UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
Commission File Number 0-21923
WINTRUST FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Illinois 36-3873352
---------------------------------------- ------------------------------------
(State of incorporation of organization) (I.R.S. Employer Identification No.)
727 North Bank Lane
Lake Forest, Illinois 60045
-------------------------------------------------------
(Address of principal executive offices)
(847) 615-4096
------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
Indicate the number of shares outstanding of each of issuer's class of common
stock, as of the last practicable date.
Common Stock - no par value, 8,660,080 shares, as of August 9, 2000.
<PAGE>
TABLE OF CONTENTS
PART I. -- FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements.__________________________________________ 1-8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. ______________________________________ 8-27
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks. __ 28-30
PART II. -- OTHER INFORMATION
ITEM 1. Legal Proceedings. ____________________________________________ 31
ITEM 2. Changes in Securities. ________________________________________ 31
ITEM 3. Defaults Upon Senior Securities. ______________________________ 31
ITEM 4. Submission of Matters to a Vote of Security Holders.___________ 31
ITEM 5. Other Information. ____________________________________________ 31
ITEM 6. Exhibits and Reports on Form 8-K. _____________________________ 32
Signatures ____________________________________________________ 33
Exhibit Index _________________________________________________ 34
<PAGE>
PART I
ITEM 1 FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
(In thousands)
June 30, December 31, June 30,
2000 1999 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 56,552 $ 53,066 $ 40,170
Federal funds sold 67,658 28,231 56,640
Interest-bearing deposits with banks 189 2,547 3,047
Available-for-Sale securities, at fair value 219,361 205,795 185,233
Loans, net of unearned income 1,400,824 1,278,249 1,137,169
Less: Allowance for possible loan losses 9,792 8,783 7,677
-------------------------------------------------------------------------------------------------------------------------
Net loans 1,391,032 1,269,466 1,129,492
Premises and equipment, net 80,771 72,851 66,302
Accrued interest receivable and other assets 36,780 35,943 32,912
Goodwill and other intangible assets, net 11,126 11,483 1,343
-------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,863,469 $1,679,382 $1,515,139
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 173,967 $ 154,034 $ 124,642
Interest bearing 1,455,225 1,309,588 1,210,083
-------------------------------------------------------------------------------------------------------------------------
Total deposits 1,629,192 1,463,622 1,334,725
Short-term borrowings 46,783 59,843 50,105
Notes payable 4,850 8,350 5,100
Long-term debt - trust preferred securities 51,050 31,050 31,050
Accrued interest payable and other liabilities 33,236 23,570 14,977
-------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,765,111 1,586,435 1,435,957
-------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock - - -
Common stock 8,850 8,771 8,172
Surplus 83,603 82,792 73,138
Common stock warrants 100 100 100
Treasury stock, at cost (1,314) - -
Retained earnings (deficit) 9,554 3,555 (1,779)
Accumulated other comprehensive loss (2,435) (2,271) (449)
-------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 98,358 92,947 79,182
-------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,863,469 $ 1,679,382 $ 1,515,139
=========================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $31,064 $23,340 $ 59,802 $45,003
Interest bearing deposits with banks 4 50 20 121
Federal funds sold 489 377 736 570
Securities 3,517 2,347 6,825 4,698
---------------------------------------------------------------------------------------------------------------------------------
Total interest income 35,074 26,114 67,383 50,392
---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 18,299 13,216 34,898 25,766
Interest on short-term borrowings and notes payable 1,093 566 2,200 743
Interest on long-term debt - trust preferred securities 833 734 1,568 1,469
---------------------------------------------------------------------------------------------------------------------------------
Total interest expense 20,225 14,516 38,666 27,978
---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 14,849 11,598 28,717 22,414
Provision for possible loan losses 1,223 933 2,364 1,717
---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 13,626 10,665 26,353 20,697
---------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Fees on mortgage loans sold 742 919 1,225 2,217
Service charges on deposit accounts 479 347 948 681
Trust fees 494 250 966 475
Gain on sale of premium finance receivables 996 263 2,237 263
Administrative services revenue 1,141 - 2,154 -
Net securities gains (losses) (28) - (25) -
Other 680 339 1,277 790
---------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 4,504 2,118 8,782 4,426
---------------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits 6,793 5,193 13,128 10,272
Occupancy, net 1,140 669 2,150 1,345
Equipment expense 1,137 702 2,286 1,330
Data processing 699 511 1,379 993
Advertising and marketing 322 363 571 732
Professional fees 357 276 652 586
Amortization of intangibles 179 35 357 70
Other 2,262 1,779 4,475 3,736
---------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 12,889 9,528 24,998 19,064
---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,241 3,255 10,137 6,059
Income tax expense 1,922 995 3,696 1,965
---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,319 $ 2,260 $ 6,441 $ 4,094
=================================================================================================================================
NET INCOME PER COMMON SHARE = BASIC $ 0.38 $ 0.28 $ 0.73 $ 0.50
=================================================================================================================================
NET INCOME PER COMMON SHARE = DILUTED $ 0.37 $ 0.27 $ 0.72 $ 0.48
=================================================================================================================================
Weighted average common shares outstanding 8,760 8,169 8,779 8,162
Dilutive potential common shares 211 335 212 330
---------------------------------------------------------------------------------------------------------------------------------
Average common shares and dilutive common shares 8,971 8,504 8,991 8,492
=================================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
Accumulated
other Total
Compre- Common Retained compre- share-
hensive Common stock earnings Treasury hensive holders'
income stock Surplus warrants (deficit) Stock income(loss) equity
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ 8,150 $ 72,878 $ 100 $ (5,872) $ - $ (51) $ 75,205
Comprehensive Income:
Net income $ 4,094 - - - 4,094 - - 4,094
Other Comprehensive Income (Loss),
net of tax:
Unrealized losses on securities,
net of reclassification adjustment (399) - - - - - (399) (399)
--------
Comprehensive Income $ 3,695
========
Common stock issued upon exercise
of stock options 17 194 - - - - 211
Common stock issued through
employee stock purchase plan 5 66 - - - - 71
------------------------------------- ---------------------------------------------------------------------------------
Balance at June 30, 1999 $ 8,172 $ 73,138 $ 100 $ (1,778) $ - $ (450) $ 79,182
===================================== =================================================================================
Balance at December 31, 1999 $ 8,771 $ 82,792 $ 100 $ 3,555 $ - $ (2,271) $ 92,947
Comprehensive Income:
Net income $ 6,441 - - - 6,441 - - 6,441
Other Comprehensive Income (Loss),
net of tax:
Unrealized losses on securities,
net of reclassification adjustment (164) - - - - - (164) (164)
--------
Comprehensive Income $ 6,277
========
Cash dividends declared on common stock - - - (442) - - (442)
Purchase of treasury stock, 85,700
shares at cost - - - - (1,314) - (1,314)
Common stock issued upon exercise
of stock options 75 759 - - - - 834
Common stock issued through
employee stock purchase plan 4 52 - - - - 56
------------------------------------- ---------------------------------------------------------------------------------
Balance at June 30, 2000 $ 8,850 $ 83,603 $ 100 $ 9,554 $ (1,314) $ (2,435) $ 98,358
===================================== =================================================================================
Six Months Ended June 30,
2000 1999
-------- --------
Disclosure of reclassification amount:
Unrealized holding losses arising during the period $ (272) $ (625)
Less: Reclassification adjustment for losses included in net income (25) -
Less: Income tax benefit (83) (226)
--------------------
Net unrealized losses on securities $ (164) $ (399)
====================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
<TABLE>
<CAPTION>
WINTRUST FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Period Ended
June 30,
-------------------------------------------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 6,441 $ 4,094
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 2,364 1,717
Depreciation and amortization 3,734 1,887
Deferred income tax benefit (786) (1,030)
Net accretion/amortization of securities 805 (489)
Originations of mortgage loans held for sale (75,135) (163,430)
Proceeds from sales of mortgage loans held for sale 83,258 169,915
Purchase of trading securities (2,940) -
Proceeds from sale of trading securities 2,945 -
Gain on sale of trading securities (5) -
Gain on sale of premium finance receivables (2,237) (263)
Loss on sale of Available-for-Sale securities 25 -
Increase (decrease) in other assets, net 82 (1,665)
Increase in other liabilities, net 9,667 2,338
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 28,218 13,074
-------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of Available-for-Sale securities 66,032 240,762
Proceeds from maturities of Held-to-Maturity securities - 5,000
Proceeds from sale of Available-for-Sale securities 9,808 -
Purchases of Available-for-Sale securities (90,533) (217,012)
Proceeds from sale of premium finance receivables 135,663 20,343
Net decrease in interest-bearing deposits with banks 2,358 4,816
Net increase in loans (265,479) (172,746)
Purchases of premises and equipment, net (11,298) (10,948)
-------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (153,449) (129,785)
-------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Increase in deposit accounts 165,570 105,571
Increase (decrease) in short-term borrowings, net (13,060) 50,105
Proceeds from notes payable 6,500 5,100
Repayment of notes payable (10,000) -
Proceeds from trust preferred securities offering 20,000 -
Common stock issued upon exercise of stock options 834 211
Common stock issued through employee stock purchase plan 56 71
Purchase of treasure shares (1,314) -
Dividends paid (442) -
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 168,144 161,058
-------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 42,913 44,347
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 81,297 52,463
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $124,210 $ 96,810
===================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 4 -
<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 of a normal or
recurring nature for a fair presentation of results as of the dates and for the
periods covered by the consolidated financial statements.
Wintrust is a bank holding company currently engaged in the business of
providing community banking services through its banking subsidiaries to
customers in the Chicago metropolitan area, trust and investment services,
financing of commercial insurance premiums, and financing and administrative
services to the temporary services industry.
As of June 30, 2000, Wintrust had six wholly-owned bank subsidiaries
(collectively, "Banks"), all of which started as de novo institutions, including
Lake Forest Bank & Trust Company ("Lake Forest Bank"), Hinsdale Bank & Trust
Company ("Hinsdale Bank"), North Shore Community Bank & Trust Company ("North
Shore Bank"), Libertyville Bank & Trust Company ("Libertyville Bank"),
Barrington Bank & Trust Company, N.A. ("Barrington Bank") and Crystal Lake Bank
& Trust Company, N.A. ("Crystal Lake Bank").
