UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2012
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period from to
Commission File Number 001-35077
Wintrust Financial Corporation
(Exact name of registrant as specified in its charter)
Illinois | 36-3873352 | |
(State of incorporation or organization) | (I.R.S. Employer Identification No.) | |
9700 W. Higgins Road, Suite 800
Rosemont, Illinois 60018
(Address of principal executive offices)
Registrant’s telephone number, including area code: (847) 939-9000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, no par value Warrants (expiring December 19, 2018) | The NASDAQ Global Select Market The NASDAQ Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes þ No
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 for 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. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ | Accelerated filer ¨ | Non-Accelerated filer ¨ | Smaller reporting company ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2012 (the last business day of the registrant’s most recently completed second quarter), determined using the closing price of the common stock on that day of $35.50, as reported by the NASDAQ Global Select Market, was $1,264,465,519.
As of February 22, 2013, the registrant had 36,983,610 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company’s Annual Meeting of Shareholders to be held on May 23, 2013 are incorporated by reference into Part III.
TABLE OF CONTENTS
Page | ||
PART I | ||
ITEM 1 | Business | |
ITEM 1A. | Risk Factors | |
ITEM 1B. | Unresolved Staff Comments | |
ITEM 2. | Properties | |
ITEM 3. | Legal Proceedings | |
ITEM 4. | Mine Safety Disclosures | |
PART II | ||
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
ITEM 6. | Selected Financial Data | |
ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | |
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
ITEM 8. | Financial Statements and Supplementary Data | |
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
ITEM 9A. | Controls and Procedures | |
ITEM 9B. | Other Information | |
PART III | ||
ITEM 10. | Directors, Executive Officers and Corporate Governance | |
ITEM 11. | Executive Compensation | |
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence | |
ITEM 14. | Principal Accountant Fees and Services | |
PART IV | ||
ITEM 15. | Exhibits and Financial Statement Schedules | |
Signatures | ||
PART I
ITEM I. BUSINESS
Overview
Wintrust Financial Corporation, an Illinois corporation (“we,” “Wintrust” or “the Company”), which was incorporated in 1992, is a financial holding company based in Rosemont, Illinois, with total assets of approximately $17.5 billion as of December 31, 2012. We conduct our businesses through three segments: community banking, specialty finance and wealth management.
We provide community-oriented, personal and commercial banking services to customers located in the Chicago metropolitan area and in southeastern Wisconsin (“our Market Area”) through our fifteen wholly owned banking subsidiaries (collectively, the “banks”), as well as the origination and purchase of residential mortgages for sale into the secondary market through Wintrust Mortgage, a division of Barrington Bank and Trust Company, N.A. (“Barrington Bank”). For the years ended December 31, 2012, 2011 and 2010, the community banking segment had net revenues of $661 million, $568 million and $520 million, respectively, and net income of $130 million, $84 million and $71 million, respectively. The community banking segment had total assets of $17.2 billion, $15.2 billion and $13.3 billion as of December 31, 2012, 2011 and 2010, respectively. All of these measurements are based on our reportable segments and do not reflect intersegment eliminations. The community banking segment accounted for 89% of our consolidated net revenues, including intersegment eliminations, for the year ended December 31, 2012.
We provide specialty finance services, including financing for the payment of commercial insurance premiums and life insurance premiums (“premium finance receivables”) on a national basis through our wholly owned subsidiary, First Insurance Funding Corporation (“FIFC”) and our Canadian premium finance company, First Insurance Funding of Canada (“FIFC Canada”), and short-term accounts receivable financing (“Tricom finance receivables”) and outsourced administrative services through our wholly owned subsidiary, Tricom, Inc. of Milwaukee (“Tricom”). For the years ended December 31, 2012, 2011 and 2010, the specialty finance segment had net revenues of $127 million, $116 million and $104 million, respectively, and net income of $50 million, $46 million and $33 million, respectively. The specialty finance segment had total assets of $3.9 billion, $3.3 billion and $2.9 billion as of December 31, 2012, 2011 and 2010, respectively. All of these measurements are based on our reportable segments and do not reflect intersegment eliminations. The specialty finance segment accounted for 17% of our consolidated net revenues, including intersegment eliminations, for the year ended December 31, 2012.
We provide a full range of wealth management services primarily to customers in our Market Area through three separate subsidiaries, including The Chicago Trust Company, N.A. (“CTC”), Wayne Hummer Investments, LLC (“WHI”) and Great Lakes Advisors, LLC (“Great Lakes Advisors”). For the years ended December 31, 2012, 2011 and 2010, the wealth management segment had net revenues of $69 million, $63 million and $58 million, respectively, and net income of $6 million, $7 million and $7 million, respectively. The wealth management segment had total assets of $93 million, $92 million and $65 million as of December 31, 2012, 2011 and 2010, respectively. All of these measurements are based on our reportable segments and do not reflect intersegment eliminations. The wealth management segment accounted for 9% of our consolidated net revenues, including intersegment eliminations, for the year ended December 31, 2012.
Our Business
Community Banking
Through our banks, we provide community-oriented, personal and commercial banking services to customers located in our Market Area. Our customers include individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the banks' local service areas. The banks have a community banking and marketing strategy. In keeping with this strategy, the banks provide highly personalized and responsive service, a characteristic of locally-owned and managed institutions. As such, the banks compete for deposits principally by offering depositors a variety of deposit programs, convenient office locations, hours and other services, and for loan originations primarily through the interest rates and loan fees they charge, the efficiency and quality of services they provide to borrowers and the variety of their loan and cash management products. Using our decentralized corporate structure to our advantage, in 2008, we announced the creation of our MaxSafe® deposit accounts, which provide customers with expanded Federal Deposit Insurance Corporation (“FDIC”) insurance coverage by spreading a customer's deposit across our fifteen banks. This product differentiates our banks from many of our competitors that have consolidated their bank charters into branches. In 2010, we opened a downtown Chicago office to work with each of our banks to capture core commercial and industrial business. Our commercial and industrial lenders in our downtown office operate in close partnership with lenders at our community banks. By combining our expertise in the commercial and industrial sector with our high level of personal service and full suite of banking products, we believe we create another point of differentiation from both our larger and smaller competitors. Our banks also offer home equity, home mortgage, consumer, and real estate loans, safe deposit facilities, ATMs, internet banking and other innovative and traditional services specially tailored to meet the needs of customers in their market areas.
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We developed our banking franchise through a combination of de novo organization and the purchase of existing bank franchises. The organizational efforts began in 1991, when a group of experienced bankers and local business people identified an unfilled niche in the Chicago metropolitan area retail banking market. As large banks acquired smaller ones and personal service was subjected to consolidation strategies, the opportunity increased for locally owned and operated, highly personal service-oriented banks. As a result, Lake Forest Bank and Trust Company (“Lake Forest Bank”) was founded in December 1991 to service the Lake Forest and Lake Bluff communities. As of December 31, 2012, we had 111 banking locations.
We now own fifteen banks, including nine Illinois-chartered banks, Lake Forest Bank, Hinsdale Bank and Trust Company (“Hinsdale Bank”), North Shore Community Bank and Trust Company (“North Shore Community Bank”), Libertyville Bank and Trust Company (“Libertyville Bank”), Northbrook Bank & Trust Company (“Northbrook Bank”), Village Bank & Trust (“Village Bank”), Wheaton Bank & Trust Company (“Wheaton Bank”), State Bank of The Lakes and St. Charles Bank & Trust Company (“St. Charles Bank”). In addition, we have one Wisconsin-chartered bank, Town Bank, and five nationally chartered banks, Barrington Bank, Crystal Lake Bank & Trust Company, N.A. (“Crystal Lake Bank”), Schaumburg Bank & Trust Company, N.A. (“Schaumburg Bank”), Beverly Bank & Trust Company, N.A. (“Beverly Bank”) and Old Plank Trail Community Bank, N.A. (“Old Plank Trail Bank”).
Each bank is subject to regulation, supervision and regular examination by: (1) the Secretary of the Illinois Department of Financial and Professional Regulation (“Illinois Secretary”) and the Board of Governors of the Federal Reserve System (“Federal Reserve”) for Illinois-chartered banks; (2) the Office of the Comptroller of the Currency (“OCC”) for nationally-chartered banks or (3) the Wisconsin Department of Financial Institutions (“Wisconsin Department”) and the Federal Reserve for Town Bank.
We also engage in the origination and purchase of residential mortgages for sale into the secondary market through Wintrust Mortgage, and provide other loan closing services to a network of mortgage brokers. Mortgage banking operations are also performed within certain banks. Wintrust Mortgage, a division of Barrington Bank, sells many of its loans with servicing released. Some of our banks engage in loan servicing, as a portion of the loans sold by the banks into the secondary market are sold with the servicing of those loans retained. Wintrust Mortgage maintains principal origination offices in a number of states, including Illinois, and originates loans in states through correspondent channels. Wintrust Mortgage also established offices at several of the banks and provides the banks with the ability to use an enhanced loan origination and documentation system. This allows Wintrust Mortgage and the banks to better utilize existing operational capacity and improve the product offering for the banks' customers.
We also offer several niche lending products through the banks. These include Barrington Bank's Community Advantage program which provides lending, deposit and cash management services to condominium, homeowner and community associations, Hinsdale Bank's mortgage warehouse lending program which provides loan and deposit services to mortgage brokerage companies located predominantly in the Chicago metropolitan area, Crystal Lake Bank's North American Aviation Financing division which provides small aircraft lending, Lake Forest Bank's franchise lending program which provides lending primarily to restaurant franchisees and Hinsdale Bank's indirect auto lending program originates new and used automobile loans, generated through a network of automobile dealers located in the Chicago metropolitan area, secured by new and used vehicles and diversified among many individual borrowers. We did not originate indirect auto loans from the third quarter of 2008 through the third quarter of 2010, but restarted loans under this program as market conditions became more favorable. In the fourth quarter of 2012, we again ceased the origination of indirect auto loans based on market conditions. In aggregate, these other specialty loans generated through divisions of the banks comprised approximately 5.0% of our loan and lease portfolio at December 31, 2012.
