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, 1999
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, 8,405,329 shares, as of November 11, 1999.
TABLE OF CONTENTS
PART I. -- FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements.__________________________________________ 1-7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. __________________________________ 8-28
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks. __ 29-31
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings. ____________________________________________ 32
ITEM 2. Changes in Securities. ________________________________________ 32
ITEM 3. Defaults Upon Senior Securities. ______________________________ 32
ITEM 4. Submission of Matters to a Vote of Security Holders.___________ 32
ITEM 5. Other Information. ____________________________________________ 32
ITEM 6. Exhibits and Reports on Form 8-K. _____________________________ 32
Signatures ____________________________________________________ 33
Exhibit Index _________________________________________________ 34
PART I
ITEM 1 FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(In thousands)
September 30, December 31, September 30,
1999 1998 1998
- ----------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks-non-interest bearing $ 38,391 $ 33,924 $ 28,048
Federal funds sold 59,161 18,539 18,250
Interest-bearing deposits with banks 3,746 7,863 10,231
Available-for-Sale securities, at fair value 164,747 209,119 193,037
Held-to-Maturity securities, at amortized cost - 5,000 5,000
Loans, net of unearned income 1,202,256 992,062 908,276
Less: Allowance for possible loan losses 8,200 7,034 6,500
- ----------------------------------------------------------------------------------------------------------
Net loans 1,194,056 985,028 901,776
Premises and equipment, net 68,257 56,964 53,165
Accrued interest receivable and other assets 35,213 30,082 32,451
Goodwill and organizational costs 1,308 1,529 1,598
- ----------------------------------------------------------------------------------------------------------
Total assets $ 1,564,879 $1,348,048 $1,243,556
==========================================================================================================
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing $ 125,870 $ 131,309 $ 106,090
Interest bearing 1,262,572 1,097,845 1,017,666
- ----------------------------------------------------------------------------------------------------------
Total deposits 1,388,442 1,229,154 1,123,756
Short-term borrowings 40,025 - -
Notes payable 7,350 - 3,203
Long-term debt - trust preferred securities 31,050 31,050 27,500
Accrued interest payable and other liabilities 17,158 12,639 15,942
- ----------------------------------------------------------------------------------------------------------
Total liabilities 1,484,025 1,272,843 1,170,401
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock - - -
Common stock 8,174 8,150 8,150
Surplus 73,165 72,878 72,878
Common stock warrants 100 100 100
Retained earnings (deficit) 749 (5,872) (7,958)
Accumulated other comprehensive loss (1,334) (51) (15)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 80,854 75,205 73,155
- ----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,564,879 $ 1,348,048 $ 1,243,556
==========================================================================================================
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,
1999 1998 1999 1998
=================================================================================================================================
Interest income
Interest and fees on loans $24,990 $20,045 $ 69,993 $ 54,645
Interest bearing deposits with banks 44 378 165 2,159
Federal funds sold 504 542 1,074 1,801
Securities 2,546 1,976 7,244 5,683
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest income 28,084 22,941 78,476 64,288
- ---------------------------------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 14,401 12,562 40,167 36,166
Interest on short-term borrowings and notes payable 727 506 1,470 1,335
Interest on long-term debt - trust preferred securities 734 - 2,203 -
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 15,862 13,068 43,840 37,501
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 12,222 9,873 34,636 26,787
Provision for possible loan losses 990 971 2,707 3,311
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 11,232 8,902 31,929 23,476
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest income
Fees on mortgage loans sold 533 1,323 2,750 3,902
Service charges on deposit accounts 399 293 1,080 747
Trust fees 295 210 770 578
Gain on sale of premium finance receivables 377 - 640 -
Net securities gains 15 - 15 -
Other 398 183 1,188 454
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 2,017 2,009 6,443 5,681
- ---------------------------------------------------------------------------------------------------------------------------------
Non-interest expense
Salaries and employee benefits 4,984 4,565 15,256 14,353
Occupancy, net 743 589 2,088 1,765
Equipment expense 796 550 2,126 1,576
Data processing 551 440 1,544 1,234
Advertising and marketing 309 358 1,041 1,114
Professional fees 242 455 828 1,203
Other 1,805 1,682 5,611 4,793
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 9,430 8,639 28,494 26,038
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,819 2,272 9,878 3,119
Income tax expense (benefit) 1,292 118 3,257 (1,040)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,527 $ 2,154 $ 6,621 $ 4,159
=================================================================================================================================
NET INCOME PER COMMON SHARE - BASIC $ 0.31 $ 0.26 $ 0.81 $ 0.51
=================================================================================================================================
NET INCOME PER COMMON SHARE - DILUTED $ 0.30 $ 0.25 $ 0.78 $ 0.49
=================================================================================================================================
Weighted average common shares outstanding 8,173 8,150 8,166 8,141
Dilutive potential common shares 310 384 322 358
- ---------------------------------------------------------------------------------------------------------------------------------
Average common shares and dilutive common shares 8,483 8,534 8,488 8,499
=================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
- 2 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)
Accumulated
other
Compre- Common Retained compre- Total
hensive Common stock earnings hensive shareholders'
income stock Surplus warrants (deficit) income(loss) equity
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 8,118 $ 72,646 $ 100 $ (12,117) $ 43 $ 68,790
Comprehensive Income:
Net income $ 4,159 - - - 4,159 - 4,159
Other Comprehensive Income (Loss), net of tax:
Unrealized losses on securities, net of
reclassification adjustment (58) - - - - (58) (58)
-----------
Comprehensive Income $ 4,101
-----------
Common stock issued upon exercise
of stock options 32 232 - - - 264
- ------------------------------------------ -----------------------------------------------------------------------
Balance at September 30, 1998 $ 8,150 $ 72,878 $ 100 $ (7,958) $ (15) $ 73,155
- ------------------------------------------ -----------------------------------------------------------------------
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
========================================== =======================================================================
Nine Months Ended September 30,
1999 1998
-----------------------
Disclosure of reclassification amount:
Unrealized holding losses arising during the period $ (2,021) $ (82)
Less: Reclassification adjustment for gains included in net income 15 -
Less: Income tax benefit (753) (24)
-----------------------
Net unrealized losses on securities $ (1,283) $ (58)
=======================
See accompanying notes to unaudited consolidated financial statements.
- 3 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
- -----------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 6,621 $ 4,159
Adjustments to reconcile net income to net cash
used for, or provided by, operating activities:
Provision for possible loan losses 2,707 3,311
Depreciation and amortization 2,832 2,118
Deferred income tax benefit (1,822) (1,040)
Net accretion/amortization of securities (637) (230)
Originations of mortgage loans held for sale (202,216) (255,257)
Proceeds from sales of mortgage loans held for sale 212,394 249,212
Gain on sale of premium finance receivables (640) -
Gain on sale of Available-for-Sale securities (15) -
Increase in other assets, net (2,650) (16,603)
Increase in other liabilities, net 4,519 4,928
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 21,093 (9,402)
- -----------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of Available-for-Sale securities 345,726 371,922
Proceeds from maturities of Held-to-Maturity securities 5,000 -
Proceeds from sale of Available-for-Sale securities 8,078 -
Purchases of Available-for-Sale securities (310,814) (462,794)
Proceeds from sale of premium finance receivables 39,873 -
Net decrease in interest-bearing deposits with banks 4,117 74,869
Net increase in loans (261,145) (191,527)
Purchases of premises and equipment, net (13,813) (10,891)
- -----------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (182,978) (218,421)
- -----------------------------------------------------------------------------------------------------
Financing Activities:
Increase in deposit accounts 159,288 206,055
Increase (decrease) in short-term borrowings, net 40,025 (35,493)
Proceeds from notes payable 7,350 7,501
Repayment of notes payable - (24,700)
Proceeds from long-term debt - trust preferred securities - 27,500
Common stock issued upon exercise of stock options 240 264
Common stock issued through employee stock purchase plan 71 -
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 206,974 181,127
- -----------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 45,089 (46,696)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 52,463 92,994
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $97,552 $ 46,298
=====================================================================================================
See accompanying notes to unaudited consolidated financial statements.