The Company provides financing of commercial insurance premiums ("premium
finance receivables") on a national basis, through its subsidiary, First
Insurance Funding Corporation ("FIFC"). FIFC is a wholly-owned subsidiary of
Crabtree Capital Corporation ("Crabtree") which is a wholly-owned subsidiary of
Lake Forest Bank. On September 30, 1998, Wintrust began operating a wholly-owned
trust and investment subsidiary, Wintrust Asset Management Company, N.A.
("WAMC"), which currently provides trust and investment services at four of the
Wintrust banks. Previously, the Company provided trust services through the
trust department of Lake Forest Bank. In October 1999, Hinsdale Bank acquired
Tricom, Inc. of Milwaukee ("Tricom"), a provider of short-term accounts
receivable financing ("Tricom finance receivables") and value-added out-sourced
administrative services, such as data processing of payrolls, billing and cash
management services, to temporary staffing clients located throughout the United
States.
The accompanying consolidated financial statements are unaudited and do not
include information or footnotes necessary for a complete presentation of
financial condition, results of operations or cash flows in accordance with
generally accepted accounting principles. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes included in the Company's Annual Report and Form 10-K for the year ended
December 31, 1999. Operating results for the three-month and six-month periods
presented are not necessarily indicative of the results which may be expected
for the entire year. Reclassifications of certain prior period amounts have been
made to conform with the current period presentation.
- 5 -
<PAGE>
(2) Cash and Cash Equivalents
-------------------------
For the purposes of the Consolidated Statements of Cash Flows, the Company
considers cash and cash equivalents to include cash and due from banks and
federal funds sold which have an original maturity of 90 days or less.
(3) Earnings Per Share
------------------
The following table shows the computation of basic and diluted earnings per
share (in thousands, except per share data):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------------------------------------------
2000 1999 2000 1999
---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net income (A) $ 3,319 $ 2,260 $ 6,441 $ 4,094
================ =============== ================ ==============
Average common shares outstanding (B) 8,760 8,169 8,779 8,162
Effect of dilutive common shares 211 335 212 330
---------------- --------------- ---------------- --------------
Weighted average common shares and
effect of dilutive common shares (C) 8,971 8,504 8,991 8,492
================ =============== ================ ==============
Net income per average
common share - Basic (A/B) $ 0.38 $ 0.28 $ 0.73 $ 0.50
================ =============== ================ ==============
Net income per average
common share - Diluted (A/C) $ 0.37 $ 0.27 $ 0.72 $ 0.48
================ =============== ================ ==============
</TABLE>
The effect of dilutive common shares outstanding results from stock options,
stock warrants and shares to be issued under the Employee Stock Purchase Plan,
all being treated as if they had been either exercised or issued, and are
computed by application of the treasury stock method.
(4) Long-term Debt - Trust Preferred Securities
-------------------------------------------
In October 1998, the Company completed an offering of $31.05 million of 9.00%
Cumulative Trust Preferred Securities. Also, in June 2000, the Company completed
an additional offering of $20 million of 10.50% Cumulative Trust Preferred
Securities. For purposes of generally accepted accounting principles, these
securities are considered to be debt securities and not a component of
shareholders' equity. The Trust Preferred Securities offerings have increased
Wintrust's regulatory capital under Federal Reserve guidelines. Interest expense
on the Trust Preferred Securities is also deductible for income tax purposes.
For further information on the first offering of Trust Preferred Securities,
please refer to Note 10 of the Company's Consolidated Financial Statements
included in the Annual Report and Form 10-K for the year ended December 31,
1999.
- 6 -
<PAGE>
(5) Segment Information
-------------------
The segment financial information provided in the following tables has been
derived from the internal profitability reporting system used by management and
the chief decision makers to monitor and manage the financial performance of the
Company. The Company evaluates segment performance based on after-tax profit or
loss and other appropriate profitability measures common to each segment.
Certain indirect expenses have been allocated based on actual volume
measurements and other criteria, as appropriate. Inter-segment revenue and
transfers are generally accounted for at current market prices. The other
category, as shown in the following table, reflects parent company information.
The net interest income and segment profit of the banking segment includes
income and related interest costs from portfolio loans that were purchased from
the premium finance and indirect auto segments. For purposes of internal segment
profitability analysis, management reviews the results of its premium finance
and indirect auto segments as if all loans originated and sold to the banking
segment were retained within that segment's operations; thereby causing the
inter-segment elimination amounts shown in the following table.
The following table is a summary of certain operating information for reportable
segments for the three-month and six-month periods ended June 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- ---------------
NET INTEREST INCOME:
<S> <C> <C> <C> <C>
Banking $ 13,814 $ 10,965 $ 26,408 $ 21,021
Premium Finance 3,256 2,921 6,392 6,053
Indirect Auto 1,778 2,033 3,653 3,897
Tricom 836 - 1,633 -
Trust 119 124 241 232
Inter-segment eliminations (3,883) (3,678) (7,643) (7,287)
Other (1,071) (767) (1,967) (1,502)
---------------- ---------------- ---------------- ---------------
Total $ 14,849 $ 11,598 $ 28,717 $ 22,414
================ ================ ================ ===============
NON-INTEREST INCOME:
Banking $ 2,026 $ 1,761 $ 3,740 $ 3,901
Premium Finance 996 263 2,237 263
Indirect Auto - - - -
Tricom 1,150 - 2,167 -
Trust 494 250 966 475
Inter-segment eliminations (162) (156) (328) (213)
---------------- ---------------- ---------------- ---------------
Total $ 4,504 $ 2,118 $ 8,782 $ 4,426
================ ================ ================ ===============
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<PAGE>
SEGMENT PROFIT (LOSS):
Banking $ 3,407 $ 2,527 $ 6,254 $ 4,888
Premium Finance 1,069 939 2,400 1,883
Indirect Auto 487 738 1,037 1,409
Tricom 387 - 670 -
Trust (94) (180) (215) (412)
Inter-segment eliminations (916) (1,054) (1,993) (2,260)
Other (1,021) (710) (1,712) (1,414)
---------------- ---------------- ---------------- ---------------
Total $ 3,319 $ 2,260 $ 6,441 $ 4,094
================ ================ ================ ===============
SEGMENT ASSETS:
Banking $1,877,503 $1,540,944
Premium Finance 322,695 280,019
Indirect Auto 239,698 254,608
Tricom 32,060 -
Trust 2,559 2,417
Inter-segment eliminations (617,534) (567,412)
Other 6,488 4,563
---------------- ----------------
Total $1,863,469 $1,515,139
================ ================
</TABLE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition as of June 30,
2000, compared with December 31, 1999, and June 30, 1999, and the results of
operations for the three-month and six-month periods ended June 30, 2000 and
1999 should be read in conjunction with the Company's unaudited consolidated
financial statements and notes contained in this report. This discussion
contains forward-looking statements that involve risks and uncertainties and, as
such, future results could differ significantly from management's current
expectations. See the last section of this discussion for further information on
forward-looking statements.
OVERVIEW AND STRATEGY
The Company's operating subsidiaries were organized within the last nine years,
with an average life of its six subsidiary banks of approximately five years.
Wintrust has grown rapidly during the past few years and its Banks have been
among the fastest growing community-oriented de novo banking operations in
Illinois and the country. Because of the rapid growth, the historical
performance of the Banks, FIFC and WAMC has been affected by costs associated
with growing market share, establishing new de novo banks, opening new branch
facilities, and building an experienced management team. The Company's financial
performance over the past several years generally reflects improving
profitability of the operating subsidiaries, as they mature, offset by the
significant costs of opening new banks and branch facilities. The Company's
experience has been that it
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<PAGE>
generally takes 13-24 months for new banking offices to first achieve
operational profitability. Similarly, management currently expects a start-up
phase for WAMC to continue for up to two more years before its operations become
profitable.
Lake Forest Bank, Hinsdale Bank, North Shore Bank, Libertyville Bank, Barrington
Bank and Crystal Lake Bank began operations in December 1991, October 1993,
September 1994, October 1995, December 1996 and December 1997, respectively.
Subsequent to those initial dates of operations, each of the Banks, except
Barrington Bank, have established additional full-service banking facilities.
FIFC began operations in 1990 and is primarily engaged in the business of
financing insurance premiums written through independent insurance agents or
brokers on a national basis for commercial customers. On September 30, 1998,
WAMC began operations and offers a full range of trust and investment services
at many of the Wintrust banks.
Crystal Lake Bank, since moving into its permanent location in downtown Crystal
Lake in September 1998, opened a new drive-thru facility in March 1999 and a new
full-service branch facility in south Crystal Lake in September 1999. In October
1999, North Shore Bank opened a new full-service branch facility in Skokie,
Illinois. In February 2000, the Lake Forest Bank opened a new temporary branch
facility in Highwood, Illinois. A permanent facility in Highwood is currently
under construction and should be open later this year. Expenses related to these
new banking operations and predominantly impact only the 2000 operating results
presented in this discussion and analysis.
While committed to a continuing growth strategy, management's current focus is
to balance further asset growth with earnings growth by seeking to more fully
leverage the existing lending capacity within each of the Banks, FIFC, WAMC and
Tricom. One aspect of this strategy is to continue to pursue specialized earning
asset niches, and to maintain the mix of earning assets such that loans, which
are higher-yielding, are kept at a level of between 85% and 90% of our deposit
funds. Another aspect of this strategy is a continued focus on less aggressive
deposit pricing at those Banks with significant market share and more
established customer bases.
FIFC has been the Company's most significant specialized earning asset niche and
is expected to reach in excess of $900 million in premium finance receivable
volume during 2000. The majority of these receivables have been retained within
the Banks' loan portfolios as part of the strategy noted above. However, since
the second quarter of 1999, as a result of the continued solid growth in loan
originations, FIFC has, from time to time, sold a portion of new receivables to
an unrelated third party. In addition to recognizing gains on the sale of these
receivables, the proceeds have provided the Company with additional liquidity.
It is possible that similar future sales may occur depending on the level of new
volume growth in relation to the desired capacity within the Banks' loan
portfolios.
The October 1999 acquisition of Tricom is another significant step in the
Company's strategy to pursue specialized earning asset niches. Tricom is a
Milwaukee-based company that has been in business for approximately ten years
and specializes in providing, on a national basis, short-term accounts
receivable financing and value-added out-sourced administrative services, such
as data processing of payrolls, billing and cash management services, to clients
in the temporary staffing industry. By virtue of the Company's funding
resources, this acquisition will provide Tricom with additional capital
necessary to expand its financing services in a national market. Tricom's
revenue principally consists of interest income from financing activities and
fee-based revenues from administrative services. In addition to expanding the
Company's earning asset niches, this acquisition will add to the level of
fee-based income and augment its community-based banking revenues.
