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, 1998
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, 8,149,946 shares, as of November 13, 1998.
<PAGE>
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. ______________________________________ 8-26
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks. __ 27-29
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings. ____________________________________________ 30
ITEM 2. Changes in Securities. ________________________________________ 30
ITEM 3. Defaults Upon Senior Securities. ______________________________ 30
ITEM 4. Submission of Matters to a Vote of Security Holders.___________ 30
ITEM 5. Other Information. ____________________________________________ 30
ITEM 6. Exhibits and Reports on Form 8-K. _____________________________ 30
Signatures ____________________________________________________ 31
Exhibit Index _________________________________________________ 32
<PAGE>
<TABLE>
<CAPTION>
PART I
ITEM 1 - FINANCIAL STATEMENTS
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(In thousands)
September 30, December 31, September 30,
1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and due from banks-noninterest bearing $ 28,048 $ 32,158 $ 34,871
Federal funds sold 18,250 60,836 75,077
Interest-bearing deposits with banks 10,231 85,100 50,023
Available-for-Sale securities, at fair value 193,037 101,934 64,705
Held-to-Maturity securities, at amortized cost 5,000 5,001 5,001
Loans, net of unearned income 908,276 712,631 694,152
Less: Allowance for possible loan losses 6,500 5,116 5,013
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans 901,776 707,515 689,139
Premises and equipment, net 53,165 44,206 39,894
Accrued interest receivable and other assets 32,451 14,894 12,478
Goodwill and organizational costs 1,598 1,756 1,782
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,243,556 $ 1,053,400 $ 972,970
====================================================================================================================================
Liabilities and Shareholders' Equity
Deposits:
Noninterest bearing $ 106,090 $ 92,840 $ 77,136
Interest bearing 1,017,666 824,861 804,174
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,123,756 917,701 881,310
Short-term borrowings -- 35,493 --
Notes payable 3,203 20,402 15,903
Accrued interest payable and other liabilities 15,942 11,014 8,841
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,142,901 984,610 906,054
- ------------------------------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of a wholly-owned subsidiary trust holding
solely subordinated debentures of the Company 27,500 -- --
Shareholders' equity:
Preferred stock -- -- --
Common stock 8,150 8,118 8,103
Surplus 72,878 72,646 72,502
Common stock warrants 100 100 100
Retained deficit (7,958) (12,117) (13,797)
Accumulated other comprehensive income (loss) (15) 43 8
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 73,155 68,790 66,916
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,243,556 $ 1,053,400 $ 972,970
====================================================================================================================================
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Nine Months Three Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
=====================================================================================================
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 54,645 $ 40,362 $ 20,045 $ 15,473
Interest=bearing deposits with banks 2,159 690 378 390
Federal funds sold 1,801 2,379 542 985
Securities 5,683 2,774 1,976 898
- -----------------------------------------------------------------------------------------------------
Total interest income 64,288 46,205 22,941 17,746
- -----------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 36,166 26,161 12,562 10,207
Interest on short=term borrowings and notes payable 1,335 663 506 199
- -----------------------------------------------------------------------------------------------------
Total interest expense 37,501 26,824 13,068 10,406
- -----------------------------------------------------------------------------------------------------
Net interest income 26,787 19,381 9,873 7,340
Provision for possible loan losses 3,311 2,512 971 958
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 23,476 16,869 8,902 6,382
- -----------------------------------------------------------------------------------------------------
Noninterest income
Fees on mortgage loans sold 3,902 1,610 1,323 625
Service charges on deposit accounts 747 553 293 227
Trust fees 578 471 210 162
Loan servicing fees = mortgage loans 114 69 43 26
Loan servicing fees - securitization -- 147 -- 4
Other 340 772 140 58
- -----------------------------------------------------------------------------------------------------
Total noninterest income 5,681 3,622 2,009 1,102
- -----------------------------------------------------------------------------------------------------
Noninterest expense
Salaries and employee benefits 14,353 10,401 4,565 3,532
Occupancy, net 1,765 1,434 589 497
Data processing 1,234 982 440 339
Advertising and marketing 1,114 932 358 360
Other 7,572 5,975 2,687 2,218
- -----------------------------------------------------------------------------------------------------
Total noninterest expense 26,038 19,724 8,639 6,946
- -----------------------------------------------------------------------------------------------------
Income before income taxes 3,119 767 2,272 538
Income tax expense (benefit) (1,040) (2,399) 118 (773)
- -----------------------------------------------------------------------------------------------------
Net income $ 4,159 $ 3,166 $ 2,154 $ 1,311
=====================================================================================================
Net income per common share = Basic $ 0.51 $ 0.41 $ 0.26 $ 0.16
=====================================================================================================
Net income per common share = Diluted $ 0.49 $ 0.39 $ 0.25 $ 0.15
=====================================================================================================
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands)
Accumulated
other
Compre- compre- Total
hensive Common Retained hensive shareholders'
income stock Surplus Warrants (deficit) income equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 6,603 $ 52,871 $ 100 $ (16,963) $ 9 $ 42,620
Comprehensive Income:
Net income $ 3,166 - - - 3,166 - 3,166
Other Comprehensive Income, net of tax
Unrealized losses, net of
reclassification adjustment (1) - - - - (1) (1)
------------
Comprehensive Income $ 3,165
------------
Common stock issued upon exercise
of stock options 102 652 - - - 754
Common stock issued in conjunction with
public offering, net of issuance costs 1,398 18,979 - - - 20,377
- ---------------------------------------- -----------------------------------------------------------------------------
Balance at September 30, 1997 $ 8,103 $ 72,502 $ 100 $ (13,797) $ 8 $ 66,916
- ---------------------------------------- -----------------------------------------------------------------------------
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, net of tax
Unrealized losses, 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
- ---------------------------------------- -----------------------------------------------------------------------------
Nine Months Ended September 30,
1998 1997
Disclosure of reclassification amount:
Unrealized holding losses arising during the period $ (58) $ (1)
Less: reclassification adjustment for losses included in net income - -
-------------------------
Unrealized losses on Available-for-Sale securities $ (58) $ (1)
-------------------------
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Nine Months Ended
September 30,
- ---------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 4,159 $ 3,166
Adjustments to reconcile net income to net cash
used for, or provided by, operating activities:
Provision for possible loan losses 3,311 2,512
Depreciation and amortization 2,118 1,709
Income tax benefit (1,040) (2,399)
Net accretion/amortization of securities (230) (332)
(Increase) decrease in other assets, net (16,603) 6,268
Increase (decrease) in other liabilities, net 4,928 (7,432)
- ---------------------------------------------------------------------------------------------
Net Cash Provided by (Used for) Operating Activities (3,357) 3,492
- ---------------------------------------------------------------------------------------------
Investing Activities:
Proceeds from maturities of Available-for-Sale securities 371,922 76,847
Purchases of Available-for-Sale securities (462,794) (71,833)
Net decrease (increase) in interest-bearing deposits with banks 74,869 (31,291)
Net increase in loans (197,572) (202,739)
Purchases of premises and equipment, net (10,891) (11,144)
- ---------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (224,466) (240,160)
- ---------------------------------------------------------------------------------------------
Financing Activities:
Increase in deposit accounts 206,055 263,281
Decrease in short-term borrowings, net (35,493) (7,058)
Proceeds from notes payable 7,501 11,700
Proceeds from company obligated mandatorily redeemable
preferred securities of a wholly-owned subsidiary trust holding
solely subordinated debentures of the Company 27,500 --
Repayment of notes payable (24,700) (17,854)
Common stock issued upon exercise of stock options 264 754
Issuance of common stock, net of issuance costs -- 20,377
- ---------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 181,127 271,200
- ---------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (46,696) 34,532
Cash and Cash Equivalents at Beginning of Period 92,994 75,416
- ---------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 46,298 $ 109,948
=============================================================================================
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
</TABLE>
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<PAGE>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The consolidated financial statements of Wintrust Financial Corporation and
Subsidiaries ("Wintrust" or "Company") presented herein are unaudited, but in
the opinion of management reflect all necessary adjustments for a fair
presentation of results as of the dates and for the periods covered by the
consolidated financial statements.
Wintrust is a financial services holding company currently engaged in the
business of providing community banking services through its banking
subsidiaries to customers in the Chicago metropolitan area and financing the
payment of commercial insurance premiums, on a national basis, through its
subsidiary, First Insurance Funding Corporation ("FIFC"). As of September 30,
1998, Wintrust had six wholly-owned bank subsidiaries (collectively, "Banks"),
all of which started as de novo institutions, including Lake Forest Bank & Trust
Company ("Lake Forest Bank"), Hinsdale Bank & Trust Company ("Hinsdale Bank"),
North Shore Community Bank & Trust Company ("North Shore Bank"), Libertyville
Bank & Trust Company ("Libertyville Bank"), Barrington Bank & Trust Company,
N.A. ("Barrington Bank") and Crystal Lake Bank & Trust Company, N.A. ("Crystal
Lake Bank"). FIFC is a wholly-owned subsidiary of Crabtree Capital Corporation
("Crabtree") which is a wholly-owned subsidiary of Lake Forest Bank. On
September 30, 1998, Wintrust received regulatory approval to operate a new trust
subsidiary, Wintrust Asset Management Company, N.A. ("WAMC"). This new
subsidiary will allow the Company to provide trust and investment services at
each of the Wintrust banks. Previously, the Company provided trust services
through the trust department of Lake Forest Bank.
The accompanying consolidated financial statements are unaudited and do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations or cash flows in accordance with
generally accepted accounting principles. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes included in the Company's Annual Report and Form 10-K for the year ended
December 31, 1997. Operating results for the three-month and 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 -
<PAGE>
(3) Earnings Per Share
------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 supersedes APB Opinion 15, "Earnings Per Share," and specifies the
computation, presentation and disclosure requirements for earnings per share
("EPS") for entities with publicly held common stock or potential common stock.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of this entity. SFAS No. 128 is effective for financial
statements for both interim and annual periods after December 15, 1997.
