UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
Commission File Number 0-21923
WINTRUST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Illinois 36-3873352
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(State of incorporation of organization) (I.R.S. Employer Identification No.)
727 North Bank Lane
Lake Forest, Illinois 60045
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(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, 8,149,946 shares, as of August 13, 1998.
TABLE OF CONTENTS
PART I. -- FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements.___________________________________________ 1-6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. ______________________________________ 7-23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks. ___ 24-26
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings. _____________________________________________ 27
ITEM 2. Changes in Securities and Use of Proceeds. _____________________ 27
ITEM 3. Defaults Upon Senior Securities. _______________________________ 27
ITEM 4. Submission of Matters to a Vote of Security Holders.____________ 27
ITEM 5. Other Information. _____________________________________________ 27
ITEM 6. Exhibits and Reports on Form 8-K. ______________________________ 27
Signatures _____________________________________________________ 28
Exhibit Index __________________________________________________ 29
PART I
ITEM 1-FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(IN THOUSANDS)
JUNE 30, December 31, June 30,
ASSETS 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
Cash and due from banks-noninterest bearing $ 28,869 $ 32,158 $ 34,463
Federal funds sold 31,235 60,836 56,590
Interest-bearing deposits with banks 33,096 85,100 2,018
Available-for-Sale securities, at fair value 152,313 101,934 59,501
Held-to-Maturity securities, at amortized cost 5,001 5,001 5,001
Loans, net of unearned income 852,241 712,631 650,085
Less: Allowance for possible loan losses 5,856 5,116 4,432
- --------------------------------------------------------------------------------------------------------------------------
Net loans 846,385 707,515 645,653
Premises and equipment, net 50,245 44,206 33,986
Accrued interest receivable and other assets 27,756 14,894 17,876
Goodwill and organizational costs 1,646 1,756 1,857
- --------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,176,546 $ 1,053,400 $ 856,945
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 103,314 $ 92,840 $ 72,137
Interest bearing 960,276 824,861 700,037
- --------------------------------------------------------------------------------------------------------------------------
Total deposits 1,063,590 917,701 772,174
Short-term borrowings 1,056 35,493 -
Notes payable 26,603 20,402 11,253
Accrued interest payable and other liabilities 14,314 11,014 8,554
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,105,563 984,610 791,981
- --------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock - - -
Common stock 8,149 8,118 8,020
Surplus 72,868 72,646 71,976
Common stock warrants 100 100 100
Retained deficit (10,112) (12,117) (15,108)
Accumulated other comprehensive income (22) 43 (24)
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 70,983 68,790 64,964
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,176,546 $ 1,053,400 $ 856,945
==========================================================================================================================
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
- 1 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 34,600 $ 24,890 $ 18,233 $ 13,660
Interest-bearing deposits with banks 1,781 300 791 73
Federal funds sold 1,259 1,394 445 743
Securities 3,707 1,875 1,978 905
- ------------------------------------------------------------------------------------------------------------------
Total interest income 41,347 28,459 21,447 15,381
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 23,604 15,954 12,090 8,473
Interest on short-term borrowings and notes payable 829 464 447 119
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 24,433 16,418 12,537 8,592
- ------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 16,914 12,041 8,910 6,789
Provision for possible loan losses 2,340 1,554 1,073 875
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 14,574 10,487 7,837 5,914
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Fees on mortgage loans sold 2,579 985 1,388 517
Loan servicing fees - mortgage loans 71 43 37 22
Loan servicing fees - securitization - 143 - 31
Trust fees 368 309 202 155
Service charges on deposit accounts 454 326 243 168
Other 200 714 119 35
- ------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,672 2,520 1,989 928
- ------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 9,788 6,869 5,510 3,413
Occupancy, net 1,176 937 604 455
Data processing 794 643 396 322
Advertising and marketing 756 572 349 276
Other 4,885 3,757 2,608 1,958
- ------------------------------------------------------------------------------------------------------------------
Total noninterest expense 17,399 12,778 9,467 6,424
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 847 229 359 418
Income tax benefit (1,158) (1,626) (604) (708)
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,005 $ 1,855 $ 963 $ 1,126
==================================================================================================================
NET INCOME PER COMMON SHARE - BASIC $ 0.25 $ 0.25 $ 0.12 $ 0.14
==================================================================================================================
NET INCOME PER COMMON SHARE - DILUTED $ 0.24 $ 0.24 $ 0.11 $ 0.13
==================================================================================================================
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
- 2 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(IN THOUSANDS)
ACCUMULATED
OTHER
COMPRE- COMPRE- TOTAL
HENSIVE COMMON RETAINED HENSIVE SHAREHOLDERS'
INCOME STOCK SURPLUS WARRANTS (DEFICIT) INCOME EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 6,603 $ 52,871 $ 100 $ (16,963) $ 9 $ 42,620
Comprehensive Income:
Net income 1,855 - - - 1,855 - 1,855
Other Comprehensive Income, net of tax
Unrealized losses, net of
reclassification adjustment (33) - - - - (33) (33)
------------
Comprehensive Income $ 1,822
------------
Common stock issued upon exercise
of stock options 19 108 - - - 127
Common stock issued in conjunction with
public offering, net of issuance costs 1,398 18,997 - - - 20,395
- -------------------------------------------- -------------------------------------------------------------------------
Balance at June 30, 1997 $ 8,020 $ 71,976 $ 100 $ (15,108) $ (24) $ 64,964
- -------------------------------------------- -------------------------------------------------------------------------
Balance at December 31, 1997 $ 8,118 $ 72,646 $ 100 $ (12,117) $ 43 $ 68,790
Comprehensive Income:
Net income 2,005 - - - 2,005 - 2,005
Other Comprehensive Income, net of tax
Unrealized losses, net of
reclassification adjustment (65) - - - - (65) (65)
------------
Comprehensive Income $ 1,940
------------
Common stock issued upon exercise
of stock options 31 222 - - - 253
- -------------------------------------------- -------------------------------------------------------------------------
BALANCE AT JUNE 30, 1998 $ 8,149 $ 72,868 $ 100 $ (10,112) $ (22) $ 70,983
============================================ =========================================================================
SIX MONTHS ENDED JUNE 30
1998 1997
Disclosure of reclassification amount:
Unrealized holding losses arising during the period $ (65) $ (33)
Less: reclassification adjustment for losses included in net income - -
------------------------
Unrealized losses on Available-for-Sale securities $ (65) $ (33)
========================
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
- 3 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 2,005 $ 1,855
Adjustments to reconcile net income to net cash used for,
or provided by, operating activities:
Provision for possible loan losses 2,340 1,554
Depreciation and amortization 1,270 1,131
Income tax benefit (1,158) (1,626)
Net accretion/amortization of securities (145) (243)
(Increase) decrease in other assets, net (11,772) 75
Increase (decrease) in other liabilities, net 3,300 (7,751)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR OPERATING ACTIVITIES (4,160) (5,005)
- ----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of Available-for-Sale securities 285,228 63,751
Purchases of Available-for-Sale securities (335,462) (53,622)
Net decrease in interest-bearing deposits with banks 52,004 16,714
Net increase in loans (141,210) (158,295)
Purchases of premises and equipment, net (7,196) (4,711)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (146,636) (136,163)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase in deposit accounts 145,889 154,145
Decrease in short-term borrowings, net (34,437) (7,058)
Proceeds from notes payable 6,201 4,750
Repayment of notes payable - (15,554)
Common stock issued upon exercise of stock options 253 127
Issuance of common stock, net of issuance costs - 20,395
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 117,906 156,805
- ----------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (32,890) 15,637
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 92,994 75,416
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 60,104 $ 91,053
======================================================================================================================
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
- 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 for a fair
presentation of results as of the dates and for the periods covered by the
consolidated financial statements.