Specialty Finance
We conduct our specialty finance businesses through indirect non-bank subsidiaries. Our wholly owned subsidiary, FIFC, engages in the premium finance receivables business, our most significant specialized lending niche, including commercial insurance premium finance and life insurance premium finance. We also engage in commercial insurance premium finance in Canada through our newly acquired wholly owned subsidiary FIFC Canada.
In their commercial insurance premium finance operations, FIFC and FIFC Canada make loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. Approved medium and large insurance agents and brokers located throughout the United States and Canada assist FIFC and FIFC Canada respectively in arranging each commercial premium finance loan between the borrower and FIFC or FIFC Canada. FIFC or FIFC Canada evaluates each loan request according to its own underwriting criteria including the amount of the down payment on the insurance policy, the term of the loan, the credit quality of the insurance company providing the financed insurance policy, the interest rate, the borrower's previous payment history, if any, and other factors deemed appropriate. Upon approval of the loan by FIFC or FIFC Canada, as the case may be, the borrower makes a down payment on the financed insurance policy, which is generally done by providing payment to the agent or broker, who then forwards it to the insurance company. FIFC or FIFC Canada may either forward the financed amount of the
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remaining policy premiums directly to the insurance carrier or to the agent or broker for remittance to the insurance carrier on FIFC's or FIFC Canada's behalf. In some cases the agent or broker may hold our collateral, in the form of the proceeds of the unearned insurance premium from the insurance company, and forward it to FIFC or FIFC Canada in the event of a default by the borrower. Because the agent or broker is the primary contact to the ultimate borrowers who are located nationwide and because proceeds and our collateral may be handled by the agent or brokers during the term of the loan, FIFC and FIFC Canada may be more susceptible to third party (i.e., agent or broker) fraud. The Company performs ongoing credit and other reviews of the agents and brokers, and performs various internal audit steps to mitigate against the risk of any fraud.
The commercial and property premium finance business is subject to regulation in the majority of states. Regulation typically governs notices to borrowers prior to cancellation of a policy, notices to insurance companies, maximum interest rates and late fees and approval of loan documentation. FIFC is licensed or otherwise qualified to provide financing of commercial insurance policies in all 50 states and FIFC’s compliance department regularly monitors changes to regulations and updates policies and programs accordingly.
In 2007, FIFC began financing life insurance policy premiums generally used for estate planning purposes of high net-worth borrowers. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and legal counsel. The cash surrender value of the life insurance policy is the primary form of collateral. In addition, these loans often are secured with a letter of credit, marketable securities or certificates of deposit. In some cases, FIFC may make a loan that has a partially unsecured position.
The life insurance premium finance business is governed under banking regulations but is not subject to additional systemic regulation. FIFC's compliance department regularly monitors the regulatory environment and the company's compliance with existing regulations. FIFC maintains a policy prohibiting the knowing financing of stranger-originated life insurance and has established procedures to identify and prevent the company from financing such policies. While a carrier could potentially put at risk the cash surrender value of a policy, which serves as FIFC's primary collateral, by challenging the validity of the insurance contract for lack of an insurable interest, FIFC believes it has strong counterclaims against any such claims by carriers, in addition to recourse to borrowers and guarantors as well as to additional collateral in certain cases.
Premium finance loans made by FIFC and FIFC Canada are primarily secured by the insurance policies financed by the loans. These insurance policies are written by a large number of insurance companies geographically dispersed throughout the country and Canada. Our premium finance receivables balances finance insurance policies which are spread among a large number of insurers, however one of the insurers represents approximately 11% of such balances and two additional insurers each of which represent approximately 4% of such balances. FIFC and FIFC Canada consistently monitor carrier ratings and financial performance of our carriers. In the event ratings fall below certain levels, most of FIFC's life insurance premium finance policies provide for an event of default and allow FIFC to have recourse to borrowers and guarantors as well as to additional collateral in certain cases. For the commercial premium finance business, the term of the loans is sufficiently short such that in the event of a decline in carrier ratings, FIFC or FIFC Canada, as the case may be, can restrict or eliminate additional loans to finance premiums to such carriers.
Through our wholly owned subsidiary, Tricom, we provide high-yielding, short-term accounts receivable financing and value-added, outsourced administrative services, such as data processing of payrolls, billing and cash management services to the temporary staffing industry. Tricom’s clients, located throughout the United States, provide staffing services to businesses in diversified industries. During 2012, Tricom processed payrolls with associated client billings of approximately $462 million and contributed approximately $8.3 million to our revenue, net of interest expense. Net revenue is based on our reportable segments and does not reflect intersegment eliminations.
In 2012, our commercial premium finance operations, life insurance premium finance operations and accounts receivable finance operations accounted for 61%, 32% and 7%, respectively, of the total revenues of our specialty finance business.
Wealth Management Activities
We offer a full range of wealth management services through three separate subsidiaries, including trust and investment services, asset management and securities brokerage services. Our asset management company which operates under the name "Great Lakes Advisors, LLC, a Wintrust Wealth Management Company", is the result of the acquisitions of Wayne Hummer Asset Management Company in 2002, Lake Forest Capital Management Company in 2003, and Great Lakes Advisors in July 2011.
Great Lakes Advisors, our registered investment adviser, provides money management services and advisory services to individuals, mutual funds and institutional municipal and tax-exempt organizations. Great Lakes Advisors also provides portfolio management and financial supervision for a wide range of pension and profit-sharing plans as well as money management and advisory services to CTC. At December 31, 2012, the Company’s wealth management subsidiaries had approximately $15.0 billion of assets under administration, which includes $1.7 billion of assets owned by the Company and its subsidiary banks.
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CTC, our trust subsidiary, offers trust and investment management services to clients through offices located in downtown Chicago and at various banking offices of our fifteen banks. CTC is subject to regulation, supervision and regular examination by the OCC. During 2012, the Company acquired the trust and investment management services of Suburban Bank & Trust Company.
In 2002, we acquired WHI, our registered broker/dealer subsidiary, which has been operating since 1931. Through WHI, we provide a full range of private client and securities brokerage services to clients located primarily in the Midwest. WHI is headquartered in downtown Chicago, operates an office in Appleton, Wisconsin, and as of December 31, 2012, established branch locations in offices at a majority of our banks. WHI also provides a full range of investment services to clients through a network of relationships with community-based financial institutions primarily located in Illinois.
Strategy and Competition
Historically, we have executed a growth strategy through branch openings and de novo bank formations, expansion of our wealth management and premium finance business, development of specialized earning asset niches and acquisitions of other community-oriented banks or specialty finance companies. However, beginning in 2006, we made a decision to slow our growth due to unfavorable credit spreads, loosened underwriting standards by many of our competitors, and intense price competition. During 2008 we were able to raise additional capital. With $300 million of additional capital, we began to increase our lending and deposits in late 2008. This additional capital allowed us to be in a position to take advantage of opportunities in a disrupted marketplace during 2009, 2010, 2011 and 2012 by:
• | Increasing our lending as other financial institutions pulled back; |
• | Hiring quality lenders and other staff away from larger and smaller institutions that may have substantially deviated from a customer-focused approach or who may have substantially limited the ability of their staff to provide credit or other services to their customers; |
• | Investing in dislocated assets such as the purchased life insurance premium finance portfolio, the Canadian commercial premium finance portfolio, the trust and investment management companies and certain collateralized mortgage obligations; |
• | Purchasing banks and banking assets either directly or through the FDIC-assisted process in areas key to our geographic expansion. |
In 2010, we further strengthened our capital position through offerings of common stock and tangible equity units that raised an aggregate of $540 million in net proceeds and repurchased our preferred stock issued to the U.S. Department of Treasury ("Treasury") under the Troubled Asset Relief Program at a price of $251.3 million, which included accrued and unpaid dividends of $1.3 million. In 2012, the Company raised net proceeds of $122.7 million through the issuance and sale of non-cumulative perpetual convertible preferred stock.
Management is committed to maintaining the Company's capital levels above the “well-capitalized” levels established by the Federal Reserve for bank holding companies. Our strategy and competitive position for each of our business segments is summarized in further detail, below.
Community Banking
We compete in the commercial banking industry through our banks in the communities they serve. The commercial banking industry is highly competitive and the banks face strong direct competition for deposits, loans and other financial related services. The banks compete with other commercial banks, thrifts, credit unions and stockbrokers. Some of these competitors are local, while others are statewide or nationwide.
As a mid-size financial services company, we expect to benefit from greater access to financial and managerial resources than our smaller local competitors while maintaining our commitment to local decision-making and to our community banking philosophy. In particular, we are able to provide a wider product selection and larger credit facilities than many of our smaller competitors, and we believe our service offerings help us in recruiting talented staff. Since the beginning of 2009, we have continued to add more lenders throughout the community banking organization, many of whom have joined us because of our ability to offer a range of products and level of services which compete effectively with both larger and smaller market participants. We have continued to expand our product delivery systems, including a wide variety of electronic banking options for our retail and commercial customers which allow us to provide a level of service typically associated with much larger banking institutions. Consequently, management views technology as a great equalizer to offset some of the inherent advantages of its significantly larger competitors. Additionally, we have access to public capital markets whereas many of our local competitors are privately held and may have limited capital raising capabilities.
We also believe we are positioned to compete effectively with other larger and more diversified banks, bank holding companies and other financial services companies due to the multi-chartered approach that pushes accountability for building a franchise and a high level of customer service down to each of our banking franchises. Additionally, we believe that we provide a relatively
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complete portfolio of products that is responsive to the majority of our customers' needs through the retail and commercial operations supplied by our banks, and through our mortgage and wealth management operations. The breadth of our product mix allows us to compete effectively with our larger competitors while our multi-chartered approach with local and accountable management provides for what we believe is superior customer service relative to our larger and more centralized competitors.
Wintrust Mortgage, a division of Barrington Bank, as well as the mortgage banking functions within the banks, competes with large mortgage brokers as well as other banking organizations. Consolidation, on-going investor push-backs, enhanced regulatory guidance and the promise of equal oversight for both banks and independent lenders have created challenges for small and medium-sized independent mortgage lenders. Wintrust Mortgage's size, bank affiliation, branding, technology, business development tools and reputation makes the firm well positioned to compete in this environment. While earnings will fluctuate with the rise and fall of long-term interest rates, mortgage banking revenue will be a continuous source of revenue for us and our mortgage lending relationships will continue to provide franchise value to our other financial service businesses.