Accordingly, EPS amounts have been presented in accordance with SFAS No. 128 for
1998 periods and prior periods have been restated to conform to the requirements
of such statement. The following table shows the computation of basic and
diluted earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
----------------------------------- ---------------------------------------
1998 1997 1998 1997
---------------- ---------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Net income (A) $ 4,159 $ 3,166 $ 2,154 $ 1,311
================ ================ ================== ===================
Average common shares outstanding (B) 8,141 7,631 8,150 8,059
effect of dilutive common shares (C) 358 486 384 528
---------------- ---------------- ------------------ -------------------
Weighted average common shares and
effect of dilutive common shares (D) 8,499 8,117 8,534 8,587
================ ================ ================== ===================
Net income per average
common share - Basic (A/B) $ 0.51 $ 0.41 $ 0.26 $ 0.16
================ ================ ================== ===================
Net income per average
common share - Diluted (A/D) $ 0.49 $ 0.39 $ 0.25 $ 0.15
================ ================ ================== ===================
<FN>
(C) The effect of dilutive common shares outstanding result from stock options
and stock warrants being treated as if they had been exercised and are
computed by application of the treasury stock method.
</FN>
</TABLE>
- 6 -
<PAGE>
(4) Trust Preferred Securities
--------------------------
On September 29, 1998, the Company completed its initial offering of $27.5
million of 9.00% Cumulative Trust Preferred Securities, which is reflected in
the Consolidated Statements of Condition as a separate line-item entitled
"Company Obligated Mandatorily Redeemable Preferred Securities of a Wholly-Owned
Subsidiary Trust Holding Solely Subordinated Debentures of the Company". For
purposes of generally accepted accounting principles, these securities are
considered to be debt securities and not a component of shareholders' equity.
The proceeds from this offering were used to pay-down the Company's outstanding
debt under its existing line of credit, and reduced the remaining outstanding
notes payable balance to $3.2 million as of September 30, 1998. On October 9,
1998, the Company completed the sale of an additional $3.55 million of the Trust
Preferred Securities as a result of the exercise of an over-allotment option by
the underwriters. These additional proceeds were used to pay-off the remaining
outstanding notes payable balance in October 1998. The Trust Preferred
Securities offering has increased Wintrust's regulatory capital (see
Shareholders' Equity section of Item 2), and will provide for the continued
growth of its banking franchise and for possible future acquisitions of other
banks or finance related companies.
Wintrust Capital Trust I ("WCT"), a statutory business trust and wholly-owned
subsidiary of the Company that was formed solely for the purpose of the above
mentioned offering, issued a total of 1,242,000 Trust Preferred Securities,
including the over-allotment, at a price of $25 per security. These securities
represent preferred undivided beneficial interests in the assets of WCT, which
consist solely of 9.00% Subordinated Debentures issued by the Company to WCT in
the aggregate principal amount of $32,010,310. WCT has also issued $960,310 of
common securities, all of which are owned by the Company. Holders of the Trust
Preferred Securities are entitled to receive preferential cumulative cash
distributions at the annual rate of 9.00%, accumulating from September 29, 1998
and payable quarterly in arrears on the last day of each quarter, beginning
December 31, 1998. Subject to certain limitations, the Company has the right to
defer payment of interest at any time, or from time to time, for a period not to
exceed 20 consecutive quarters. The Trust Preferred Securities are subject to
mandatory redemption, in whole or in part, upon repayment of the Subordinated
Debentures at maturity or their earlier redemption. The Subordinated Debentures
will mature on September 30, 2028, which may be shortened to a date not earlier
than September 30, 2003, or extended to a date not later than September 30,
2047, in each case if certain conditions are met, and also only after the
Company has obtained Federal Reserve approval, if then required under applicable
guidelines or regulations.
(5) Comprehensive Income
--------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 was issued to address concerns over the practice of
reporting elements of comprehensive income directly in equity. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. SFAS No. 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed in equal prominence with the other financial statements. The
statement does not require a specific format for that financial statement but
requires a company to display an amount representing total comprehensive income
for the period in that financial statement. SFAS No. 130 is effective for both
interim and annual financial statements for periods beginning after December 15,
1997. Comparative financial statements for earlier periods must be reclassified
to reflect the provisions of this statement. The Company is disclosing
comprehensive income in the Consolidated Statements of Changes in Shareholders'
Equity.
- 7 -
<PAGE>
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,
1998, compared with December 31, 1997, and September 30, 1997, and the results
of operations for the three and nine month periods ended September 30, 1998 and
1997 should be read in conjunction with the Company's unaudited consolidated
financial statements and notes contained in this report. This discussion
contains forward-looking statements that involve risks and uncertainties and, as
such, future results could differ significantly from management's current
expectations. See the last section of this discussion for further information on
forward-looking statements.
OVERVIEW
The Company's operating subsidiaries were organized within the last eight years
in an effort to fulfill a financial services need in the banking and insurance
premium financing industries. Lake Forest Bank, Hinsdale Bank, North Shore Bank,
Libertyville Bank, Barrington Bank and Crystal Lake Bank began operations in
December 1991, October 1993, September 1994, October 1995, December 1996 and
December 1997, respectively. Subsequent to those initial dates of operations,
each of the Banks, except Barrington Bank and Crystal Lake Bank have established
additional full-service banking facilities. FIFC began operations in 1990 and is
primarily engaged in the business of financing insurance premiums written
through independent insurance agents or brokers on a national basis for
commercial customers. On September 30, 1998, the Company received regulatory
approval to operate WAMC as a separately chartered trust subsidiary, that will,
over time, offer trust and investment services to customers at many of
Wintrust's banking locations.
In December 1997, the Company opened the Crystal Lake Bank in a temporary
location, and in September 1998, the Bank moved into its permanent location in
downtown Crystal Lake. A full-service facility of Hinsdale Bank was opened in
November 1997 in Western Springs, Illinois and branch facilities of North Shore
Bank were opened in early 1998 in Glencoe and Wilmette, Illinois. In October
1998, the Libertyville Bank opened a new branch facility that is located in
south Libertyville, which is near Vernon Hills, Illinois. Expenses related to
these new operations and the establishment of WAMC impact only 1998 operating
results for the periods that are presented herein.
The historical performance of the Company has been affected by costs associated
with growing market share in deposits and loans, establishing new de novo banks,
opening new branch facilities, and building an experienced management team. The
Company's financial performance over the past several years reflects improving
financial performance of the Banks as they mature, offset by the significant
costs of opening new banks and branch facilities. The Company's experience has
been that it generally takes 13-24 months for new banking offices to first
achieve operational profitability. Similarly, management currently expects a
start-up phase for WAMC of approximately two years before its operations become
profitable.
While committed to a continuing growth strategy, management's current focus is
to balance further asset growth with earnings growth by seeking to more fully
leverage the existing capacity within each of the Banks and FIFC. 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. In addition to Lake
Forest Bank's July 1998 acquisition of a small business engaged in medical and
municipal equipment leasing, the Company may pursue acquisitions of
- 8 -
<PAGE>
other specialty finance businesses that generate assets that are suitable for
bank investment and/or secondary market sales. To further balance growth with
increased earnings, management also intends to focus on reducing the cost of
deposits, particularly in the older banks that have more established customer
bases.
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 will be able to offer trust
and investment management services in all Wintrust bank communities. 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 will be adding permanent
trust professionals at North Shore Bank, Hinsdale Bank and Barrington Bank. As
in the past, Lake Forest Bank will continue to have a full complement of trust
professionals.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for the quarter ended September 30, 1998 totaled $2.2 million or
$0.25 per diluted common share, compared to $1.3 million, or $0.15 per diluted
common share, for the third quarter of 1997. For the nine months ended September
30, 1998, net income totaled $4.2 million, or $0.49 per diluted common share,
compared to $3.2 million, or $0.39 per diluted common share, for the same period
of 1997.
In the second quarter of 1998, net income was unfavorably impacted by the
previously reported non-recurring $1.0 million pre-tax charge related to
severance amounts due to the Company's former Chairman and Chief Executive
Officer and certain related legal fees. Excluding this charge, on an after-tax
basis, net income for the nine month period ended September 30, 1998 would have
been $4.8 million, or $0.56 per diluted common share, an increase of $1.6
million, or 51%, over the same period in 1997.
A significant factor contributing to the quarterly and year-to-date net income
for both 1998 and 1997 was the recognition of income tax benefits from the
realization of previously unvalued tax loss benefits. For the nine months ended
September 30, 1998 and 1997, the Company recorded income tax benefits of $1.0
million and $2.4 million, respectively. For the quarter ended September 30,
1998, the Company recorded $118,000 of net tax expense, and for the quarter
ended September 30, 1997, recorded $773,000 of tax benefits. These income tax
benefits reflect management's determination that certain of the Company's
subsidiaries' earnings history and projected future earnings were sufficient to
make a judgment that the realization of a portion of the net deferred tax assets
not previously recognized was more likely than not to occur. See the Income
Taxes section later in this discussion for further information.
Excluding the impact of income tax benefits and the second quarter 1998 $1.0
million non-recurring pre-tax charge, the Company recorded operating income of
$4.1 million and $767,000 in the first nine months of 1998 and 1997,
respectively. In the third quarters of 1998 and 1997, exclusive of income tax
benefits, operating income totaled $2.3 million and $538,000, respectively. The
improvement in operating results was due to the enhanced performance of the
Company's more established subsidiaries.