- 9 -
<PAGE>
Other newer specialized earning asset niches include Lake Forest Bank's MMF
Leasing Services equipment leasing division, a previously established small
business that was acquired in July 1998, and Barrington Bank's recently
established program that provides lending and deposit services to condominium,
homeowner and community associations. In addition, Hinsdale Bank's mortgage
warehouse lending program provides loan and deposit services to approximately
thirty mortgage brokerage companies located predominantly in the Chicago
metropolitan area. The Company plans to continue pursuing the development or
acquisition of other specialty finance businesses that generate assets suitable
for bank investment and/or secondary market sales.
With the formation of WAMC, the Company is expanding the trust and investment
management services that had already been provided prior to October 1998 through
the trust department of the Lake Forest Bank. With a separately chartered trust
subsidiary, the Company is now better able to offer trust and investment
management services to all communities served by Wintrust banks, which
management believes are some of the best trust markets in Illinois. In addition
to offering these services to existing bank customers at each of the Banks, the
Company believes WAMC can successfully compete for trust business by targeting
small to mid-size businesses and newly affluent individuals whose needs command
the personalized attention that is offered by WAMC's experienced trust
professionals. Since the fourth quarter of 1998, WAMC has provided the services
of experienced trust professionals at North Shore Bank, Hinsdale Bank and
Barrington Bank. As in the past, a full complement of trust professionals
continues to operate from offices at the Lake Forest Bank. Prospective trust and
investment customers at Libertyville Bank and Crystal Lake Bank are currently
being served on an appointment basis, as the need arises. Services offered by
WAMC typically will include traditional trust products and services, as well as
investment management, financial planning and 401(k) management services.
Similar to starting a de novo bank, the introduction of expanded trust services
has caused relatively high overhead levels when compared to initial fee income
generated to date. The overhead consists primarily of the salaries and benefits
of experienced trust professionals. Management currently anticipates that WAMC's
efforts to attract trust business will begin to generate sufficient trust fees
to absorb the overhead of WAMC and make that entity a contributor to the
Company's profits within the next two years.
RESULTS OF OPERATIONS
EARNINGS SUMMARY
Net income for the quarter ended June 30, 2000 totaled $3.3 million, an increase
of $1.1 million, or 47%, over the second quarter of 1999. On a per share basis,
net income for the second quarter of 2000 totaled $0.37 per diluted common
share, a $0.10 per share, or 37%, increase over the second quarter of 1999. The
return on average equity for the second quarter of 2000 increased to 13.86% from
11.55% for the prior year quarter.
For the six months ended June 30, 2000, net income totaled $6.4 million, or
$0.72 per diluted common share, an increase of $2.3 million, or 57%, and $0.24
per diluted share, when compared to the same period in 1999.
NET INTEREST INCOME
The following tables present a summary of the Company's net interest income and
related net interest margins, calculated on a fully taxable equivalent basis,
for the three-month and six-month periods ended June 30, 2000 and 1999:
- 10 -
<PAGE>
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
June 30, 2000 June 30, 1999
----------------------------------------- ---------------------------------------
(dollars in thousands) Average Interest Rate Average Interest Rate
----------------------
---------------- ------------- ---------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Liquidity management assets (1) (2) $249,621 $ 4,038 6.51% $ 213,506 $ 2,776 5.22%
Loans, net of unearned income (2) 1,367,470 31,181 9.17 1,108,933 23,390 8.46
---------------- ------------- ---------- --------------- ------------- ---------
Total earning assets 1,617,091 35,219 8.76% 1,322,439 26,166 7.94%
---------------- ------------- ---------- --------------- ------------- ---------
Interest-bearing deposits 1,399,332 18,299 5.26% 1,150,344 13,216 4.61%
Short-term borrowings and notes payable 70,450 1,093 6.24 55,400 566 4.10
Long-term debt - trust preferred securities 34,610 833 9.63 31,050 734 9.46
---------------- ------------- ---------- --------------- ------------- ---------
Total interest-bearing liabilities 1,504,392 20,225 5.41% 1,236,794 14,516 4.71%
---------------- ------------- ---------- --------------- ------------- ---------
Tax equivalent net interest income $ 14,994 $ 11,650
============= =============
Net interest margin 3.73% 3.53%
========== =========
Core net interest margin(3) 3.94% 3.76%
========== =========
-------------------------------
<FN>
(1) Liquidity management assets include securities, interest earning deposits
with banks and federal funds sold.
(2) Interest income on tax advantaged loans and securities reflects a
tax-equivalent adjustment based on a marginal federal corporate tax rate of
35% and 34% in 2000 and 1999, respectively. This total adjustment is
$145,000 and $52,000 for the quarters ended June 30, 2000 and 1999,
respectively.
(3) The core net interest margin excludes the interest expense associated with
the Company's Trust Preferred Securities.
</FN>
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 2000 June 30, 1999
----------------------------------------- ---------------------------------------
(dollars in thousands) Average Interest Rate Average Interest Rate
----------------------
---------------- ------------- ---------- --------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Liquidity management assets (1) (2) $239,279 $ 7,619 6.40% $ 207,772 $ 5,394 5.24%
Loans, net of unearned income (2) 1,340,473 60,025 9.01 1,068,225 45,090 8.51
---------------- ------------- ---------- --------------- ------------- ---------
Total earning assets 1,579,752 67,644 8.61% 1,275,997 50,484 7.98%
---------------- ------------- ---------- --------------- ------------- ---------
Interest-bearing deposits 1,366,164 34,898 5.14% 1,122,122 25,766 4.63%
Short-term borrowings and notes payable 72,472 2,200 6.10 36,340 743 4.12
Long-term debt - trust preferred securities 32,830 1,568 9.55 31,050 1,469 9.46
---------------- ------------- ---------- --------------- ------------- ---------
Total interest-bearing liabilities 1,471,466 38,666 5.28% 1,189,512 27,978 4.74%
---------------- ------------- ---------- --------------- ------------- ---------
Tax equivalent net interest income $ 28,978 $ 22,506
============= =============
Net interest margin 3.69% 3.56%
========== =========
Core net interest margin(3) 3.89% 3.79%
========== =========
-------------------------------
<FN>
(1) Liquidity management assets include securities, interest earning deposits
with banks and federal funds sold.
(2) Interest income on tax advantaged loans and securities reflects a
tax-equivalent adjustment based on a marginal federal corporate tax rate of
35% and 34% in 2000 and 1999, respectively. This total adjustment is
$261,000 and $92,000 for the six-month periods ended June 30, 2000 and
1999, respectively.
(3) The core net interest margin excludes the interest expense associated with
the Company's Trust Preferred Securities.
</FN>
</TABLE>
Net interest income is defined as the difference between interest income and
fees on earning assets and interest expense on deposits, borrowings and
long-term debt. The related net interest margin represents the net interest
income on a tax-equivalent basis as a percentage of average earning assets
during the period.
- 11 -
<PAGE>
Tax-equivalent net interest income for the quarter ended June 30, 2000 totaled
$15.0 million, an increase of $3.3 million, or 29%, as compared to the $11.7
million recorded in the same quarter of 1999. This increase mainly resulted from
loan growth, the October 1999 acquisition of Tricom, Inc. of Milwaukee
("Tricom") and management's ability to control funding costs in the current
interest rate environment. Tax-equivalent interest and fees on loans for the
quarter ended June 30, 2000 totaled $31.2 million, an increase of $7.8 million,
or 33%, over the prior year quarterly total of $23.4 million. This growth was
predominantly due to a $259 million, or 23%, increase in average total loans.
For the second quarter of 2000, the net interest margin was 3.73%, an increase
of 20 basis points when compared to the margin of 3.53% in the prior year
quarter. The core net interest margin, which excludes the net impact of the
Company's Trust Preferred Securities offerings was 3.94% for the second quarter
of 2000, an increase of 18 basis points over the core net interest margin of
3.76% for the second quarter of 1999. The improved margin resulted primarily
from higher yields on both loans and securities coupled with solid loan growth
and the addition of Tricom.
The rate paid on interest-bearing deposits averaged 5.26% for the second quarter
of 2000 versus 4.61% for the same quarter of 1999, an increase of 65 basis
points. This increase was caused by continued increases in market rates, which
was somewhat offset by management's decision to be less aggressive on its
deposit pricing. The rate paid on short-term borrowings and notes payable
increased to 6.24% in the second quarter of 2000 as compared to 4.10% in the
same quarter of 1999, due primarily to a higher outstanding balance under the
company's revolving credit agreement with an unaffiliated bank and a higher rate
environment for the Company's short-term funding sources.
The yield on total earning assets for the second quarter of 2000 was 8.76% as
compared to 7.94% in 1999, an increase of 82 basis points resulting primarily
from increases in the prime lending rate, general market rate increases on
liquidity management assets, and the acquisition of Tricom. The second quarter
2000 loan yield of 9.17% increased 71 basis points when compared to the prior
year quarterly yield of 8.46% and was due primarily to a higher average prime
lending rate of 9.24% during the second quarter of 2000 versus an average prime
lending rate of 7.75% for the second quarter of 1999. The Company's loan
portfolio does not re-price in a parallel fashion to increases in the prime rate
due to a portion of the portfolio being longer-term fixed rate loans.
For the first six months of 2000, tax equivalent net interest income totaled
$29.0 million and increased $6.5 million, or 29%, over the $22.5 million
recorded in the same period of 1999. This increase was also mainly due to a
combination of loan growth and the addition of Tricom. Interest and fees on
loans, on a tax equivalent basis, totaled $60.0 million for the first six months
of 2000, and increased $14.9 million, or 33%, over the same period of 1999.
Average loans for the first six months of 2000 grew $272 million, or 25%, over
the average for the first six months of 1999. The net interest margin for the
first six months of 2000 was 3.69%, an increase of 13 basis points when compared
to the same period in 1999. The core net interest margin was 3.89% for the first
six months of 2000 and increased 10 basis points over the prior year period.
Consistent with the second quarter margin improvement as noted above, the
year-to-date margin increase was mainly the result of loan growth, the addition
of Tricom and the ability to control funding costs in a rising rate environment.