- 4 -
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The consolidated financial statements of Wintrust Financial Corporation and
Subsidiaries ("Wintrust" or "Company") presented herein are unaudited, but in
the opinion of management reflect all necessary adjustments of a normal or
recurring nature for a fair presentation of results as of the dates and for the
periods covered by the consolidated financial statements.
Wintrust is a financial 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 for the
payment of commercial insurance premiums ("premium finance receivables"), on a
national basis, through its subsidiary, First Insurance Funding Corporation
("FIFC"). As of September 30, 1999, 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 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. On October 26, 1999
(effective October 1, 1999), Hinsdale Bank acquired Tricom, Inc. of Milwaukee
("Tricom"), a national financial and administrative service bureau to the
staffing industry.
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, 1998. Operating results for the three 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.
(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.
- 5 -
(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,
---------------------------------------------------------------------
1999 1998 1999 1998
---------------- --------------- ---------------- --------------
Net income (A) $ 2,527 $ 2,154 $ 6,621 $ 4,159
================ =============== ================ ==============
Average common shares outstanding (B) 8,173 8,150 8,166 8,141
Effect of dilutive common shares 310 384 322 358
---------------- --------------- ---------------- --------------
Weighted average common shares and
effect of dilutive common shares (C) (C) 8,483 8,534 8,488 8,499
================ =============== ================ ==============
Net income per average
common share - Basic (A/B) $ 0.31 $ 0.26 $ 0.81 $ 0.51
================ =============== ================ ==============
Net income per average
common share - Diluted (A/C) $ 0.30 $ 0.25 $ 0.78 $ 0.49
================ =============== ================ ==============
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 its offering of $31.05 million of 9.00%
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 offering
has 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 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, 1998.
(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.
- 6 -
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 and nine-month periods ended September 30, 1999 and 1998 (in
thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME:
Banking $ 11,552 $ 9,085 $ 32,573 $ 24,793
Premium Finance 3,117 2,661 9,417 7,083
Indirect Auto 2,096 1,444 5,993 3,836
Trust 106 88 338 221
Inter-segment eliminations (3,829) (2,917) (11,363) (7,894)
Other (820) (488) (2,322) (1,252)
================ ================ ================ ===============
Total $ 12,222 $ 9,873 $ 34,636 $ 26,787
================ ================ ================ ===============
NON-INTEREST INCOME:
Banking $ 1,512 $ 1,917 $ 5,413 $ 5,388
Premium Finance 377 - 640 -
Indirect Auto 1 - 1 2
Trust 295 210 770 578
Inter-segment eliminations (168) (118) (381) (287)
================ ================ ================ ===============
Total $ 2,017 $ 2,009 $ 6,443 $ 5,681
================ ================ ================ ===============
SEGMENT PROFIT (LOSS):
Banking $ 2,712 $ 1,759 $ 7,600 $ 3,486
Premium Finance 1,206 589 3,240 1,376
Indirect Auto 775 477 2,184 1,216
Trust (134) (43) (546) 81
Inter-segment eliminations (1,294) (140) (3,705) (156)
Other (738) (488) (2,152) (1,844)
================ ================ ================ ===============
Total $ 2,527 $ 2,154 $ 6,621 $ 4,159
================ ================ ================ ===============
SEGMENT ASSETS:
Banking $1,597,087 $1,265,693
Premium Finance 277,022 225,261
Indirect Auto 268,063 196,676
Trust 2,354 3,460
Inter-segment eliminations (583,550) (453,455)
Other 3,903 5,921
================ ================
Total $1,564,879 $1,243,556
================ ================
- 7 -
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,
1999, compared with December 31, 1998, and September 30, 1998, and the results
of operations for the three and nine-month periods ended September 30, 1999 and
1998 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 eight years,
with an average life of its six subsidiary banks of approximately four 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 and FIFC 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 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 a few 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, 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. 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 April
and May 1998, North Shore Bank opened new branch facilities in Wilmette and
Glencoe, Illinois, respectively, and in October 1999, opened a new full-service
branch facility in Skokie, Illinois. In October 1998, the Libertyville Bank
opened a new branch facility that is located in south Libertyville, which is
near Vernon Hills, Illinois. In December 1998, the Lake Forest Bank opened a new
branch in the newly constructed, upscale senior housing development known as
Lake Forest Place. Also in late 1998, Hinsdale Bank's Western Springs operation
moved into its new, permanent full-service facility. Expenses related to these
new banking operations and the start-up of WAMC predominantly impact only the
1999 operating results presented in this discussion and analysis.
- 8 -
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, FIFC and WAMC. One
aspect of this strategy is to continue to pursue specialized earning asset
niches, and to shift the mix of earning assets to higher-yielding loans. Another
aspect of this strategy is a continued focus on less aggressive deposit pricing
at the Banks with significant market share and more established customer bases.
FIFC has been the Company's most significant specialized earning asset niche and
is expected to reach $650 million in premium finance receivable volume during
1999. These receivables have been retained within the Banks' loan portfolios as
part of the strategy noted above. During the second quarter of 1999, as a result
of the continued solid volume growth, FIFC began to sell a portion of new
receivables to an unrelated third party. 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.
The October 1999 acquisition of Tricom is another significant step in the
Company's strategy to pursue specialized earning asset niches. Tricom is a ten
year old Milwaukee-based company that 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. On an annual
basis, Tricom currently finances and processes payrolls with associated billings
in excess of $200 million and generates approximately $7 million in revenues. By
virtue of the Company's funding resources, this acquisition will provide 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 will add to the
level of fee-based income and augment its community-based banking revenues.
Other newer specialized earning asset niches include Lake Forest Bank's medical
and municipal equipment leasing division, a previously established small
business that was acquired in July 1998, and Barrington Bank's newly established
program that provides lending and deposit services to condominium, homeowner and
community associations. 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 intends to expand the trust and
investment management services that have already been provided during the past
several years 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 will be offered by WAMC's
experienced trust professionals. During the fourth quarter of 1998, WAMC added
experienced trust professionals at North Shore Bank, Hinsdale Bank and
Barrington Bank. As in the past, a full complement of trust professionals
continue 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.
- 9 -
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, to a level that trust fees absorb the overhead of WAMC at that time.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for the quarter ended September 30, 1999 totaled $2.5 million, an
increase of $373,000, or 17%, over the third quarter of 1998. On a per share
basis, net income for the third quarter of 1999 totaled $0.30 per diluted common
share, a $0.05 per share, or 20%, increase over the third quarter of 1998. The
return on average equity for the third quarter of 1999 increased to 12.46% from
11.80% for the same prior year quarter.