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<PAGE>
NET INTEREST INCOME
Net interest income is defined as the difference between interest income and
fees on earning assets and interest expense on deposits and borrowings. The
related net interest margin represents the net interest income on a tax
equivalent basis as a percentage of average earning assets during the period.
The following table presents a summary of Wintrust's net interest income and
related net interest margin for the nine months ended September 30, 1998 and
1997, calculated on a tax equivalent basis (dollars in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997
------------------------------------------ ------------------------------------------
Average Interest Rate Average Interest Rate
----------------- -------------- --------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks $ 50,415 $ 2,159 5.72% $ 16,670 $ 690 5.52%
Federal funds sold 44,628 1,801 5.40 58,644 2,379 5.41
Investment securities (1) 133,297 5,683 5.70 68,067 2,779 5.44
Loans, net of unearned income (1) 808,009 54,711 9.05 598,138 40,409 9.01
----------------- -------------- --------- --------------- --------------- ----------
Total earning assets 1,036,349 64,354 8.30% 741,519 46,257 8.32%
----------------- -------------- --------- --------------- --------------- ----------
Interest-bearing deposits 924,048 36,166 5.23% 659,164 26,161 5.29%
Notes payable, trust preferred
securities and short-term borrowings 26,559 1,335 6.72 13,325 663 6.63
----------------- -------------- --------- --------------- --------------- ----------
Total interest-bearing liabilities $ 950,607 $ 37,501 5.27% $ 672,489 $ 26,824 5.32%
----------------- -------------- --------- --------------- --------------- ----------
Tax equivalent net interest income $ 26,853 $ 19,433
============== ===============
Net interest spread 3.03% 3.00%
========= ==========
Net interest margin 3.46% 3.49%
========= ==========
- -------------------------------
<FN>
(1) Interest income on tax advantaged investment securities and loans reflect a
tax equivalent adjustment based on a marginal federal corporate tax rate of
34%. The total tax equivalent adjustment reflected in the above table is
$66,000 and $52,000 in 1998 and 1997, respectively.
</FN>
</TABLE>
While the year-to-date 1998 net interest margin of 3.46% is slightly lower in
comparison to the 1997 margin of 3.49%, the third quarter 1998 net interest
margin, as shown on the following page, was 3.61% and shows improvement over
both the third quarter 1997 margin of 3.47% and the first and second quarter
1998 margins of 3.27% and 3.45%, respectively. This improvement was due to lower
deposit rates and continued loan growth, which has caused the mix of average
loans to average earning assets to increase from 74% in the first quarter of
1998 to 81% in the most recent quarter. In comparison to the first nine months
of 1997, yields on earning assets for the same period in 1998 have declined 2
basis points to 8.30%, however, the rate paid on interest-bearing deposits
improved from 5.29% in 1997 to 5.23% in 1998.
The Company's net interest margin is low compared to industry standards
primarily for the following reasons. First, as de novo banking institutions,
Wintrust's subsidiary banks have been aggressive in providing competitive loan
and deposit interest rates to the communities that they serve in order to
develop significant market share. In addition, newer de novo banks typically
have lower loan-to-deposit ratios than more established banks, as loan growth is
slower to develop in new markets than deposit growth.
- 10 -
<PAGE>
The following table presents a summary of Wintrust's net interest income and
related net interest margin for the three months ended September 30, 1998 and
1997, calculated on a tax equivalent basis (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
------------------------------------------ ------------------------------------------
Average Interest Rate Average Interest Rate
----------------- -------------- --------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks $ 26,692 $ 378 5.62% $ 28,392 $ 390 5.45%
Federal funds sold 40,328 542 5.33 70,642 985 5.53
Investment securities (1) 137,895 1,976 5.69 67,808 898 5.25
Loans, net of unearned income (1) 883,515 20,068 9.01 674,260 15,491 9.12
----------------- -------------- --------- --------------- --------------- ----------
Total earning assets 1,088,430 22,964 8.37% 841,102 17,764 8.38%
----------------- -------------- --------- --------------- --------------- ----------
Interest-bearing deposits 969,591 12,562 5.14% 749,464 10,207 5.40%
Notes payable, trust preferred
securities and short-term borrowings 30,447 506 6.59 12,856 199 6.14
----------------- -------------- --------- --------------- --------------- ----------
Total interest-bearing liabilities $ 1,000,038 $13,068 5.18% $ 762,320 $ 10,406 5.42%
----------------- -------------- --------- --------------- --------------- ----------
Tax equivalent net interest income $ 9,896 $ 7,358
============== ===============
Net interest spread 3.19% 2.96%
========== ==========
Net interest margin 3.61% 3.47%
========== ==========
- -------------------------------
<FN>
(1) Interest income on tax advantaged investment securities and loans reflect a
tax equivalent adjustment based on a marginal federal corporate tax rate of
34%. The adjustment reflected in the above table is $23,000 and $18,000 in
1998 and 1997, respectively.
</FN>
</TABLE>
For the third quarter of 1998, the yield on earning assets of 8.37% remained
relatively constant with the 1997 third quarter yield of 8.38%. The rate paid on
interest-bearing deposits, however, improved from 5.40% in the third quarter of
1997 to 5.14% in the third quarter of 1998, due to both a general decline in
rates and less aggressive deposit pricing in the markets of the more mature
banks that have already established significant market share. Management's
continued focus on deposit pricing at the more mature banks may result in
further improvements in the net interest margin.
The following table presents a reconciliation of Wintrust's net interest income,
calculated on a tax equivalent basis, for the three and nine month periods
between September 30, 1997 and September 30, 1998. The reconciliation sets forth
the change in the net interest income as a result of changes in volumes, changes
in rates and the change due to the combination of volume and rate changes (in
thousands):
<TABLE>
<CAPTION>
Three Month Nine Month
Period Period
------ ------
<S> <C> <C> <C> <C>
Tax equivalent net interest income for the periods ended September 30, 1997............ $ 7,358 $ 19,433
Change due to average earning assets fluctuations (volume)......................... 2,163 7,696
Change due to interest rate fluctuations (rate).................................... 297 (166)
Change due to rate/volume fluctuations (mix)....................................... 78 (110)
-----------------------------
Tax equivalent net interest income for the periods ended September 30, 1998... $ 9,896 $ 26,853
=============================
</TABLE>
- 11 -
<PAGE>
NONINTEREST INCOME
For the third quarter of 1998, noninterest income increased $907,000, or 82%,
over the prior year quarter and totaled $2.0 million. Total noninterest income
for the first nine months of 1998 was $5.7 million, an increase of $2.1 million,
or 57%, over 1997. The year-to-date increase would have been $2.7 million, or
88%, if not for the approximately $600,000 of proceeds from the settlement of a
lawsuit in 1997. The following table presents noninterest income by category (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------------------- ------------------------------------
1998 1997 1998 1997
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Fees on mortgage loans sold $3,902 $ 1,610 $1,323 $ 625
Service charges on deposit accounts 747 553 293 227
Trust fees 578 471 210 162
Loan servicing fees - mortgage loans 114 69 43 26
Loan servicing fees - securitization - 147 - 4
Securities gains, net - - - -
Other income 340 772 140 58
---------------- ---------------- ---------------- ---------------
Total noninterest income $5,681 $ 3,622 $2,009 $1,102
================ ================ ================ ===============
</TABLE>
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. These fees rose $2.3 million, or
142%, in the first nine months of 1998 and totaled $3.9 million. For the third
quarter of 1998, fees totaled $1.3 million and increased $698,000 over the 1997
third quarter. These strong increases were the result of a favorable mortgage
interest rate environment and related high levels of refinancing activity,
coupled with a healthy residential real estate market.
Increased deposit balances resulted in a higher level of service charges, which
increased $194,000, or 35%, for the first nine months of 1998 when compared to
1997, and totaled $747,000. For the third quarter of 1998, deposit service
charges totaled $293,000, and increased $66,000, or 29%, over the same quarter
of 1997. The majority of deposit service charges relate to 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 increased in the first nine months of 1998 and totaled $578,000, a
$107,000 or 23% increase over the 1997 period. For the third quarter of 1998,
trust fees totaled $210,000 and increased $48,000, or 30%, over the third
quarter of 1997, as a result of new business development efforts.
Management believes that its bank facilities are located in some of the best
trust markets in Illinois and that current market areas will support WAMC's
product offerings that are principally designed for the small-to-mid size trust
or investment account. Services typically will include traditional trust
products and services, as well as investment management, financial planning and
401(k) management services. The Company will begin introducing these services at
each of the Banks over the next few years, beginning with fourth quarter 1998
openings at North Shore Bank, Hinsdale Bank and Barrington Bank. As mentioned
earlier, the Lake Forest Bank previously operated a trust department for many
years and will continue to offer trust services, as well as new product
offerings, under the WAMC name.
- 12 -
<PAGE>
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 two
years, and that trust fees should increase to levels sufficient to absorb the
overhead of WAMC.
Other noninterest income for the first nine months of 1998 totaled $340,000, a
decline of $432,000 from the same period in 1997. This decrease was primarily
related to approximately $600,000 of proceeds from the settlement of a lawsuit
in 1997. For the third quarter of 1998, other noninterest income totaled
$140,000, an increase of $82,000 over the prior year quarter due mainly to safe
deposit rental income and other services added at the newer banks, coupled with
lease rental income from the new medical and municipal equipment leasing
division of the Lake Forest Bank.
Loan servicing fees from securitization in the 1997 periods were derived from
the former practice of selling premium finance loans to a third-party
securitization facility. These sales resulted in gains on the sale of such loans
and generated servicing fees. Since the fourth quarter of 1996, all loans
originated have been sold to the Company's subsidiary banks and, accordingly,
income earned by FIFC in conjunction with the sale and servicing of these loans
has been eliminated as an inter-company transaction.