- 12 -
<PAGE>
The following table presents a reconciliation of the Company's tax-equivalent
net interest income, calculated on a tax equivalent basis, between the three and
six-month periods ended June 30, 1999 and June 30, 2000. The reconciliation sets
forth the change in the tax-equivalent net interest income as a result of
changes in volumes, changes in rates and the change due to the combination of
volume and rate changes (in thousands):
<TABLE>
<CAPTION>
Three Month Six Month
Period Period
------ ------
<S> <C> <C>
Tax equivalent net interest income for the period ended June 30, 1999.......... $ 11,650 $ 22,506
Change due to average earning assets fluctuations (volume)................. 2,728 5,653
Change due to interest rate fluctuations (rate)............................ 563 827
Change due to rate/volume fluctuations (mix)............................... 53 (8)
-------------------- -------------------
Tax equivalent net interest income for the period ended June 30, 2000 ......... $ 14,994 $ 28,978
==================== ===================
</TABLE>
NON-INTEREST INCOME
For the second quarter of 2000, non-interest income totaled $4.5 million and
increased $2.4 million, or 113%, over the prior year quarter. For the first six
months of 2000, non-interest income totaled $8.8 million and increased $4.4
million, or 98%, when compared to the same period in 1999. Gains from the sale
of premium finance receivables, revenues from Tricom and increases in trust
fees, deposit services charges and leased equipment rental income were partially
offset by a lower level of fees from the sale of mortgage loans. The following
table presents non-interest income by category (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Fees on mortgage loans sold $ 742 $ 919 $ 1,225 $ 2,217
Service charges on deposit accounts 479 347 948 681
Trust fees 494 250 966 475
Administrative services revenue 1,141 - 2,154 -
Gain on sale of premium finance receivables 996 263 2,237 263
Securities gains (losses), net (28) - (25) -
Other income 680 339 1,277 790
----------------- ---------------- ---------------- ---------------
Total non-interest income $ 4,504 $ 2,118 $ 8,782 $ 4,426
================= ================ ================ ===============
</TABLE>
Fees on mortgage loans sold include income from originating and selling
residential real estate loans into the secondary market. For the quarter ended
June 30, 2000, these fees totaled $742,000, a decline of $177,000, or 19%, from
the prior year quarter. For the first six months of 2000, fees on mortgage loans
sold totaled $1.2 million and declined $1.0 million, or 45%, when compared to
the same period of 1999. These declines were due to lower levels of mortgage
origination volumes, particularly refinancing activity, caused by the recent
increases in mortgage interest rates.
Service charges on deposit accounts totaled $479,000 for the second quarter of
2000, an increase of $132,000 when compared to the same quarter of 1999. For the
first six months of 2000, deposit service charges totaled $948,000 and increased
$267,000 when compared to the same period of 1999. These increases were due to a
- 13 -
<PAGE>
higher deposit base and a larger number of accounts at the banking subsidiaries.
The majority of deposit service charges relates to customary fees on overdrawn
accounts and returned items. The level of service charges received is
substantially below peer group levels as management believes in the philosophy
of providing high quality service without encumbering that service with numerous
activity charges.
Trust fees totaled $494,000 for the second quarter of 2000, a $244,000, or 98%,
increase over the same quarter of 1999. For the first six months of 2000, trust
fees totaled $966,000 and increased $491,000, or 103%, over the same period of
1999. The increases were mainly the result of new business development efforts
from the staff of experienced trust officers added since late 1998 with the
formation of Wintrust Asset Management Company. Wintrust is committed to growing
the trust and investment business in order to better service its customers and
create a more diversified revenue stream. However, as the introduction of
expanded trust and investment services continues to unfold, it is expected that
overhead levels will be high when compared to the initial fee income that is
generated. It is anticipated that trust fees will eventually increase to a level
sufficient to absorb this overhead within the next two years.
The administrative services revenue contributed by Tricom, which was acquired in
October 1999, added $1.1 million to total non-interest income in the second
quarter of 2000 and $2.2 million for the first six months of 2000. This revenue
comprises income from administrative services, such as data processing of
payrolls, billing and cash management services, to temporary staffing service
clients located throughout the United States. Tricom also earns interest and fee
income from providing short-term accounts receivable financing to this same
client base, which is included in the net interest income category.
As a result of strong loan originations during the second quarter of 2000,
approximately $62 million of premium finance receivables were sold to an
unrelated third party and resulted in the recognition of a $1.0 million gain.
Through the first six months of 2000, approximately $133 million of premium
finance receivables have been sold resulting in a year-to-date gain of $2.2
million. The Company currently has a philosophy of maintaining its average
loan-to-deposit ratio in the range of 85-90%. During the second quarter of 2000,
the ratio was approximately 87.6%. Accordingly, the Company sold excess premium
finance receivables volume to an unrelated third party financial institution.
Consistent with Wintrust's strategy to be asset-driven and the desire to
maintain our loan-to-deposit ratio in the aforementioned range, it is probable
that similar sales of premium finance receivables will occur in the future.
Other non-interest income for the second quarter totaled $680,000 and increased
$341,000 over the prior year quarterly total of $339,000. For the first six
months of 2000, other non-interest income totaled $1.3 million and increased
$487,000, or 62%, over the same period of 1999. These increases were due
primarily to increases in rental income from equipment leased through the MMF
Leasing Services division of the Lake Forest Bank of $203,000 and $417,000,
respectively, for the three and six months periods of 2000 compared 1999.
NON-INTEREST EXPENSE
Non-interest expense for the second quarter of 2000 totaled $12.9 million and
increased $3.4 million, or 35%, from the second quarter 1999 total of $9.5
million. For the first six months of 2000, non-interest expense totaled $25.0
million and increased $5.9 million, or 31%, when compared to the prior year
period. The continued growth and expansion of the de novo banks, the development
of the trust and investment business, and the October 1999 acquisition of Tricom
were the primary causes for this increase. Since June 30, 1999,
- 14 -
<PAGE>
total deposits have grown 22% and total loan balances have risen 23%, requiring
higher levels of staffing and other costs to both attract and service the larger
customer base. The following table presents non-interest expense by category (in
thousands):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
------------------- ---------------- ------------------------------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 6,793 $ 5,193 $ 13,128 $ 10,272
Occupancy, net 1,140 669 2,150 1,345
Equipment expense 1,137 702 2,286 1,330
Data processing 699 511 1,379 993
Advertising and marketing 322 363 571 732
Professional fees 357 276 652 586
Other 2,441 1,814 4,832 3,806
------------------- ---------------- ------------------------------------
Total non-interest expense $ 12,889 $ 9,528 $ 24,998 $ 19,064
=================== ================ ====================================
</TABLE>
Salaries and employee benefits expense totaled $6.8 million for the second
quarter of 2000, an increase of $1.6 million, or 31%, as compared to the prior
year quarter total of $5.2 million. For the first six months of 2000, salaries
and employee benefits expense totaled $13.1 million and increased $2.9 million,
or 28%, when compared to the first six months of 1999. These increases were
primarily due to the acquisition of Tricom, the expansion of the trust and
investment business and the addition of four additional banking offices since
June 30, 1999. As a percent of average total assets, on an annualized basis,
salaries and employee benefits were 1.51% and 1.48% for the first six months of
2000 and 1999, respectively. The slight increase in this ratio is primarily a
result of the administrative services staffing at Tricom in 2000. Since Tricom
was not acquired until the fourth quarter of 1999, the 1999 ratio does not
reflect those salaries and employee benefits.
For the second quarter of 2000, occupancy costs, equipment expense and data
processing increased $471,000 (70%), $435,000 (62%) and $188,000 (37%),
respectively, over the prior year first quarter. For the first six months of
2000, the respective increases were $805,000 (60%), $956,000 (72%) and $386,000
(39%). These increases were due to the general growth of the Company including
the opening of several new banking facilities as discussed in the Overview and
Strategy section, the acquisition of Tricom and the development of the trust and
investment business.
Other non-interest expense, for the six months ended June 30, 2000, totaled $4.8
million and increased $1.0 million, or 27%, due mainly to the factors mentioned
earlier. This category of expense includes loan expenses, correspondent bank
service charges, postage, insurance, stationary and supplies, goodwill
amortization and other sundry expenses. Goodwill and other intangibles
amortization expense totaled $179,000 and $357,000 for the three and six month
periods of 2000, respectively, compared to $35,000 and $70,000 for the same
periods of 1999, respectively. The increases in goodwill and other intangibles
amortization expense is a result of the acquisition of Tricom in October 1999.
Despite the Company's growth and the related increases in many of the
non-interest expense categories, the net overhead ratio for the first six months
of 2000 declined to 1.87% as compared to the first six months of 1999 ratio of
2.10%. The overhead ratio is within management's stated performance goal range
of 1.50% - 2.00%.
- 15 -
<PAGE>
INCOME TAXES
The Company recorded income tax expense of $1.9 million for the three months
ended June 30, 2000 versus $1.0 million for the same period of 1999. For the
first six months of 2000, approximately $3.7 million of income tax expense was
recorded versus approximately $2.0 million in the prior year period. The
increase was due primarily to the increase in operating income and the fact that
1999 also included the realization of approximately $225,000 and $300,000 of
income tax benefits relating to recognition of prior net operating losses for
the three and six month periods of 1999, respectively.
OPERATING SEGMENT RESULTS
As shown in Note 5 to the Unaudited Consolidated Financial Statements, the
Company's operations consist of five primary segments: banking, premium finance,
indirect auto, Tricom and trust. The Company's profitability is primarily
dependent on the net interest income, provision for possible loan losses,
non-interest income and operating expenses of its banking segment.
For the second quarter of 2000, the banking segment's net interest income
totaled $13.8 million, an increase of $2.8 million, or 26%, as compared to the
$11.0 million recorded in the same quarter of 1999. On a year-to-date basis, the
banking segment net interest income totaled $26.4 million and increased $5.4
million, or 26%, as compared to the 1999 period. These increases were the direct
result of earning asset growth of approximately 23% for the periods,
particularly in the loan portfolio, as earlier discussed in the Net Interest
Income section. The banking segment's non-interest income totaled $2.0 million
for the second quarter of 2000 and increased $265,000, or 15%, when compared to
the prior year quarter. The slight increase was due primarily to increased
income from operating equipment leases and service charges on a higher level of
deposit accounts. Somewhat offsetting those increases was a drop in fees on
mortgage loans sold that was caused by the recent rise in mortgage interest
rates and the related lower levels of refinancing activity. On a year-to-date
basis, non-interest income totaled $3.7 million and declined $161,000, or 4%, as
compared to the first six months of 1999. Although the majority of the banking
segment's non-interest income categories increased due to higher volumes of
accounts, the decline on a year-to-date basis was a direct result of the lower
fees on mortgage loans in 2000 versus 1999 in the amount of $1.0 million. The
banking segment's after-tax profit for the quarter ended June 30, 2000, totaled
$3.4 million, an increase of $880,000, or 35%, as compared to the prior year
quarterly total of $2.5 million. For the first six months of 2000, after-tax
operating profit for the banking segment totaled $6.3 million and increased $1.4
million, or 28%, over the same period of 1999. This improved profitability
resulted mainly from higher levels of net interest income created from the
continued growth and maturation of the Company's de novo banks and branches.