In 2012, we furthered our growth strategy by purchasing, through certain of our banking subsidiaries, a number of additional banks and banking locations. In three FDIC-assisted transactions, we purchased a total of ten new banking locations, three in Chicago, one in Hanover Park, Illinois, one in Crete, Illinois, two in Frankfort, Illinois, one in Hoffman Estates, Illinois, one in Steger, Illinois and one in St. John, Indiana. The location in St. John Indiana was subsequently closed and the Company divested of the three Chicago locations, comprising Second Federal Savings and Loan Association of Chicago ("Second Federal"), in February 2013. In addition, we acquired two new banking locations in a non-FDIC-assisted transaction in the Hyde Park neighborhood of Chicago, Illinois that were merged into Beverly Bank, as well as one banking location in Orland Park, Illinois through the acquisition of a branch of Suburban Bank & Trust Company ("Suburban") that was merged into Old Plank Trail Bank. Each of these acquisitions allowed us to expand our franchise into strategic locations on a cost-effective basis. We believe that these strategic acquisitions will allow us to grow into contiguous markets which we do not currently service and expand our footprint.
Specialty Finance
FIFC encounters intense competition from numerous other firms, including a number of national commercial premium finance companies, companies affiliated with insurance carriers, independent insurance brokers who offer premium finance services and other lending institutions. Some of its competitors are larger and have greater financial and other resources. FIFC competes with these entities by emphasizing a high level of knowledge of the insurance industry, flexibility in structuring financing transactions, and the timely funding of qualifying contracts. We believe that our commitment to service also distinguishes us from our competitors. Additionally, we believe that FIFC's acquisition of a large life insurance premium finance portfolio and related assets in 2009 enhanced our ability to market and sell life insurance premium finance products. FIFC Canada competes with one national commercial premium finance company and a number of regional providers.
Tricom competes with numerous other firms, including a small number of similar niche finance companies and payroll processing firms, as well as various finance companies, banks and other lending institutions. Tricom's management believes that its commitment to service distinguishes it from competitors. To the extent that other finance companies, financial institutions and payroll processing firms add greater programs and services to their existing businesses, Tricom's operations could be negatively affected.
Wealth Management Activities
Our wealth management companies (CTC, WHI and Great Lakes Advisors) compete with larger wealth management subsidiaries of other larger bank holding companies as well as with other trust companies, brokerage and other financial service companies, stockbrokers and financial advisors. We believe we can successfully compete for trust, asset management and brokerage business by offering personalized attention and customer service to small to midsize businesses and affluent individuals. We continue to recruit and hire experienced professionals from the larger Chicago area wealth management companies, which is expected to help in attracting new customer relationships.
Supervision and Regulation
General
Our business is subject to extensive regulation and supervision under federal and state laws and regulations. The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), subject to regulation, supervision, and examination by the Federal Reserve. Our subsidiary banks are subject to regulation, supervision, and examination by the agency that granted their banking charters-(i) the OCC for Barrington Bank, Crystal Lake Bank, Schaumburg Bank, Beverly Bank and Old Plank Trail Bank, our nationally-chartered subsidiary banks; (ii) the Illinois Secretary for Lake Forest Bank, Hinsdale Bank, North Shore Community Bank, Libertyville Bank, Northbrook Bank, Village Bank, Wheaton Bank, State Bank of The Lakes and St. Charles Bank, each of which is an Illinois state-chartered bank; and (iii) the Wisconsin Department for Town Bank, a Wisconsin state-chartered bank. Our Illinois and Wisconsin state-chartered bank subsidiaries are also members of the Federal
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Reserve System, subject to supervision and regulation by the Federal Reserve as their primary federal regulator. The deposits of all of our subsidiary banks are insured by the Deposit Insurance Fund (“DIF”) and, as such, the FDIC has additional oversight authority over the banks. The supervision, regulation and examination of banks and bank holding companies by bank regulatory agencies are intended primarily for the protection of depositors, the DIF, and the banking system as a whole, rather than shareholders of banks and bank holding companies, and in some instances may be contrary to their interests.
Our non-bank subsidiaries generally are subject to regulation by their functional regulators, including state finance and insurance agencies, the Securities and Exchange Commission (the "SEC"), the Financial Industry Regulatory Authority, the Chicago Stock Exchange, the OCC, as well as by the Federal Reserve.
The following is a description of some of the laws and regulations that currently affect our business. By necessity, the descriptions below are summaries which do not purport to be complete, and which are qualified in their entirety by reference to those statutes and regulations discussed, and all regulatory interpretations thereof. In recent years, lawmakers and regulators have increased their focus on the financial services industry. Additional changes in applicable laws, regulations, or the interpretations thereof are possible, and could have a material adverse effect on our business or the business of our subsidiaries.
Bank Holding Company Regulation
The Company is a bank holding company that has elected to be treated by the Federal Reserve as a financial holding company for purposes of the BHC Act. The activities of bank holding companies generally are limited to the business of banking, managing or controlling banks, and other activities determined by the Federal Reserve, by regulation or order, to be so closely related to banking as to be a proper incident thereto. Impermissible activities for bank holding companies and their subsidiaries include activities that are related to commerce, such as retail sales of nonfinancial products or manufacturing.
The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) amended the BHC Act to establish a new regulatory framework applicable to “financial holding companies,” which are bank holding companies that meet certain qualifications and elect financial holding company status. Financial holding companies and their non-bank subsidiaries may engage in an expanded range of activities that are considered to be financial in nature, or incidental or complementary to financial activities, if the Federal Reserve determines that such activities pose no risk to the safety or soundness of depository institutions or the financial system in general, including the businesses conducted by our wealth management subsidiaries.
Maintaining our financial holding company status requires that our subsidiary banks remain “well-capitalized” and “well-managed” as defined by regulation and maintain at least a “satisfactory” rating under the Community Reinvestment Act (“CRA”). In addition, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), we must also remain well-capitalized and well-managed to maintain our financial holding company status. If we or our subsidiary banks fail to continue to meet these requirements, we could be subject to restrictions on new activities and acquisitions and/or be required to cease existing activities that are not permissible for a bank holding company that is not a financial holding company.
The BHC Act generally requires us to obtain prior approval from the Federal Reserve before acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of, or substantially all the assets of, a bank, or to merge or consolidate with another bank holding company. As a result of the Dodd-Frank Act, the BHC Act also now requires us to be well-capitalized and well-managed, not merely adequately capitalized and adequately managed, in order to acquire a bank located outside of our home state. In addition, subject to certain exceptions, the BHC Act generally prohibits us from acquiring direct or indirect ownership or control of voting shares of any company engaged in activities that are not permissible for us to engage in.
The Federal Deposit Insurance Act (“FDIA”), as amended by the Dodd-Frank Act, and Federal Reserve regulations and policy require us to serve as a source of financial and managerial strength for our subsidiary banks, and to commit resources to support the banks. This support may be required even if doing so may adversely affect our ability to meet our other obligations.
Acquisitions of Ownership
Acquisitions of our voting stock above certain thresholds may be subject to prior regulatory notice or approval under applicable federal and state banking laws. Investors are responsible for ensuring that they do not, directly or indirectly, acquire shares of our stock in excess of the amount that can be acquired without regulatory approval under the BHC Act, the Change in Bank Control Act, the Illinois Banking Act and Wisconsin Department.
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Regulatory Reform
The Dodd-Frank Act strengthened the ability of the federal bank regulatory agencies to supervise and examine bank holding companies and their subsidiaries. To date, many final rulemakings under the Dodd-Frank Act have not yet been completed. The exact impact of the changing regulatory environment on our business and operations depends upon the final implementing regulations and the actions of our competitors, customers, and other market participants. However, the changes mandated by the Dodd-Frank Act, as well as other possible legislative and regulatory changes, generally could have a significant impact on us. For a discussion of the most recent developments under the Dodd-Frank Act, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
Volcker Rule
The Dodd-Frank Act added a new Section 13 to the BHC Act, the so-called “Volcker Rule,” which generally restricts certain banking entities, and their subsidiaries or affiliates, from engaging in proprietary trading activities and owning equity in or sponsoring any private equity or hedge fund. The draft implementing regulations for the Volcker Rule were issued by various regulatory agencies in October 2011, but final rules have not yet been adopted. In April 2012, the Federal Reserve announced that entities subject to the Volcker Rule would have until July 21, 2014 to comply. Under the proposed regulations, we (or our affiliates) may be restricted from engaging in proprietary trading, investing in third party hedge or private equity funds or sponsoring new funds unless we qualify for an exemption from the rule. We will not know the full impact of the Volcker Rule on our operations or financial condition until the final implementing regulations are adopted.
Extraordinary Government Programs
In recent years, the federal government, the Federal Reserve Bank of New York (the "New York Fed") and the FDIC have made a number of programs available to banks and other financial institutions in an effort to ensure a well-functioning U.S. financial system. Two of these programs, the Treasury's Capital Purchase Program pursuant to the Emergency Economic Stabilization Act of 2008 (the “CPP”) and the New York Fed's Term Asset-Backed Securities Loan Facility (“TALF”) have provided us with a significant amount of relatively inexpensive funding, which we used to accelerate our growth and expand lending. For a discussion of our participation in these two programs, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
Capital Requirements
The Company and our subsidiary banks are subject to risk-based capital guidelines established by the Federal Reserve, OCC, and FDIC. These guidelines define regulatory capital and establish minimum capital ratios in relation to assets, both on an aggregate basis and as adjusted for credit risks and off-balance sheet exposures. As a bank holding company, we are required to maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 capital (generally common equity, retained earnings and a limited amount of qualifying preferred stock, less goodwill and certain core deposit intangibles). The remainder may consist of Tier 2 capital, which, subject to certain conditions and limitations, consists of: the allowance for credit losses; perpetual preferred stock and related surplus; hybrid capital instruments; unrealized holding gains on marketable equity securities; perpetual debt and mandatory convertible debt securities; term subordinated debt and intermediate-term preferred stock. The Federal Reserve has stated that Tier 1 voting common equity should be the predominant form of capital.
