, and continued marketing efforts at the more established banks to
create additional deposit market share.
SHORT-TERM BORROWINGS AND NOTES PAYABLE
As of September 30, 2000, the Company's short-term borrowings totaled $42
million and consisted primarily of short-term repurchase agreements utilized to
leverage certain investment transactions within several banks' security
portfolios and certain customer repurchase agreements. At September 30, 2000,
the Company also had $33 million outstanding on its $40 million revolving credit
line with an unaffiliated bank. The outstanding balance on this credit line as
of September 30, 1999 and December 31, 1999 was $7 million and $8 million,
respectively. The Company continues to maintain the revolving credit line for
corporate purposes such as to provide capital to fund continued growth at the
Banks, expansion of WAMC, purchases of treasury stock, possible future
acquisitions and for other general corporate matters.
LONG-TERM DEBT - TRUST PREFERRED SECURITIES
For each of the reporting periods, the long-term debt category included $31.05
million of 9.00% Cumulative Trust Preferred Securities, which were publicly sold
in an offering that was completed in October 1998. In June of 2000, the Company
issued another $20.0 million of Trust Preferred Securities bringing the total
long-term debt category to $51.05 million. The June 2000 offering consisted of
800,000 shares of $25.00 par value securities with a 10.50% interest rate. The
sale of the Trust Preferred Securities increased Wintrust's regulatory capital
and provided for and will provide for the continued growth of the banking
franchise, and for possible future acquisitions of other banks or
finance-related companies.
The ability to treat these Trust Preferred Securities as regulatory capital
under Federal Reserve guidelines, coupled with the Federal income tax
deductibility of the related interest expense, provides the Company with a
- 22 -
cost-effective form of capital. See Note 10 to the Company's 1999 Consolidated
Financial Statements for further information on the first Trust Preferred
Securities offering.
SHAREHOLDERS' EQUITY
Total shareholders' equity was $97 million at September 30, 2000 and increased
$17 million since September 30, 1999 and $4 million since the end of 1999. These
increases were the result of the Company's corporate earnings offset by dividend
payments and stock repurchases. In addition, the increase in shareholders'
equity from September 30, 1999 to September 30, 2000 reflects $6 million from
the private placement of 352,942 shares of common stock in November 1999 and $4
million from the issuance of 227,635 shares of common stock in connection with
the October 1999 acquisition of Tricom. Net unrealized losses on the Company's
available-for-sale security portfolio totaled $1.3 million at September 30, 2000
and remained consistent with the September 30, 1999 balance and declined
$922,000 from the $2.3 million unrealized loss position at December 31, 1999.
On January 27, 2000, Wintrust declared its first semi-annual cash dividend of
$0.05 per common share. The dividends were paid on February 24, 2000. During the
third quarter of 2000, the Company declared a second semi-annual cash dividend
of $0.05 per common share payable on August 24, 2000. Additionally, during the
first quarter of 2000, the Company initiated a stock buyback program authorizing
the repurchase of up to 300,000 shares of its common stock. Through September
30, 2000, the Company repurchased a total of 242,300 shares at an average price
of $15.94 per share.
The annualized return on average equity for the quarter ended September 30,
2000, excluding the $4.5 million non-recurring charge, increased to 14.74% as
compared to 12.46% for the prior year period. The following table reflects
various consolidated measures of capital at September 30, 2000, December 31,
1999 and September 30, 1999:
September 30, December 31, September 30,
2000 1999 1999
---------------------- ------------------- --------------------
Leverage ratio 6.3% 7.1% 7.0%
Ending tier 1 capital to risk-based asset ratio 6.9% 7.8% 7.8%
Ending total capital to risk-based asset ratio 8.5% 8.4% 8.6%
Dividend payout ratio 9.1% 0.0% 0.0%
To be "adequately capitalized", an entity must maintain a leverage ratio of at
least 4.0%, a Tier 1 risk-based capital ratio of at least 4.0%, and a total
risk-based capital ratio of at least 8.0%. To be considered "well capitalized,"
an entity must maintain a leverage ratio of at least 5.0%, a Tier 1 risk-based
capital ratio of at least 6.0%, and a total risk-based capital ratio of at least
10.0%. At September 30, 2000, the Company was considered "well capitalized"
under both the leverage ratio and the Tier 1 risk-based capital ratio, and was
considered "adequately capitalized" under the total risk-based capital ratio.