Net interest income from the premium finance segment totaled $3.3 million for
the quarter ended June 30, 2000 compared to $2.9 million for the same quarter of
1999. On a year-to-date basis, the premium finance segment net interest income
totaled $6.4 million compared to $6.0 million recorded for the first six months
of 1999. The increases in net interest income are a result of higher levels of
outstanding receivables offset slightly by a higher funding costs associated
with this portfolio in 2000. Non-interest income for the three months ended June
30, 2000 totaled $1.0 million compared to $263,000 for the same period of 1999.
For the first six months of 2000, non-interest income for the premium finance
segment totaled $2.2 million compared to the $263,000 recorded in the same
period of 1999. The increases are a result of gains from the sale of additional
premium finance receivables in 2000, as mentioned earlier in this report.
After-tax profit for the premium finance segment totaled $1.1 million for the
three-month period ended June 30, 2000, and increased $130,000, or 14%, over the
same
-16-
<PAGE>
period of 1999. For the six months ended June 30, 2000 and 1999, the after-tax
profit for this segment was $6.3 million and $4.9 million, respectively. These
increases were due mostly to higher levels of premium finance receivables
created from new product offerings and targeted marketing programs and the
additional gains from the sale of receivables.
The indirect auto segment recorded $1.8 million of net interest income for the
second quarter of 2000, a decline of $255,000, or 13%, as compared to the 1999
quarterly total. On a year-to-date basis, net interest income declined $244,000,
or 6%, to $3.7 million from the comparable period of 1999. The decline is due to
management's efforts to reduce the level of outstanding loans in this portfolio
and higher funding costs in 2000 compared to 1999. After-tax segment profit
totaled $487,000 for the three-month period ended June 30, 2000, a decline of
$251,000 when compared to the same period of 1999. For the first six months of
2000, after-tax operating profits were $1.0 million in 2000 compared to $1.4
million in the first six months of 1999. The decline in this segment's
profitability was caused mainly by a higher level of credit losses, lower
outstanding loan balances and compressed margins in 2000 versus 1999. See
further discussion of credit quality information in the "ASSET QUALITY" section
of this report.
The Tricom segment data reflects the net interest income, non-interest income
and segment profit associated with short-term accounts receivable financing and
value-added out-sourced administrative services, such as data processing of
payrolls, billing and cash management services, that Tricom provides to its
clients in the temporary staffing industry. For the quarter and six months ended
June 30, 2000, the Tricom segment added $836,000 and $1.6 million, respectively,
to the Company's net interest income, $1.2 million and $2.2 million,
respectively, to the Company's non-interest income, and $387,000 and $670,000,
respectively, to the Company's net income. No results are included for the first
quarter of 1999 because Tricom was acquired in October 1999 using the purchase
method of accounting.
The trust segment recorded non-interest income of $494,000 for the second
quarter of 2000 as compared to $250,000 for the same quarter of 1999, an
increase of $244,000, or 98%. On a year-to-date basis, non-interest income for
the trust segment increased to $966,000 from $475,000 in the prior year period,
an increase of 103%. The increase was the result of continued new business
development efforts by a larger staff of experienced trust professionals that
were hired in connection with the October 1998 start-up of WAMC. The trust
segment's after-tax loss totaled $94,000 for the three-month period ended June
30, 2000, as compared to after-tax loss of $180,000 for the same period of 1999.
For the first six months of 2000 and 1999, after-tax losses for this segment
were $215,000 and $412,000, respectively. The decline in after-tax segment
losses was a direct result of the increased asset base managed by WAMC and the
associated fees. As more fully discussed in the Overview and Strategy section of
this analysis, management expects the start-up phase for the trust segment to
continue for up to two years before its operations become profitable.
FINANCIAL CONDITION
Total assets were $1.86 billion at June 30, 2000, an increase of $348 million,
or 23%, over the $1.52 billion a year earlier, and $184 million, or 11%, over
the $1.68 billion at December 31, 1999. Growth at the newer banks and branches
coupled with continued market share growth at the more mature banks were the
primary factors for these increases. Total funding liabilities, which include
deposits, short-term borrowings, notes payable and long-term debt, were $1.73
billion at June 30, 2000, and increased $311 million, or 22%, over the prior
year, and $169 million, or 11%, since December 31, 1999. These increases were
primarily utilized to fund growth in the loan portfolio and certain
discretionary investment leveraging transactions.
- 17 -
<PAGE>
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>
June 30, 2000 December 31, 1999 June 30, 1999
------------------------------- ------------------------------ -----------------------------
Loans: Balance Percent Balance Percent Balance Percent
------------------ ------------ ------------------ ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and commercial
real estate $ 552,694 33% $ 485,776 32% $ 420,528 30%
Premium finance, net 250,796 15 219,341 15 216,209 16
Indirect auto, net 234,774 14 255,410 17 243,804 18
Home equity 157,042 9 139,194 9 118,436 8
Residential real estate 135,746 8 111,026 7 99,987 7
Tricom finance receivables 20,978 1 17,577 1 - -
Installment and other 48,794 3 49,925 3 38,205 3
------------------ ------------ ------------------ ----------- ----------------- ----------
Total loans, net of
unearned income 1,400,824 83 1,278,249 84 1,137,169 82
------------------ ------------ ------------------ ----------- ----------------- ----------
Securities and money
market investments 287,208 17 236,573 16 244,920 18
------------------ ------------ ------------------ ----------- ----------------- ----------
Total earning assets $ 1,688,032 100% $ 1,514,822 100% $ 1,382,089 100%
================== ============ ================== =========== ================= ==========
</TABLE>
Earning assets as of June 30, 2000, increased $306 million, or 22%, over the
balance a year earlier, and $173 million, or 11%, over the balance at the end of
1999. The ratio of earning assets as a percent of total assets remained
consistent at approximately 90% - 91% as of each reporting period date shown in
the above table.
Total net loans were $1.40 billion at June 30, 2000, an increase of $123
million, or 10%, since December 31, 1999, and an increase of $264 million, or
23%, since June 30, 1999. Solid loan growth in the core commercial loan, home
equity and residential real estate portfolios were the main factor for these
increases. Also, showing increases were the specialty premium finance and Tricom
finance receivable segments, the latter category which was added as a result of
the October 1999 acquisition of Tricom. Offsetting the increases in all of the
other loan categories was a decline in the balance of indirect auto loans.
Because of the impact of the current economic and competitive environment on
interest rates surrounding this portfolio, management has begun to reduce the
level of new indirect auto loans originated and is dedicating additional
resources to optimize the profitability of this loan segment at slightly reduced
levels of outstanding receivables. Total net loans comprised 83% of total
earning assets at June 30, 2000 as compared to 82% a year earlier and 84% at the
end of 1999.
Commercial and commercial real estate loans, the largest loan category,
comprised 33% of total earning assets and 39% of total loans as of June 30, 2000
and has increased $132.2 million, or 31%, since June 30, 1999 and $66.9 million,
or 14%, since the end of 1999. The strong growth experienced over the past year
has resulted mainly from a healthy economy and the hiring of additional
experienced lending officers.
Net premium finance receivables totaled $250.8 million at June 30, 2000 and
comprised 18% of the total loan portfolio. This total balance increased $34.6
million, or 16%, since June 30, 1999 and $31.5 million, or 14%, since the end of
1999. This growth was primarily the result of increased market penetration from
new product offerings and marketing programs. Over the past few years, the
majority of premium finance receivables
- 18 -
<PAGE>
originated by FIFC were being sold to the Banks and consequently remained an
asset of the Company. However, since the second quarter of 1999, as a result of
the continued solid growth in loan originations, FIFC has been selling a portion
of new receivables to an unrelated third party. During the second quarter of
2000 the Company sold approximately $62 million of premium finance receivables
to an unrelated third party at a gain of $1.0 million. For the first six months
of 2000, approximately $133 million of premium finance receivables at a gain of
$2.2 million. In addition to recognizing gains on the sale of these receivables,
the proceeds provided the Company with additional liquidity. It is possible that
similar future sales may occur depending on the level of new volume growth in
relation to the desired capacity within the Banks' loan portfolios.
Net indirect auto loans comprised 14% of total earning assets and 17% of total
loans as of June 30, 2000. This portfolio decreased $9.0 million, or 4%, from a
year ago, and decreased $20.6 million, or 8%, since the end of 1999. The
decrease in the balance is the result of a higher interest rate environment
experienced during the first six months of 2000 coupled with a decision by
management to reduce its reliance upon indirect automobile lending as a percent
of the overall earning asset portfolio due to competitive pricing and margin
concerns. As such, management intends to maintain the outstanding level of the
portfolio near or slightly below the existing level. The Company utilizes credit
underwriting routines that management believes result in a high quality new and
used auto loan portfolio. The Company does not currently originate any
significant level of sub-prime loans, which are made to individuals with
impaired credit histories at generally higher interest rates, and accordingly,
with higher levels of credit risk. Management continually monitors the dealer
relationships and the Banks are not dependent on any one dealer as a source of
such loans.
The October 1999 acquisition of Tricom added a new category of specialty finance
receivables to the Company's earning asset portfolio. These receivables consist
of high-yielding short-term accounts receivable financing to clients in the
temporary staffing industry located throughout the United States. At June 30,
2000, outstanding finance receivables totaled $21.0 million, an increase of $3.4
million, or 19%, from the December 31, 1999 balance.
Home equity loans totaled $157.0 million at June 30, 2000 and increased $38.6
million, or 33%, since a year earlier and $17.8 million, or 13%, as compared to
the end of 1999. This category of loans continues to represent approximately
8%-9% of total earning assets and has grown in proportion to the entire growth
of the Company. The growth is due mainly to targeted marketing programs over the
past year and higher usage of existing lines than in the past. The marketing
programs generally use a short-term low initial interest rate as an incentive to
the borrower. Unused commitments on home equity lines of credit have increased
$27.1 million, or 15%, over the balance at June 30, 1999 and totaled $204.7
million at June 30, 2000.