For the nine months ended September 30, 1999, net income totaled $6.6 million,
or $0.78 per diluted common share, an increase of $2.5 million, or 59%, and
$0.29 per diluted share, when compared to the same period in 1998. Excluding the
impact of the prior year non-recurring $1.0 million pre-tax charge related to
severance amounts due to the former Chairman and Chief Executive Officer and
certain related legal fees, net income for the nine-month period increased $1.8
million, or 39%, and $0.22 per diluted common share, when compared to the same
period in 1998. The return on average equity for the nine months ended September
30, 1999 rose to 11.29% versus 8.99% in the same period of 1998, exclusive of
the non-recurring charge.
A significant factor that contributed to the prior year net income was the
recognition of income tax benefits from the realization of previously unvalued
tax loss benefits. Due to the prior year recognition of tax benefits, the
Company's true growth in profitability over the past year has been masked.
Therefore, a comparison of pre-tax operating income is more representative of
the Company's improvement in operating results. On a pre-tax basis, operating
income totaled $3.8 million for the third quarter of 1999, an increase of $1.5
million, or 68%, over the prior year quarter. For the first nine months of 1999,
operating income totaled $9.9 million and increased $5.8 million, or 140%, over
the prior year period, exclusive of the previously mentioned prior year
non-recurring charge. This significant improvement in operating results has
primarily been the result of enhanced performance of the Company's more
established subsidiaries. For further information regarding the recognition of
income tax benefits, please refer to the Income Taxes section of this discussion
and analysis.
- 10 -
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 quarterly and nine-month periods ended September 30, 1999 and 1998:
For the Quarter Ended For the Quarter Ended
September 30, 1999 September 30, 1998
----------------------------------------- ---------------------------------------
(dollars in thousands) Average Interest Rate Average Interest Rate
---------------- ------------- ---------- --------------- ------------- ---------
Liquidity management assets (1) (2) $ 231,273 $ 3,096 5.31% $ 204,915 $ 2,896 5.61%
Loans, net of unearned income (2) 1,173,278 25,065 8.48 883,515 20,068 9.01
---------------- ------------- ---------- --------------- ------------- ---------
Total earning assets 1,404,551 28,161 7.95% 1,088,430 22,964 8.37%
---------------- ------------- ---------- --------------- ------------- ---------
Interest-bearing deposits 1,225,090 14,401 4.66% 969,591 12,562 5.14%
Short-term borrowings and notes payable 59,315 727 4.86 30,447 506 6.59
Long-term debt - trust preferred securities 31,050 734 9.46 - - -
---------------- ------------- ---------- --------------- ------------- ---------
Total interest-bearing liabilities 1,315,455 15,862 4.78% 1,000,038 13,068 5.18%
---------------- ------------- ---------- --------------- ------------- ---------
Tax-equivalent net interest income $ 12,299 $ 9,896
============= =============
Net interest margin 3.47% 3.61%
========== =========
Core net interest margin (3) 3.59% 3.61%
========== =========
For the Nine Months Ended For the Nine Months Ended
September 30, 1999 September 30, 1998
----------------------------------------- ---------------------------------------
(dollars in thousands) Average Interest Rate Average Interest Rate
---------------- ------------- ---------- --------------- ------------- ---------
Liquidity management assets (1) (2) $ 216,047 $ 8,490 5.25% $ 228,340 $ 9,643 5.65%
Loans, net of unearned income (2) 1,103,881 70,154 8.50 808,009 54,711 9.05
---------------- ------------- ---------- --------------- ------------- ---------
Total earning assets 1,319,928 78,644 7.97% 1,036,349 64,354 8.30%
---------------- ------------- ---------- --------------- ------------- ---------
Interest-bearing deposits 1,157,076 40,167 4.64% 924,048 36,166 5.23%
Short-term borrowings and notes payable 44,439 1,470 4.42 26,559 1,335 6.72
Long-term debt - trust preferred securities 31,050 2,203 9.46 - - -
---------------- ------------- ---------- --------------- ------------- ---------
Total interest-bearing liabilities 1,232,565 43,840 4.76% 950,607 37,501 5.27%
---------------- ------------- ---------- --------------- ------------- ---------
Tax-equivalent net interest income $ 34,804 $ 26,853
============= =============
Net interest margin 3.53% 3.46%
========== =========
Core net interest margin (3) 3.64% 3.46%
========== =========
- -------------------------------
<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
34%. This total adjustment for the quarters ended September 30, 1999 and
1998 was $77,000 and $23,000, respectively, and for the nine-month periods
ended September 30, 1999 and 1998 was $168,000 and $66,000, respectively.
(3) The core net interest margin excludes the net impact of the Company's 9.00%
Cumulative Trust Preferred Securities offering and certain discretionary
investment leveraging transactions.
</FN>
- 11 -
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, 1999
totaled $12.3 million, an increase of $2.4 million, or 24%, as compared to the
$9.9 million recorded in the same quarter of 1998. This increase was mainly the
result of loan growth coupled with a decline in deposit funding cost rates.
Tax-equivalent interest and fees on loans for the quarter ended September 30,
1999 totaled $25.1 million, an increase of $5.0 million, or 25%, over the prior
year quarterly total of $20.1 million. This growth was predominantly due to a
$290 million, or 33%, increase in average total loans.
For the third quarter of 1999, the net interest margin was 3.47%, a decline of
14 basis points when compared to the margin of 3.61% in the prior year quarter.
This decline was due mainly to the net impact of the 9.00% Cumulative Trust
Preferred Securities offering and certain discretionary investment leveraging
transactions. The core net interest margin, which excludes the impact of these
items, was 3.59% for the third quarter of 1999, and declined only 2 basis points
when compared to the prior year quarterly margin of 3.61%.
The rate paid on interest-bearing deposits averaged 4.66% for the third quarter
of 1999 versus 5.14% for the same quarter in 1998, a decline of 48 basis points.
This decline was caused by a general decline in market rates coupled with
management's decision to be less aggressive on its deposit pricing at the more
mature banks. The rate paid on short-term borrowings and notes payable declined
to 4.86% in the third quarter of 1999 as compared to 6.59% in the same quarter
of 1998. A change in composition of this category coupled with a general decline
in market rates were the primary factors causing this 173 basis point decline.
In 1998, most of the average balance was comprised of notes payable under a line
of credit agreement with an unaffiliated bank at an interest rate indexed at 125
basis points over the LIBOR rate. In 1999, the average balance was comprised of
mainly short-term repurchase agreements, which generally have lower rates when
compared to the terms of the line of credit agreement.
The yield on total earning assets for the third quarter of 1999 was 7.95% as
compared to 8.37% in 1998, a decline of 42 basis points due to lower yields on
both loans and liquidity management assets, offset somewhat by a higher
proportion of average loans to average earning assets. The third quarter 1999
loan yield of 8.48% declined 53 basis points when compared to the prior year
quarterly yield of 9.01% and was due primarily to a higher prime lending rate of
8.50% during the entire third quarter of 1998 versus an average prime lending
rate of 8.10% for the third quarter of 1999.