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 or additional trust preferred securities are the primary
forms of capital that the Company considers as it evaluates its capital
position.
- 23 -
ASSET QUALITY
Allowance for Possible Loan Losses
A reconciliation of the activity in the allowance for possible loan losses for
the three and nine months ended September 30, 2000 and 1999 is shown as follows
(dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------- ---------------- ----------------- -----------------
Balance at beginning of period $ 9,792 $ 7,677 $8,783 $7,034
Provision for possible loan losses 1,307 990 3,671 2,707
Charge-offs
-----------
Core banking loans 312 190 758 593
Indirect automobile loans 348 156 979 795
Tricom finance receivables -- -- 73 --
Premium finance receivables 288 193 647 383
------------------- ---------------- ----------------- -----------------
Total charge-offs 948 539 2,457 1,771
------------------- ---------------- ----------------- -----------------
Recoveries
----------
Core banking loans 10 9 21 19
Indirect automobile loans 47 33 120 61
Tricom finance receivables -- -- -- --
Premium finance receivables 23 30 93 150
------------------- ---------------- ----------------- -----------------
Total recoveries 80 72 234 230
------------------- ---------------- ----------------- -----------------
Net charge-offs (868) (467) (2,223) (1,541)
------------------- ---------------- ----------------- -----------------
Balance at September 30 $ 10,231 $ 8,200 $10,231 $8,200
=================== ================ ================= =================
Loans at September 30 $1,486,929 $1,202,256
================= =================
Allowance as a percentage of loans 0.69% 0.68%
Annualized net charge-offs as a percentage of average:
Core banking loans 0.12% 0.12%
Indirect automobile loans 0.48% 0.42%
Tricom finance receivables 0.48% --
Premium finance receivables 0.28% 0.15%
Total loans 0.22% 0.19%
Annualized provision for
possible loan losses 60.55% 56.93%
================= =================
Management believes that the loan portfolio is well diversified and well
secured, without undue concentration in any specific risk area. Control of loan
quality is continually monitored by management and is reviewed by the Banks'
Board of Directors and their Credit Committees on a monthly basis. Independent
external review of the loan portfolio is provided by the examinations conducted
by regulatory authorities and an independent loan review performed by an entity
engaged by the Board of Directors. Additions to the allowance for possible loan
losses, which are charged to earnings through the provision for possible loan
losses, are determined based on a variety of factors, including actual
charge-offs during the year, historical loss experience, delinquent and other
potential problem loans, and an evaluation of economic conditions in the market
area.
- 24 -
The provision for possible loan losses totaled $1.3 million for the third
quarter of 2000, an increase of $317,000 from a year earlier. For the first nine
months of 2000, the provision totaled $3.7 million and increased $964,000, or
36%, over the same period of 1999. The higher provision levels were necessary
due to a 24% increase in loan balances compared to September 30, 1999 and a
slightly higher level of net charge-offs to average loans during the period. For
the nine months ended September 30, 2000, net charge-offs totaled $2.2 million
and increased from the $1.5 million of net charge-offs recorded in the same
period of 1999. On a ratio basis, net charge-offs as a percentage of average
loans increased slightly to 0.22% for the first nine months of 2000, from 0.19%
for the same period in 1999.
Management believes the allowance for possible loan losses is adequate to cover
inherent losses in the portfolio. There can be no assurance, however, that
future losses will not exceed the amounts provided for, thereby affecting future
results of operations. The amount of future additions to the allowance for
possible loan losses will be dependent upon the economy, changes in real estate
values, interest rates, the view of regulatory agencies toward adequate reserve
levels, the level of past-due and non-performing loans, and other factors.
- 25 -
PAST DUE LOANS AND NON-PERFORMING ASSETS
The following table sets forth the Company's non-performing assets at the dates
indicated. The information in the table should be read in conjunction with the
detailed discussion following the table (dollars in thousands).