Residential real estate loans totaled $135.7 million as of June 30, 2000 and
increased $35.8 million, or 36%, over a year ago and $24.7 million, or 22%,
since December 31, 1999. Mortgage loans held for sale are included in this
category and totaled $12.1 million as of June 30, 2000, $8.1 million as of
December 31, 1999 and $11.5 million as of June 30, 1999. The Company collects a
fee on the sale of these loans into the secondary market, as discussed earlier
in the Non-interest Income section of this analysis. As these loans are
predominantly long-term fixed rate loans, the Company eliminates the interest
rate risk associated with these loans by selling them into the secondary market.
The remaining residential real estate loans in this category are maintained
within the Banks' portfolios and include mostly adjustable rate mortgage loans
and shorter-term fixed rate mortgage loans. The growth in this loan category has
been due mainly to the relatively low mortgage interest rate environment
experienced until recently and a continued strong local housing market.
- 19 -
<PAGE>
Securities and money market investments (i.e. federal funds sold and
interest-bearing deposits with banks) totaled $287.2 million at June 30, 2000,
an increase of $50.6 million, or 21%, since December 31, 1999 and $42.3 million,
or 17%, since a year earlier. This category as a percent of total earning assets
was 17% at June 30, 2000 versus 16% and 18% at December 31, 1999 and June 30,
1999; respectively.
The Company maintained no trading account securities at June 30, 2000 or as of
any of the other previous reporting dates. The balances of securities and money
market investments fluctuate frequently based upon deposit inflows, loan demand
and proceeds from loan sales. As a result of anticipated growth in the
development of the de novo banks, it has been Wintrust's policy to generally
maintain its securities and money market portfolio in short-term, liquid, and
diversified high credit quality securities in order to facilitate the funding of
quality loan demand as it emerges and to keep the Banks in a liquid condition in
the event that deposit levels fluctuate.
DEPOSITS
Total deposits at June 30, 2000 were $1.63 billion, an increase of $294 million,
or 22%, over the June 30, 1999 total and an increase of $166 million, or 11%,
since December 31, 1999. The following table sets forth, by category, the
composition of deposit balances and the relative percentage of total deposits as
of the date specified (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999 June 30, 1999
--------------------------------- --------------------------------- --------------------------------
Percent Percent Percent
Balance of Total Balance of Total Balance of Total
----------------- -------------- ------------------ -------------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 173,967 11% $ 154,034 11% $ 124,642 9%
NOW 154,056 9 130,625 9 139,700 11
Money market 284,918 17 252,483 17 232,198 17
Savings 74,434 5 72,718 5 73,445 6
Certificates of deposit 941,817 58 853,762 58 764,740 57
----------------- -------------- ------------------ -------------- ------------------ -------------
Total $ 1,629,192 100% $ 1,463,622 100% $ 1,334,725 100%
================= ============== ================== ============== ================== =============
</TABLE>
The percentage mix of deposits as of June 30, 2000 was relatively consistent
with the deposit mix as of the prior year dates. Growth in both the number of
accounts and balances has been primarily the result of newer bank and branch
growth, and continued marketing efforts at the more established banks to create
additional deposit market share.
SHORT-TERM BORROWINGS AND NOTES PAYABLE
As of June 30, 2000, the Company's short-term borrowings totaled $46.8 million
and consisted primarily of short-term repurchase agreements utilized to leverage
certain investment transactions within several banks' security portfolios and
certain customer repurchase agreements. At June 30, 2000, the Company also had
$4.9 million outstanding on its $40 million revolving credit line with an
unaffiliated bank. The outstanding balance on this credit line as of June 30,
1999 was $5.1 million and $8.4 million at December 31, 1999. The Company
continues to maintain the revolving credit line for corporate purposes such as
to provide capital to fund continued growth at the Banks, expansion of WAMC,
purchases of treasury stock, possible future acquisitions and for other general
corporate matters.
- 20 -
<PAGE>
LONG-TERM DEBT - TRUST PREFERRED SECURITIES
For each of the reporting periods, the long-term debt category included $31.05
million of 9.00% Cumulative Trust Preferred Securities, which were publicly sold
in an offering that was completed in October 1998. In June of 2000, the Company
issued another $20.0 million of Trust Preferred Securities bringing the total
long-term debt category to $51.05 million. The June 2000 offering consisted of
800,000 shares of $25.00 par value securities with a 10.50% interest rate. The
sale of the Trust Preferred Securities increased Wintrust's regulatory capital
and provided for and will provide for the continued growth of the banking
franchise, and for possible future acquisitions of other banks or
finance-related companies.
The ability to treat these Trust Preferred Securities as regulatory capital
under Federal Reserve guidelines, coupled with the Federal income tax
deductibility of the related interest expense, provides the Company with a
cost-effective form of capital. See Note 4 to the Unaudited Consolidated
Financial Statements for further information on the first Trust Preferred
Securities offering.
SHAREHOLDERS' EQUITY
Total shareholders' equity was $98.4 million at June 30, 2000 and increased
$19.2 million since June 30, 1999 and $5.4 million since the end of 1999. These
increases were the result of the Company's corporate earnings offset by net
unrealized losses of the available-for-sale security portfolio, dividend
payments and stock repurchases. The annualized return on average equity for the
quarter ended June 30, 2000 increased to 13.86% as compared to 11.55% for the
prior year period.
The following table reflects various consolidated measures of capital at June
30, 2000, December 31, 1999 and June 30, 1999:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
---------------------- ------------------- --------------------
<S> <C> <C> <C>
Leverage ratio 6.9% 7.1% 7.2%
Ending tier 1 capital to risk-based asset ratio 7.3% 7.8% 7.9%
Ending total capital to risk-based asset ratio 8.9% 8.4% 8.9%
Dividend payout ratio 6.9% 0.0% 0.0%
</TABLE>
On January 27, 2000, Wintrust declared its first semi-annual cash dividend of
$0.05 per common share. The dividend was paid on February 24, 2000. Subsequent
to the end of the June 30, 2000 quarter, the Company declared its second
semi-annual cash dividend of $0.05 per common share to shareholders of record as
of August 10, 2000 and payable on August 24, 2000. Additionally, the Company
initiated a stock buyback program authorizing the repurchase of up to 300,000
shares of its common stock. Through June 30, 2000, the Company repurchased a
total of 85,700 shares at an average price of $15.33 per share.
To be "adequately capitalized", an entity must maintain a leverage ratio of at
least 4.0%, a Tier 1 risk-based capital ratio of at least 4.0%, and a total
risk-based capital ratio of at least 8.0%. To be considered "well capitalized,"
an entity must maintain a leverage ratio of at least 5.0%, a Tier 1 risk-based
capital ratio of at least 6.0%, and a total risk-based capital ratio of at least
10.0%. At June 30, 2000, the Company was considered "well capitalized" under
both the leverage ratio and the Tier 1 risk-based capital ratio, and was
considered
- 21 -
<PAGE>
"adequately capitalized" under the total risk-based capital ratio. The Company's
total risk-based capital ratio increased since the prior year end due to the
issuance of the Trust Preferred Securities as discussed above in the "Long-term
Debt - Trust Preferred Securities" section of this report.
The Company attempts to maintain an efficient capital structure in order to
provide higher returns on equity. Additional capital is required from time to
time, however, to support the growth of the organization. The issuance of
additional common stock or additional trust preferred securities are the primary
forms of capital that the Company considers as it evaluates its capital
position.
ASSET QUALITY
Allowance for Possible Loan Losses
A reconciliation of the activity in the allowance for possible loan losses for
the three and six months ended June 30, 2000 and 1999 is shown as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 9,359 $ 7,518 $8,783 $7,034
Provision for possible loan losses 1,223 933 2,364 1,717
Charge-offs
Core banking loans 316 302 446 403
Indirect automobile loans 320 479 631 639
Tricom receivables 73 -- 73 --
Premium finance receivables 158 95 359 190
------------------- ---------------- ----------------- --------------
Total charge-offs 867 876 1,509 1,232
Recoveries
Core banking loans 3 4 11 10
Indirect automobile loans 30 14 73 28
Tricom receivables -- -- -- --
Premium finance receivables 44 84 70 120
------------------- ---------------- ----------------- --------------
Total recoveries 77 102 154 158
------------------- ---------------- ----------------- --------------
Net charge-offs (790) (774) (1,355) (1,074)
------------------- ---------------- ----------------- --------------
Balance at June 30 $ 9,792 $ 7,677 $9,792 $7,677
=================== ================ ================= ==============
Loans at June 30 $1,400,824 $1,137,169
================= ==============
Allowance as a percentage of loans 0.70% 0.68%
================= ==============
Annualized net charge-offs as a percentage of average:
Core banking loans 0.10% 0.12%
Indirect automobile loans 0.45% 0.54%
Premium finance receivables 0.23% 0.07%
----------------- --------------
Total loans 0.20% 0.20%
================= ==============
Annualized provision for
possible loan losses 57.32% 62.55%
================= ==============
</TABLE>
- 22 -
<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 economic conditions in the
market area.
The provision for possible loan losses totaled $1.2 million for the second
quarter of 2000, an increase of $290,000 from a year earlier. For the first six
months of 2000, the provision totaled $2.4 million and increased $647,000, or
38%, over the same period of 1999. The higher provision levels were necessary to
cover a 23% increase in loan balances compared to June 30, 1999. For the six
months ended June 30, 2000, net charge-offs totaled $1.4 million and increased
from the $1.1 million of net charge-offs recorded in the same period of 1999. On
a ratio basis, net charge-offs as a percentage of average loans remained
consistent at 0.20% for the first six months of 2000 and 1999.
Management believes the allowance for possible loan losses is adequate to cover
inherent losses in the portfolio. There can be no assurance, however, that
future losses will not exceed the amounts provided for, thereby affecting future
results of operations. The amount of future additions to the allowance for
possible loan losses will be dependent upon the economy, changes in real estate
values, interest rates, the view of regulatory agencies toward adequate reserve
levels, the level of past-due and non-performing loans, and other factors.