For the nine months ended September 30, 1999, tax-equivalent net interest income
totaled $34.8 million and increased $8.0 million, or 30%, over the $26.9 million
recorded in the same period of 1998. This increase was primarily due to a
combination of loan growth and lower funding cost rates. Interest and fees on
loans, on a tax-equivalent basis, totaled $70.2 million for the nine-month
period ended September 30, 1999 and increased $15.4 million, or 28%, over the
same period of 1998. Average loans for the nine-month period of 1999 totaled
$1.10 billion and grew $296 million, or 37%, over the average for the same
period of 1998. The net interest margin for the nine months ended September 30,
1999 was 3.53%, an increase of 7 basis points when compared to the same period
in 1998. The core net interest margin for the nine-month period of 1999 was
3.64% and increased 18 basis points over the same margin in the prior year
period. These margin increases were directly the result of a decline in funding
cost rates and loan growth. The total deposit funding cost rate declined 59
basis points since the prior year nine-month period and was 4.64% for nine-month
period of 1999. The growth
- 12 -
in loans caused a higher proportion of average loans to average total earning
assets, and increased from 78% in the 1998 period to 84% in the 1999 period.
This improved loan proportion creates a higher net interest margin, as loans
earn interest at a higher rate than other earning assets. The year-to-date loan
yield declined 55 basis points to 8.50%, which was due to a lower average prime
lending rate of 7.87% in the year-to-date 1999 period versus and average prime
lending rate of 8.50% in the 1998 year-to-date period.
In early October 1998, the Company completed its 9.00% Cumulative Trust
Preferred Securities offering totaling $31.05 million, which is reflected as
long-term debt in the above tables. The effective rate of 9.46% is higher than
the 9.00% coupon rate of the securities as it reflects the amortization of
offering costs, including underwriting fees, legal and professional fees, and
other related costs. These securities are considered capital for regulatory
purposes and the interest is deductible for tax purposes. The proceeds from this
offering have provided for, and will continue to provide for, the Company's
growth and expansion.
The following table presents a reconciliation of the Company's tax-equivalent
net interest income, calculated on a tax equivalent basis, for the three and
nine-month periods between September 30, 1998 and September 30, 1999. 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 September 30, 1998 $ 9,896 $ 26,853
Change due to average earning assets fluctuations (volume).................... 2,876 7,339
Change due to interest rate fluctuations (rate)............................... (384) 543
Change due to rate/volume fluctuations (mix).................................. (89) 69
------------------- -------------------
Tax-equivalent net interest income for the period ended September 30, 1999 $ 12,299 $ 34,804
=================== ===================
NON-INTEREST INCOME
For the nine months ended September 30, 1999, non-interest income totaled $6.4
million and increased $762,000, or 13%, when compared to the same period in
1998. This increase was mainly the result of gains from the sale of premium
finance receivables, increased trust fees, higher levels of deposit service
charges, premium income from certain call option transactions and rental income
from leased equipment. Partially offsetting these increases was a decline in
fees from the sale of mortgage loans, as further explained below. The following
table presents non-interest income by category (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
----------------- ---------------- ---------------- ---------------
Fees on mortgage loans sold $ 533 $ 1,323 $ 2,750 $ 3,902
Service charges on deposit accounts 399 293 1,080 747
Trust fees 295 210 770 578
Gain on sale of premium finance receivables 377 - 640 -
Net securities gains 15 - 15 -
Other income 398 183 1,188 454
----------------- ---------------- ---------------- ---------------
Total non-interest income $ 2,017 $ 2,009 $ 6,443 $ 5,681
================= ================ ================ ===============
- 13 -
Fees on mortgage loans sold includes income from originating and selling
residential real estate loans into the secondary market, the majority of which
are sold without retaining servicing rights. For the quarter ended September 30,
1999, these fees totaled $533,000 and declined $790,000 from the 1998 quarterly
total of $1.3 million. For the nine months ended September 30, 1999, fees on
mortgage loans sold totaled $2.8 million and declined $1.2 million, or 30%, when
compared to the same period in 1998. These declines were due to lower mortgage
volumes and related refinancing activity caused by the recent increases in
mortgage interest rates. Accordingly, future fee income on mortgage loans sold
is not expected to be at the levels that were experienced in the last quarter of
1998.
During the third quarter of 1999, approximately $20 million of premium finance
receivables were sold to an unrelated third party and resulted in the
recognition of a $377,000 gain. On a year-to-date basis, a total of $640,000 in
gains were recognized from the sale of approximately $40 million of premium
finance receivables. It is possible that similar future sales of premium finance
receivables may occur depending on the level of new volume growth in relation to
the desired capacity within the Banks' loan portfolios.
Service charges on deposit accounts totaled $399,000 for the third quarter of
1999, an increase of $106,000, or 36%, when compared to the same quarter of
1998. For the first nine months of 1999, deposit service charges totaled $1.1
million and increased $333,000, or 45%, when compared to the same period of
1998. These increases were due to a higher deposit base and a larger number of
accounts at both the more mature banks and the newer de novo banks. 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.
Trust fees totaled $295,000 for the third quarter of 1999, an $85,000, or 40%,
increase over the same quarter of 1998. For the nine months ended September 30,
1999, trust fees totaled $770,000 and increased $192,000, or 33%, over the same
period of 1998. These increases were mainly the result of new business
development efforts generated from a larger staff of experienced trust officers.
The Company 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 a few
years. For further discussion of the start-up of WAMC and the expansion of trust
and investment services, please refer to the previous Overview and Strategy
section.
During 1999, the Company recognized premium income from certain call option
transactions totaling $13,000 and $249,000 for the three and nine-month periods
ended September 30, 1999, respectively. These transactions were designed to
utilize excess capital at certain banks, increase the total return associated
with holding certain securities as earning assets, and yield additional fee
income. This income is included in the category of other non-interest income in
the Consolidated Statements of Income, and was a significant factor for the
year-to-date increase in this category when compared to the prior year period.
Other non-interest income for the three and nine-month periods ended September
30, 1999 also included $105,000 and $212,000, respectively, of rental income
from equipment leased through the Medical and Municipal Funding division of the
Lake Forest Bank.
- 14 -
NON-INTEREST EXPENSE
Non-interest expense for the third quarter of 1999 totaled $9.4 million and
increased $791,000, or 9%, from the third quarter 1998 total of $8.6 million.
For the nine months ended September 30, 1999, non-interest expense totaled $28.5
million and increased $3.5 million, or 14%, when compared to the prior year
period, excluding the previously mentioned second quarter 1998 non-recurring
$1.0 million charge. The continued growth and expansion of the de novo banks and
the development of the new trust and investment subsidiary were the primary
causes for this increase. Since September 30, 1998, total deposits have grown
24% and total loan balances have risen 32%, 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,
------------------------------------ -----------------------------------
1999 1998 1999 1998
------------------- ---------------- ------------------ ----------------
Salaries and employee benefits $ 4,984 $ 4,565 $ 15,256 $ 14,353
Occupancy, net 743 589 2,088 1,765
Equipment expense 796 550 2,126 1,576
Data processing 551 440 1,544 1,234
Advertising and marketing 309 358 1,041 1,114
Professional fees 242 455 828 1,203
Other 1,805 1,682 5,611 4,793
=================== ================ ================== ================
Total non-interest expense $ 9,430 $ 8,639 $ 28,494 $ 26,038
=================== ================ ================== ================
Salaries and employee benefits expense for the third quarter of 1999 totaled
$5.0 million, an increase of $419,000, or 9%, from same quarter of 1998. For the
first nine months of 1999, salaries and employee benefits totaled $15.3 million
and increased $903,000, or 6%, when compared to the 1998 period. Approximately
$900,000 of the $1.0 million non-recurring charge recorded in 1998 related to a
severance accrual and, excluding this charge, the year-to-date increase over the
1998 period was $1.8 million, or 13%. These increases were primarily due to
growth in the Company and the hiring of experienced trust professionals for the
new WAMC subsidiary. As a percent of average total assets, on an annualized
basis, salaries and employee benefits were 1.41% for the first nine months of
1999, an improvement from 1.59% in the same period of 1998, excluding the
non-recurring charge.