September 30, December 31, September 30,
2000 1999 1999
---- ---- ----
Past Due greater than 90 days
And still accruing:
Core banking loans $ 539 $ 713 $ 997
Indirect automobile loans 323 391 354
Premium finance receivables 2,107 1,523 1,337
--------------------- ---------------------- ---------------------
Total 2,969 2,627 2,688
--------------------- ---------------------- ---------------------
Non-accrual loans:
Core banking loans 600 1,895 1,139
Indirect automobile loans 271 298 369
Premium finance receivables 3,232 2,145 1,726
--------------------- ---------------------- ---------------------
Total non-accrual loans 4,103 4,338 3,234
--------------------- ---------------------- ---------------------
Total non-performing loans:
Core banking loans 1,139 2,608 2,136
Indirect automobile loans 594 689 723
Premium finance receivables 5,339 3,668 3,063
--------------------- ---------------------- ---------------------
Total non-performing loans 7,072 6,965 5,922
--------------------- ---------------------- ---------------------
Other real estate owned - - -
--------------------- ---------------------- ---------------------
Total non-performing assets $ 7,072 $ 6,965 $ 5,922
===================== ====================== =====================
Total non-performing loans by category as a percent of its own respective
category:
Core banking loans 0.12% 0.32% 0.29%
Indirect automobile loans 0.27% 0.27% 0.28%
Premium finance receivables 1.85% 1.67% 1.42%
--------------------- ---------------------- ---------------------
Total non-performing loans 0.48% 0.54% 0.49%
--------------------- ---------------------- ---------------------
Total non-performing assets as a
percentage of total assets 0.35% 0.41% 0.38%
Allowance for possible loan losses as
a percentage of non-performing loans 144.67% 126.10% 138.47%
Non-performing Core Banking Loans
Total non-performing loans for the Company's core banking business were $1.1
million, or 0.12%, of the Company's core banking loans as of September 30, 2000,
and were down from the ratios of 0.32% as of December 31, 1999 and 0.29% as of
September 30, 1999. Total non-performing core banking loans declined
- 26 -
$1.5 million from the December 31, 1999 balances. Non-performing core banking
loans consist primarily of a small number of commercial and real estate loans,
of which management believes are well secured and in the process of collection.
The small number of such non-performing loans allows management the opportunity
to monitor closely 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 September 30, 2000 and 1999, and the amount of net charge-offs for the
nine months then ended.
9/30/00 9/30/99
------- -------
Non-performing premium finance receivables $5,339 $3,063
- as a percent of premium finance receivables 1.85% 1.42%
Net charge-offs of premium finance receivables $554 $233
- annualized, as a percent of average premium finance receivables 0.28% 0.15%
The level of non-performing premium finance receivables has gradually been
increasing over the course of the last year. The increase is related to a higher
number of small balance loans that have become delinquent. Collection of smaller
balance loans places additional strain on the collection staff as the same
general collection efforts are required to collect smaller balance loans as is
required for average size loans. Management is currently revising its
underwriting procedures as it relates to the origination of smaller balance
loans and has begun to substantially reduce the amount of smaller balance loans
originated.
It is important to note that the ratio of net charge-offs is substantially less
than the ratio of non-performing assets. Management has a goal of maintaining
credit losses for this portfolio at a level below 35 basis points of average
premium finance loans outstanding. The recent growth in the portfolio has
contributed to the increase in delinquent accounts and management has
implemented additional collection procedures and invested in additional
collection staff and is diligently working to reduce the level of delinquent
accounts. It should be noted that an increase in delinquent accounts also
results in additional late charge income from the borrowers that helps to offset
the impact of the higher level of net charge-offs.
The ratio of non-performing premium finance receivables fluctuates throughout
the year due to the nature and timing of canceled account collections from
insurance carriers. Due to the nature of collateral for premium finance
receivables, it customarily takes 60-150 days to convert the collateral into
cash collections. Accordingly, the level of non-performing premium finance
receivables is not necessarily indicative of the loss inherent in the portfolio.
In the event of default, the Company has the power to cancel the insurance
policy and collect the unearned portion of the premium from the insurance
carrier. In the event of cancellation, the cash returned in payment of the
unearned premium by the insurer should generally be sufficient to cover the
receivable balance, the interest and other charges due. Due to notification
requirements and processing time by most insurance carriers, many receivables
will become delinquent beyond 90 days while the insurer is processing the return
of the unearned premium. Management continues to accrue interest until maturity
as the unearned premium is ordinarily sufficient to pay-off the outstanding
balance and contractual interest due.