In addition, the Federal Reserve requires a minimum leverage ratio of Tier 1 capital to total assets of 3.0% for the most highly-rated bank holding companies, and 4% for all other bank holding companies. As of December 31, 2012, the Company's total capital to risk-weighted assets ratio was 13.1%, its Tier 1 Capital to risk-weighted asset ratio was 12.1% and its Tier 1 leverage ratio was 10.0%.
Capital requirements for the banks generally parallel the capital requirements applicable to bank holding companies. In addition, the federal banking agencies adopted a final rule which modified the risk-based capital standards to provide for consideration of interest rate risk when assessing the capital adequacy of a bank. Under this rule, the federal banking agencies must explicitly include a bank's exposure to declines in the economic value of its capital due to changes in interest rates as a factor in evaluating a bank's capital adequacy. The federal banking agencies also have adopted a joint policy statement providing guidance to banks for managing interest rate risk. The policy statement emphasizes the importance of adequate oversight by management and a sound risk management process. The assessment of interest rate risk management made by the banks' examiners will be incorporated into the banks' overall risk management rating and used to determine the effectiveness of management.
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The capital adequacy guidelines also emphasize that the foregoing standards are supervisory minimums and that banks and bank holding companies generally are expected to operate well above the minimum ratios, particularly if they are experiencing growth, whether internally or through acquisition. All bank holding companies and banks are expected to hold capital commensurate with the level and nature of their risks, and additional capital may be required for institutions with a higher risk profile. Lastly, the Federal Reserve's guidelines indicate that it will continue to consider a bank holding company's tangible Tier 1 leverage ratio in evaluating proposals for expansion or new activities.
Current or future regulatory initiatives may require us to hold more capital in the future. In June 2012, the federal banking agencies proposed comprehensive revisions to their regulatory capital guidelines to implement requirements of the Dodd-Frank Act as well as the provisions of enhanced regulatory capital reforms published by the Basel Committee on Banking Supervision, referred to as “Basel III.” For more information on the banking agencies' June 2012 proposal, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
In October 2012, the Federal Reserve, OCC, and FDIC published final rules implementing the stress test requirements under the Dodd-Frank Act. For more information, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
Payment of Dividends and Share Repurchases
We are a legal entity separate and distinct from our banking and non-banking subsidiaries. Since our consolidated net income consists largely of net income of our bank and non-bank subsidiaries, our ability to pay dividends depends upon our receipt of dividends from our subsidiaries. There are various federal and state law limitations on the extent to which our banking subsidiaries can declare and pay dividends to us, including minimum regulatory capital requirements, federal and state banking law requirements concerning the payment of dividends out of net profits or surplus, and general regulatory oversight to prevent unsafe or unsound practices. No assurances can be given that the banks will, in any circumstances, pay dividends to the Company.
In general, applicable federal and state banking laws prohibit, without prior regulatory approval, insured depository institutions, such as our bank subsidiaries, from making dividend distributions if such distributions are not paid out of available earnings, or would cause the institution to fail to meet applicable minimum capital requirements. In addition, our right, and the right of our shareholders and creditors, to participate in any distribution of the assets or earnings of our bank and non-bank subsidiaries is further subject to the prior claims of creditors of our subsidiaries.
Our ability to declare and pay dividends to our shareholders is similarly limited by federal banking law and Federal Reserve regulations and policy. Federal Reserve policy provides that a bank holding company should not pay dividends unless (i) the bank holding company's net income over the last four quarters (net of dividends paid) is sufficient to fully fund the dividends, (ii) the prospective rate of earnings retention appears consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries and (iii) the bank holding company will continue to meet minimum required capital adequacy ratios. The policy also provides that a bank holding company should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the bank holding company's capital structure. Bank holding companies also are required to consult with the Federal Reserve before increasing dividends or redeeming or repurchasing capital instruments. Additionally, the Federal Reserve could prohibit or limit the payment of dividends by a bank holding company if it determines that payment of the dividend would constitute an unsafe or unsound practice.
FDICIA and Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal bank regulatory agencies to take “prompt corrective action” regarding FDIC-insured depository institutions that do not meet minimum capital requirements. Depository institutions are placed into one of five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution that fails to remain well-capitalized will be subject to a series of restrictions that increase as its capital condition worsens. For example, institutions that are less than well-capitalized are barred from soliciting, taking or rolling over brokered deposits. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) if the depository institution would be undercapitalized thereafter. Undercapitalized depository institutions are subject to growth limitations and must submit a capital restoration plan, which must be guaranteed by the institution's holding company. In addition, an undercapitalized institution is subject to increased monitoring and asset growth restrictions and is subject to greater regulatory approval requirements. The FDIA also provides for enhanced supervisory authority over undercapitalized institutions, including authority for the appointment of a conservator or receiver for the institution. Guidance from the federal banking agencies also indicates that a holding company may be required to provide assurances that a subsidiary bank will comply with any requirements imposed on it under prompt corrective action.
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As a result of the Dodd-Frank Act, bank holding companies will be subject to an “early remediation” regime that is substantially similar to the prompt corrective action regime applicable to banks. The remedial actions also increase as the condition of the holding company decreases, although the proposed holding company regime would use several forward-looking triggers to identify when a holding company is in troubled condition, beyond just the capital ratios used under the prompt corrective action regime.
As of December 31, 2012 and 2011, each of the Company's banks was categorized as “well capitalized.” In order to maintain the Company's designation as a financial holding company, each of the banks is required to maintain capital ratios at or above the “well capitalized” levels.
Enforcement Authority
The federal bank regulatory agencies have broad authority to issue orders to depository institutions and their holding companies prohibiting activities that constitute violations of law, rule, regulation, or administrative order, or that represent unsafe or unsound banking practices, as determined by the federal banking agencies. The federal banking agencies also are empowered to require affirmative actions to correct any violation or practice; issue administrative orders that can be judicially enforced; direct increases in capital; limit dividends and distributions; restrict growth; assess civil money penalties against institutions or individuals who violate any laws, regulations, orders, or written agreements with the agencies; order termination of certain activities of holding companies or their non-bank subsidiaries; remove officers and directors; order divestiture of ownership or control of a non-banking subsidiary by a holding company; terminate deposit insurance and appoint a conservator or receiver.
FDIA
The FDIA imposes various requirements on insured depository institutions, including our subsidiary banks. Among other things, the FDIA includes requirements applicable to the closure of branches; merger or consolidation by or with another insured bank; additional disclosures to depositors with respect to terms and interest rates applicable to deposit accounts; uniform regulations for extensions of credit secured by real estate; restrictions on activities of and investments by state-chartered banks; and increased reporting requirements on agricultural loans and loans to small businesses. Under the “cross-guarantee” provision of the FDIA, insured depository institutions such as the banks may be liable to the FDIC for any losses incurred, or reasonably expected to be incurred, by the FDIC resulting from the default of, or FDIC assistance to, any other commonly controlled insured depository institution. All of our subsidiary banks are commonly controlled within the meaning of the cross-guarantee provision.
The FDIA also requires the federal bank regulatory agencies to prescribe standards of safety and soundness, by regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock valuation and compensation. The federal bank regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards pursuant to the FDIA. The guidelines establish general standards relating to internal controls and information systems, informational security, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder.
Insurance of Deposit Accounts
The deposits of each of our subsidiary banks are insured by the DIF up to applicable limits. The Dodd-Frank Act increased the standard maximum deposit insurance amount to $250,000 per depositor, and temporarily provided unlimited deposit insurance of the net amount of certain non-interest-bearing transaction accounts through December 31, 2012.
As insured depository institutions, each of our subsidiary banks is subject to deposit insurance assessments based on the risk it poses to the DIF, as determined by the capital category and supervisory category to which it is assigned. The FDIC has authority to raise or lower assessment rates on insured deposits in order to achieve statutorily required reserve ratios in the DIF and to impose special additional assessments. In light of the significant increase in depository institution failures in 2008-2010 and the increase of deposit insurance limits, the DIF incurred substantial losses during recent years. To bolster reserves in the DIF, the Dodd-Frank Act increased the minimum reserve ratio of the DIF to 1.35% of insured deposits and deleted the statutory cap for the reserve ratio. In December 2010, the FDIC set the designated reserve ratio at 2%, 65 basis points above the statutory minimum. In April 2011, the FDIC implemented changes required by the Dodd-Frank Act to revise the definition of the assessment base for calculating deposit insurance premiums from the amount of insured deposits held by an institution to the institution's average total consolidated assets less average tangible equity. The FDIC also changed the assessment rates, providing that they will initially range from 2.5 basis points to 45 basis points. The FDIC has indicated that these changes generally will not require an increase in the level of assessments for depository institutions with less than $10 billion in assets, such as each of our bank subsidiaries, and may result in decreased assessments for such institutions. However, there is a risk that the banks' deposit insurance premiums will again increase if failures of insured depository institutions continue to deplete the DIF.
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In addition, the Deposit Insurance Fund Act of 1996 authorizes the Financing Corporation (“FICO”) to impose assessments on DIF assessable deposits in order to service the interest on FICO's bond obligations. The FICO annualized assessment rate is $0.64 and $0.66 per $100 of deposits for the first quarter of 2013 and the first quarter of 2012, respectively.
Limits on Loans to One Borrower and Loans to Insiders
Federal and state banking laws impose limits on the amount of credit a bank can extend to any one person (or group of related persons). The Dodd-Frank Act expanded the scope of these restrictions for national banks under federal law to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. Provisions of the Dodd-Frank Act also amended the FDIA to prohibit state-chartered banks (including certain of our banking subsidiaries) from engaging in derivative transactions unless the state lending limit laws take into account credit exposure to such transactions.
Applicable banking laws and regulations also place restrictions on loans by FDIC-insured banks and their affiliates to their directors, executive officers and principal shareholders.
Additional Provisions Regarding Deposit Accounts
The Dodd-Frank Act eliminated prohibitions under federal law against the payment of interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts. Depending upon the market response, this change could have an adverse impact on our interest expense.
In addition, the banks are subject to Federal Reserve regulations requiring depository institutions to maintain interest-bearing reserves against their transaction accounts (primarily NOW and regular checking accounts). As of December 31, 2012 the first $11.5 million of otherwise reservable balances (subject to adjustments by the Federal Reserve for each of the banks) are exempt from the reserve requirements. A 3% reserve ratio applies to balances over $11.5 million up to and including $71.0 million and a 10% reserve ratio applies to balances in excess of $71.0 million.