For the third quarter of 1999, occupancy costs, equipment expense and data
processing increased $154,000 (26%), $246,000 (45%) and $111,000 (25%),
respectively, over the third quarter 1998 totals. For the first nine months of
1999, the respective increases were $323,000 (18%), $550,000 (35%) and $310,000
(25%). These increases were due mainly to the opening of new facilities, as
discussed in the Overview and Strategy section, and the general growth of the
Company's customer base.
Other non-interest expense for the nine months ended September 30, 1999 totaled
$5.6 million and increased $818,000, or 17%, due mainly to the opening of
several new banking facilities combined with the general growth of the Company
and its customer base, including the related higher levels of loan and deposit
activities. This category of expense includes the amortization of organizational
costs and intangible assets, loan expenses, correspondent bank service charges,
postage, insurance, stationary and supplies and other sundry expenses. This
category's year-to-date 1999 total included approximately $200,000 of previously
unamortized deferred organizational costs, which were expensed in the first
quarter of 1999 in connection with the required adoption
- 15 -
of Statement of Position 98-5, "Reporting on the Costs of Start-up Activities".
This new accounting principle, which became effective as of January 1, 1999,
required companies to write-off previously capitalized start-up costs and
expense future start-up costs as incurred. In the first nine months of 1998,
approximately $101,000 was expensed for the normal amortization of deferred
organizational costs.
Despite the Company's growth and the related increases in many of the
non-interest expense categories, the ratio of non-interest expense to total
average assets declined from 2.95% for the nine-month period ended September 30,
1998, exclusive of the previously mentioned non-recurring charge, to 2.63% for
the 1999 period, and is favorable to the Company's most recent peer group ratio.
In addition, the net overhead ratio for the first nine months of 1999 declined
to 2.03% as compared to the 1998 year-to-date ratio of 2.28%, excluding the
non-recurring charge. For the third quarter of 1999, this ratio improved to
1.91%, which is within management's previously stated performance goal range of
1.50% - 2.00%.
INCOME TAXES
The Company recorded income tax expense of $1.3 million for the three months
ended September 30, 1999 versus $118,000 for the same period of 1998. For the
first nine months of 1999, approximately $3.3 million of income tax expense was
recorded versus approximately $1.0 million of income tax benefits in the prior
year period. 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 become available, subject to certain limitations, to
offset tax expense generated from profitable operations. The income tax benefits
recorded in the 1998 periods 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.
Accordingly, unlike prior periods, the Company's results in 1999 and future
years will not benefit significantly from the recognition of net operating loss
carryforwards. The value of prior net operating losses recognized for financial
statement reporting purposes during for the first nine months of 1999 and 1998
was approximately $370,000 and $2.2 million, respectively.
OPERATING SEGMENT RESULTS
As shown in Note 5 to the Unaudited Consolidated Financial Statements, the
Company's operations consist of four primary segments: banking, premium finance,
indirect auto, 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 1999, the banking segment's net interest income totaled
$11.6 million, an increase of $2.5 million, or 27%, as compared to the $9.1
million recorded in the same quarter of 1998. On a year-to-date basis, the
banking segment net interest income totaled $32.6 million and increased $7.8
million, or 31%, as compared to the 1998 period. These increases were the direct
result of earning asset growth, particularly in the
- 16 -
loan portfolio, as earlier discussed in the Net Interest Income section. The
banking segment's non-interest income totaled $1.5 million for the third quarter
of 1999 and declined $405,000, or 21%, when compared to the prior year quarter.
This decline was due to a drop in fees on mortgage loans sold that was caused by
the recent rise in mortgage interest rates and the related lower levels of
refinancing activity. Partially offsetting the decline in mortgage fees were
increases in deposit service charges and rental income on equipment leases. On a
year-to-date basis, non-interest income totaled $5.4 million and increased
$25,000 when compared to the prior year period. Non-interest income increases
resulting from a combination of higher deposit service charges and fees on a
larger deposit base, call option premium income and leased equipment rental
income were offset by a lower level of fees on mortgage loans sold. The banking
segment's after-tax profit for the quarter ended September 30, 1999 totaled $2.7
million, an increase of $953,000 million, or 54%, as compared to the prior year
quarterly total of $1.8 million. For the first nine months of 1999, after-tax
operating profit for the banking segment totaled $7.6 million and increased $4.1
million, or 118%, over the same period in 1998. This improved profitability was
caused mainly from higher levels of net interest income created from the
continued growth and maturation of the more established de novo banks.
Net interest income from the premium finance segment totaled $3.1 million for
the quarter ended September 30, 1999, an increase of $456,000, or 17%, over the
$2.7 million recorded in the same quarter of 1998. On a year-to-date basis, the
premium finance segment net interest income totaled $9.4 million and increased
$2.3 million, or 33%, over the same period in 1998. Non-interest income for the
three and nine months ended September 30, 1999 totaled $377,000 and $640,000,
respectively, as a result of gains from the sale of premium finance receivables,
as mentioned earlier. After-tax profit for the premium finance segment totaled
$1.2 million and $3.2 million for the three and nine-month periods ended
September 30, 1999, respectively, and increased $617,000, or 105%, and $1.9
million, or 135%, respectively, over the same periods of 1998. These increases
were due mostly to higher levels of premium finance receivables created from new
product offerings and targeted marketing programs, the gain from the sale of
receivables and the control of servicing costs from enhanced systems
capabilities and capacity.
The indirect auto segment recorded $2.1 million of net interest income for the
third quarter of 1999, an increase of $652,000, or 45%, as compared to the 1998
quarterly total of $1.4 million. On a year-to-date basis, net interest income
totaled $6.0 million and increased $2.2 million, or 56% over the 1998 period.
After-tax segment profit totaled $775,000 and $2.2 million for the three and
nine-month periods ended September 30, 1999, respectively, increases of
$298,000, or 62%, and $968,000, or 80%, respectively, when compared to the same
periods of 1998. These increases were caused mainly by growth in outstanding
indirect auto loans resulting from higher origination volumes from both existing
dealers and new dealer relationships.