Wintrust is a financial services holding company currently engaged in the
business of providing community banking services through its banking
subsidiaries to customers in the Chicago metropolitan area and financing the
payment of commercial insurance premiums, on a national basis, through its
subsidiary, First Insurance Funding Corporation ("FIFC"). As of June 30, 1998,
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"). FIFC is a wholly-owned subsidiary of Crabtree Capital Corporation
("Crabtree") which is a wholly-owned subsidiary of Wintrust. The Company
recently received regulatory approval to operate Crabtree and FIFC as
subsidiaries of Lake Forest Bank in order to maximize flexibility in the future
under existing banking regulations. During the second quarter of 1998, the
Company began organizing a new trust subsidiary, Wintrust Asset Management
Company ("WAMC"), and it is expected that regulatory approval will be received
during the remainder of 1998.
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, 1997. Operating results for the three-month and six-month periods
presented are not necessarily indicative of the results which may be expected
for the entire year. Reclassifications of certain prior year amounts have been
made to conform with the current year presentation.
(2) Cash and Cash Equivalents
-------------------------
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers cash and cash equivalents to include cash and due from banks and
federal funds sold which have an original maturity of 90 days or less.
(3) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 supersedes APB Opinion 15, "Earnings Per Share," and specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock or potential common stock.
- 5 -
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of this entity. SFAS No. 128 is effective for financial
statements for both interim and annual periods after December 15, 1997.
Accordingly, EPS amounts have been presented in accordance with SFAS No. 128 for
1998 and prior periods have been restated to conform to the requirements of such
statement. The following table shows the computation of basic and diluted
earnings per share (in thousands, except per share data):
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
------------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------- ----------- ------------
Net income (A) $2,005 $ 1,855 $ 963 $ 1,126
============ ============= =========== ============
Average common shares outstanding (B) 8,135 7,416 8,143 8,017
Average common share equivalents (C) 344 466 368 455
------------ ------------- ----------- ------------
Weighted average common shares and
Common share equivalents (D) 8,479 7,882 8,511 8,472
============ ============= =========== ============
Net income per average
Common share - Basic (A/B) $ 0.25 $ 0.25 $ 0.12 $ 0.14
============ ============= =========== ============
Net income per average
Common share - Diluted (A/D) $ 0.24 $ 0.24 $ 0.11 $ 0.13
============ ============= =========== ============
<FN>
(C) Common share equivalents result from stock options and stock warrants
being treated as if they had been exercised and are computed by
application of the treasury stock method.
</FN>
(4) Comprehensive Income
--------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 was issued to address concerns over the practice of
reporting elements of comprehensive income directly in equity. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS No. 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed in equal prominence with the other financial statements. The
statement does not require a specific format for that financial statement but
requires that a company display an amount representing total comprehensive
income for the period in that financial statement. SFAS No. 130 is effective for
both interim and annual financial statements for periods beginning after
December 15, 1997. Comparative financial statements provided for earlier periods
are required to be reclassified to reflect the provisions of this statement. The
Company is disclosing comprehensive income in the Statements of Changes in
Shareholders' Equity.
- 6 -
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition as of June 30,
1998, compared with December 31, 1997, and June 30, 1997, and the results of
operations for the three and six month periods ended June 30, 1998 and 1997
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
The Company's operating subsidiaries were organized within the last eight years
in an effort to fulfill a financial services need in the banking and insurance
premium financing industries. Lake Forest Bank, Hinsdale Bank, North Shore Bank,
Libertyville Bank, Barrington Bank and Crystal Lake Bank began operations in
December 1991, October 1993, March 1994, October 1995, December 1996 and
December 1997, respectively. Subsequent to those initial dates of operations,
each of the Banks, except Libertyville Bank, Barrington Bank and Crystal Lake
Bank have 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. During the second quarter of 1998, the
Company also began organizing WAMC, that will, over time, offer trust and
investment services to customers at many of Wintrust's banking locations.
In December 1997, the Company opened the Crystal Lake Bank in a temporary
location in downtown Crystal Lake. A full-service facility of Hinsdale Bank was
also opened in November 1997 in Western Springs, Illinois and branch facilities
of North Shore Bank were opened in early 1998 in Glencoe and Wilmette, Illinois.
Expenses related to these new operations and the establishment of WAMC impacted
only 1998 operating results.
The historical performance of the Company has been affected by costs associated
with growing market share in deposits and loans, 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 reflects improving
financial performance of the Banks 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 of approximately two years before its operations become
profitable.
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 capacity within each of the Banks and FIFC. Management
intends to pursue this refined strategy by continuing to pursue specialized
earning asset niches to increase loan-to-deposit ratios and shift the mix of
earning assets to higher-yielding loans, and by controlling the cost of deposits
as the maturing banks achieve more established customer bases.