NONINTEREST EXPENSE
Noninterest expense for the third quarter of 1998 totaled $8.6 million, an
increase of $1.7 million or 24% over the third quarter of 1997. For the first
nine months of 1998, total noninterest expense was $26.0 million, an increase of
$6.3 million or 32%, over the same period in 1997. Included in the increase for
the first nine months of 1998 was a $1.0 million non-recurring pre-tax charge
that was recorded in the second quarter of 1998, as mentioned earlier. Excluding
this non-recurring charge, total noninterest expense for the first nine months
of 1998 would have increased $5.3 million or 27%, over the same period in 1997.
The following table presents noninterest expense by category (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months
September 30, Ended September 30,
------------------------------------ ---------------------------------------
1998 1997 1998 1997
----------------- ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 14,353 $ 10,401 $ 4,565 $ 3,532
Occupancy, net 1,765 1,434 589 497
Data processing 1,234 982 440 339
Advertising and marketing 1,114 932 358 360
Other 7,572 5,975 2,687 2,218
----------------- ----------------- ------------------- ------------------
Total noninterest expense $ 26,038 $ 19,724 $ 8,639 $ 6,946
================= ================= =================== ==================
</TABLE>
The increases in noninterest expense were predominantly caused by the continued
growth of the Company. Since September 30, 1997, total deposits have grown 28%
and total loan balances have risen 31%, requiring higher levels of staffing and
other costs to both originate and service the larger customer base.
- 13 -
<PAGE>
Salaries and employee benefits for the third quarter of 1998 totaled $4.6
million, an increase of $1.0 million, or 29%, from the same quarter of 1997. For
the first nine months of 1998, salaries and employee benefits totaled $14.4
million and increased $4.0 million, or 38%, over the 1997 period. Approximately
$900,000 of the $1.0 million non-recurring charge mentioned earlier relates to a
severance accrual and, excluding this charge, the year-to-date increase over the
1997 period would have been $3.1 million, or 29%.
The increases in salaries and employee benefits were directly caused by higher
staffing levels necessary to support the growth of the Company including 1) the
Crystal Lake Bank that was opened in December 1997, 2) a new full-service
facility located in Western Springs that opened in November 1997, 3) two branch
facilities, in Wilmette and Glencoe, that began operations in early 1998, 4) the
formation of WAMC as a separate trust company, 5) the addition of the new
medical and municipal equipment leasing division in July 1998, and 6) additional
staffing to service the larger deposit and loan portfolios.
Net occupancy expenses for the nine months ended September 30, 1998 totaled $1.8
million, an increase of $331,000, or 23%, compared to the same period in 1997.
For the third quarter of 1998, the increase was $92,000, or 19%, over the same
quarter in 1997. These increases were due primarily to the opening of new
facilities, as discussed above.
Data processing expenses totaled $1.2 million for the first nine months of 1998,
an increase of $252,000, or 26%, when compared to the same period in 1997. For
the third quarter of 1998, data processing expenses totaled $440,000 and
increased $101,000, or 30%, over the same 1997 quarter. These increases are due
primarily to additional transactional charges related to the larger deposit and
loan portfolios, which increased approximately 28% and 31%, respectively, as of
September 30, 1998 when compared to September 30, 1997. Additionally, the 1998
totals include data processing costs related to the Crystal Lake Bank, which was
opened in December 1997.
Advertising and marketing expenses totaled $1.1 million for the first nine
months of 1998, an increase of $182,000, or 20%, over the same period of 1997.
For the third quarter of 1998, total advertising and marketing expenses were
$358,000 as compared to $360,000 in the same quarter of 1997. The year-to-date
increase over 1997 was predominantly caused by higher levels of marketing costs
that were necessary to attract loans and deposits at the new Crystal Lake Bank
and other new branch facilities, and to introduce new loan promotions at FIFC.
Management anticipates continued increases in this expense category as Wintrust
continues to expand its base of customers and market additional banking and
trust products and services.
Other noninterest expenses for the nine months ended September 30, 1998 totaled
$7.6 million, an increase of $1.6 million, or 27%, over the same prior year
period. For the third quarter of 1998, other noninterest expense totaled $2.7
million, an increase of $469,000, or 21%, over the same quarter of 1997. This
category includes expenses incurred for audits and examinations, amortization of
organizational costs and other intangible assets, correspondent bank service
charges, insurance, legal fees, postage, stationery and supplies and other
sundry expenses. The increase in this category of expenses is generally a result
of the Company's expansion activities, including the origination and servicing
of a larger base of deposit and loan accounts. Other noninterest expense as a
percentage of total average assets, on an annualized basis, was 0.89% in 1998,
an improvement from 0.99% in 1997.
- 14 -
<PAGE>
Despite the increases in various noninterest expense categories, the Company's
year-to-date ratio of total noninterest expense to total average assets,
excluding the non-recurring 1998 charge, declined to 2.95% in 1998 from 3.26% in
1997, reflecting management's commitment to maintaining low overhead costs while
providing superior customer service. Additionally, Wintrust's net overhead ratio
of 2.28% for the first nine months of 1998, excluding the non-recurring charge,
compares favorably to the nine month 1997 ratio of 2.66%, and is comparable to
peer group ratios.
INCOME TAXES
The Company recorded income tax benefits of $1.0 million and $2.4 million for
the nine months ended September 30, 1998 and 1997, respectively. Prior to the
September 1, 1996 merger transaction that formed Wintrust, each of the merging
companies, except Lake Forest Bank, had net operating losses and, based upon the
start-up nature of the organization, there was not sufficient evidence to
justify the full realization of the net deferred tax assets generated by those
losses. Accordingly, during 1996, certain valuation allowances were established
against deferred tax assets with the combined result being that a minimal amount
of federal tax expense or benefit was recorded. As the entities become
profitable, the recognition of previously unvalued tax loss benefits become
available, subject to certain limitations, to offset tax expense generated from
profitable operations. The income tax benefit recorded in 1998 and 1997
reflected management's determination that certain of the subsidiaries' earnings
history and projected future earnings were sufficient to make a judgment that
the realization of a portion of the net deferred tax assets not previously
valued was more likely than not to occur. Management anticipates that full
recognition of the net operating losses, for financial accounting purposes, will
be complete by year-end 1998 and the Company will be fully-taxable during 1999.
- 15 -
<PAGE>
FINANCIAL CONDITION
Total assets were $1.24 billion at September 30, 1998, an increase of $270.6
million, or 28%, over the $973.0 million a year earlier, and $190.2 million, or
18%, over the $1.05 billion at December 31, 1997. This growth was caused by
higher deposit levels at the newer de novo banks and continued market share
growth at the other banks. These deposit increases were utilized to fund growth
in the loan portfolio, as noted below. Shareholders' equity rose to $73.2
million at September 30, 1998, an increase of $4.4 million from the December 31,
1997 balance, due primarily to the Company's net income for the first nine
months of 1998.
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):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
------------------ ------------ ----------------- ----------- ---------------- ------------
Loans: Balance Percent Balance Percent Balance Percent
------------------ ------------ ----------------- ----------- ---------------- ------------
Commercial and commercial
<S> <C> <C> <C> <C> <C> <C>
real estate $ 312,853 28% $235,483 25% $237,095 27%
Premium finance, net 174,551 15 128,453 13 129,100 15
Indirect auto, net 188,490 17 138,784 14 129,050 15
Home equity 113,946 10 116,147 12 110,042 12
Residential real estate 84,646 7 61,611 6 58,498 6
Installment and other 33,790 3 32,153 4 30,367 3
------------------ ------------ ----------------- ----------- ---------------- ------------
Total loans, net of
unearned income 908,276 80 712,631 74 694,152 78
------------------ ------------ ----------------- ----------- ---------------- ------------
Securities and money
market investments 226,518 20 252,871 26 194,806 22
------------------ ------------ ----------------- ----------- ---------------- ------------
Total earning assets $ 1,134,794 100% $965,502 100% $888,958 100%
================== ============ ================= =========== ================ ============
</TABLE>
Total loans were $908.3 million at September 30, 1998, an increase of $195.6
million, or 27%, from $712.6 million at December 31, 1997, and an increase of
$214.1 million, or 31%, from September 30, 1997. Loan growth has been mainly in
the commercial, premium finance and indirect auto loan categories, resulting in
the loan portfolio comprising 80% of total earning assets as of September 30,
1998 as compared to 78% a year earlier.
Commercial and commercial real estate loans, the largest loan category,
comprised 28% of total loans as of September 30, 1998 and has increased $77.4
million, or 33%, since December 31, 1997 and $75.8 million, or 32%, since
September 30, 1997. These increases were generally due to the low rate
environment, healthy economy and the hiring of additional experienced lending
officers. Net premium finance loans totaled $174.6 million at September 30,
1998, an increase of $46.1 million, or 36%, since December 31, 1997. This growth
was primarily due to increased market penetration from new product offerings and
targeted marketing programs. Net indirect auto loans totaled $188.5 million as
of September 30, 1998, an increase of $49.7 million, or 36%, since December 31,
1997, and an increase of $59.4 million, or 46%, since September 30, 1997. These
increases were primarily the result of business development efforts that added
new dealers to the network of auto dealer relationships and the low interest
rate environment. The indirect auto portfolio consists of high
- 16 -
<PAGE>
quality new and used auto loans and does not include sub-prime loans. Sub-prime
loans are generally made to individuals with impaired credit histories at
generally higher interest rates, and accordingly, involve higher levels of
credit risk that the Company is not willing to accept. The total of home equity
loans has remained relatively constant when compared to the prior year dates,
despite the large volume of home equity loans that have been refinanced into
first mortgage loans over the past year as a result of low mortgage loan
interest rates. In addition, unused commitments on home equity lines of credit
have increased $54.3 million, or 52%, over the balance at September 30, 1997 and
totaled $159.1 million at September 30, 1998.