De Novo Branching
The Dodd-Frank Act amended the FDIA and the National Bank Act to allow national banks and state banks, with the approval of their regulators, to establish de novo branches in states other than the bank's home state as if such state was the bank's home state.
In 2009, the FDIC adopted enhanced supervisory procedures for de novo banks, which extended the special supervisory period for such banks from three to seven years. Throughout the de novo period, newly chartered banks will be subject to higher capital requirements, more frequent examinations and other requirements.
Anti-Tying Provisions
Under the anti-tying provisions of the BHC Act, among other things, each of our subsidiary banks is prohibited from conditioning the availability of any product or service, or varying the price for any product or service, on the requirement that the customer obtain some additional product or service from the bank or any of its affiliates, other than loans, deposits and trust services.
Transactions with Affiliates
Certain “covered” transactions between a bank and its holding company or other non-bank affiliates are subject to various restrictions imposed by state and federal law and regulation. Such “covered transactions” include loans and other extensions of credit by the bank to the affiliate, investments in securities issued by the affiliate, purchases of assets from the affiliate, payments of fees or other distributions to the affiliate, certain derivative transactions that create a credit exposure to an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of the affiliate. In general, these affiliate transaction rules limit the amount of covered transactions between an institution and a single affiliate, as well as the aggregate amount of covered transactions between an institution and all of its affiliates. In addition, covered transactions that are credit transactions must be secured by acceptable collateral, and all covered transactions must be on terms that are at least as favorable to the institution as then-prevailing in the market for comparable transactions with unaffiliated entities. Transactions between affiliated banks may be subject to certain exemptions under applicable federal law.
Community Reinvestment Act
Under the CRA, a financial institution has a continuing and affirmative obligation, consistent with the safe and sound operation of such institution, to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.
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However, institutions are rated on their performance in meeting the needs of their communities. The CRA requires each federal banking agency to take an institution's CRA record into account when evaluating certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and bank and savings association acquisitions. An unsatisfactory record of performance may be the basis for denying or conditioning approval of an application by a financial institution or its holding company. The CRA also requires that all institutions publicly disclose their CRA ratings. Each of the banks received a “satisfactory” or better rating from the Federal Reserve or the OCC on their most recent CRA performance evaluations.
Compliance with Consumer Protection Laws
The banks and some operating subsidiaries are also subject to many federal consumer protection statutes and regulations including the Truth in Lending Act, the Truth in Savings Act, the Equal Credit Opportunity Act, the FCRA, the Electronic Fund Transfer Act, the Consumer Financial Protection Act, the Federal Trade Commission Act and analogous state statutes, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Servicemembers Civil Relief Act and the Home Mortgage Disclosure Act. Wintrust Mortgage, as a division of Barrington Bank, must also comply with many of these consumer protection statutes and regulations. Violation of these statutes can lead to significant potential liability for damages and penalties, in litigation by consumers as well as enforcement actions by regulators. Some of the key requirements of these laws:
• | require specific disclosures of the terms of credit, and regulate underwriting and other practices for mortgage loans and other types of credit; |
• | require specific disclosures about deposit account terms, and the electronic transfers that can be made to or from accounts at the banks; |
• | provide limited consumer liability for unauthorized transactions; |
• | prohibit discrimination against an applicant in any consumer or business credit transaction; |
• | require notifications about the approval or decline of credit applications, the reasons for a decline, and the credit scores used to make credit decisions; |
• | prohibit unfair, deceptive or abusive acts or practices; |
• | require mortgage lenders to collect and report applicant and borrower data regarding loans for home purchases or improvement projects; |
• | require lenders to provide borrowers with information regarding the nature and cost of real estate settlements; |
• | forbid the payment of referral fees for any settlement service as part of a real estate transaction; |
• | prohibit certain lending practices and limit escrow amounts with respect to real estate transactions; |
• | provide interest rate reductions and other protections for servicemembers called to active duty; and |
• | prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations. |
During the past several years, Congress has amended these laws and federal regulators have proposed and finalized a number of significant amendments to the regulations implementing these laws. Among other things, the Federal Reserve, the FDIC and the OCC have adopted new rules applicable to the banks (and in some cases, Wintrust Mortgage, as a division of Barrington Bank) that govern consumer credit practices and disclosures, as well as rules that govern overdraft practices and disclosures. These rules may affect the profitability of our consumer banking activities.
The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”) within the Federal Reserve, and both transferred to the CFPB existing regulatory authority with respect to many of these regulations, and gave the CFPB new authority under the Consumer Financial Protection Act. In July 2011, many of the consumer financial protection functions previously assigned to other federal agencies shifted to the CFPB. The CFPB now has broad rulemaking authority over a wide range of consumer protection laws that apply to banks and other providers of financial products and services, including the authority to prohibit “unfair, deceptive or abusive practices,” to ensure that all consumers have access to markets for consumer financial products and services, and to ensure that such markets are fair, transparent and competitive. The Dodd-Frank Act also required the CFPB to adopt a number of new specific regulatory requirements. These new rules may increase the costs of engaging in these activities for all market participants, including our subsidiaries. In addition to the CFPB, other federal and state regulators have issued, and may in the future issue, regulations and guidance affecting aspects of our business. The developments may impose additional burdens on us and our subsidiaries. The CFPB has broad supervisory, examination and enforcement authority. Although we and our subsidiary banks are not subject to CFPB examination, the actions taken by the CFPB may influence enforcement actions and positions taken by other federal and state regulators, including those with jurisdiction over us and our subsidiaries. Finally, the Dodd-Frank Act authorizes state attorneys general and other state officials to enforce consumer protection rules issued by the CFPB.
The Dodd-Frank Act amended the Truth in Lending Act and the Real Estate Settlement Procedures Act to impose a number of new requirements regarding the origination and servicing of residential mortgage loans. These amendments created a variety of new consumer protections, including limitations on the manner by which loan originators may be compensated. The CFPB recently
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released final regulations regarding several of these new requirements, including the requirement that a mortgage lender assess and verify a borrower's “ability to repay” a residential mortgage loan. For further discussion of these regulations, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview and Strategy - Financial Regulatory Reform.”
Federal Preemption
The Dodd-Frank Act also amended the laws governing federal preemption of state laws as applied to national banks, and eliminated federal preemption for subsidiaries of national banks. These changes may subject the Company's national banks and their subsidiaries and divisions, including Wintrust Mortgage, to additional state regulation and enforcement.
Debit Interchange
The Dodd-Frank Act added a new statutory requirement that interchange fees for electronic debit transactions that are paid to or charged by payment card issuers (including our bank subsidiaries) be reasonable and proportional to the cost incurred by the issuer. The Act also gave the Federal Reserve the authority to establish rules regarding these interchange fees. The Federal Reserve issued final regulations that were effective in October 2011, and that limit interchange fees for electronic debit transactions to 21 cents plus .05% of the transaction, plus an additional one cent per transaction fraud adjustment. The rule also imposes requirements regarding routing and exclusivity of electronic debit transactions, and generally requires that debit cards be usable in at least two unaffiliated networks.
Anti-Money Laundering Programs
The Bank Secrecy Act (“BSA”) and USA PATRIOT Act of 2001 contain anti-money laundering (“AML”) and financial transparency provisions intended to detect, and prevent the use of the U.S. financial system for, money laundering and terrorist financing activities. The BSA, as amended by the USA PATRIOT Act, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. Each of our subsidiary banks is subject to the BSA and, therefore, is required to provide its employees with AML training, designate an AML compliance officer and undergo an annual, independent audit to assess the effectiveness of its AML program. We have implemented policies, procedures and internal controls that are designed to comply with these AML requirements.
Protection of Client Information
Legal requirements concerning the use and protection of client information affect many aspects of the Company's business, and are continuing to evolve. Current legal requirements include the privacy and information safeguarding provisions of the GLB Act, the Fair Credit Reporting Act (“FCRA”) and the amendments adopted by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), as well as state law requirements. The GLB Act requires a financial institution to disclose its privacy policy to consumer-purpose customers, and requires the financial institution to allow those customers to opt-out of some sharing of the customers' nonpublic personal information with nonaffiliated third persons. In accordance with these requirements, we and each of our banks and operating subsidiaries provide a written privacy to each customer when the customer relationship begins and an annual basis. As described in the privacy notice, we protect the security of information about our customers, educate our employees about the importance of protecting customer privacy, and allow our customers to opt out of certain types of information sharing. We and our subsidiaries also require business partners with which we share information to have adequate security safeguards and to follow the requirements of the GLB Act. The GLB Act, as interpreted by the federal banking regulators and state laws require us to take certain actions, including possible notice to affected customers, in the event that sensitive customer information is comprised. We and/or each of the banks and operating subsidiaries may need to amend our privacy policies and adapt our internal procedures in that even that these legal requirements, or the regulators' interpretation of them, change, or if new requirements are added.
Like other lenders, the banks and several of our operating subsidiaries utilize credit bureau data in their underwriting activities. Use of such data is regulated under the FCRA, and the FCRA also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on us, the banks and our operating subsidiaries.
Violation of these legal requirements may expose us to regulatory action and private litigation, including claims for damages and penalties. In addition, a security incident can cause substantial reputational harm.
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Broker-Dealer and Investment Adviser Regulation
WHI and Great Lakes Advisors are subject to extensive regulation under federal and state securities laws. WHI is registered as a broker-dealer with the SEC and in all 50 states, the District of Columbia and the U.S. Virgin Islands. Both WHI and Great Lakes Advisors are registered as investment advisers with the SEC. In addition, WHI is a member of several self-regulatory organizations (“SROs”), including the Financial Industry Regulatory Authority (“FINRA”) and the Chicago Stock Exchange. Although WHI is required to be registered with the SEC, much of its regulation has been delegated to SROs that the SEC oversees, including FINRA and the national securities exchanges. In addition to SEC rules and regulations, the SROs adopt rules, subject to approval of the SEC, that govern all aspects of business in the securities industry and conduct periodic examinations of member firms. WHI is also subject to regulation by state securities commissions in states in which it conducts business. WHI and Great Lakes Advisors are registered only with the SEC as investment advisers, but certain of their advisory personnel are subject to regulation by state securities regulatory agencies.