- 7 -
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for the quarter ended June 30, 1998 totaled $963,000, or $0.11 per
diluted common share, compared to $1.1 million, or $0.13 per diluted common
share, for the second quarter of 1997. Net income was unfavorably impacted by a
non-recurring $1.0 million pre-tax charge related to severance amounts due to
the Company's former Chairman and Chief Executive Officer under terms of his
employment contract and certain related legal fees. Excluding this charge, on an
after-tax basis, net income for the second quarter of 1998 would have been $1.6
million, or $0.18 per diluted common share, an increase of $450,000, or 40%,
over the second quarter of 1997.
For the six months ended June 30, 1998 net income totaled $2.0 million, or $0.24
per diluted common share, compared to $1.9 million, or $0.24 per diluted common
share, in the same period of 1997. Excluding the aforementioned non-recurring
charge, on an after-tax basis, net income for the six months of 1998 would have
been $2.6 million, or $0.31 per diluted common share, an increase of $763,000,
or 41%, over the same period in 1997.
A significant factor contributing to the quarterly and year-to-date net income
was the recording of net tax benefits of $604,000 and $708,000 for the second
quarter of 1998 and 1997, respectively, and $1.2 million and $1.6 million for
the six months ended June 30, 1998 and 1997, respectively. These income tax
benefits reflect management's determination that certain of the Company's
subsidiaries' earnings history and projected future earnings were sufficient to
make a judgment that the realization of a portion of the net deferred tax assets
not previously recognized was more likely than not to occur. Excluding the
impact of income tax benefits and the $1.0 million non-recurring pre-tax charge,
the Company recorded operating income of $1.8 million and $229,000 in the first
six months of 1998 and 1997, respectively, and $1.4 million and $418,000 for the
second quarter of 1998 and 1997, respectively. The improvement in operating
results, prior to the $1.0 million non-recurring pre-tax charge, was due to the
enhanced performance of the Company's more established subsidiaries.
- 8 -
NET INTEREST INCOME
Net interest income is defined as the difference between interest income and
fees on earning assets and interest expense on deposits and borrowings. 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.
The following table presents a summary of Wintrust's net interest income and
related net interest margin, calculated on a tax equivalent basis (dollars in
thousands):
SIX MONTHS ENDED Six Months Ended
JUNE 30, 1998 June 30, 1997
------------------------------------------ ----------------------------------------
AVERAGE INTEREST RATE Average Interest Rate
----------------- ------------- ---------- --------------- ------------- ----------
Interest-bearing deposits with banks $ 60,513 $ 1,781 5.94% $ 10,809 $ 300 5.55%
Federal funds sold 46,778 1,259 5.43 52,645 1,394 5.30
Investment securities (1) 132,762 3,707 5.63 68,196 1,881 5.52
Loans, net of unearned discount (1) 770,256 34,643 9.07 560,077 24,918 8.90
----------------- ------------- ---------- --------------- ------------- ----------
Total earning assets $1,010,309 $41,390 8.26% $691,727 $28,493 8.24%
----------------- ------------- ---------- --------------- ------------- ----------
Interest-bearing deposits $901,277 $23,604 5.28% $614,013 $15,954 5.20%
Term debt and short-term borrowings 25,067 829 6.67 13,559 464 6.84
----------------- ------------- ---------- --------------- ------------- ----------
Total interest-bearing liabilities $926,344 $24,433 5.32% $627,572 $16,418 5.23%
----------------- ------------- ---------- --------------- ------------- ----------
Tax equivalent net interest income $16,957 $12,075
============= =============
Net interest spread 2.94% 3.01%
========== ==========
Net interest margin 3.38% 3.49%
========== ==========
- -------------------------------
<FN>
(1) Interest income on tax advantaged investment securities and loans reflect a
tax equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
$43,000 and $34,000 in 1998 and 1997, respectively.
</FN>
Although the year-to-date 1998 net interest margin of 3.38% is lower in
comparison to the 1997 margin of 3.49%, the second quarter 1998 margin was 3.45%
and shows improvement over the first quarter 1998 margin of 3.27%. This
improvement was primarily due to recent loan growth, which has caused the mix of
average loans to average earning assets to increase from 74% in the first
quarter of 1998 to 78% in the second quarter of 1998. In comparison to the first
six months of 1997, yields on earning assets have improved slightly, however the
rate paid on interest bearing deposits increased from 5.20% in 1997 to 5.28% in
1998, which was the primary factor that caused the margin decline.
The Company's net interest margin is low compared to industry standards
primarily for the following reasons. First, as de novo banking institutions,
Wintrust's subsidiary banks have been aggressive in providing competitive loan
and deposit interest rates to the communities that they serve. In addition,
newer de novo banks typically have lower loan-to-deposit ratios than more
established banks, as loan growth is slower to develop in new markets than
deposit growth.
- 9 -
The following table presents a reconciliation of Wintrust's net interest income,
calculated on a tax equivalent basis between the six month periods ended June
30, 1997 and June 30, 1998. The reconciliation sets forth the change in the 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):
Tax equivalent net interest income for the six months ended June 30, 1997......... $ 12,075
Change due to average earning assets fluctuations (volume)................... 5,559
Change due to interest rate fluctuations (rate).............................. 364)
Change due to rate/volume fluctuations (mix)................................. (313)
-----------
Tax equivalent net interest income for the six months ended June 30, 1998......... $ 16,957
===========
NONINTEREST INCOME
Total noninterest income increased approximately $1.2 million, or 46%, to $3.7
million for the first half of 1998, as compared with $2.5 million for the same
period in 1997. The following table presents noninterest income by category (in
thousands):
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------------------- -----------------------------------------
1998 1997 1998 1997
------------------- ------------------ ------------------ -----------------
Fees on mortgage loans sold $ 2,579 $ 985 $ 1,388 $ 517
Loan servicing fees - mortgage loans 71 43 37 22
Loan servicing fees - securitization - 143 - 31
Securities gains, net - - - -
Service charges on deposit accounts 454 326 243 168
Trust fees 368 309 202 155
Other income 200 714 119 35
------------------- ------------------ ------------------ -----------------
Total noninterest income $ 3,672 $ 2,520 $ 1,989 $ 928
=================== ================== ================== =================
Fees on mortgage loans sold includes income from originating and selling
residential real estate loans into the secondary market. These fees rose $1.6
million, or 162%, in the first half of 1998 when compared to 1997, and increased
$871,000, or 168%, in the second quarter of 1998 as compared to the same quarter
in 1997. The strong increases resulted from a favorable interest rate
environment, and related high levels of refinancing activity, coupled with a
healthy residential real estate market.