- 23 -
<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>
June 30, December 31, June 30,
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Past Due greater than 90 days
and still accruing:
Core banking loans $ 438 $ 713 $ 413
Indirect automobile loans 362 391 168
Premium finance receivables 1,817 1,523 1,243
--------------------- ---------------------- ---------------------
Total 2,617 2,627 1,824
--------------------- ---------------------- ---------------------
Non-accrual loans:
Core banking loans 626 1,895 1,478
Indirect automobile loans 391 298 307
Premium finance receivables 2,548 2,145 1,354
--------------------- ---------------------- ---------------------
Total non-accrual loans 3,565 4,338 3,139
--------------------- ---------------------- ---------------------
Total non-performing loans:
Core banking loans 1,064 2,608 1,891
Indirect automobile loans 753 689 475
Premium finance receivables 4,365 3,668 2,597
--------------------- ---------------------- ---------------------
Total non-performing loans 6,182 6,965 4,963
--------------------- ---------------------- ---------------------
Other real estate owned - - -
--------------------- ---------------------- ---------------------
Total non-performing assets $ 6,182 $ 6,965 $ 4,963
===================== ====================== =====================
Total non-performing loans by category as a percent of its own respective
category:
Core banking loans 0.12% 0.32% 0.28%
Indirect automobile loans 0.32% 0.27% 0.19%
Premium finance receivables 1.74% 1.67% 1.20%
--------------------- ---------------------- ---------------------
Total non-performing loans 0.44% 0.54% 0.44%
--------------------- ---------------------- ---------------------
Total non-performing assets as a
percentage of total assets 0.33% 0.41% 0.33%
Allowance for possible loan losses as
a percentage of non-performing loans 158.40% 126.10% 154.68%
</TABLE>
- 24 -
<PAGE>
NON-PERFORMING CORE BANKING LOANS
Total non-performing loans for the Company's core banking business were $1.1
million, or 0.12%, of the Company's core banking loans as of June 30, 2000, and
were down from the ratios of 0.32% as of December 31, 1999 and 0.28% as of June
30, 1999. When comparing the June 30, 2000 total to the balance of $2.6 million
as of December 31, 1999, total non-performing core loans declined $1.5 million.
Non-performing core banking loans consist primarily of a small number of
commercial and real estate loans, of which management believes are well secured
and in the process of collection. The small number of such non-performing loans
allows management the opportunity to monitor closely the status of these credits
and work with the borrowers to resolve these problems effectively.
Non-performing Premium Finance Receivables
The table below presents the level of non-performing premium finance receivables
as of June 30, 2000 and 1999, and the amount of net charge-offs for the six
months then ended.
<TABLE>
<CAPTION>
As of and for the As a As of and for the As a
six-months ended % of Premium six-months ended % of Premium
6/30/00 Finance Rec. 6/30/99 Finance Rec.
------- ------------ ------- ------------
<S> <C> <C> <C> <C>
Non-performing premium finance
receivables $4,365,000 1.74% $2,597,000 1.20%
Net charge-offs of premium
finance receivables 289,000 0.23% 70,000 0.07%
</TABLE>
It is important to note that the ratio of net charge-offs is substantially less
than the ratio of non-performing assets. Management has a goal of maintaining
credit losses for this portfolio at a level below 35 basis points of average
premium finance loans outstanding. The recent growth in the portfolio has
contributed to the increase in delinquent accounts and management has
implemented additional collection procedures and invested in additional
collection staff and is diligently working to reduce the level of delinquent
accounts. It should be noted that an increase in delinquent accounts also
results in additional late charge income from the borrowers that helps to offset
the impact of the higher level of net charge-offs.
The ratio of non-performing premium finance receivables fluctuates throughout
the year due to the nature and timing of canceled account collections from
insurance carriers. Due to the nature of collateral for premium finance
receivables, it customarily takes 60-150 days to convert the collateral into
cash collections. Accordingly, the level of non-performing premium finance
receivables is not necessarily indicative of the loss inherent in the portfolio.
In the event of default, the Company has the power to cancel the insurance
policy and collect the unearned portion of the premium from the insurance
carrier. In the event of cancellation, the cash returned in payment of the
unearned premium by the insurer should generally be sufficient to cover the
receivable balance, the interest and other charges due. Due to notification
requirements and processing time by most insurance carriers, many receivables
will become delinquent beyond 90 days while the insurer is processing the return
of the unearned premium. Management continues to accrue interest until maturity
as the unearned premium is ordinarily sufficient to pay-off the outstanding
balance and contractual interest due.
- 25 -
<PAGE>
Non-performing Indirect Automobile Loans
Total non-performing indirect automobile loans were $753,000 at June 30, 2000,
compared to $689,000 at December 31, 1999 and $475,000 at June 30, 1999. The
ratio of these non-performing loans has increased slightly to 0.32% of total
indirect automobile loans at June 30, 2000 from 0.27% at December 31, 1999 and
0.19% at June 30, 1999. As noted in the Allowance for Possible Loan Losses
table, net charge-offs as a percent of total indirect automobile loans decreased
from 0.54% in the first half of 1999 to 0.45% in the first half of 2000. Despite
the increase in the level of non-performing loans, these ratios continue to be
below standard industry ratios for this type of loan category. However, based on
the impact of the current economic and competitive environment surrounding this
portfolio, management has begun to reduce the level of new loans originated and
is dedicating additional resources to reduce the level of delinquencies.
Potential Problem Loans
In addition to those loans disclosed under "Past Due Loans and Non-performing
Assets," there are certain loans in the portfolio which management has
identified, through its problem loan identification system, which exhibit a
higher than normal credit risk. However, these loans are still considered
performing and, accordingly, are not included in non-performing loans. Examples
of these potential problem loans include certain loans that are in a past-due
status, loans with borrowers that have recent adverse operating cash flow or
balance sheet trends, or loans with general risk characteristics that the loan
officer feels might jeopardize the future timely collection of principal and
interest payments. Management's review of the total loan portfolio to identify
loans where there is concern that the borrower will not be able to continue to
satisfy present loan repayment terms includes factors such as review of
individual loans, recent loss experience and current economic conditions. The
principal amount of potential problem loans as of June 30, 2000 and December 31,
1999 was approximately $17.1 million and $14.4 million, respectively.
LIQUIDITY
Wintrust manages the liquidity position of its banking operations to ensure that
sufficient funds are available to meet customers' needs for loans and deposit
withdrawals. The liquidity to meet the demand is provided by maturing assets,
sales of premium finance receivables, liquid assets that can be converted to
cash, and the ability to attract funds from external sources. Liquid assets
refer to federal funds sold and to marketable, unpledged securities, which can
be quickly sold without material loss of principal.
INFLATION
A banking organization's assets and liabilities are primarily monetary. Changes
in the rate of inflation do not have as great an impact on the financial
condition of a bank as do changes in interest rates. Moreover, interest rates do
not necessarily change at the same percentage, as does inflation. Accordingly,
changes in inflation are not expected to have a material impact on the Company.
An analysis of the Company's asset and liability structure provides the best
indication of how the organization is positioned to respond to changing interest
rates.
- 26 -
<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. The Company intends such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and is including this statement for
purposes of invoking these safe harbor provisions. Such forward-looking
statements may be deemed to include, among other things, statements relating to
anticipated improvements in financial performance and management's long-term
performance goals, as well as statements relating to the anticipated effects on
results of operations and financial condition from expected development or
events, the Company's business and growth strategies, including anticipated
internal growth, plans to form additional de novo banks and to open new branch
offices, and to pursue additional potential development or acquisition of banks,
specialty finance or fee related businesses. Actual results could differ
materially from those addressed in the forward-looking statements as a result of
numerous factors, including the following:
o The level of reported net income, return on average assets and return on
average equity for the Company will in the near term continue to be
impacted by start-up costs associated with de novo bank formations, branch
openings, and expanded trust and investment operations. De novo banks may
typically require 13 to 24 months of operations before becoming profitable,
due to the impact of organizational and overhead expenses, the start-up
phase of generating deposits and the time lag typically involved in
redeploying deposits into attractively priced loans and other higher
yielding earning assets. Similarly, the expansion of trust and investment
services through the Company's new trust subsidiary, WAMC, is expected to
continue in a start-up phase during the next two years, before becoming
profitable.
o The Company's success to date has been and will continue to be strongly
influenced by its ability to attract and retain senior management
experienced in banking and financial services.
o Although management believes the allowance for possible loan losses is
adequate to absorb losses that may develop in the existing portfolio of
loans and leases, there can be no assurance that the allowance will prove
sufficient to cover actual future loan or lease losses.
o If market interest rates should move contrary to the Company's gap position
on interest earning assets and interest bearing liabilities, the "gap" will
work against the Company and its net interest income may be negatively
affected.
o The financial services business is highly competitive which may affect the
pricing of the Company's loan and deposit products as well as its services.
o The Company's ability to adapt successfully to technological changes to
compete effectively in the marketplace.
o Unforeseen future events that may cause slower than anticipated development
and growth of the Tricom business, changes in the temporary staffing
industry or difficulties integrating the Tricom acquisition.
o The Company may not identify attractive opportunities to expand in the
future through acquisitions of other community banks, specialty finance
companies or fee-based businesses or may have difficulty negotiating
potential acquisitions on terms considered acceptable to the Company.
o Changes in the economic environment, competition, or other factors, may
influence the anticipated growth rate of loans and deposits, the quality of
the loan portfolio and loan and deposit pricing.
- 27 -
<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 net interest income. This
effort entails providing a reasonable balance between interest rate risk, credit
risk, liquidity risk and maintenance of yield. Asset-liability management
policies are established and monitored by management in conjunction with the
boards of directors of the Banks, subject to general oversight by the Company's
Board of Directors. The policy establishes guidelines for acceptable limits on
the sensitivity of the market value of assets and liabilities to changes in
interest rates.
Derivative Financial Instruments
One method utilized by financial institutions to limit market risk is to enter
into derivative financial instruments. A derivative financial instrument
includes interest rate swaps, interest rate caps and floors, futures, forwards,
option contracts and other financial instruments with similar characteristics.
As of June 30, 2000, the Company had $315 million notional principal amount of
interest rate cap contracts that mature in September 2000 ($60 million), October
2000 ($60 million), January 2001 ($60 million), February 2001 ($55 million),
April 2001 ($60 million) and July 2001 ($20 million). These contracts, which
have various strike rates measured against the 91-day treasury bill rate, were
purchased to mitigate the effect of rising rates on certain of its floating rate
deposit products and fixed rate loan products. During 2000, the Company also
entered into certain covered call option transactions related to certain
securities held by the Company. These transactions were designed to utilize
excess capital at certain banks and increase the total return associated with
holding these securities as earning assets. The Company may enter into other
derivative financial instruments in the future to more effectively manage its
market risk.
Commitments To Extend Credit And Standby Letters Of Credit
In addition, the Company is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated statements of condition. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation on any
condition established in the contract. Commitments may require collateral from
the borrower if deemed necessary by the Company and generally have a fixed
expiration date. Standby letters of credit are conditional commitments issued by
the Banks to guarantee the performance of a customer to a third party up to a
specified amount and with specific terms and conditions. Commitments to extend
credit and standby letters of credit are not recorded as an asset or liability
by the Company until the instrument is exercised.