Non-performing Indirect Automobile Loans
Total non-performing indirect automobile loans were $594,000 at September 30,
2000, compared to $689,000 at December 31, 1999 and $723,000 at September 30,
1999. The ratio of these non-performing loans to total indirect automobile loans
was 0.27% at September 30, 2000 and December 31, 1999 and 0.28% September 30,
1999. As noted in the Allowance for Possible Loan Losses table, net charge-offs
as a percent of total indirect automobile loans increased from 0.42% in the
first nine months of 1999 to 0.48% in the first nine months of 2000. Despite the
increase in the level of net charge-offs, these ratios continue to be below
standard industry ratios for this type of loan category. However, based on the
impact of the current economic and competitive environment surrounding this
portfolio, management has begun to reduce the level of new loans originated and
is dedicating additional resources to reduce the level of delinquencies.
- 27 -
Potential Problem Loans
In addition to those loans disclosed under "Past Due Loans and Non-performing
Assets," there are certain loans in the portfolio which management has
identified, through its problem loan identification system, which exhibit a
higher than normal credit risk. However, these loans are still considered
performing and, accordingly, are not included in non-performing loans. Examples
of these potential problem loans include certain loans that are in a past-due
status, loans with borrowers that have recent adverse operating cash flow or
balance sheet trends, or loans with general risk characteristics that the loan
officer feels might jeopardize the future timely collection of principal and
interest payments. Management's review of the total loan portfolio to identify
loans where there is concern that the borrower will not be able to continue to
satisfy present loan repayment terms includes factors such as review of
individual loans, recent loss experience and current economic conditions. The
principal amount of potential problem loans as of September 30, 2000 and
December 31, 1999 was approximately $17.1 million and $14.4 million,
respectively.
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.
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.
EFFECTS OF NEW ACCOUNTING PRINCIPLE
In June 1999, the Financial Accounting Standards Board "FASB" issued Statement
of Financial Accounting Standards "SFAS" No. 137 to effectively defer the
implementation date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" for one year. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derirative Instruments and Certain Hedging Activities -
An Amendment of FASB Statement No. 133." SFAS No. 138 does not amend any of the
fundamental precepts of SFAS No. 133. SFAS No. 133 was issued in June 1998 and
establishes, for the first time, comprehensive accounting and reporting
standards for derivative instruments and hedging activities. Previous accounting
standards and methodologies did not adequately address the many derivative and
hedging activities in the current financial marketplace and, as such, the
Securities and Exchange Commission, and other organizations, urged the FASB to
deal expeditiously with the related accounting and reporting problems. The
accounting and reporting principles prescribed by this standard are complex and
will significantly change the way entities account for these activities. These
new rules require that all derivative instruments be recorded in the statement
of condition at fair value. The recording of the gain or loss could either be
reported in earnings or as other comprehensive income in the statements of
shareholders' equity, depending on the type of instrument and whether or not it
is designated and effective as a hedge. These new rules are effective for the
Company as of January 1, 2001. The adoption of these new statements is currently
not expected to have a material effect on the Company's future financial
condition, results of operations, or liquidity.
- 28 -
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act 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 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 trust and investment
services through the Company's new trust subsidiary, WAMC, is expected to
continue in a start-up phase during the next two years, before becoming
profitable.
o The Company's success to date has been and will continue to be strongly
influenced by its ability to attract and retain senior management
experienced in banking and financial services.
o Although management believes the allowance for possible loan losses is
adequate to absorb losses that may develop in the existing portfolio of
loans and leases, there can be no assurance that the allowance will prove
sufficient to cover actual future loan or lease losses.
o If market interest rates should move contrary to the Company's gap position
on interest earning assets and interest bearing liabilities, the "gap" will
work against the Company and its net interest income may be negatively
affected.
o The financial services business is highly competitive which may affect the
pricing of the Company's loan and deposit products as well as its services.
o The Company's ability to adapt successfully to technological changes to
compete effectively in the marketplace.