Loan servicing fees from securitization in the 1997 periods were derived from
the former practice of selling premium finance loans to a third-party
securitization facility. These sales resulted in gains on the sale of such loans
and generated servicing fees. Since the fourth quarter of 1996, all loans
originated have been sold to the Company's subsidiary banks and, accordingly,
income earned by FIFC in conjunction with the sale and servicing of these loans
has been eliminated as an inter-company transaction.
Service charges on deposit accounts for the first six months of 1998 totaled
$454,000, an increase of 39% when compared to the same period of 1997. For the
second quarter of 1998, deposit service charges totaled $243,000, and increased
45% over the same quarter of 1997. These increases were primarily the result of
a 46% increase in average deposit balances for the first six months of 1998
compared to the same period of 1997. The majority of deposit service charges
relate 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.
- 10 -
Trust fees for the first half of 1998 increased to $368,000, up 19% from the
$309,000 recorded in the same period of 1997. For the second quarter of 1998,
trust fees totaled $202,000 and increased 30% over the prior year quarter. As
mentioned earlier, the Company began organizing a separate trust subsidiary,
WAMC, in the second quarter of 1998, and presently expects to receive regulatory
approval during the remainder of 1998. WAMC will allow Wintrust to service its
customers' trust and investment needs with many types of trust and investment
services, including traditional trust products and services, as well as
investment management, financial planning and 401(k) management services. The
Company's objective is to generate additional fee income by offering a high
degree of personalized trust services by well-experienced trust professionals.
Management believes that its bank facilities are located in some of the best
trust markets in Illinois and that current market areas will support WAMC's
product offerings that are principally designed for the small-to-mid size trust
or investment account. After receiving regulatory approval, the Company expects
to introduce these trust services at each of the Banks over the next few years,
beginning with 1998 openings at North Shore Bank and Hinsdale Bank.
Similar to starting a de novo bank, the introduction of expanded trust services
is expected to cause relatively high overhead levels when compared to initial
fee income generated by WAMC. The overhead will consist primarily of the
salaries and benefits of experienced trust professionals. Management anticipates
that WAMC will be successful in attracting trust business over the next few
years, and that trust fees will increase to levels sufficient to absorb the
overhead of WAMC.
Other year-to-date noninterest income decreased from $714,000 in 1997 to
$200,000 in 1998. This decrease is primarily related to proceeds from the
settlement of a lawsuit in 1997.
NONINTEREST EXPENSE
Noninterest expense for the second quarter of 1998 totaled $9.5 million and
included the non-recurring $1.0 million pre-tax charge related to the Company's
former Chairman and Chief Executive Officer, as mentioned earlier. Excluding
this charge, total noninterest expense for the quarter increased $2.0 million,
or 32%, over the same quarter of 1997. For the first six months of 1998, total
noninterest expense increased $3.6 million, or 28%, over the prior year period,
excluding the non-recurring charge. The increased expenses were predominantly
caused by the continued growth of the Company. Since June 30, 1997, total
deposits have grown 38% and total loan balances have risen 31%, requiring higher
levels of staffing and other costs to both originate and service the larger
customer base. The following table presents noninterest expenses by category (in
thousands):
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------------------- ----------------------------------------
1998 1997 1998 1997
----------------- ----------------- ------------------- -----------------
Salaries and employee benefits $ 9,788 $ 6,869 $ 5,510 $ 3,413
Occupancy, net 1,176 937 604 455
Data processing 794 643 396 322
Advertising and marketing 756 572 349 276
Other 4,885 3,757 2,608 1,958
----------------- ----------------- ------------------- -----------------
Total noninterest expense $ 17,399 $ 12,778 $ 9,467 $ 6,424
================= ================= =================== =================
- 11 -
As mentioned earlier, the second quarter of 1998 includes a non-recurring $1.0
million pre-tax charge, of which approximately $900,000 relates to a severance
accrual that is included in salaries and employee benefits. Excluding this
charge, salaries and employee benefits in the second quarter of 1998 increased
$1.2 million, or 35%, over the 1997 quarter. The increase during the first six
months of 1998 over the same period in 1997, exclusive of the non-recurring
charge, was $2.0 million, or 29%. These increases were caused by higher staffing
levels to support the growth of the Company including 1) the Crystal Lake Bank
that was opened in December 1997, 2) a new full-service facility located in
Western Springs that opened in November 1997, 3) two branch facilities, in
Wilmette and Glencoe, that began operations in early 1998, 4) the formation of
WAMC as a separate trust company and 5) additional staffing to service the
larger deposit and loan portfolios, as mentioned earlier.
Net occupancy expenses for the six months ended June 30, 1998 totaled $1.2
million, an increase of $239,000, or 26%, compared to the same period in 1997.
For the second quarter of 1998, the increase was $149,000, or 33%, over the 1997
quarter. These increases were due primarily to the opening of new facilities, as
discussed above.
Data processing expenses totaled $794,000 for the first half of 1998, an
increase of $151,000, or 23%, when compared to the first half of 1997. For the
second quarter of 1998, these expenses totaled $396,000, an increase of $74,000,
or 23%, over the second quarter of 1997. These increases are due primarily to
the larger deposit and loan portfolios, which increased approximately 38% and
31%, respectively, as of June 30, 1998 when compared to June 30, 1997.
Additionally, the first half of 1998 included data processing costs related to
the opening of Crystal Lake Bank and other bank facilities, as noted above.
Advertising and marketing expenses totaled $756,000 for the first six months of
1998, an increase of $184,000, or 32%, over the first six months of 1997. For
the second quarter of 1998, total advertising and marketing expenses were
$349,000, an increase of $73,000, or 26%, from the same quarter in 1997.
Management provided for a higher level of marketing expenditures in order to
attract loans and deposits, to continue expansion of FIFC loan products and for
the opening of the Crystal Lake Bank and other branch facilities. Management
anticipates continued increases in this expense category as Wintrust continues
to expand its base of customers and market additional banking and trust products
and services.
Other noninterest expenses increased by $1.1 million, or 30%, to $4.9 million
for the six months ended June 30, 1998. For the quarter, this category of
expense totaled $2.6 million, an increase of $650,000, or 33%, over the second
quarter of 1997. This category includes expenses incurred for audits and
examinations, amortization of organizational costs, correspondent bank service
charges, insurance, legal fees, postage, stationery and supplies and other
sundry expenses. The increase in this category of expenses is generally a result
of the Company's expansion activities, including the origination and servicing
of a larger base of deposit and loan accounts.