The trust segment recorded non-interest income of $295,000 for the third quarter
of 1999 as compared to $210,000 for the same quarter of 1998, an increase of
$85,000, or 40%. For the first nine months of 1999, non-interest income for the
trust segment totaled $770,000 and increased $192,000, or 33%, over the 1998
total. These increases were the result of new business development efforts by a
larger staff of experienced trust professionals that were hired in connection
with the start-up of WAMC. The trust segment after-tax loss totaled $134,000 and
$546,000 for the three and nine-month periods ended September 30, 1999,
respectively, as compared to after-tax totals of a $43,000 loss and $81,000 of
net income for the same periods of 1998, respectively. The increases in
after-tax segment losses were caused by the September 1998 start-up of WAMC and
the related salary and employee benefit costs of hiring experienced trust
professionals. As more fully discussed in the Overview and Strategy section of
this analysis, management expects a start-up phase for the trust segment of a
few years before its operations become profitable.
- 17 -
FINANCIAL CONDITION
Total assets were $1.56 billion at September 30, 1999, an increase of $321
million, or 26%, over the $1.24 billion a year earlier, and $217 million, or
16%, over the $1.35 billion at December 31, 1998. Growth at the newer de novo
banks 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
$1.47 billion at September 30, 1999, and increased $312 million, or 27%, over
the prior year, and $207 million, or 16%, since December 31, 1998. 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, 1999 December 31, 1998 September 30, 1998
------------------------------- ------------------------------ -----------------------------
Loans: Balance Percent Balance Percent Balance Percent
------------------ ------------ ------------------ ----------- ----------------- ----------
Commercial and commercial
real estate $ 447,365 31% $ 366,229 30% $ 312,853 28%
Premium finance, net 215,948 15 178,138 14 174,551 15
Indirect auto, net 257,030 18 209,983 17 188,490 17
Home equity 126,467 9 111,537 9 113,946 10
Residential real estate 108,220 8 91,525 7 84,646 7
Installment and other 47,226 3 34,650 3 33,790 3
------------------ ------------ ------------------ ----------- ----------------- ----------
Total loans, net of
unearned income 1,202,256 84 992,062 80 908,276 80
------------------ ------------ ------------------ ----------- ----------------- ----------
Securities and money
market investments 227,654 16 240,521 20 226,518 20
------------------ ------------ ------------------ ----------- ----------------- ----------
Total earning assets $ 1,429,910 100% $ 1,232,583 100% $ 1,134,794 100%
================== ============ ================== =========== ================= ==========
Earning assets as of September 30, 1999 increased $295 million, or 26%, over the
balance a year earlier, and $197 million, or 16%, over the balance at the end of
1998. The ratio of earning assets as a percent of total assets remained
consistent at 91% as of each reporting period date shown in the above table.
Total net loans were $1.20 billion at September 30, 1999, an increase of $210
million, or 21%, since December 31, 1998, and an increase of $294 million, or
32%, since September 30, 1998. Solid loan growth in the core commercial loan
portfolio and the specialty premium finance and indirect auto segment portfolios
were the main factors for these increases. Due to this growth, total net loans
comprised 84% of total earning assets at September 30, 1999 as compared to 80% a
year earlier and at the end of 1998. The loan-to-deposit ratio also increased to
almost 87% at September 30, 1999 versus 81% a year ago and at the end of 1998.
Commercial and commercial real estate loans, the largest loan category,
comprised 37% of total loans as of September 30, 1999 and has increased $134.5
million, or 43%, since September 30, 1998 and $81.1 million, or 22%, since the
end of 1998. The strong growth experienced over the past year has resulted
mainly from the low interest rate environment, a healthy economy and the hiring
of additional experienced lending officers.
- 18 -
Net indirect auto loans comprised 21% of total net loans as of September 30,
1999 and increased $68.5 million, or 36%, over a year ago, and $47.0 million, or
22%, over the end of 1998. These increases were primarily the result of business
development efforts that added new dealers to the established network of
metropolitan Chicago auto dealer relationships and the low interest rate
environment. 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.
Net premium finance receivables totaled $215.9 million at September 30, 1999 and
comprised 18% of the total loan portfolio. This total balance increased $41.4
million, or 24%, since September 30, 1998 and $37.8 million, or 21%, since the
end of 1998. This growth was primarily the result of increased market
penetration from new product offerings and targeted marketing programs. Over the
past few years, all premium finance receivables originated by FIFC were being
sold to the Banks and consequently remained an asset of the Company. During the
second and third quarters of 1999, and as a result of continued solid growth,
approximately $40 million of premium finance receivables were sold to an
unrelated third party at a gain of $640,000. In July 1999, FIFC signed a program
agreement with Dallas-based Premium Finance Holdings (PFH) to purchase premium
finance receivables originated by PFH, which is anticipated to add an estimated
$150 million to $200 million in annual volume to FIFC's existing business. With
this anticipated growth, it is possible the Company may continue to sell a
portion of new volume to unrelated third parties depending on the relationship
of growth to the desired capacity within the Banks' loan portfolios. All premium
finance receivables, however financed, are subject to the Company's stringent
credit standards, and substantially all such loans are made to commercial
customers.
Home equity loans totaled $126.5 million at September 30, 1999 and increased
$12.5 million, or 11%, since a year earlier and $14.9 million, or 13%, as
compared to the end of 1998. This category of loans has increased due mainly to
targeted marketing programs, 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. Unused commitments on home equity lines of
credit have increased $14.1 million, or 8.9%, over the balance at September 30,
1998 and totaled $173.2 million at September 30, 1999.
Residential real estate loans totaled $108.2 million as of September 30, 1999
and increased $23.6 million, or 28%, over a year ago and $16.7 million, or 18%,
since December 31, 1998. Mortgage loans held for sale are included in this
category and totaled $7.9 million as of September 30, 1999, $18.0 million as of
December 31, 1998 and $15.6 million as of September 30, 1998. 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 low mortgage interest rate environment
experienced until recently and related high levels of refinancing activity.
Securities and money market investments (i.e. federal funds sold and
interest-bearing deposits with banks) totaled $227.7 million at September 30,
1999, a decline of $12.9 million, or 5%, since December 31, 1998 and a slight
increase of $1.1 million, or 0.5%, since a year earlier. This category as a
percent of total earning assets has declined to 16% at September 30, 1999 versus
20% at both December 31, 1998 and September 30, 1998;
- - 19 -
the decline caused mainly from the continued solid growth in the loan portfolio.
The Company maintained no trading account securities at September 30, 1999 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 significant
growth in the development of de novo banks, it has been Wintrust's policy to
maintain its securities 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.
DEPOSITS
Total deposits at September 30, 1999 were $1.39 billion, an increase of $265
million, or 24%, over the September 30, 1998 total and an increase of $159
million, or 13%, since December 31, 1998. 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, 1999 December 31, 1998 September 30, 1998
--------------------------------- --------------------------------- --------------------------------
Percent Percent Percent
Balance of Total Balance of Total Balance of Total
----------------- -------------- ------------------ -------------- ------------------ -------------
Demand $ 125,870 9% $ 131,309 11% $ 106,090 9%
NOW 140,160 10 114,283 9 105,678 9
Money market 248,602 18 227,668 18 200,236 18
Savings 71,710 5 70,264 6 65,290 6
Certificates of deposit 802,100 58 685,630 56 646,462 58
----------------- -------------- ------------------ -------------- ------------------ -------------
Total $ 1,388,442 100% $ 1,229,154 100% $ 1,123,756 100%
================= ============== ================== ============== ================== =============
The percentage mix of deposits as of September 30, 1999 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 de novo
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, 1999, the Company's short-term borrowings totaled $40.0
million and consisted primarily of short-term repurchase agreements utilized to
leverage certain investment transactions within several banks' security
portfolios. At September 30, 1999, the Company also had $7.4 million outstanding
on its $40 million revolving credit line with an unaffiliated bank. The
outstanding balance on this credit line as of September 30, 1998 was $3.2
million, which was subsequently paid-off in October 1998 from the remaining
proceeds of the Company's Trust Preferred Securities offering, as more fully
explained below. 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, possible future acquisitions and for other general
corporate matters.