Interest Rate Sensitivity Analysis
Interest rate sensitivity is the fluctuation in earnings resulting from changes
in market interest rates. Wintrust continuously monitors not only the
organization's current net interest margin, but also the historical trends of
these margins. In addition, Wintrust also attempts to identify potential adverse
swings in net interest income in future years, as a result of interest rate
movements, by performing computerized simulation analysis of potential interest
rate environments. If a potential adverse swing in net interest margin and/or
net income were identified, management then would take appropriate actions
within its asset/liability structure to counter these potential adverse
situations. Please refer to the "Net Interest Income" section for further
discussion of the net interest margin.
- 28 -
<PAGE>
The Company's exposure to market risk is reviewed on a regular basis by
management and the boards of directors of the Banks and the Company. The
objective is to measure the effect on net income and to adjust balance sheet and
off-balance sheet instruments to minimize the inherent risk while at the same
time maximize income. Tools used by management include a standard gap report and
a rate simulation model whereby changes in net interest income are measured in
the event of various changes in interest rate indices. An institution with more
assets than liabilities repricing over a given time frame is considered asset
sensitive and will generally benefit from rising rates and conversely, a higher
level of repricing liabilities versus assets would be beneficial in a declining
rate environment. The following table illustrates the Company's gap position as
of June 30, 2000.
<TABLE>
<CAPTION>
TIME TO MATURITY OR REPRICING
-----------------------------
0-90 91-365 1-5 5+ YEARS
DAYS DAYS YEARS & OTHER TOTAL
---- ---- ----- ------- -----
(DOLLARS IN THOUSANDS)
ASSETS:
<S> <C> <C> <C> <C> <C>
Loans, net of unearned income........ $610,263 $338,820 $422,128 $29,613 $ 1,400,824
Securities........................... 63,702 19,501 97,173 38,985 219,361
Interest-bearing bank deposits....... 189 - - - 189
Federal funds sold................... 67,658 - - - 67,658
Other................................ - - - 175,437 175,437
--------------- ---------------- ---------------- -------------- -----------------
Total rate sensitive assets (RSA) 741,812 358,321 519,301 244,035 1,863,469
=============== ================ ================ ============== =================
LIABILITIES AND SHAREHOLDERS'
EQUITY:
NOW.................................. 154,056 - - - 154,056
Savings and money market............. 344,580 - - 14,772 359,352
Time deposits........................ 399,671 374,748 166,682 716 941,817
Short term borrowings................ 36,585 10,198 - - 46,783
Notes payable........................ 4,850 - - - 4,850
Demand deposits & other
liabilities....................... - - - 207,203 207,203
Trust preferred securities........... - - - 51,050 51,050
Shareholders' equity................. - - - 98,358 98,358
--------------- ---------------- ---------------- -------------- -----------------
Total rate sensitive liabilities
and equity (RSL)............... 939,742 384,946 166,682 372,099 1,863,469
=============== ================ ================ ============== =================
Cumulative gap, excluding interest
rate caps (GAP = RSA - RSL) (1) $(197,930) $ (224,555) $128,064 $ -
=============== ================ ================ ==============
Cumulative RSA/RSL (1).................. 0.79 0.93 3.12
RSA/Total assets........................ 0.40 0.19 0.28
RSL/Total assets (1).................... 0.50 0.21 0.09
GAP/Total assets (1).................... (11)% (12)% 7%
GAP/Cumulative RSA (1).................. (27)% (20)% 8%
------------------------------------------------------
<FN>
(1) The gap amount and related ratios do not reflect $315 million notional
amount of interest rate caps, as discussed on the following page.
</FN>
</TABLE>
- 29 -
<PAGE>
While the gap position illustrated on the previous page is a useful tool that
management can assess for general positioning of the Company's and its
subsidiaries' balance sheets, it is only as of a point in time and does not
reflect the impact of off-balance sheet interest rate cap contracts. As of June
30, 2000, the Company had $315 million notional principal amount of interest
rate caps that reprice on a monthly basis. These interest rate caps, which
mature in intervals throughout the next 12 months, were purchased to mitigate
the effect of rising rates on certain floating rate deposit products and fixed
rate loan products. When the gap position in the above table is adjusted for the
impact of these interest rate caps, the Company's short-term gap position
becomes relatively neutral in that the level of rate sensitive assets that
reprice within one year approximately match the level of rate sensitive
liabilities that reprice within one year.
Management uses an additional measurement tool to evaluate its asset/liability
sensitivity which determines exposure to changes in interest rates by measuring
the percentage change in net interest income due to changes in interest rates
over a two-year time horizon. Management measures its exposure to changes in
interest rates using many different interest rate scenarios. One interest rate
scenario utilized is to measure the percentage change in net interest income
assuming an instantaneous permanent parallel shift in the yield curve of 200
basis points, both upward and downward. This analysis also includes the impact
of both interest rate cap agreements mentioned above. Utilizing this measurement
concept, the interest rate risk of the Company, expressed as a percentage change
in net interest income over a two-year time horizon due to changes in interest
rates, at June 30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-------------------
+200 BASIS -200 BASIS
POINTS POINTS
------ ------
<S> <C> <C>
Percentage change in net interest income due to an immediate 200 basis point
change in interest rates over a two-year time horizon.... 1.8% (0.5%)
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------
+200 BASIS -200 BASIS
POINTS POINTS
------ ------
<S> <C> <C>
Percentage change in net interest income due to an immediate 200 basis point
change in interest rates over a two-year time horizon.... 1.3% 0.6%
=============== ===============
</TABLE>
- 30 -
<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.
(a) The Annual Meeting of Shareholders was held on May 25, 2000.
(c) At the Annual Meeting of Shareholders, the following matter was submitted
to a vote of the shareholders:
(1) The election of eight Class I directors to the Board of Directors to
hold office for a three-year term.
<TABLE>
<CAPTION>
Director Votes For Withheld Authority
-------- --------- ------------------
<S> <C> <C>
James E. Mahoney 6,820,922 265,575
James B. McCarthy 6,783,110 303,387
John W. Leopold 6,822,917 263,580
Dorothy M. Mueller 6,799,020 287,477
Thomas J. Neis 6,797,920 288,577
J. Christopher Reyes 6,823,972 262,525
Peter P. Rusin 6,772,935 313,562
Edward J. Wehmer 6,817,358 269,139
</TABLE>
(2) To consider a proposal to amend the Wintrust Financial Corporation
1997 Stock Incentive Plan to increase the number of shares of Common
Stock authorized to be issued under the Plan by 450,000 shares.
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C> <C>
4,237,619 735,312 69,113
</TABLE>
ITEM 5: OTHER INFORMATION.
None.
- 31 -
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
4.1 Preferred Securities Guarantee Agreement by and between Wintrust
Financial Corporation and Wilmington Trust Company dated June 14, 2000,
relating to the 10.50% Cumulative Trust Preferred Securities of Wintrust
Capital Trust II (incorporated by reference to Exhibit 4.7 of Form S-3
Registration Statement (No. 333-37520) filed with the Securities and
Exchange Commission).
4.2 Indenture by and between Wintrust Financial Corporation and Wilmington
Trust Company dated June 14, 2000, relating to the 10.50% Subordinated
Debentures issued to Wintrust Capital Trust II (incorporated by
reference to Exhibit 4.1 of Form S-3 Registration Statement (No.
333-37520) filed with the Securities and Exchange Commission).
4.3 Amended and Restated Trust Agreement by and among Wintrust Financial
Corporation, Wilmington Trust Company and the Administrative Trustees
named therein dated June 14, 2000, relating to the 10.50% Cumulative
Trust Preferred Securities of Wintrust Capital Trust II (incorporated by
reference to Exhibit 4.5 of Form S-3 Registration Statement (No.
333-37520) filed with the Securities and Exchange Commission).
4.4 Form of Preferred Security Certificate of Wintrust Capital Trust II
(incorporated by reference to Exhibit 4.6 of Form S-3 Registration
Statement (No. 333-37520) filed with the Securities and Exchange
Commission).
4.5 Form of Subordinated Debenture (incorporated by reference to Exhibit 4.2
of Form S-3 Registration Statement (No. 333-37520) filed with the
Securities and Exchange Commission).
10.1 First Amendment To Wintrust Financial Corporation 1997 Stock Incentive
Plan
27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed during the second quarter of 2000.
- 32 -
<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: August 14, 2000 /s/ Edward J. Wehmer
--------------------
President & Chief Executive Officer
Date: August 14, 2000 /s/ David A. Dykstra
--------------------
Executive Vice President & Chief
Financial Officer
(Principal Financial and Accounting
Officer)
- 33 -
<PAGE>
EXHIBIT INDEX
Exhibit 4.1 Preferred Securities Guarantee Agreement by and between
Wintrust Financial Corporation and Wilmington Trust Company
dated June 14, 2000, relating to the 10.50% Cumulative Trust
Preferred Securities of Wintrust Capital Trust II
(incorporated by reference to Exhibit 4.7 of Form S-3
Registration Statement (No. 333-37520) filed with the
Securities and Exchange Commission).
Exhibit 4.2 Indenture by and between Wintrust Financial Corporation and
Wilmington Trust Company dated June 14, 2000, relating to
the 10.50% Subordinated Debentures issued to Wintrust
Capital Trust II (incorporated by reference to Exhibit 4.1
of Form S-3 Registration Statement (No. 333-37520) filed
with the Securities and Exchange Commission).
Exhibit 4.3 Amended and Restated Trust Agreement by and among Wintrust
Financial Corporation, Wilmington Trust Company and the
Administrative Trustees named therein dated June 14, 2000,
relating to the 10.50% Cumulative Trust Preferred Securities
of Wintrust Capital Trust II (incorporated by reference to
Exhibit 4.5 of Form S-3 Registration Statement (No.
333-37520) filed with the Securities and Exchange
Commission).
Exhibit 4.4 Form of Preferred Security Certificate of Wintrust Capital
Trust II (incorporated by reference to Exhibit 4.6 of Form
S-3 Registration Statement (No. 333-37520) filed with the
Securities and Exchange Commission).
Exhibit 4.5 Form of Subordinated Debenture (incorporated by reference to
Exhibit 4.2 of Form S-3 Registration Statement (No.
333-37520) filed with the Securities and Exchange
Commission).
Exhibit 10.1 First Amendment To Wintrust Financial Corporation 1997 Stock
Incentive Plan
Exhibit 27 Financial Data Schedule
- 34 -
<PAGE>