Despite the increases in various noninterest expense categories during the first
half of 1998 as compared to 1997, Wintrust's ratio of noninterest expense to
total average assets, excluding the non-recurring 1998 charge, declined to 2.97%
in 1998 from 3.35% in 1997, reflecting management's commitment to maintaining
low overhead costs while providing superior customer service. Additionally,
Wintrust's net overhead ratio of 2.30% for the first six months of 1998,
excluding the non-recurring charge, compares favorably to the six month 1997
ratio of 2.69%, and is comparable to peer group ratios.
- 12 -
INCOME TAXES
The Company recorded income tax benefits of $1.2 million and $1.6 million for
the six months ended June 30, 1998 and 1997, respectively. Prior to the
September 1, 1996 merger transaction that formed Wintrust, each of the merging
companies except Lake Forest Bank had net operating losses and, based upon the
start-up nature of the organization, there was not sufficient evidence to
justify the full realization of the net deferred tax assets generated by those
losses. Accordingly, during 1996, certain valuation allowances were established
against deferred tax assets with the combined result being that a minimal amount
of federal tax expense or benefit was recorded. As the entities become
profitable, the recognition of previously unvalued tax loss benefits are
available, subject to certain limitations, to offset tax expense generated from
profitable operations. The income tax benefit recorded in 1998 and 1997
reflected management's determination that certain of the subsidiaries' earnings
history and projected future earnings were sufficient to make a judgment that
the realization of a portion of the net deferred tax assets not previously
valued was more likely than not to occur. Management anticipates that full
recognition of the net operating losses, for financial accounting purposes, will
be complete by year-end 1998 and the Company will be fully-taxable during 1999.
FINANCIAL CONDITION
Total assets were $1.18 billion at June 30, 1998, an increase of $319.6 million,
or 37%, over the $856.9 million a year earlier, and $123.1 million, or 12%, over
the $1.05 billion at December 31, 1997. This increase was created mainly through
deposit growth at the newer de novo banks and continued market share growth at
the other banks. Shareholders' equity rose to $71.0 million at June 30, 1998, an
increase of $2.2 million from the 1997 year-end level, due primarily to the
Company's net income for the first half of 1998.
INTEREST-EARNING ASSETS
Total loans were $852.2 million at June 30, 1998, an increase of $139.6 million,
or 20%, from $712.6 million at December 31, 1997, and an increase of $202.2
million, or 31%, from June 30, 1997. As the following table indicates, growth in
the loan portfolio has been diversified amongst all categories of loans with the
mix remaining relatively consistent (dollars in thousands):
JUNE 30, 1998 December 31, 1997 June 30, 1997
------------------------------- ----------------------------- -----------------------------
Loans: BALANCE PERCENT Balance Percent Balance Percent
----------------- ------------- --------------- ------------- --------------- -------------
Commercial and commercial
real estate $295,149 27% $235,483 25% $221,162 29%
Premium finance, net 167,783 16 128,453 13 126,543 16
Indirect auto, net 166,461 15 138,784 14 113,651 15
Home equity 116,676 11 116,147 12 102,574 13
Residential real estate 71,648 7 61,611 6 58,351 7
Installment 34,524 3 32,153 4 27,804 4
----------------- ------------- --------------- ------------- --------------- -------------
Total loans, net of
unearned income 852,241 79 712,631 74 650,085 84
----------------- ------------- --------------- ------------- --------------- -------------
Securities and money market
investments 221,645 21 252,871 26 123,110 16
----------------- ------------- --------------- ------------- --------------- -------------
Total earning assets $1,073,886 100% $965,502 100% $773,195 100%
================= ============= =============== ============= =============== =============
- 13 -
Almost half of the increase in total loans resulted from growth in the Company's
niche loan categories, premium finance loans and indirect auto loans. The growth
in premium finance loans has been due mainly to the combination of increased
market penetration from new product offerings and targeted marketing programs.
The indirect auto loan portfolio has grown over the past year as a result of
increased sales efforts and a greater number of auto dealer relationships.
Commercial and commercial real estate loans, the largest loan category,
comprised 27% of total loans as of June 30, 1998 and has increased $59.7
million, or 25%, since December 31, 1997 and $74.0 million, or 33%, since June
30, 1997. These increases were generally due to the low rate environment,
healthy economy and the hiring of additional experienced lending officers. The
total of home equity loans has remained relatively constant when compared to the
prior year dates, despite the large volume of home equity loans that have been
refinanced into first mortgage loans over the past year as a result of low
mortgage loan interest rates. In addition, unused commitments on home equity
lines of credit have increased $29.0 million, or 27%, over the balance at June
30, 1997 and totaled $136.5 million at June 30, 1998.
Total securities and money market investments (i.e. federal funds sold and
interest-bearing deposits with banks) were $221.6 million at June 30, 1998, down
12% from $252.9 million at December 31, 1997, and up 80% from the year-ago level
of $123.1 million. As of June 30, 1998, total securities and money market
investments were comprised of 12% in U.S. Treasury and government agency
securities, 59% in other debt and equity securities, 15% in short-term
interest-bearing deposits with banks and 14% in overnight federal funds sold.
The Company maintained no trading account securities at June 30, 1998 or in any
of the other previous reporting periods.
The balances of securities and money market investments fluctuate based upon
deposit inflows and loan demand. As a result of the significant growth in
deposits and loans, it has been Wintrust's policy to maintain its investment
portfolio in short-term, liquid, and diversified high credit quality investments
at the Banks 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. Furthermore, since short-term investment yields are comparable
to long-term investment yields in the current interest rate environment, there
is little incentive to invest in securities with extended maturities.
DEPOSITS
Total deposits at June 30, 1998 were $1.06 billion, or 16% higher than the
year-end 1997 level of $917.7 million and 38% higher than the June 30, 1997
level of $772.2 million. 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):
JUNE 30, 1998 December 31, 1997 June 30, 1997
--------------------------------- -------------------------------- --------------------------------
PERCENT Percent Percent
BALANCE OF TOTAL Balance of Total Balance of Total
---------------- --------------- --------------- --------------- --------------- ---------------
Demand $ 103,314 10% $ 92,840 10% $ 72,137 9%
NOW 95,470 9 83,301 9 67,428 9
Money market 190,425 18 154,893 17 135,152 18
Savings 64,574 6 61,445 7 56,779 7
Certificates of deposit 609,807 57 525,222 57 440,678 57
---------------- --------------- --------------- --------------- --------------- ---------------
Total $1,063,590 100% $ 917,701 100% $ 772,174 100%
================ =============== =============== =============== =============== ===============
- 14 -
The mix of deposits has remained relatively consistent over the past year.