- 20 -
LONG-TERM DEBT - TRUST PREFERRED SECURITIES
At September 30, 1999, the long-term debt category consists of the Company's
$31.05 million of 9.00% Cumulative Trust Preferred Securities, which were
publicly sold in an offering that was completed in October 1998. The $27.5
million balance at September 30, 1998 relates to the offering proceeds received
prior to the October 9, 1998 completion of the $3.55 million over-allotment
portion of the offering. The proceeds were used to pay-off the outstanding
balance on the revolving credit line. The Trust Preferred Securities offering
has increased the Company's regulatory capital, has provided for the continued
growth of its banking and trust franchise, and will continue to provide for
growth and 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
cost-effective form of capital. See Note 4 to the Unaudited Consolidated
Financial Statements for further information on these Trust Preferred
Securities.
SHAREHOLDERS' EQUITY
Total shareholders' equity was $80.9 million at September 30, 1999 and increased
$7.7 million since September 30, 1998 and $5.6 million since the end of 1998.
These increases were created mostly from the retention of net income, offset
partially by net unrealized losses of the available-for-sale security portfolio.
The annualized return on average equity for the quarter ended September 30, 1999
increased to 12.46% as compared to 11.80% for the prior year period.
The following table reflects various consolidated measures of capital at
September 30, 1999, December 31, 1998 and September 30, 1998:
September 30, December 31, September 30,
1999 1998 1998
---------------------- ------------------- --------------------
Leverage ratio 7.0% 7.5% 8.0%
Ending tier 1 capital to risk-based asset ratio 7.8% 8.5% 9.0%
Ending total capital to risk-based asset ratio 8.6% 9.7% 9.9%
Dividend payout ratio 0.0% 0.0% 0.0%
The Company's capital ratios at September 30, 1999 were lower in comparison to
the ratios a year earlier due to continued asset growth, coupled with slow
capital growth caused primarily from expenses associated with the newer de novo
banks and the start-up of WAMC. 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, 1999, 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.
- 21 -
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, 1999 and 1998 is shown as follows
(dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------- ---------------- ----------------- ----------------
Balance at beginning of period $ 7,677 $ 5,856 $7,034 $ 5,116
Provision for possible loan losses 990 971 2,707 3,311
Charge-offs
Core banking loans 190 235 593 1,508
Indirect automobile loans 156 115 795 380
Premium finance receivables 193 62 383 359
------------------- ---------------- ----------------- ----------------
Total charge-offs 539 412 1,771 2,247
Recoveries
Core banking loans 9 14 19 176
Indirect automobile loans 33 19 61 32
Premium finance receivables 30 52 150 112
------------------- ---------------- ----------------- ----------------
Total recoveries 72 85 230 320
------------------- ---------------- ----------------- ----------------
Net charge-offs (467) (327) (1,541) (1,927)
------------------- ---------------- ----------------- ----------------
Balance at September 30 $ 8,200 $ 6,500 $8,200 $ 6,500
=================== ================ ================= ================
Loans at September 30 $1,202,256 $ 908,276
================= ================
Allowance as a percentage of loans 0.68% 0.72%
================= ================
Annualized net charge-offs as a percentage of average:
Core banking loans 0.12% 0.36%
Indirect automobile loans 0.42% 0.29%
Premium finance receivables 0.15% 0.21%
----------------- ----------------
Total loans 0.19% 0.32%
================= ================
Annualized provision for
possible loan losses 56.93% 58.20%
================= ================
- 22 -
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 economic conditions in the
market area.
The provision for possible loan losses totaled $990,000 for the third quarter of
1999, a slight increase from a year earlier. For the first nine months of 1999,
the provision totaled $2.7 million and declined $604,000 from the prior year
total. The higher provision in 1998 was necessary to cover increased loan
charge-offs that occurred at one banking office in early 1998. For the first
nine months of 1999, net charge-offs totaled $1.5 million and were down from the
$1.9 million of net charge-offs recorded in 1998. However, indirect automobile
loan net charge-offs for the first nine months of 1999 totaled $734,000 and
increased $386,000 when compared to the same period in 1998. These increased net
charge-offs occurred mainly in the second quarter of 1999 as a result of an
in-depth review of all problem credits and the implementation of a more
aggressive charge-off policy. On a ratio basis, annualized total net charge-offs
as a percentage of average total loans declined to 0.19% for the first nine
months of 1999 versus 0.32% in the same period of 1998.
Management believes the allowance for possible loan losses is adequate to cover
potential 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.
- 23 -
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,
1999 1998 1998
---- ---- ----
Past Due greater than 90 days
and still accruing:
Core banking loans $ 997 $ 800 $ 686
Indirect automobile loans 354 274 167
Premium finance receivables 1,337 1,214 778
--------------------- ---------------------- ---------------------
Total 2,688 2,288 1,631
--------------------- ---------------------- ---------------------
Non-accrual loans:
Core banking loans 1,139 1,487 3,387
Indirect automobile loans 369 195 129
Premium finance receivables 1,726 1,455 875
--------------------- ---------------------- ---------------------
Total non-accrual loans 3,234 3,137 4,391
--------------------- ---------------------- ---------------------
Total non-performing loans:
Core banking loans 2,136 2,287 4,073
Indirect automobile loans 723 469 296
Premium finance receivables 3,063 2,669 1,653
--------------------- ---------------------- ---------------------
Total non-performing loans 5,922 5,425 6,022
--------------------- ---------------------- ---------------------
Other real estate owned - 587 -
--------------------- ---------------------- ---------------------
Total non-performing assets $ 5,922 $ 6,012 $ 6,022
===================== ====================== =====================
Total non-performing loans by category as
a percent of its own respective category:
Core banking loans 0.29% 0.38% 0.75%
Indirect automobile loans 0.28% 0.22% 0.16%
Premium finance receivables 1.42% 1.50% 0.95%
--------------------- ---------------------- ---------------------
Total non-performing loans 0.49% 0.55% 0.66%
--------------------- ---------------------- ---------------------
Total non-performing assets as a
percentage of total assets 0.38% 0.45% 0.48%
Allowance for possible loan losses as
a percentage of non-performing loans 138.47% 129.66% 107.94%
- 24 -
Non-performing Core Banking Loans
Total non-performing loans for the Company's core banking business were $2.1
million, or 0.29%, of the Company's core banking loans as of September 30, 1999,
and were down from the ratios of 0.38% as of December 31, 1998, and 0.75% one
year ago. Although the outstanding core loan portfolio has increased 34% from a
year ago, the amount of non-performing core loans has declined 48% from the
prior year totals. Non-performing core banking loans consist primarily of a
small number of commercial and real estate loans, which management believes are
well secured and in the process of collection. In fact, about $455,000 of the
total relates to two residential real estate loans with appropriate advance
ratios that protect the Company from loss. 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
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 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 premium finance receivables
were $3.1 million, or 1.42% of total premium finance receivables, as of
September 30, 1999. This ratio compares favorably with the ratio of 1.50% at
December 31, 1998. The ratio fluctuates throughout the year due to the nature
and timing of canceled account collections from insurance carriers. It is
important to note that the ratio of losses is substantially less than the ratio
of non-performing assets indicated above. Please refer to the Allowance for
Possible Loan Losses table where annualized net charge-offs for the first nine
months of 1999 were only 0.15% of average premium finance receivables.