As a result of federal and state registrations and SRO memberships, WHI is subject to over-lapping schemes of regulation which cover all aspects of its securities businesses. Such regulations cover, among other things, minimum net capital requirements; uses and safekeeping of clients' funds; record-keeping and reporting requirements; supervisory and organizational procedures intended to assure compliance with securities laws and to prevent improper trading on material nonpublic information; personnel-related matters, including qualification and licensing of supervisory and sales personnel; limitations on extensions of credit in securities transactions; clearance and settlement procedures; “suitability” determinations as to certain customer transactions; limitations on the amounts and types of fees and commissions that may be charged to customers; and regulation of proprietary trading activities and affiliate transactions. Violations of the laws and regulations governing a broker-dealer's actions can result in censures, fines, the issuance of cease-and-desist orders, revocation of licenses or registrations, the suspension or expulsion from the securities industry of a broker-dealer or its officers or employees, or other similar actions by both federal and state securities administrators, as well as the SROs.
As a registered broker-dealer, WHI is subject to the SEC's net capital rule as well as the net capital requirements of the SROs of which it is a member. Net capital rules, which specify minimum capital requirements, are generally designed to measure general financial integrity and liquidity and require that at least a minimum amount of net assets be kept in relatively liquid form. Rules of FINRA and other SROs also impose limitations and requirements on the transfer of member organizations' assets. Compliance with net capital requirements may limit the Company's operations requiring the intensive use of capital. These requirements restrict the Company's ability to withdraw capital from WHI, which in turn may limit its ability to pay dividends, repay debt or redeem or purchase shares of its own outstanding stock. WHI is a member of the Securities Investor Protection Corporation (“SIPC”), which subject to certain limitations, serves to oversee the liquidation of a member brokerage firm, and to return missing cash, stock and other securities owed to the firm's brokerage customers, in the event a member broker-dealer fails. The general SIPC protection for customers' securities accounts held by a member broker-dealer is up to $500,000 for each eligible customer, including a maximum of $250,000 for cash claims. SIPC does not protect brokerage customers against investment losses.
WHI in its capacity as an investment adviser are subject to regulations covering matters such as transactions between clients, transactions between the adviser and clients, custody of client assets and management of mutual funds and other client accounts. The principal purpose of regulation and discipline of investment firms is the protection of customers, clients and the securities markets rather than the protection of creditors and shareholders of investment firms. Sanctions that may be imposed for failure to comply with laws or regulations governing investment advisers include the suspension of individual employees, limitations on an adviser's engaging in various asset management activities for specified periods of time, the revocation of registrations, other censures and fines.
Employees
At December 31, 2012, the Company and its subsidiaries employed a total of 3,269 full-time-equivalent employees. The Company provides its employees with comprehensive medical and dental benefit plans, life insurance plans, 401(k) plans and an employee stock purchase plan. The Company considers its relationship with its employees to be good.
Available Information
The Company’s Internet address is www.wintrust.com. The Company makes available at this address, free of charge, its annual report on Form 10-K, its annual reports to shareholders, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.
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Supplemental Statistical Data
The following statistical information is provided in accordance with the requirements of The Securities Act Industry Guide 3, Statistical Disclosure by Bank Holding Companies, which is part of Regulation S-K as promulgated by the SEC. This data should be read in conjunction with the Company’s Consolidated Financial Statements and notes thereto, and Management’s Discussion and Analysis which are contained in this Form 10-K.
Investment Securities Portfolio
The following table presents the fair value of the Company’s available-for-sale securities portfolio, by investment category, as of December 31, 2012, 2011 and 2010:
(Dollars in thousands) | 2012 | 2011 | 2010 | |||||||||
U.S. Treasury | $ | 219,487 | $ | 16,173 | $ | 96,097 | ||||||
U.S. Government agencies | 990,039 | 765,916 | 884,055 | |||||||||
Municipal | 110,471 | 60,098 | 52,303 | |||||||||
Corporate notes and other: | ||||||||||||
Financial issuers | 140,675 | 142,644 | 187,007 | |||||||||
Other | 14,131 | 27,292 | 74,908 | |||||||||
Mortgage-backed: (1) | ||||||||||||
Agency | 197,260 | 218,612 | 158,653 | |||||||||
Non-agency CMOs | 74,314 | 29,939 | 3,028 | |||||||||
Other equity securities | 49,699 | 31,123 | 40,251 | |||||||||
Total available-for-sale securities | $ | 1,796,076 | $ | 1,291,797 | $ | 1,496,302 | ||||||
(1) Consisting entirely of residential mortgage-backed securities, none of which are subprime.
Tables presenting the carrying amounts and gross unrealized gains and losses for securities available-for-sale at December 31, 2012 and 2011 are included by reference to Note 3 to the Consolidated Financial Statements included in the 2012 Annual Report to Shareholders, which is incorporated herein by reference. The fair value of available-for-sale securities as of December 31, 2012, by maturity distribution, is as follows:
(Dollars in thousands) | Within 1 year | From 1 to 5 years | From 5 to 10 years | After 10 years | Mortgage- backed | Other Equities | Total | |||||||||||||||
U.S. Treasury | $ | 2,001 | 18,236 | 199,250 | — | — | — | 219,487 | ||||||||||||||
U.S. Government agencies | 142,450 | 274,172 | 116,447 | 456,970 | — | — | 990,039 | |||||||||||||||
Municipal | 24,065 | 30,200 | 22,693 | 33,513 | — | — | 110,471 | |||||||||||||||
Corporate notes and other: | ||||||||||||||||||||||
Financial issuers | 12,191 | 91,224 | 23,745 | 13,515 | — | — | 140,675 | |||||||||||||||
Other | 8,308 | 5,823 | — | — | — | — | 14,131 | |||||||||||||||
Mortgage-backed: (1) | ||||||||||||||||||||||
Agency | — | — | — | — | 197,260 | — | 197,260 | |||||||||||||||
Non-agency CMOs | — | — | — | — | 74,314 | — | 74,314 | |||||||||||||||
Other equity securities | — | — | — | — | — | 49,699 | 49,699 | |||||||||||||||
Total available-for-sale securities | $ | 189,015 | 419,655 | 362,135 | 503,998 | 271,574 | 49,699 | 1,796,076 | ||||||||||||||
(1) Consisting entirely of residential mortgage-backed securities, none of which are subprime.
The weighted average yield for each range of maturities of securities, on a tax-equivalent basis, is shown below as of December 31, 2012:
Within 1 year | From 1 to 5 years | From 5 to 10 years | After 10 years | Mortgage- backed | Other Equities | Total | |||||||||||||||
U.S. Treasury | 0.26 | % | 0.72 | % | 1.61 | % | — | — | — | 1.53 | % | ||||||||||
U.S. Government agencies | 0.30 | % | 0.38 | % | 1.33 | % | 2.98 | % | — | — | 1.68 | % | |||||||||
Municipal | 2.15 | % | 3.01 | % | 4.08 | % | 5.05 | % | — | — | 3.70 | % | |||||||||
Corporate notes and other: | |||||||||||||||||||||
Financial issuers | 2.88 | % | 1.58 | % | 1.77 | % | 5.46 | % | — | — | 2.09 | % | |||||||||
Other | 2.58 | % | 2.66 | % | — | — | — | — | 2.62 | % | |||||||||||
Mortgage-backed: (1) | |||||||||||||||||||||
Agency | — | — | — | — | 2.09 | % | — | 2.09 | % | ||||||||||||
Non-agency CMOs | — | — | — | — | 1.83 | % | — | 1.83 | % | ||||||||||||
Other equity securities | — | — | — | — | — | 2.47 | % | 2.47 | % | ||||||||||||
Total available-for-sale securities | 0.80 | % | 0.88 | % | 1.69 | % | 3.18 | % | 2.02 | % | 2.47 | % | 1.90 | % | |||||||
(1) Consisting entirely of residential mortgage-backed securities, none of which are subprime.
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ITEM 1A. | RISK FACTORS |
An investment in our securities is subject to risks inherent to our business. The material risks and uncertainties that management believes affect Wintrust are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair Wintrust's business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our securities could decline significantly, and you could lose all or part of your investment.
Risks Related to Our Business and Operating Environment
Difficult economic conditions have adversely affected our company and the financial services industry in general and further deterioration in economic conditions may materially adversely affect our business, financial condition, results of operations and cash flows.
The U.S. economy was in a recession from the third quarter of 2008 to the second quarter of 2009, and economic activity continues to be restrained. The housing and real estate markets have also been experiencing extraordinary slowdowns since 2007. Additionally, unemployment rates remained historically high during these periods. These factors have had a significant negative effect on us and other companies in the financial services industry. As a lending institution, our business is directly affected by the ability of our borrowers to repay their loans, as well as by the value of collateral, such as real estate, that secures many of our loans. Market turmoil has led to an increase in charge-offs and has negatively impacted consumer confidence and the level of business activity. However, net charge-offs, excluding covered loans, decreased to $74.8 million in 2012 from $103.3 million in 2011 and non-performing loans, excluding covered loans, decreased to $118.2 million as of December 31, 2012 from $120.1 million as of December 31, 2011. Our balance of other real estate owned (“OREO”), excluding covered other real estate owned, was $62.9 million at December 31, 2012 and $86.5 million at December 31, 2011. Continued weakness or further deterioration in the economy, real estate markets or unemployment rates, particularly in the markets in which we operate, will likely diminish the ability of our borrowers to repay loans that we have given them, the value of any collateral securing such loans and may cause increases in delinquencies, problem assets, charge-offs and provision for credit losses, all of which could materially adversely affect our financial condition and results of operations. Further, the underwriting and credit monitoring policies and procedures that we have adopted may not prevent losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Since our business is concentrated in the Chicago metropolitan area and southeast Wisconsin metropolitan areas, further declines in the economy of this region could adversely affect our business.