Growth has been due primarily to higher deposit levels at the newer de novo
banks and branches, and continued success of marketing the Company's deposit
products at the more established banks, which has increased deposit market
share.
SHAREHOLDERS' EQUITY
Shareholders' equity grew $2.2 million to $71.0 million at June 30, 1998, from
$68.8 million at December 31, 1997. The primary components of the change in
shareholders' equity are net income for the first six months of 1998 and, to a
lesser extent, the exercise of certain stock options.
The following table reflects various consolidated measures of capital at June
30, 1998, December 31, 1997 and June 30, 1997:
JUNE 30, December 31, June 30,
1998 1997 1997
---------------------- ------------------- --------------------
Leverage ratio 6.1% 6.6% 7.9%
Ending tier 1 capital to risk-based asset ratio 6.9% 8.7% 8.7%
Ending total capital to risk-based asset ratio 7.5% 9.4% 9.4%
Dividend payout ratio 0.0% 0.0% 0.0%
The Company's capital ratios have declined over the course of the last year due
to the continued growth of the Company's deposit and asset base, coupled with
slow capital growth primarily due to expenses associated with the newer de novo
banks. The level of the Company's leverage and tier 1 risk-based capital ratios
qualify the Company as being "well capitalized"; however, the level of the
Company's total risk-based capital ratio has declined to a level where
additional capital is required to support the asset growth. To that end, on July
28, 1998, the Company's Board of Directors authorized the issuance of
approximately $30 million in publicly traded trust preferred securities, which
qualify as regulatory capital under Federal Reserve guidelines. The offering is
expected to be completed on or about September 30, 1998 and will result in the
Company being at or near the "well capitalized" minimum capital ratios for each
of the capital ratio categories. 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%.
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%. Management is not aware of any known
events, regulatory recommendations or uncertainties that will have any adverse
effect on the Company's capital resources.
- 15 -
ASSET QUALITY
ALLOWANCE FOR POSSIBLE LOAN LOSSES
A reconciliation of the activity in the balance of the allowance for possible
loan losses for the six and three month periods is shown as follows (dollars in
thousands):
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------------------
1998 1997 1998 1997
---------------- ----------------- ---------------- -----------------
Balance at beginning of period $ 5,116 $3,636 $5,665 $4,073
Provision for possible loan losses 2,340 1,554 1,073 875
Loans charged-off
Core banking loans 1,273 137 661 73
Premium finance 297 621 157 441
Indirect auto 265 29 153 8
---------------- ----------------- ---------------- -----------------
Total loans charged-off 1,835 787 971 522
---------------- ----------------- ---------------- -----------------
Recoveries
Core banking loans 162 20 55 4
Premium finance 60 9 30 2
Indirect auto 13 - 4 -
---------------- ----------------- ---------------- -----------------
Total recoveries 235 29 89 6
================ ================= ================ =================
Net loans charged off (1,600) (758) (882) (516)
---------------- ----------------- ---------------- -----------------
Balance at June 30 $5,856 $4,432 $5,856 $4,432
================ ================= ================ =================
Loans at June 30 $852,241 $650,085
================ =================
Allowance as a percentage of loans 0.69% 0.68%
================ =================
Annualized net charge-offs
as a percentage of average:
Core banking loans 0.47% 0.06%
Premium finance 0.32% 1.36%
Indirect auto 0.34% 0.06%
---------------- -----------------
Total loans 0.42% 0.27%
================ =================
Annualized provision for possible
loan losses 68.38% 48.78%
================ =================
- 16 -
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. The amount of 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 current and prospective
economic conditions in the market area.
Net charge-offs of core banking loans during the first half of 1998 totaled $1.1
million, of which approximately $815,000 was attributable to loans originated at
one banking office and reflect what management believes to be an isolated
problem that has been resolved through the dismissal of the lending officer
involved and a subsequent thorough review of all credits originated under his
authority. Management continues to be actively involved with each of the credits
at this office and presently believes that all material losses have been
recorded.
The provision for possible loan losses totaled $1.1 million for the second
quarter of 1998 and $2.3 million for the first six months of 1998, increases of
$198,000 and $786,000, respectively, over the same periods of 1997. These
increases were necessary to cover higher loan charge-offs, as mentioned above,
and also to maintain the allowance for possible loan losses at an appropriate
level, considering the growth experienced in the portfolio. Management believes
the allowance for possible loan losses is adequate to provide for any potential
losses in the portfolio.
- 17 -
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):
JUNE 30, March 31, December 31, June 30,
1998 1998 1997 1997
---------------- --------------- ----------------- ----------------
Past Due greater than 90 days
and still accruing:
Core banking loans $ 1,311 $ 381 $ 868 $ 173
Indirect automobile loans 45 47 11 27
Premium finance loans 897 1,082 887 769
---------------- --------------- ----------------- ----------------
2,253 1,510 1,766 969
---------------- --------------- ----------------- ----------------
Non-accrual loans:
Core banking loans 3,841 4,225 782 33
Indirect automobile loans 74 19 29 63
Premium finance loans 1,484 2,039 1,629 753
---------------- --------------- ----------------- ----------------
5,399 6,283 2,440 849
---------------- --------------- ----------------- ----------------
Total non-performing loans:
Core banking loans 5,152 4,606 1,650 206
Indirect automobile loans 119 66 40 90
Premium finance loans 2,381 3,121 2,516 1,522
---------------- --------------- ----------------- ----------------
7,652 7,793 4,206 1,818
---------------- --------------- ----------------- ----------------
Other real estate owned - - - -
---------------- --------------- ----------------- ----------------
Total non-performing assets $ 7,652 $ 7,793 $ 4,206 $ 1,818
================ =============== ================= ================
Total non-performing loans by
category as a percent of its own
respective category:
Core banking loans 0.99% 0.99% 0.37% 0.05%
Indirect automobile loans 0.07% 0.04% 0.03% 0.08%
Premium finance loans 1.42% 2.23% 1.96% 1.20%
---------------- --------------- ----------------- ----------------
Total loans 0.90% 1.03% 0.59% 0.28%
---------------- --------------- ----------------- ----------------
Total non-performing assets as a
percentage of total assets: 0.65% 0.68% 0.40% 0.21%
Allowance for possible loan losses as a
percentage of non-performing loans 76.53% 72.69% 121.64% 243.78%
- 18 -
Non-performing Core Banking Loans
Non-performing loans for the Company's core banking business totaled $5.2
million or 0.99% of the Company's core banking loans as of June 30, 1998. One
borrower accounts for approximately $2.6 million of this total and is a credit
that is adequately secured but is more than 90 days past due and on non-accrual
status. The borrower has entered into a contract to sell the property and the
Company believes that proceeds from the sale will retire amounts outstanding
and, accordingly, no loss is currently anticipated. Another $898,000 relates to
six residential real estate loans which management believe are adequately
secured by the underlying real estate. The remaining $1.7 million of
non-performing loans is comprised of approximately 17 loans. The small number of
borrowers enables management to monitor closely the status of these credits and
work with the borrowers to resolve these problems effectively. Management
believes that each of these loans are well secured and that collection efforts
are active.