Securities and money market investments (i.e. federal funds sold and
interest-bearing deposits with banks) totaled $226.5 million at September 30,
1998, a decline of $26.4 million from the December 31, 1997 balance, and an
increase of $31.7 million since the September 30, 1997 balance. As of September
30, 1998, total securities and money market investments were comprised of 18% in
U.S. Treasury and government agency securities, 69% in other debt and equity
securities, 5% in short-term interest-bearing deposits with banks and 8% in
overnight federal funds sold. The Company maintained no trading account
securities at September 30, 1998 or in any of the other previous reporting
periods.
The balances of securities and money market investments fluctuate based upon
deposit inflows and loan demand. As a result of anticipated significant growth
in the development of de novo banks, it has been Wintrust's policy to maintain
its investment portfolio in short-term, liquid, and diversified high credit
quality investments at the Banks in order to facilitate the funding of quality
loan demand as it emerges and to keep the Banks in a liquid condition in the
event that deposit levels fluctuate. Furthermore, since short-term investment
yields are comparable to long-term investment yields in the current interest
rate environment, there is little incentive to invest in securities with
extended maturities.
DEPOSITS
Total deposits at September 30, 1998 were $1.12 billion, an increase of 22% over
the December 31, 1997 deposit total of $917.7 million and an increase of 28%
since the September 30, 1997 total of $881.3 million. The following table sets
forth, by category, the composition of deposit balances and the relative
percentage of total deposits as of the date specified (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997 September 30, 1997
--------------------------------- --------------------------------- --------------------------------
Percent Percent Percent
Balance of Total Balance of Total Balance of Total
----------------- -------------- ------------------ -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 106,090 9% $ 92,840 10% $ 77,136 9%
NOW 105,678 9 83,301 9 76,917 9
Money market 200,236 18 154,893 17 149,436 17
Savings 65,290 6 61,445 7 55,758 6
Certificates of deposit 646,462 58 525,222 57 522,063 59
----------------- -------------- ------------------ -------------- ----------------- --------------
Total $ 1,123,756 100% $ 917,701 100% $881,310 100%
================= ============== ================== ============== ================= ==============
</TABLE>
The mix of deposits as of September 30, 1998 has remained relatively consistent
with the mix shown as of the prior year dates. Growth has been due primarily to
higher deposit levels at the newer de novo banks and branches, and continued
success of marketing the Company's deposit products at the more established
banks, which has increased deposit market share.
- 17 -
<PAGE>
SHAREHOLDERS' EQUITY
Shareholders' equity grew $4.4 million to $73.2 million at September 30, 1998,
from $68.8 million at December 31, 1997. The primary components of the change in
shareholders' equity are net income for the first nine months of 1998 and, to a
lesser extent, the exercise of certain common stock options.
The following table reflects various consolidated measures of capital at
September 30, 1998, December 31, 1997 and September 30, 1997:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1998 1997 1997
---------------------- ------------------- --------------------
<S> <C> <C> <C>
Leverage ratio 8.0% 6.6% 7.3%
Ending tier 1 capital to risk-based asset ratio 9.0% 8.7% 8.6%
Ending total capital to risk-based asset ratio 9.9% 9.4% 9.3%
Dividend payout ratio 0.0% 0.0% 0.0%
</TABLE>
The Company's capital ratios as of September 30, 1998 were higher in comparison
to the earlier dates presented due to the September 1998 Trust Preferred
Securities offering, as discussed in Note 4 of the Notes to Unaudited
Consolidated Financial Statements in Item 1 of this report. The continued asset
growth of the Company, coupled with slow capital growth primarily due to
expenses associated with the newer de novo banks, necessitated additional
capital to both support the growth and maintain the Company in the "adequately
capitalized" category for total risk-based capital. Partially for this reason,
the Company issued the Trust Preferred Securities, which qualify as regulatory
capital under Federal Reserve guidelines. 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%. As of September 30, 1998,
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, as the ratio of 9.9% was slightly
below the "well capitalized" minimum of 10.0%.
In early October 1998, the Company's regulatory capital increased $3.55 million
from the completion of the sale of additional Trust Preferred Securities
pursuant to the underwriters' over-allotment option, as more fully discussed in
Note 4 of the Notes to Unaudited Consolidated Financial Statements in Item 1 of
this report. If this over-allotment option would have been completed in
September 1998, the total risk-based capital ratio would have been approximately
10.3% and the Company would have been in the "well capitalized" category.
- 18 -
<PAGE>
ASSET QUALITY
ALLOWANCE FOR POSSIBLE LOAN LOSSES
A reconciliation of the activity in the balance of the allowance for possible
loan losses for the nine and three month periods is shown as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 5,116 $ 3,636 $ 5,856 $ 4,432
Provision for possible loan losses 3,311 2,512 971 958
Loans charged-off
- -----------------
Core banking loans 1,508 343 235 234
Premium finance 359 722 62 136
Indirect auto 380 155 115 63
--------- --------- --------- ---------
Total loans charged-off 2,247 1,220 412 433
--------- --------- --------- ---------
Recoveries
- ----------
Core banking loans 176 42 14 22
Premium finance 112 36 52 27
Indirect auto 32 7 19 7
--------- --------- --------- ---------
Total recoveries 320 85 85 56
--------- --------- --------- ---------
Net loans charged off (1,927) (1,135) (327) (377)
--------- --------- --------- ---------
Balance at September 30 $ 6,500 $ 5,013 $ 6,500 $ 5,013
========= ========= ========= =========
Loans at September 30 $ 908,276 $ 694,152
========= =========
Allowance as a percentage of loans 0.72% 0.72%
========= =========
Annualized net charge-offs as a percentage of average:
Core banking loans 0.36% 0.10%
Premium finance 0.21% 0.84%
Indirect auto 0.29% 0.18%
--------- ---------
Total loans 0.32% 0.25%
========= =========
Annualized provision for
possible loan losses 58.20% 45.18%
========= =========
</TABLE>
- 19 -
<PAGE>
Management believes that the loan portfolio is well diversified and well
secured, without undue concentration in any specific risk area. Control of loan
quality is continually monitored by management and is reviewed by the Banks'
Board of Directors and their Credit Committees on a monthly basis. Independent
external review of the loan portfolio is provided by the examinations conducted
by regulatory authorities and an independent loan review performed by an entity
engaged by the Board of Directors. The amount of additions to the allowance for
possible loan losses, which are charged to earnings through the provision for
possible loan losses, are determined based on a variety of factors, including
actual charge-offs during the year, historical loss experience, delinquent and
other potential problem loans, and an evaluation of current and prospective
economic conditions in the market area.
Net charge-offs of core banking loans during the first nine months of 1998
totaled $1.3 million, of which approximately $815,000 was attributable to loans
originated at one banking office and reflect what management believes to be an
isolated problem that has been resolved through the dismissal of the lending
officer involved and a subsequent thorough review of all credits originated
under his authority. Management continues to be actively involved with each of
the credits at this office and presently believes that all material losses have
been recorded. Annualized core loan net charge-offs as a percentage of average
core loans were 0.36% in 1998 as compared to 0.10% in 1997, the increase due to
the charge-offs noted above.
Premium finance loan net charge-offs for the nine months ended September 30,
1998 totaled $247,000 as compared to the $686,000 recorded in the same period of
1997. On an annualized basis, net charge-offs were 0.21% of average premium
finance loans in 1998 versus 0.84% in 1997. This improvement was the result of
an enhanced management team and the implementation of additional collection
procedures and system upgrades.
Indirect auto loan net charge-offs totaled $348,000 for the first nine months of
1998 as compared to $148,000 in the same period of 1997. Net charge-offs as a
percentage of average indirect auto loans, on an annualized basis, were 0.29% in
1998 in comparison to 0.18% in 1997. Although net charge-offs have increased
over the prior year, the level of net charge-offs continues to be lower than the
normal industry experience levels for this type of loan portfolio. The amount of
total non-performing indirect auto loans, as shown in the following section, is
also below normal industry levels.
The provision for possible loan losses totaled $971,000 for the third quarter of
1998 and $3.3 million for the first nine months of 1998, increases of $13,000
and $799,000, respectively, over the same periods of 1997. The year-to-date
increase was necessary to cover higher loan charge-offs, as mentioned above, and
also to maintain the allowance for possible loan losses at an appropriate level,
considering the growth experienced in the portfolio.
As of September 30, 1998, the allowance for possible loan losses as a percentage
of total loans was 0.72%, an increase from 0.69% as of June 30, 1998, and
equivalent to the percentages as of December 31, 1997 and September 30, 1997.
Management has a goal of increasing the allowance level over the next two years
to at least 1.00% of total loans, which will bring the ratio closer to the
Company's peer group ratio. Management believes that the allowance for possible
loan losses is adequate to provide for any potential losses in the portfolio.