Non-performing Indirect Automobile Loans
Total non-performing indirect automobile loans were $723,000 at September 30,
1999. The ratio of these non-performing loans has increased slightly to 0.28% of
total indirect automobile loans at September 30, 1999 from 0.22% at December 31,
1998 and 0.16% at September 30, 1998. Despite the increase in the level of
non-performing loans, the ratios continue to be below standard industry ratios
for this type of loan category.
- 25 -
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, 1999 and
December 31, 1998 was approximately $11.3 million and $5.1 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.
YEAR 2000 READINESS DISCLOSURE
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. Like most financial service providers, the
Company may be significantly affected by the Year 2000 problem due to the nature
of financial information. Furthermore, if computer systems are not adequately
changed to properly identify the Year 2000, many computer applications could
fail or generate erroneous reports.
- 26 -
During 1997, management began the process of working with its two outside data
processors and other software vendors to ensure that the Company is prepared for
the Year 2000. Management has been in frequent contact with the outside data
providers and has developed the Company's testing strategy and Year 2000 plan
with the knowledge and understanding of each of the data providers' plans and
timetables. Final testwork by the Company of its outside data providers' Year
2000 compliance efforts was completed during the second quarter of 1999.
Additionally, critical in-house hardware and related systems, such as
workstations, file servers, the wide area network and all local area networks,
have been reviewed, upgraded, if necessary, and tested to be Year 2000
compliant. The completion of upgraded software installations, where previous
software versions were not Year 2000 compliant, has also been completed.
Customer assessments have also been completed and, based on those assessments,
no significant potential exposures have been identified.
The Company has finalized and tested its contingency plan and believes the
validation of this plan provides significant evidence that the Company is well
prepared for the Year 2000 date change. Currently, each of the Company's bank
subsidiaries are evaluating their cash needs in relation to possible additional
liquidity requirements that may occur during the remainder of 1999 or early in
the Year 2000. Management is also reviewing the overall liquidity position of
the Company.
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 preparedness planning for systems-related
Year 2000 issues. Total estimated Year 2000 compliance costs, incurred and to be
incurred, are not expected to exceed $200,000 and, accordingly, are not expected
to be material to the Company's financial position or results of operations in
any given year. This cost does not include internal salary and employee benefit
costs for persons that have responsibilities, or are involved, with the Year
2000 project.
The above estimated dates and costs are based on management's best estimates and
include assumptions of future events, including availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that current estimates will be achieved, and actual results
could differ significantly from these plans. In the event the Company does
experience Year 2000 systems failures or malfunctions and despite the testing
preparedness efforts, or if the outside data processors prove not to be Year
2000 compliant, the Company's operations would be disrupted until the systems
are restored, and the Company's ability to conduct its business may be adversely
impacted in connection with processing customer transactions related to its
banking operations. Management anticipates, however, that the contingency plans
developed and in place would enable the Company to continue to conduct
transactions on a manual basis, if necessary, for a limited period of time until
the Year 2000 problems are rectified. In addition, there can be no guarantee
that the systems of the Company's outside data providers, of which the Company
relies upon, will be timely converted, or that failure to convert would not have
a significant adverse impact to the Company.
- 27 -
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
financial results of 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 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 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
be in a start-up phase for approximately the next few 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 extent of the Company's preparedness efforts, and that of its outside
data processing providers, software vendors, and customers, in implementing
and testing Year 2000 compliant hardware, software and systems, and the
effectiveness of appropriate contingency plans that have been developed.
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 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.
- 28 -
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, 1999, the Company had $220 million notional principal amount
of interest rate cap contracts that mature in December 1999 ($100 million),
April 2000 ($60 million) and September 2000 ($60 million). These contracts were
purchased to mitigate the effect of rising rates on certain of its floating rate
deposit products and fixed rate loan products. During 1999, the Company also
entered into certain covered call option transactions related to certain
securities held by the Company. These transactions were designed to utilize
excess capital at certain banks and 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 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.
- 29 -
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, 1999.
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........ $522,756 $279,523 $357,934 $ 42,043 $ 1,202,256
Securities........................... 70,297 38,018 48,274 8,158 164,747
Interest-bearing bank deposits....... 1,132 2,614 - - 3,746
Federal funds sold................... 59,161 - - - 59,161
Other................................ - - - 134,969 134,969
--------------- ---------------- ---------------- -------------- -----------------
Total rate sensitive assets (RSA) 653,346 320,155 406,208 185,170 1,564,879
=============== ================ ================ ============== =================
Liabilities and Shareholders' Equity:
NOW.................................. 140,160 - - - 140,160
Savings and money market............. 284,390 - - 35,922 320,312
Time deposits........................ 363,989 329,278 108,104 729 802,100
Short term borrowings................ 40,025 - - - 40,025
Notes payable........................ 7,350 - - - 7,350
Demand deposits & other
liabilities....................... - - - 143,028 143,028
Trust preferred securities........... - - - 31,050 31,050
Shareholders' equity................. - - - 80,854 80,854
--------------- ---------------- ---------------- -------------- -----------------
Total rate sensitive liabilities
and equity (RSL)............... 835,914 329,278 108,104 291,583 1,564,879
=============== ================ ================ ============== =================
Cumulative gap, excluding interest
rate caps (GAP = RSA - RSL) (1) $(182,568) $ (191,691) $106,413 $ -
=============== ================ ================ ==============
Cumulative RSA/RSL (1).................. 0.78 0.84 1.08
RSA/Total assets........................ 0.42 0.20 0.26
RSL/Total assets (1).................... 0.53 0.21 0.07
GAP/Total assets (1).................... (12)% (12)% 7%
GAP/Cumulative RSA (1).................. (28)% (20)% 8%
- ------------------------------------------------------
<FN>
(1) The gap amount and related ratios do not reflect $220 million notional
amount of interest rate caps, as discussed on the following page.
</FN>
- 30 -
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, 1999, the Company had $220 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 12 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.
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, 1999, is as follows:
+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%
=============== ===============
- 31 -
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.
--------------------
One Form 8-K report as of September 17, 1999 was filed during the quarter and
announced the Company's signing of an agreement to acquire Tricom, Inc. of
Milwaukee, a financial and administrative service bureau to the staffing
industry.
- 32 -
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 12, 1999 /s/ Edward J. Wehmer
--------------------
President & Chief Executive Officer
Date: November 12, 1999 /s/ David A. Dykstra
--------------------
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 1999 /s/ Todd A. Gustafson
---------------------
Vice President - Finance
(Principal Accounting Officer)
- 33 -
EXHIBIT INDEX
Exhibit 27 Financial Data Schedule
- - 34 -