Non-performing Premium Finance Loans
Another significant category of non-performing loans is premium finance loans.
Due to the nature of the collateral, it customarily takes 60-150 days to convert
the collateral into cash collections. Accordingly, it is important to note that
the level of non-performing premium finance loans is not necessarily indicative
of the loss inherent in the portfolio. In financing insurance premiums, the
Company does not assume the risk of loss normally borne by insurance carriers.
Typically the insured buys an insurance policy from an independent insurance
agent or broker who offers financing through the Company's subsidiary, First
Insurance Funding Corp. (FIFC). The insured makes a down payment of
approximately 15% to 25% of the total premium and signs a premium finance
agreement with FIFC for the balance due, which amount FIFC disburses directly to
the insurance carrier or its agents to satisfy the unpaid premium amount. As the
insurer earns the premium ratably over the life of the policy, the unearned
portion of the premium secures payment of the balance due to FIFC by the
insured. Under the terms of FIFC's standard form of financing contract, FIFC has
the right to cancel the insurance policy if there is a default in the payment on
the finance contract and to collect the unearned portion of the premium from the
insurance carrier. In the event of cancellation of a policy, the cash returned
in payment of the unearned premium by the insurer should generally be sufficient
to cover the loan balance, the interest and other charges due as well. In the
event an insurer becomes insolvent and unable to pay claims to an insured or
refund unearned premiums upon cancellation of a policy to a finance company,
each state provides a state guaranty fund that will pay such a refund, less a
per claim deductible in certain states. FIFC diversifies its financing
activities among a wide range of brokers and insurers. Due to the notification
requirements and the time to process the return of the unearned premium by most
insurance carriers, many loans will become delinquent beyond 90 days while the
processing of the unearned premium refund to the Company occurs. Management
continues to accrue interest until maturity as the unearned premium by the
insurance carrier is ordinarily sufficient to pay-off the outstanding principal
and contractual interest due.
Total non-performing premium finance loans as of June 30, 1998 were
approximately $2.4 million or 1.42% of the outstanding premium finance loans.
The decline in the percent of non-performing loans from 2.23% at March 31, 1998
and 1.96% at December 31, 1997 is primarily the result of management's
implementation of additional collection procedures and upgraded systems.
Management believes the level of net charge-offs is acceptable based on an
average gross yield from premium finance loan interest and late fees of
approximately 12%.
- 19 -
The amount of non-performing premium finance loans at June 30, 1997 were
significantly less because, prior to October 1996, the Company had sold its
originated loans to a securitization facility. In October 1996, the Company
began retaining all originated loans, and the Company terminated the
securitization facility during the third quarter of 1997. If the loans sold to
the securitization facility had been retained by the Company, the level of
non-performing premium finance loans would have been approximately 2.4% of total
premium finance loans.
Non-performing Indirect Automobile Loans
Total non-performing indirect automobile loans were $119,000 at June 30, 1998 as
compared to $66,000 at March 31, 1998 and $40,000 as of the end of 1997.
Although the total has increased slightly, these loans as a percent of total
indirect automobile loans were only 0.07% at June 30, 1998 as compared to 0.04%
at March 31, 1998 and 0.03% at December 31, 1997. These individual loans
comprise smaller dollar amounts and collection efforts are active.
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 do not represent
non-performing loans to the Company. 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 loans in this category as
of June 30, 1998 and December 31, 1997 were approximately $2.5 million and $7.2
million, respectively.
LIQUIDITY MANAGEMENT
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,
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. An analysis of
a banking organization's asset and liability structure provides the best
indication of how a banking organization is positioned to respond to changing
interest rates and maintain profitability.
- 20 -
YEAR 2000 ISSUE
A critical issue has emerged in the banking industry and generally for all
industries that are heavily reliant upon computers regarding how existing
software application programs and operating systems can accommodate the date
value for the "Year 2000." The Year 2000 issue is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. As such, certain programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, the year 1999 (i.e. `99') could be the maximum date value these systems
will be able to accurately process. During 1997, management began the process of
working with its outside data processor and other software vendors to ensure
that the Company is prepared for the Year 2000. That process has continued
during 1998 and current expectations are that testing will be completed in early
1999. The Company is regulated by the Federal Reserve Bank, the Office of the
Comptroller of the Currency and the State of Illinois bank regulatory agency,
all of which are active in monitoring compliance with the implementation of
systems-related Year 2000 issues. The financial impact to the Company is not
anticipated to be material to its financial position or results in any given
year.
SHAREHOLDER RIGHTS PLAN
On July 28, 1998, the Company's Board of Directors adopted a Shareholder Rights
Plan ("Plan") in which preferred stock purchase rights ("Rights") will be
distributed as a dividend at the rate of one right for each share of the
Company=s outstanding common stock to shareholders of record as of the close of
business on August 7, 1998.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131:
- ----------------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 was issued in
response to requests from financial statement users for additional and improved
segment information. The statement requires a variety of disclosures to better
explain and reconcile segment data so that a user of the financial statements
can be better enabled to understand the information and its limitations within
the context of the consolidated financial statements. SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to be
restated, unless it is impracticable to do so. SFAS No. 131 need not be applied
to interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
shall be reported in financial statements for interim periods in the second year
of application. The Company will present this new statement's required
disclosures in its December 31, 1998 audited financial statements. The Company
has yet to determine its segments and related disclosures.