- 20 -
<PAGE>
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):
<TABLE>
<CAPTION>
September 30, June 30, December 31, September 30,
1998 1998 1997 1997
-------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Past Due greater than 90 days
and still accruing:
Core banking loans $ 686 $ 1,311 $ 868 $ 611
Premium finance loans 778 897 887 1,081
Indirect auto loans 167 45 11 9
-------------------- ----------------- ------------------ -----------------
1,631 2,253 1,766 1,701
-------------------- ----------------- ------------------ -----------------
Non-accrual loans:
Core banking loans 3,387 * 3,841 782 277
Premium finance loans 875 1,484 1,629 2,597
Indirect auto loans 129 74 29 40
-------------------- ----------------- ------------------ -----------------
4,391 5,399 2,440 2,914
-------------------- ----------------- ------------------ -----------------
Total non-performing loans:
Core banking loans 4,073 5,152 1,650 888
Premium finance loans 1,653 2,381 2,516 3,678
Indirect auto loans 296 119 40 49
-------------------- ----------------- ------------------ -----------------
6,022 7,652 4,206 4,615
-------------------- ----------------- ------------------ -----------------
Other real estate owned - - - -
-------------------- ----------------- ------------------ -------------------
Total non-performing assets $ 6,022 $ 7,652 $ 4,206 $ 4,615
==================== ================= ================== ===================
Total non-performing loans by
category as a percent of its own
respective category:
Core banking loans 0.75% 0.99% 0.37% 0.21%
Premium finance loans 0.95% 1.42% 1.96% 2.85%
Indirect auto loans 0.16% 0.07% 0.03% 0.04%
-------------------- ----------------- ------------------ -------------------
Total loans 0.66% 0.90% 0.59% 0.66%
-------------------- ----------------- ------------------ -------------------
Total non-performing assets as a
percentage of total assets 0.48% 0.65% 0.40% 0.47%
Allowance for possible loan losses as
a percentage of non-performing loans 107.94% 76.53% 121.64% 108.64%
-------------------------------
<FN>
* In October 1998, a $2.6 million non-accrual loan was paid-off, without
loss, from the sale of the underlying real estate collateral to an
unrelated third party, with a portion of the sale being financed through
the Company.
</FN>
</TABLE>
- 21 -
<PAGE>
Non-performing Core Banking Loans
Total non-performing loans for the Company's core banking business were $4.1
million or 0.75% of the Company's core banking loans as of September 30, 1998,
an improvement from the $5.2 million or 0.99% of core banking loans as of June
30, 1998. In October 1998, the single largest non-performing loan at $2.6
million was paid-off, without loss, from the sale of the underlying real estate
collateral to an unrelated third party, with a portion of the sale being
financed through the Company. The remaining $1.5 million of non-performing loans
was comprised of a variety of smaller commercial loans and management believes
each of these loans are well secured and in the process of collection. The small
number of 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 Loans
Another significant category of non-performing loans is premium finance loans.
Due to the nature of the collateral, it customarily takes 60-150 days to convert
the collateral into cash collections. Accordingly, it is important to note that
the level of non-performing premium finance loans is not necessarily indicative
of the loss inherent in the portfolio. In financing insurance premiums, the
Company does not assume the risk of loss normally borne by insurance carriers.
Typically the insured buys an insurance policy from an independent insurance
agent or broker who offers financing through FIFC. The insured makes a down
payment of approximately 15% to 25% of the total premium and signs a premium
finance agreement with FIFC for the balance due, which amount FIFC disburses
directly to the insurance carrier or its agents to satisfy the unpaid premium
amount. As the insurer earns the premium ratably over the life of the policy,
the unearned portion of the premium secures payment of the balance due to FIFC
by the insured. Under the terms of FIFC's standard form of financing contract,
FIFC has the right to cancel the insurance policy if there is a default in the
payment on the finance contract and to collect the unearned portion of the
premium from the insurance carrier. In the event of cancellation of a policy,
the cash returned in payment of the unearned premium by the insurer should
generally be sufficient to cover the loan balance, the interest and other
charges due as well. In the event an insurer becomes insolvent and unable to pay
claims to an insured or refund unearned premiums upon cancellation of a policy
to a finance company, each state provides a state guaranty fund that will pay
such a refund, less a per claim deductible in certain states. FIFC diversifies
its financing activities among a wide range of brokers and insurers. Due to the
notification requirements and the time to process the return of the unearned
premium by most insurance carriers, many loans will become delinquent beyond 90
days while the processing of the unearned premium refund to the Company occurs.
Management continues to accrue interest until maturity as the unearned premium
by the insurance carrier is ordinarily sufficient to pay-off the outstanding
principal and contractual interest due.
Total non-performing premium finance loans as of September 30, 1998 were
approximately $1.7 million or 0.95% of total outstanding premium finance loans.
This is an improvement from 1.42% as of June 30, 1998 and 1.96% as of December
31, 1997, and is primarily the result of management's implementation of
additional collection procedures and upgraded systems. Management believes the
level of net charge-offs is acceptable based on an average gross yield from
premium finance loan interest and late fees of approximately 12%.
- 22 -
<PAGE>
Non-performing Indirect Auto Loans
Total non-performing indirect auto loans were $296,000 at September 30, 1998 as
compared to $119,000 at June 30, 1998 and $40,000 as of the end of 1997.
Although the total has increased, these loans as a percent of total indirect
automobile loans were 0.16% at September 30, 1998 as compared to 0.07% at June
30, 1998 and 0.03% at December 31, 1997, in management's view still well below
standard industry ratios for this type of loan category. These individual loans
comprise smaller dollar amounts and collection efforts are active.
Potential Problem Loans
In addition to those loans disclosed under "Past Due Loans and Non-performing
Assets," there are certain loans in the portfolio which management has
identified, through its problem loan identification system, which exhibit a
higher than normal credit risk. However, these loans are still considered
performing and, accordingly, are not included as 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, 1998 and
December 31, 1997 were approximately $2.5 million and $7.2 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,
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.
- 23 -
<PAGE>
YEAR 2000 ISSUE
A critical issue has emerged in the banking industry and generally for all
industries that are heavily reliant upon computers regarding how existing
software application programs and operating systems can accommodate the date
value for the "Year 2000." The Year 2000 issue is the result of computer
programs being written using two digits (rather than four) to define the
applicable year. As such, certain programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, the year 1999 (i.e. `99') could be the maximum date value these systems
will be able to accurately process. 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 create erroneous results.
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. Preliminary testing by the Company of its outside data providers'
Year 2000 compliance efforts has already taken place and it is expected that
final testwork will be completed in early 1999. Additionally, critical in-house
hardware and related systems are being reviewed and upgraded, if necessary, to
be Year 2000 compliant. Testing of these critical hardware systems, such as
workstations, file servers, the wide area network and all local area networks,
is expected to be completed no later than June 30, 1999. The completion of
upgraded software installations, where previous software versions were not Year
2000 compliant, is presently scheduled to be completed by December 31, 1998. The
Company is also in the process of completing customer assessments to determine
whether any potential exposure exists, and expects to complete this step by
early 1999.
The Company has not yet completed a contingency plan, however, a plan is in
development with applicable testing anticipated to be completed by March 31,
1999. The Company is regulated by the Federal Reserve Bank, the Office of the
Comptroller of the Currency and the State of Illinois bank regulatory agency,
all of which are active in monitoring preparedness planning for systems-related
Year 2000 issues. Total estimated Year 2000 compliance costs 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 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
have a significant adverse impact to the Company.
SHAREHOLDER RIGHTS PLAN
On July 28, 1998, the Company's Board of Directors adopted a Shareholder Rights
Plan ("Rights Plan") in which preferred stock purchase rights were distributed
as a dividend at the rate of one right for each share of the Company=s
outstanding common stock to shareholders of record as of the close of business
on August 7, 1998. Implementation of the Rights Plan is not expected to have any
measurable impact on the Company's financial condition or results of operations.
- 24 -
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 131:
- ----------------------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 was issued in
response to requests from financial statement users for additional and improved
segment information. The statement requires a variety of disclosures to better
explain and reconcile segment
data so that a user of the financial statements can be better enabled to
understand the information and its limitations within the context of the
consolidated financial statements. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years is to be restated, unless
it is impracticable to do so. SFAS No. 131 need not be applied to interim
financial statements in the initial year of its application, but comparative
information for interim periods in the initial year of application shall be
reported in financial statements for interim periods in the second year of
application. The Company will present this new statement's required disclosures
in its December 31, 1998 audited financial statements. The Company has yet to
determine its segments and related disclosures.
AICPA Accounting Standards Executive Committee Statement of Position 98-5:
- --------------------------------------------------------------------------
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities"
("SOP 98-5"). SOP 98-5 requires that the unamortized portion of previously
capitalized start-up costs be written-off as a cumulative effect of a change in
accounting principle upon adoption of SOP 98-5. Subsequent to adoption of the
statement, start-up and organization costs must be expensed as incurred. SOP
98-5 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company will implement the statement in the first quarter
of 1999 and the pre-tax impact will be less than $225,000.
Statement of Financial Accounting Standards No. 133:
- ----------------------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes, for the first time, comprehensive accounting
and reporting standards for derivative instruments and hedging activities.
Previous accounting standards and methodologies did not adequately address the
many derivative and hedging transactions in the current financial marketplace
and, as such, the Securities and Exchange Commission, and other organizations,
urged the FASB to deal expeditiously with the related accounting and reporting
problems. The accounting and reporting principles prescribed by this standard
are complex and will significantly change the way entities account for these
activities. This new standard requires that all derivative instruments be
recorded in the statement of condition at fair value. The recording of the gain
or loss due to changes in fair value could be either reported in earnings or as
other comprehensive income in the statement of shareholders' equity, depending
on the type of instrument and whether or not it is considered a hedge. This
standard is effective for the Company as of January 1, 2000. The Company has not
yet determined the impact this new statement may have on its future financial
condition or its results of operations.