Except for our premium finance business and certain other niche businesses, our success depends primarily on the general economic conditions of the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers primarily in the Chicago metropolitan and southeast Wisconsin metropolitan areas. The local economic conditions in these areas significantly impact the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources. Specifically, most of the loans in our portfolio are secured by real estate located in the Chicago metropolitan area. Our local market area has experienced negative changes in overall market conditions relating to real estate valuation. These market conditions are exacerbated by the liquidation of troubled assets into the market, which creates additional supply and drives appraised valuations of real estate lower. Further declines in economic conditions, including inflation, recession, unemployment, changes in securities markets or other factors impacting these local markets could, in turn, have a material adverse effect on our financial condition and results of operations. Continued deterioration in the real estate markets where collateral for our mortgage loans is located could adversely affect the borrower's ability to repay the loan and the value of the collateral securing the loan, and in turn the value of our assets.
If our allowance for loan losses is not sufficient to absorb losses that may occur in our loan portfolio, our financial condition and liquidity could suffer.
We maintain an allowance for loan losses that is intended to absorb credit losses that we expect to incur in our loan portfolio. At each balance sheet date, our management determines the amount of the allowance for loan losses based on our estimate of probable and reasonably estimable losses in our loan portfolio, taking into account probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified.
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Because our allowance for loan losses represents an estimate of probable losses, there is no certainty that it will be adequate over time to cover credit losses in the portfolio, particularly if there is continued deterioration in general economic or market conditions or events that adversely affect specific customers. In 2012, we charged off $74.8 million in loans, excluding covered loans, (net of recoveries) and decreased our allowance for loan losses, excluding the allowance for covered loans, from $110.4 million at December 31, 2011 to $107.4 million at December 31, 2012. Our allowance for loan losses, excluding the allowance for covered loans, represents 0.91% of total loans, excluding covered loans outstanding at December 31, 2012, compared to 1.05% at December 31, 2011.
Although we believe our loan loss allowance is adequate to absorb probable and reasonably estimable losses in our loan portfolio, if our estimates are inaccurate and our actual loan losses exceed the amount that is anticipated, our financial condition and liquidity could be materially adversely affected.
For more information regarding our allowance for loan losses, see “Loan Portfolio and Asset Quality” under Management's Discussion and Analysis of Financial Condition and Results of Operations.
A significant portion of our loan portfolio is comprised of commercial loans, the repayment of which is largely dependent upon the financial success and economic viability of the borrower.
The repayment of our commercial loans is dependent upon the financial success and viability of the borrower. If the economy remains weak for a prolonged period or experiences further deterioration or if the industry or market in which the borrower operates weakens, our borrowers may experience depressed or dramatic and sudden decreases in revenues that could hinder their ability to repay their loans. Our commercial loan portfolio totaled $2.9 billion, or 24% of our total loan portfolio, at December 31, 2012, compared to $2.5 billion, or 22% of our total loan portfolio, at December 31, 2011.
Commercial loans are secured by different types of collateral related to the underlying business, such as accounts receivable, inventory and equipment. Should a commercial loan require us to foreclose on the underlying collateral, the unique nature of the collateral may make it more difficult and costly to liquidate, thereby increasing the risk to us of not recovering the principal amount of the loan. Accordingly, our business, results of operations and financial condition may be materially adversely affected by defaults in this portfolio.
A substantial portion of our loan portfolio is secured by real estate, in particular commercial real estate. Continued deterioration in the real estate markets could lead to additional losses, which could have a material adverse effect on our financial condition and results of operations.
As of December 31, 2012 and December 31, 2011, approximately 40% and 42%, respectively, of our total loan portfolio was secured by real estate, the majority of which is commercial real estate. The commercial and residential real estate market continues to experience a variety of difficulties. In particular, market conditions in the Chicago metropolitan area, in which a majority of our real estate loans are concentrated, have declined significantly beginning in 2007. As a result of increased levels of commercial and consumer delinquencies and declining real estate values, which reduce the customer's borrowing power and the value of the collateral securing the loan, for the last five years, we have experienced higher than normal levels of charge-offs and provisions for loan losses. Increases in commercial and consumer delinquency levels or continued declines in real estate market values would require increased net charge-offs and increases in the allowance for loan and lease losses, which could have a material adverse effect on our business, financial condition and results of operations.
Unanticipated changes in prevailing interest rates and the effects of changing regulation could adversely affect our net interest income, which is our largest source of income.
Wintrust is exposed to interest rate risk in its core banking activities of lending and deposit taking, since changes in prevailing interest rates affect the value of our assets and liabilities. Such changes may adversely affect our net interest income, which is the difference between interest income and interest expense. Our net interest income is affected by the fact that assets and liabilities reprice at different times and by different amounts as interest rates change. Net interest income represents our largest component of net income, and was $519.5 million and $461.4 million for the years ended December 31, 2012 and 2011, respectively.
Each of our businesses may be affected differently by a given change in interest rates. For example, we expect that the results of our mortgage banking business in selling loans into the secondary market would be negatively impacted during periods of rising interest rates, whereas falling interest rates could have a negative impact on the net interest spread earned on deposits as we would be unable to lower the rates on many interest bearing deposit accounts of our customers to the same extent as many of our higher yielding asset classes.
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Additionally, increases in interest rates may adversely influence the growth rate of loans and deposits, the quality of our loan portfolio, loan and deposit pricing, the volume of loan originations in our mortgage banking business and the value that we can recognize on the sale of mortgage loans in the secondary market.
We seek to mitigate our interest rate risk through several strategies, which may not be successful. With the relatively low interest rates that prevailed in recent years, we were able to augment the total return of our investment securities portfolio by selling call options on fixed-income securities that we own. We recorded fee income of approximately $10.5 million, $13.6 million and $2.2 million for the years ended December 31, 2012, 2011 and 2010, respectively. We also mitigate our interest rate risk by entering into interest rate swaps and other interest rate derivative contracts from time to time with counterparties. To the extent that the market value of any derivative contract moves to a negative market value, we are subject to loss if the counterparty defaults. In the future, there can be no assurance that such mitigation strategies will be available or successful.
Our liquidity position may be negatively impacted if economic conditions continue to suffer.
Liquidity is a measure of whether our cash flows and liquid assets are sufficient to satisfy current and future financial obligations, such as demand for loans, deposit withdrawals and operating costs. Our liquidity position is affected by a number of factors, including the amount of cash and other liquid assets on hand, payment of interest and dividends on debt and equity instruments that we have issued, capital we inject into our bank subsidiaries, proceeds we raise through the issuance of securities, our ability to draw upon our revolving credit facility and dividends received from our banking subsidiaries. Our future liquidity position may be adversely affected by multiple factors, including:
• | if our banking subsidiaries report net losses or their earnings are weak relative to our cash flow needs; |
• | if it is necessary for us to make capital injections to our banking subsidiaries; |
• | if changes in regulations require us to maintain a greater level of capital, as more fully described below; |
• | if we are unable to access our revolving credit facility due to a failure to satisfy financial and other covenants; or |
• | if we are unable to raise additional capital on terms that are satisfactory to us. |
Continued weakness or worsening of the economy, real estate markets or unemployment levels may increase the likelihood that one or more of these events will occur. If our liquidity is adversely effected, it may have a material adverse effect on our business, results of operations and financial condition.
The financial services industry is very competitive, and if we are not able to compete effectively, we may lose market share and our business could suffer.
We face competition in attracting and retaining deposits, making loans, and providing other financial services (including wealth management services) throughout our market area. Our competitors include national, regional and other community banks, and a wide range of other financial institutions such as credit unions, government-sponsored enterprises, mutual fund companies, insurance companies, factoring companies and other non-bank financial companies. Many of these competitors have substantially greater resources and market presence than Wintrust and, as a result of their size, may be able to offer a broader range of products and services as well as better pricing for those products and services than we can. Several of our local competitors have experienced improvements in their financial condition over the past year and are better positioned to compete for loans, acquisitions and personnel. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and payment systems, and for banks that do not have a physical presence in our markets to compete for deposits.
Our ability to compete successfully depends on a number of factors, including, among other things:
• | the ability to develop, maintain and build upon long-term customer relationships based on top quality service and high ethical standards; |
• | the scope, relevance and pricing of products and services offered to meet customer needs and demands; |
• | the ability to expand our market position; |
• | the rate at which we introduce new products and services relative to our competitors; |
• | customer satisfaction with our level of service; and |
• | industry and general economic trends. |
If we are unable to compete effectively, we will lose market share and income from deposits, loans and other products may be reduced. This could adversely affect our profitability and have a material adverse effect on our business, financial condition and results of operations.
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If we are unable to continue to identify favorable acquisitions or successfully integrate our acquisitions, our growth may be limited and our results of operations could suffer.
In the past several years, we have completed numerous acquisitions of banks, other financial service related companies and financial service related assets, including acquisitions of troubled financial institutions, as more fully described below. We expect to continue to make such acquisitions in the future. Wintrust seeks merger or acquisition partners that are culturally similar, have experienced management, possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Failure to successfully identify and complete acquisitions likely will result in Wintrust achieving slower growth. Acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:
• | potential exposure to unknown or contingent liabilities or asset quality issues of the target company; |
• | difficulty and expense of integrating the operations and personnel of the target company; |
• | potential disruption to our business, including diversion of our management's time and attention; |
• | the possible loss of key employees and customers of the target company; |
• | difficulty in estimating the value of the target company; and |
• | potential changes in banking or tax laws or regulations that may affect the target company. |
Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of Wintrust's tangible book value and net income per common share may occur as a result of any future transaction. In addition, certain acquisitions may expose us to additional regulatory risks, including from foreign governments. Our ability to comply with any such regulations will impact the success of any such acquisitions. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on our financial condition and results of operations.
Our participation in FDIC-assisted acquisitions may present additional risks to our financial condition and results of operations.
As part of our growth strategy, we have made opportunistic partial acquisitions of troubled financial institutions in transactions facilitated by the FDIC, including our recent acquisitions of First United Bank of Crete, Illinois ("First United Bank") and Charter National Bank and Trust ("Charter National") through our bank subsidiaries. These acquisitions, and any future FDIC-assisted transactions we may undertake, involve greater risk than traditional acquisitions because they are typically conducted on an accelerated basis, allowing less time for us to prepare for and evaluate possible transactions, or to prepare for integration of an acquired institution. These transactions also present risks of customer loss, strain on management resources related to collection and management of problem loans and problems related to the integration of operations and personnel of the acquired financial institutions. As a result, there can be no assurance that we will be able to successfully integrate the financial institutions we acquire, or that we will realize the anticipated benefits of the acquisitions. Additionally, while the FDIC may agree to assume certain losses in transactions that it facilitates, there can be no assurances that we would not be required to raise additional capital as a condition to, or as a result of, participation in an FDIC-assisted transaction. Any such transactions and related issuances of stock may have dilutive effect on earnings per share. Furthermore, we may face competition from other financial institutions with respect to proposed FDIC-assisted transactions.