o The Company's ability to recover on the loss resulting from the fraudulent
loan scheme perpetrated against the Company's premium finance subsidiary.
o Unforeseen future events that may cause slower than anticipated development
and growth of the Tricom business, changes in the temporary staffing
industry or difficulties integrating the Tricom acquisition.
o The Company may not identify attractive opportunities to expand in the
future through acquisitions of other community banks, specialty finance
companies or fee-based businesses or may have difficulty negotiating
potential acquisitions on terms considered acceptable to the Company.
o Changes in the economic environment, competition, or other factors, may
influence the anticipated growth rate of loans and deposits, the quality of
the loan portfolio and loan and deposit pricing.
- 29 -
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.
Derivative Financial Instruments
One method utilized by financial institutions to limit market risk is to enter
into derivative financial instruments. A derivative financial instrument
includes interest rate swaps, interest rate caps and floors, futures, forwards,
option contracts and other financial instruments with similar characteristics.
As of September 30, 2000, the Company had $375 million notional principal amount
of interest rate cap contracts that mature in October 2000 ($60 million),
January 2001 ($60 million), February 2001 ($55 million), April 2001 ($60
million), July 2001 ($20 million), September 2001 ($30 million), October 2001
($30 million), November 2001 ($30 million) and December 2001 ($30 million).
These contracts, which have various strike rates measured against the 91-day
treasury bill rate, were purchased to mitigate the effect of rising rates on
certain of its floating rate deposit products and fixed rate loan products.
During 2000, the Company also entered into certain covered call option
transactions related to certain securities held by the Company. These
transactions were designed primarily to increase the total return associated
with holding these securities as earning assets. The Company may enter into
other derivative financial instruments in the future to more effectively manage
its market risk.
Commitments To Extend Credit And Standby Letters Of Credit
In addition, the Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated statements of condition. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation on any
condition established in the contract. Commitments may require collateral from
the borrower if deemed necessary by the Company and generally have a fixed
expiration date. Standby letters of credit are conditional commitments issued by
the Banks to guarantee the performance of a customer to a third party up to a
specified amount and with specific terms and conditions. Commitments to extend
credit and standby letters of credit are not recorded as an asset or liability
by the Company until the instrument is exercised.
Interest Rate Sensitivity Analysis Interest rate sensitivity is the fluctuation
in earnings resulting from changes in market interest rates. Wintrust
continuously monitors not only the organization's current net interest margin,
but also the historical trends of these margins. In addition, Wintrust also
attempts to identify potential adverse swings in net interest income in future
years, as a result of interest rate movements, by performing computerized
simulation analysis of potential interest rate environments. If a potential
adverse swing in net interest margin and/or net income were identified,
management then would take appropriate actions within its asset/liability
structure to counter these potential adverse situations. Please refer to the
"Net Interest Income" section for further discussion of the net interest margin.
The Company's exposure to market risk is reviewed on a regular basis by
management and the boards of directors of the Banks and the Company. The
objective is to measure the effect on net income and to adjust balance sheet and
off-balance sheet instruments to minimize the inherent risk while at the same
time maximize income. Tools used by management include a standard gap report and
a rate simulation model whereby changes in net interest income are measured in
the event of various changes in interest rate indices. An institution with more
assets than liabilities repricing over a given time frame is considered asset
sensitive and will generally benefit from rising rates and conversely, a higher
level of repricing liabilities versus assets would be beneficial in a declining
rate environment. The following table illustrates the Company's gap position as
of September 30, 2000.