- 25 -
<PAGE>
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act of
1934, as amended. Such forward-looking statements may be deemed to include,
among other things, statements relating to anticipated improvements in financial
performance and management's long-term performance goals, as well as statements
relating to the Company's business and growth strategies, including anticipated
internal growth, plans to form additional de novo banks and to open new branch
offices, and to pursue additional potential development or acquisition of banks
or specialty finance businesses. Actual results could differ materially from
those addressed in the forward-looking statements as a result of numerous
factors, including the following:
o The level of reported net income, return on average assets and return on
average equity for the Company will in the near term continue to be
impacted by start-up costs associated with de novo bank formations, branch
openings, and expanded trust operations. De novo banks may typically
require 13 to 24 months of operations before becoming profitable, due to
the impact of organizational and overhead expenses, the 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 services through the Company's
new trust subsidiary, WAMC, is expected to be in a start-up phase for
approximately the next two years, at which time the operations are
expected to first become 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 on any existing loans or leases that may become
uncollectible, there can be no assurance that the allowance will prove
sufficient to cover actual loan or lease losses in the future.
o If market interest rates should move contrary to the Company's gap
position on interest earning assets and interest bearing liabilities, the
"gap" will work against the Company and its net interest income may be
negatively affected.
o The financial services business is highly competitive which may affect the
pricing of the Company's loan and deposit products as well as its
services.
o The Company's ability to adapt successfully to technological changes to
compete effectively in the marketplace.
o The extent of the Company's success, and that of its outside data
processing providers, software vendors, and customers, in implementing and
testing Year 2000 compliant hardware, software and systems, along with
having appropriate contingency plans in place.
o Changes in the economic environment may influence the growth rate of loans
and deposits and also the quality of the loan portfolio.
- 26 -
<PAGE>
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As a continuing part of its financial strategy, the Company attempts to manage
the impact of fluctuations in market interest rates on its net interest income.
This effort entails providing a reasonable balance between interest rate risk,
credit risk, liquidity risk and maintenance of yield. Asset-liability management
policies are established and monitored by management in conjunction with the
boards of directors of the Banks, subject to general oversight by the Company's
Board of Directors. The policy establishes guidelines for acceptable limits on
the sensitivity of the market value of assets and liabilities to changes in
interest rates.
Derivative Financial Instruments
One method utilized by financial institutions to limit market risk is to enter
into derivative financial instruments. A derivative financial instrument
includes interest rate swaps, interest rate caps and floors, futures, forwards,
option contracts and other financial instruments with similar characteristics.
The Company had not previously entered into any such derivative financial
instruments until the third quarter of 1998, when the Company entered into a 15
month interest rate cap contract, with a notional amount of $100 million, to
mitigate the effect of rising rates on certain of its floating rate deposit
products and fixed rate loan products.
Commitments To Extend Credit And Standby Letters Of Credit
In addition, the Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated statements of condition. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation on any
condition established in the contract. Commitments may require collateral from
the borrower if deemed necessary by the Company and generally have a fixed
expiration date. Standby letters of credit are conditional commitments issued by
the Banks to guarantee the performance of a customer to a third party up to a
specified amount and with specific terms and conditions. Commitments to extend
credit and standby letters of credit are not recorded as an asset or liability
by the Company until the instrument is exercised.
Interest Rate Sensitivity Analysis
Interest rate sensitivity is the fluctuation in earnings resulting from changes
in market interest rates. Wintrust continuously monitors not only the
organization's current net interest margin, but also the historical trends of
these margins. In addition, Wintrust also attempts to identify potential adverse
swings in net interest income in future years, as a result of interest rate
movements, by performing computerized simulation analysis of potential interest
rate environments. If a potential adverse swing in net interest margin and/or
net income are identified, management then would take appropriate actions within
its asset/liability structure to counter these potential adverse situations.
Please refer to the "Net Interest Income" section for further discussion of the
net interest margin.
The Company's exposure to market risk is reviewed on a regular basis by
management and the boards of directors of the individual subsidiaries and the
Company. The objective is to measure the effect on net income and to adjust
balance sheet and off-balance sheet instruments to minimize the inherent risk
while at the same time maximize income. Tools used by management include a
standard gap report and a rate simulation model whereby changes in net income
are measured in the event of various changes in interest rate indices. An
institution with more assets
- 27 -
<PAGE>
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 estimated interest
rate sensitivity and periodic and cumulative gap positions as calculated as of
September 30, 1998.
<TABLE>
<CAPTION>
TIME TO MATURITY OR REPRICING
-----------------------------
0-90 91-365 1-5 Over 5
Days Days Years Years Total
---- ---- ----- ----- -----
(Dollars in thousands)
Assets:
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income. $419,496 $232,341 $229,189 $ 27,250 $ 908,276
Securities........................... 167,957 24,635 - 5,445 198,037
Interest-bearing bank deposits....... 7,981 2,250 - - 10,231
Federal funds sold................... 18,250 - - - 18,250
Other................................ - - - 108,762 108,762
--------------- --------------- ---------------- -------------- -----------------
Total rate sensitive assets (RSA) 613,684 259,226 229,189 141,457 1,243,556
--------------- --------------- ---------------- -------------- -----------------
Liabilities and Shareholders' Equity:
NOW.................................. 105,678 - - - 105,678
Savings and money market............. 253,566 - - 11,960 265,526
Time deposits........................ 314,163 242,768 89,531 - 646,462
Short term borrowings................ - - - - -
Notes payable........................ 3,203 - - - 3,203
Demand deposits & other
liabilities......................... 3,172 - - 118,860 122,032
Trust preferred securities........ - - - 27,500 27,500
Shareholders' equity................. - - - 73,155 73,155
--------------- --------------- ---------------- -------------- -----------------
Total rate sensitive liabilities
and equity (RSL)............... 679,782 242,768 89,531 231,475 $ 1,243,556
--------------- --------------- ---------------- -------------- -----------------
Cumulative gap
(GAP = RSA - RSL)..................... $(66,098) $(49,640) $ 90,018 $ -
--------------- --------------- ---------------- --------------
RSA/RSL................................. 0.90 1.07 2.56
RSA/Total assets........................ 0.49 0.21 0.18
RSL/Total assets........................ 0.55 0.20 0.07
GAP/Total assets........................ (5)% (4)% 7%
GAP/RSA................................. (11)% (6)% 8%
</TABLE>
The above table does not reflect the impact of the $100 million notional amount
interest rate cap that was entered into during July 1998 to mitigate potential
exposure to rising rates on certain of the Company's floating rate deposit
products and fixed rate loan products.
- 28 -
<PAGE>
While the gap position illustrated above is a useful tool that management can
assess for general positioning of the Company's and its subsidiaries' balance
sheets, it is only as of a point in time. Management uses an additional
measurement tool to evaluate its asset/liability sensitivity which determines
exposure to changes in interest rates by measuring the percentage change in net
income due to changes in rates over a two-year time horizon. Management measures
its exposure to changes in interest rates using many different interest rate
scenarios. One interest rate scenario utilized is to measure the percentage
change in net income assuming an instantaneous permanent parallel shift in the
yield curve of 200 basis points, both upward and downward. This analysis also
includes the impact of the recently purchased $100 million notional amount
interest rate cap, which is designed to mitigate the effect of rising rates on
certain floating rate deposit products and fixed rate loan products. Utilizing
this measurement concept, the interest rate risk of the Company, expressed as a
percentage change in net income over a two-year time horizon due to changes in
interest rates, at September 30, 1998, is as follows:
<TABLE>
<CAPTION>
+200 Basis -200 Basis
Points Points
<S> <C> <C>
Percentage change in net income due to an immediate 200 basis point change in
interest rates over a two-year time horizon........ 2.8% -4.7%
=============== ===============
</TABLE>
- 29 -
<PAGE>
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.
This item has been omitted from this Form 10-Q since it is inapplicable or would
contain a negative response.
ITEM 5: OTHER INFORMATION.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
4 Rights Agreement between Wintrust Financial Corporation and Illinois
Stock Transfer Company, as Rights Agent, dated July 28, 1998
(incorporated by reference to Exhibit 4.1 to the Company's Form 8-A
Registration Statement (No. 000-21923) filed with the Securities and
Exchange Commission on August 28, 1998).
10 Third Amendment to Loan Agreement between Wintrust Financial
Corporation and LaSalle National Bank, dated September 1, 1998.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
On August 28, 1998, the Company filed a Form 8-K to provide information relating
to the implementation of its shareholder rights plan.
- 30 -
<PAGE>
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 13, 1998 /s/ Edward J. Wehmer
President & Chief Executive Officer
Date: November 13, 1998 /s/ David A. Dykstra
Executive Vice President
& Chief Financial Officer
(Principal Accounting Officer)
- 31 -
<PAGE>
EXHIBIT INDEX
Exhibit 4 Rights Agreement
Exhibit 10 Third Amendment to Loan Agreement
Exhibit 27 Financial Data Schedule
- 32 -
<PAGE>
THIRD AMENDMENT TO
LOAN AGREEMENT
THIS THIRD AMENDMENT TO LOAN AGREEMENT dated as of September 1, 1998
(this "Amendment"), is between WINTRUST FINANCIAL CORPORATION, an Illinois
corporation (the "Borrower"), and LASALLE NATIONAL BANK, a national banking
association (the "Bank").
WITNESSETH:
WHEREAS, the Borrower and the Bank entered into a Loan Agreement dated
as of September 1, 1996, as amended by a First Amendment thereto dated March 1,
1997 and a Second Amendment thereto dated September 1, 1997 (collectively, the
"Agreement"); and
WHEREAS, the Borrower and the Bank desire to amend the Agreement as more
fully described herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. All capitalized terms used herein without definition
shall have the respective meanings set forth in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
2.1 Amendment to the first "WHEREAS" clause of the Agreement. The
-----------------------------------------------------------
first "WHEREAS" clause of the Agreement is hereby amended as of the date hereof
by deleting it in its entirety and replacing it with the following:
"WHEREAS, the Borrower desires to borrow from LaSalle up to the sum of
FORTY MILLION DOLLARS ($40,000,000) in order to support the Borrower's
working capital needs;"
2.2 Amendment to Section I of the Agreement. Section 1 of the
------------------------------------------- ----------
Agreement is hereby amended as of the date hereof by deleting the figure "THIRTY
MILLION DOLLARS ($30,000,000)" and substituting therefor the figure "FORTY
MILLION DOLLARS ($40,000,000)".