- 21 -
AICPA Accounting Standards Executive Committee Statement of Position 98-5:
- --------------------------------------------------------------------------
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires that the unamortized portion of previously
capitalized start-up costs be written-off as a cumulative effect of a change in
accounting principle upon adoption of SOP 98-5. Subsequent to adoption of the
statement, start-up and organization costs must be expensed as incurred. SOP
98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company will implement the statement in the first quarter
of 1999 and the pre-tax impact will be less than $225,000.
Statement of Financial Accounting Standards No. 133:
- ----------------------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 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 transactions 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. This new standard requires that all derivative instruments be
recorded in the statement of condition at fair value. The recording of the gain
or loss due to changes in fair value could be either reported in earnings or as
other comprehensive income in the statement of shareholders' equity, depending
on the type of instrument and whether or not it is considered a hedge. This
standard is effective for the Company as of January 1, 2000. The Company has not
yet determined the impact this new statement may have on its future financial
condition or its results of operations.
- 22 -
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, as amended. 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 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
or specialty finance 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 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 startup phase of
generating deposits and the time lag typically involved in redeploying
deposits into attractively priced loans and other higher yielding earning
assets.
o The Company's success to date has been and will continue to be strongly
influenced by its ability to attract and retain senior management
experienced in banking and financial services.
o Although management believes the allowance for possible loan losses is
adequate to absorb losses on any existing loans that may become
uncollectible, there can be no assurance that the allowance will prove
sufficient to cover actual loan losses in the future.
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 Changes in the economic environment may influence the growth rate of loans
and deposits and also the quality of the loan portfolio.
- 23 -
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 its 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.
The Company, during each of the reported periods, had not entered into any such
derivative financial instruments. However, during the third quarter of 1998, the
Company entered into an interest rate cap contract with a notional amount of
$100 million to mitigate the effect of rising rates on certain of its floating
rate deposit products and fixed rate loan products.
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 are 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 individual subsidiaries 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 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
- 24 -
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 estimated interest rate sensitivity and periodic and
cumulative gap positions as calculated as of June 30, 1998.
TIME TO MATURITY OR REPRICING
-----------------------------
0-90 91-365 1-5 OVER 5 TOTAL
-----
DAYS DAYS YEARS YEARS
---------------- --------------- --------------- -------------- --------------
(DOLLARS IN THOUSANDS)
ASSETS:
Loans, net of unearned income........ $ 385,464 $ 221,166 $ 213,980 $ 31,631 $ 852,241
Securities........................... 141,119 13,854 271 2,070 157,314
Interest-bearing bank deposits....... 29,969 3,127 - - 33,096
Federal funds sold................... 31,235 - - - 31,235
Other................................ - - - 102,660 102,660
---------------- --------------- --------------- -------------- --------------
Total assets....................... 587,787 238,147 214,251 136,361 1,176,546
---------------- --------------- --------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
NOW.................................. 95,470 - - - 95,470
Savings and money market............. 241,409 - - 13,590 254,999
Time deposits........................ 305,723 221,308 82,776 - 609,807
Short term borrowings................ 1,056 - - - 1,056
Notes payable........................ 26,603 - - - 26,603
Demand deposits & other
liabilities....................... - - - 117,628 117,628
Shareholders' equity................. - - - 70,983 70,983
---------------- --------------- --------------- -------------- --------------
Total liabilities and
shareholders' equity.......... $ 670,261 $ 221,308 $ 82,776 $ 202,201 $ 1,176,546
---------------- --------------- --------------- -------------- --------------
Rate sensitive assets (RSA)............. 587,787 238,147 214,251 136,361
Rate sensitive liabilities (RSL)........ 670,261 221,308 82,776 202,201
---------------- --------------- --------------- --------------
Cumulative gap
(GAP = RSA - RSL)..................... $ (82,474) $ (65,635) $ 65,840 $ -
================ =============== =============== ==============
RSA/RSL................................. 0.88 1.08 2.59
RSA/Total assets........................ 0.50 0.20 0.18
RSL/Total assets........................ 0.57 0.19 0.07
GAP/Total assets........................ (7)% (6)% 6%
GAP/RSA................................. (14)% (8)% 6%
- 25 -
While the gap position illustrated above 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. 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
income due to changes in 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 income assuming an instantaneous permanent parallel shift in the
yield curve of 200 basis points, both upward and downward. Utilizing this
measurement concept, the interest rate risk of the Company, expressed as a
percentage change in net income over a two-year time horizon due to changes in
interest rates, at June 30, 1998, is as follows:
+200 BASIS -200 BASIS
POINTS POINTS
--------------- ---------------
Percentage change in net income due to an immediate 200 basis point change in
interest rates over a two-year time horizon........ 5.6% -10.4%
--------------- ---------------
- 26 -
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 AND USE OF PROCEEDS.
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.
(a) The Annual Meeting of Shareholders was held on May 28, 1998.
(c) At the Annual Meeting of Shareholders, the following matter was submitted to
a vote of the shareholders:
(1) The election of eight Class II directors to the Board of Directors
to hold office for a three-year term.
Director Votes For Votes Against Abstentions
-------- --------- -------------- -----------
Bruce K. Crowther 5,312,501 0 1,303,917
Maurice F. Dunne, Jr. 5,322,097 0 1,294,321
William C. Graft 5,312,901 0 1,303,517
Marguerite Savard McKenna 5,312,209 0 1,304,209
Albin F. Moschner 5,319,901 0 1,296,517
Ingrid Stafford 5,313,701 0 1,302,717
Jane R. Stein 5,318,096 0 1,298,322
Katharine V. Sylvester 5,311,696 0 1,304,722
ITEM 5: OTHER INFORMATION.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
3 (i) Amended By-Laws
27 Financial Data Schedule
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed by the Company during the quarter ended June
30, 1998.
- 27 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WINTRUST FINANCIAL CORPORATION
(Registrant)
Date: August 14, 1998 /s/ Edward J. Wehmer
President & Chief Executive Officer
Date: August 14, 1998 /s/ David A. Dykstra
Executive Vice President
& Chief Financial Officer
Date: August 14, 1998 /s/ Todd A. Gustafson
Vice President/Finance
(Principal Accounting Officer)
- 28 -
EXHIBIT INDEX
Exhibit 3 (i) Amended By-Laws
Exhibit 27 Financial Data Schedule
- 29 -