- 30 -
Time to Maturity or Repricing
0-90 91-365 1-5 5+ Years
Days Days Years & Other Total
---- ---- ----- ------- -----
(Dollars in thousands)
ASSETS:
Loans, net of unearned income........ $657,624 $339,580 $434,838 $54,896 $ 1,486,929
Securities........................... 164,369 13,022 93,483 47,711 318,585
Interest-bearing bank deposits....... 180 - - - 180
Federal funds sold................... 16,624 - - - 16,624
Other................................ - - - 173,988 173,988
--------------- ---------------- ---------------- -------------- -----------------
Total rate sensitive assets (RSA) 838,797 352,602 528,321 276,586 1,996,306
=============== ================ ================ ============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY:
NOW.................................. 179,281 - - - 179,281
Savings and money market............. 359,542 - - - 359,542
Time deposits........................ 419,868 403,413 177,137 1,830 1,002,248
Short term borrowings................ 41,848 62 - - 41,910
Notes payable........................ 33,250 - - - 33,250
Demand deposits & other
liabilities....................... - - - 231,655 231,655
Trust preferred securities........... - - - 51,050 51,050
Shareholders' equity................. - - - 97,370 97,370
--------------- ---------------- ---------------- -------------- -----------------
Total rate sensitive liabilities
and equity (RSL)............... 1,033,789 403,475 177,137 381,905 1,996,306
=============== ================ ================ ============== =================
Cumulative gap, excluding interest
rate caps (GAP = RSA - RSL) (1) $(194,992) $ (245,865) $105,319 $ -
=============== ================ ================ ==============
Cumulative RSA/RSL (1).................. 0.81 0.87 2.98
RSA/Total assets........................ 0.42 0.18 0.26
RSL/Total assets (1).................... 0.52 0.20 0.09
GAP/Total assets (1).................... (10)% (12)% 5%
GAP/Cumulative RSA (1).................. (23)% (21)% 5%
<FN>
(1) The gap amount and related ratios do not reflect $375 million notional amount of interest rate caps, as discussed on the
following page.
</FN>
While the gap position illustrated on the previous page is a useful tool that
management can assess for general positioning of the Company's and its
subsidiaries' balance sheets, it is only as of a point in time and does not
reflect the impact of off-balance sheet interest rate cap contracts. As of
September 30, 2000, the Company had $375 million notional principal amount of
interest rate caps that reprice on a monthly basis. These interest rate caps,
which mature in intervals throughout the next 15 months, were purchased to
mitigate the effect of rising rates on certain floating rate deposit products
and fixed rate loan products. When the gap position in the above table is
adjusted for the impact of these interest rate caps, the Company's short-term
gap position becomes relatively neutral in that the level of rate sensitive
assets that reprice within one year approximately match the level of rate
sensitive liabilities that reprice within one year.
- 31 -
Management uses an additional measurement tool to evaluate its asset/liability
sensitivity which determines exposure to changes in interest rates by measuring
the percentage change in net interest income due to changes in interest rates
over a two-year time horizon. Management measures its exposure to changes in
interest rates using many different interest rate scenarios. One interest rate
scenario utilized is to measure the percentage change in net interest income
assuming an instantaneous permanent parallel shift in the yield curve of 200
basis points, both upward and downward. This analysis also includes the impact
of both interest rate cap agreements mentioned above. Utilizing this measurement
concept, the interest rate risk of the Company, expressed as a percentage change
in net interest income over a two-year time horizon due to changes in interest
rates, at September 30, 2000 and 1999, is as follows:
As of September 30, 2000
------------------------
+200 Basis -200 Basis
Points Points
------ ------
Percentage change in net interest income due to an immediate 200 basis point
change in interest rates over a two-year time horizon.... (1.2)% 2.6%
=============== ===============
As of September 30, 1999
------------------------
+200 Basis -200 Basis
Points Points
------ ------
Percentage change in net interest income due to an immediate 200 basis point
change in interest rates over a two-year time horizon.... 1.4% 0.7%
=============== ===============
- 32 -
PART II
ITEM 1: LEGAL PROCEEDINGS.
This item has been omitted from this Form 10-Q since it is inapplicable or would
contain a negative response.
ITEM 2: CHANGES IN SECURITIES.
This item has been omitted from this Form 10-Q since it is inapplicable or would
contain a negative response.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
This item has been omitted from this Form 10-Q since it is inapplicable or would
contain a negative response.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5: OTHER INFORMATION.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
A Form 8-K report as of September 7, 2000 was filed during the quarter and
announced that the Company expected to incur a one-time after tax charge of $2.7
million related to the discovery of a series of fraudulent loan transactions
perpetrated against its premium finance subsidiary.
- 33 -
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: November 14, 2000 /s/ Edward J. Wehmer
--------------------
President & Chief Executive Officer
Date: November 14, 2000 /s/ David A. Dykstra
--------------------
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
- 34 -
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
- 35 -