2.3 Amendment to Section 3 of the Agreement. Section 3 of the
------------------------------------------- ----------
Agreement is hereby amended as of the date hereof by deleting the figure "THIRTY
MILLION DOLLARS ($30,000,000)" and substituting therefor the figure "FORTY
MILLION DOLLARS ($40,000,000)".
<PAGE>
2.4 Amendment to Section 3(a) of the Agreement. Section 3(a) of the
------------------------------------------ ------------
Agreement is hereby amended as of the date hereof by deleting it in its entirety
and replacing it with the following:
"(a) Interest on amounts outstanding under the Note shall be payable
quarterly, in arrears, commencing on December 1, 1998 and continuing on the
first day of each March, June, September and December thereafter. A final
payment of all outstanding amounts due under the Note including, but not limited
to principal, interest and any amounts owing under Subsection 10(m) of this
Agreement, if not payable earlier, shall be due and payable on September 1,
1999. The amounts outstanding under the Note from time to time shall bear
interest calculated on the actual number of days elapsed on the basis of a 360
day year, at a rate equal, at the Borrower's option, to either (a) the London
Inter-Bank Offered Rate ("LIBOR") plus 125 basis points, or (b) the Prime Rate
(whichever rate is so selected, the "Interest Rate")."
2.5 Amendment to Section 7(b) of the Agreement. Section 7(b) of the
------------------------------------------ ------------
Agreement is hereby amended as of the date hereof by deleting subsections (d)
and (e) and replacing them with the following:
" (d) maintain such capital as is necessary to cause the
Borrower to be classified as an "adequately capitalized" institution in
accordance with the regulations of the Federal Reserve Bank, currently
measured on the basis of information filed by Borrower in its quarterly
Consolidated Report of Income and Condition (the "Call Report") as
follows:
(i) Total Capital to Risk-Weighted Assets of not
less than 8 %;
(ii) Tier I Capital to Risk-Weighted Assets of
not less than 4%; and
(iii) Tier I Capital to average Total Assets of
not less than 4% (For the purposes of this
subsection (d)(iii), the average Total
Assets shall be determined on the basis of
information contained in the preceding four
(4) Call Reports);
(e) cause the Borrower, on a consolidated basis, to maintain
tangible equity capital of no less than $60,000,000. For the purposes
of this Section 7(e), "tangible equity capital" shall mean the sum of
the common stock, surplus and retained earning accounts of the
Borrower, reduced by the amount of any goodwill;"
3. WARRANTIES. To induce the Bank to enter into this Amendment, the Borrower
warrants that:
- 2 -
<PAGE>
3.1 Authorization. The Borrower is duly authorized to execute and
-------------
deliver this Amendment and is and will continue to be duly authorized to borrow
monies under the Agreement, as amended hereby, and to perform its obligations
under the Agreement, as amended hereby.
3.2 No Conflicts. The execution and delivery of this Amendment and
------------
the performance by the Borrower of its obligations under the Agreement, as
amended hereby, do not and will not conflict with any provision of law or of the
charter or by-laws of the Borrower or of any agreement binding upon the
Borrower.
3.3 Validity and Binding Effect. The Agreement, as amended hereby,
---------------------------
is a legal, valid and binding obligation of the Borrower, enforceable against
the Borrower in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency or other similar laws of general application
affecting the enforcement of creditors' rights or by general principles of
equity limiting the availability of equitable remedies.
3.4 No Default. As of the date hereof, no Event of Default under
----------
Section 9 of the Agreement, as amended by this Amendment, or event or condition
which, with the giving of notice or the passage of time, shall constitute an
Event of Default, has occurred or is continuing.
3.5 Warranties. As of the date hereof, the representations and
----------
warranties in Section 5 of the Agreement are true and correct as though made on
---------
such date, except for such changes as are specifically permitted under the
Agreement.
3.6 Year 2000. The Borrower and its Subsidiaries have reviewed the
---------
areas within their business and operations which could be adversely affected by,
and have developed or are developing a program to address on a timely basis, the
"Year 2000 Problem" (that is, the risk that computer applications used by the
Borrower and its Subsidiaries may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date after
December 31, 1999), and have made related appropriate inquiry of material
suppliers and vendors. Based on such review and program, the Borrower believes
that the Year 2000 Problem will not have a material adverse effect on the
Borrower.
4. CONDITIONS PRECEDENT. This Amendment shall become effective as of the
date above first written after receipt by the Bank of the following documents:
(a) This Amendment duly executed by the Borrower;
(b) A Replacement Revolving Note in the form attached hereto
as Exhibit A-3, duly executed by the Borrower; and
-----------
(c) Such other documents and instruments as the Bank
reasonably requests.
- 3 -
<PAGE>
5. GENERAL.
5.1 Law. This Amendment shall be construed in accordance with and
---
governed by the laws of the State of Illinois.
5.2 Successors. This Amendment shall be binding upon the Borrower
----------
and the Bank and their respective successors and assigns, and shall inure to the
benefit of the Borrower and the Bank and their respective successors and
assigns.
5.3 Confirmation of the Agreement. Except as amended hereby, the
-----------------------------
Agreement shall remain in full force and effect and is hereby ratified and
confirmed in all respects.
LASALLE NATIONAL BANK WINTRUST FINANCIAL
CORPORATION
By: By:
Its: Its:
- 4 -
<PAGE>
Exhibit A-3
REPLACEMENT REVOLVING NOTE
$40,000,000 Dated: September 1, 1998
FOR VALUE RECEIVED, WINTRUST FINANCIAL CORPORATION, an
Illinois corporation (the "Maker") promises to pay to the order of LASALLE
NATIONAL BANK, a national banking association (the "Bank") the lesser of the
principal sum of FORTY MILLION DOLLARS ($40,000,000), or the aggregate unpaid
principal amount outstanding under the Loan Agreement dated September 1, 1996
(as amended from time to time, the "Loan Agreement") between the Bank and the
Maker at the maturity or maturities and in the amount or amounts as stated on
the records of the Bank together with interest (computed on actual days elapsed
on the basis of a 360 day year) on any and all principal amounts outstanding
hereunder from time to time from the date hereof until maturity. Interest shall
be payable at the rates of interest and the times set forth in the Loan
Agreement. In no event shall any principal amount have a maturity later than
September 1, 1999.
This Note shall be available for direct advances.
Principal and interest shall be paid to the Bank at its office at 135
South LaSalle Street, Chicago, Illinois 60603, or. at such other place as the
holder of this Note may designate in writing to the Maker. This Note may be
prepaid in whole or in part as provided for in the Loan Agreement.
This Note evidences indebtedness incurred under the Loan Agreement, to
which reference is hereby made for a statement of the terms and conditions under
which the due date of the Note or any payment thereon may be accelerated. The
holder of this Note is entitled to all of the benefits provided for in the Loan
Agreement.
The Maker agrees that in action or proceeding instituted to collect or
enforce collection of this Note, the amount on the Bank's records shall be
conclusive and binding evidence, absent demonstrable error, of the unpaid
principal balance of this Note.
This Note is in replacement and substitution of, but not repayment for,
a Revolving Note of the Borrower dated September 1, 1997 in the principal amount
of $30,000,000 and is in no way intended to constitute a novation therefor.
WINTRUST FINANCIAL CORPORATION
By: ______________________________
Its: ______________________________
August 13, 1998
90995-1
- 5 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the interim
unaudited financial statements of Wintrust Financial Corporation for the three
and nine month periods ended September 30, 1998 and 1997, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001015328
<NAME> WINTRUST FINANCIAL CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 28,048 34,871
<INT-BEARING-DEPOSITS> 10,231 50,023
<FED-FUNDS-SOLD> 18,250 75,077
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 193,037 64,705
<INVESTMENTS-CARRYING> 5,000 5,001
<INVESTMENTS-MARKET> 5,005 4,952
<LOANS> 908,276 694,152
<ALLOWANCE> 6,500 5,013
<TOTAL-ASSETS> 1,243,556 972,970
<DEPOSITS> 1,123,756 881,310
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 15,942 8,841
<LONG-TERM> 3,203 15,903
0 0
27,500 0
<COMMON> 8,150 8,103
<OTHER-SE> 65,005 58,813
<TOTAL-LIABILITIES-AND-EQUITY> 1,243,556 972,970
<INTEREST-LOAN> 54,645 40,362
<INTEREST-INVEST> 5,683 2,774
<INTEREST-OTHER> 3,960 3,069
<INTEREST-TOTAL> 64,288 46,205
<INTEREST-DEPOSIT> 36,166 26,161
<INTEREST-EXPENSE> 37,501 26,824
<INTEREST-INCOME-NET> 26,787 19,381
<LOAN-LOSSES> 3,311 2,512
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 26,038 19,724
<INCOME-PRETAX> 3,119 767
<INCOME-PRE-EXTRAORDINARY> 4,159 3,166
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,159 3,166
<EPS-PRIMARY> 0.51 0.41
<EPS-DILUTED> 0.49 0.39
<YIELD-ACTUAL> 3.46 3.49
<LOANS-NON> 4,391 2,914
<LOANS-PAST> 1,631 1,701
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 2,518 2,300
<ALLOWANCE-OPEN> 5,116 3,636
<CHARGE-OFFS> (2,247) (1,220)
<RECOVERIES> 320 85
<ALLOWANCE-CLOSE> 6,500 5,013
<ALLOWANCE-DOMESTIC> 5,735 3,333
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 765 1,680
</TABLE>