We are also subject to certain risks relating to our loss sharing agreements with the FDIC. Under a loss sharing agreement, the FDIC generally agrees to reimburse the acquiring bank for a portion of any losses relating to covered assets of the acquired financial institution. This is an important financial term of any FDIC-assisted transaction, as troubled financial institutions often have poorer asset quality. As a condition to reimbursement, however, the FDIC requires the acquiring bank to follow certain servicing procedures. A failure to follow servicing procedures or any other breach of a loss sharing agreement by us could result in the loss of FDIC reimbursement. While we have established a group dedicated to servicing the loans covered by the FDIC loss sharing agreements, there can be no assurance that we will be able to comply with the FDIC servicing procedures. In addition, reimbursable losses and recoveries under loss sharing agreements are based on the book value of the relevant loans and other assets as determined by the FDIC as of the effective dates of the acquisitions. The amount that the acquiring banks realize on these assets could differ materially from the carrying value that will be reflected in our financial statements, based upon the timing and amount of collections on the covered loans in future periods. Any failure to receive reimbursement, or any material differences between the amount of reimbursements that we do receive and the carrying value reflected in our financial statements, could have a material negative effect on our financial condition and results of operations.
An actual or perceived reduction in our financial strength may cause others to reduce or cease doing business with us, which could result in a decrease in our net interest income and fee revenues.
Our customers rely upon our financial strength and stability and evaluate the risks of doing business with us. If we experience diminished financial strength or stability, actual or perceived, including due to market or regulatory developments, announced or
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rumored business developments or results of operations, or a decline in stock price, customers may withdraw their deposits or otherwise seek services from other banking institutions and prospective customers may select other service providers. The risk that we may be perceived as less creditworthy relative to other market participants is increased in the current market environment, where the consolidation of financial institutions, including major global financial institutions, is resulting in a smaller number of much larger counterparties and competitors. If customers reduce their deposits with us or select other service providers for all or a portion of the services that we provide them, net interest income and fee revenues will decrease accordingly, and could have a material adverse effect on our results of operations.
If our growth requires us to raise additional capital, that capital may not be available when it is needed or the cost of that capital may be very high.
We are required by regulatory authorities to maintain adequate levels of capital to support our operations (see “-Risks Related to Our Regulatory Environment-If we fail to meet our regulatory capital ratios, we may be forced to raise capital or sell assets”) and as we grow, internally and through acquisitions, the amount of capital required to support our operations grows as well. We may need to raise additional capital to support continued growth both internally and through acquisitions. Any capital we obtain may result in the dilution of the interests of existing holders of our common stock.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time which are outside our control and on our financial condition and performance. If we cannot raise additional capital when needed, or on terms acceptable to us, our ability to further expand our operations through internal growth and acquisitions could be materially impaired and our financial condition and liquidity could be materially and negatively affected.
Disruption in the financial markets could result in lower fair values for our investment securities portfolio.
The Company's available-for-sale and trading securities are carried at fair value. Major disruptions in the capital markets experienced in the past five years have impacted investor demand for all classes of securities and resulted in volatility in the fair values of the Company's investment securities.
Accounting standards require the Company to categorize these according to a fair value hierarchy. As of December 31, 2012, over 97% of the Company's available-for-sale securities were categorized in level 2 of the fair value hierarchy (meaning that their fair values were determined by quoted prices for similar assets or other observable inputs). Significant prolonged reduced investor demand could manifest itself in lower fair values for these securities and may result in recognition of an other-than-temporary or permanent impairment of these assets, which could lead to accounting charges and have a material adverse effect on the Company's financial condition and results of operations.
The remaining securities in our investment securities portfolio were categorized as level 3 (meaning that their fair values were determined by inputs that are unobservable in the market and therefore require a greater degree of management judgment). The determination of fair value for securities categorized in level 3 involves significant judgment due to the complexity of factors contributing to the valuation, many of which are not readily observable in the market. Recent market disruptions make valuation of such securities even more difficult and subjective. In addition, the nature of the business of the third party source that is valuing the securities at any given time could impact the valuation of the securities. Consequently, the ultimate sales price for any of these securities could vary significantly from the recorded fair value at December 31, 2012, especially if the security is sold during a period of illiquidity or market disruption or as part of a large block of securities under a forced transaction.
There can be no assurance that decline in market value associated with these disruptions will not result in other-than-temporary or permanent impairments of these assets, which would lead to accounting charges which could have a material negative effect on our business, financial condition and results of operations.
New lines of business and new products and services are essential to our ability to compete but may subject us to additional risks.
We continually implement new lines of business and offer new products and services within existing lines of business to offer our customers a competitive array of products and services. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies needed to compete effectively result in incremental operating costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in operations. Many of our competitors, because of their larger size and available capital, have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could cause a loss of customers and have a material adverse effect on our business.
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At the same time, there can be substantial risks and uncertainties associated with these efforts, particularly in instances where the markets for such services are still developing. In developing and marketing new lines of business and/or new products or services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, financial condition, and results of operations.
Failures of our information technology systems may adversely effect our operations.
We are increasingly dependent upon computer and other information technology systems to manage our business. We rely upon information technology systems to process, record, monitor and disseminate information about our operations. In some cases, we depend on third parties to provide or maintain these systems. While we perform a review of controls instituted by our critical vendors in accordance with industry standards, we must rely on the continued maintenance of these controls by the outside party, including safeguards over the security of customer data. If any of our financial, accounting or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected. Security breaches in our online banking systems could also have an adverse effect on our reputation and could subject us to possible liability. Our systems may also be affected by events that are beyond our control, which may include, for example, computer viruses, electrical or telecommunications outages or other damage to our property or assets. Although we take precautions against malfunctions and security breaches, our efforts may not be adequate to prevent problems that could materially adversely effect our business, financial condition and results of operations.
We depend on the accuracy and completeness of information we receive about our customers and counterparties to make credit decisions.
We rely on information furnished by or on behalf of customers and counterparties in deciding whether to extend credit or enter into other transactions. This information could include financial statements, credit reports, and other financial information. We also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could have a material adverse impact on our business, financial condition and results of operations.
If we are unable to attract and retain experienced and qualified personnel, our ability to provide high quality service will be diminished and our results of operations may suffer.
We believe that our future success depends, in part, on our ability to attract and retain experienced personnel, including our senior management and other key personnel. Our business model is dependent upon our ability to provide high quality, personal service at our community banks. In addition, as a holding company that conducts its operations through our subsidiaries, we are focused on providing entrepreneurial-based compensation to the chief executives of each our business units. As a Company with start-up and growth oriented operations, we are cognizant that to attract and retain the managerial talent necessary to operate and grow our businesses we often have to compensate our executives with a view to the business we expect them to manage, rather than the size of the business they currently manage. Accordingly any executive compensation restrictions may negatively impact our ability to retain and attract senior management. The loss of any of our senior managers or other key personnel, or our inability to identify, recruit and retain such personnel, could materially and adversely affect our business, results of operations and financial condition.
We are subject to environmental liability risk associated with lending activities.
A significant portion of the Company's loan portfolio is secured by real property. In the ordinary course of business, the Company may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal injury and property damage. In addition, we own and operate a number of properties that may be subject to similar environmental liability risks.
Environmental laws may require the Company to incur substantial expenses and could materially reduce the affected property's value or limit the Company's ability to use or sell the affected property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Although the Company has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs
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and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Company's business, financial condition and results of operations.
We are subject to claims and legal actions which could negatively affect our results of operations or financial condition.
Periodically, as a result of our normal course of business, we are involved in claims and related litigation from our customers or employees. These claims and legal actions whether meritorious or not, as well as reviews, investigations and proceedings by governmental and self-regulatory agencies could involve large monetary claims and significant legal expense. In addition, such actions may negatively impact our reputation in the marketplace and lessen customer demand. If such claims and legal actions are not decided in Wintrust's favor, our results of operations and financial condition could be adversely impacted.
Losses incurred in connection with actual or projected repurchases and indemnification payments related to mortgages that we have sold into the secondary market may exceed our financial statement reserves and we may be required to increase such reserves in the future. Increases to our reserves and losses incurred in connection with actual loan repurchases and indemnification payments could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We engage in the origination and purchase of residential mortgages for sale into the secondary market. In connection with such sales, we make certain representations and warranties, which, if breached, may require us to repurchase such loans, substitute other loans or indemnify the purchasers of such loans for actual losses incurred in respect of such loans. Due, in part, to recent increased mortgage payment delinquency rates and declining housing prices, we have been receiving such requests for loan repurchases and indemnification payments relating to the representations and warranties with respect to such loans. We have been able to reach settlements with a number of purchasers, and believe that we have established appropriate reserves with respect to indemnification requests. While we have recently received fewer requests for indemnification, it is possible that the number of such requests will increase or that we will not be able to reach settlements with respect to such requests in the future. Accordingly, it is possible that losses incurred in connection with loan repurchases and indemnification payments may be in excess of our financial statement reserves, and we may be required to increase such reserves and may sustain additional losses associated with such loan repurchases and indemnification payments in the future. Increases to our reserves and losses incurred by us in connection with actual loan repurchases and indemnification payments in excess of our reserves could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Consumers may decide not to use banks to complete their financial transactions, which could adversely affect our business and results of operations.
Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on our business, financial condition and results of operations.
We may be adversely impacted by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties and routinely execute transactions with counterparties in the financial services industry, including the Federal Home Loan bank ("FHLB"), commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount due to us. Any such losses could have material adverse effect on our business, financial condition and results of operations.
Europe's debt crisis could have a material adverse effect on our business, financial condition and liquidity.
The possibility that certain European Union (“EU”) member states will default on their debt obligations has negatively impacted economic conditions and global markets. The continued uncertainty over the outcome of international and the EU's financial support programs and the possibility that other EU member states may experience similar financial troubles could further disrupt global markets. The negative impact on economic conditions and global markets could also have a material adverse effect on our liquidity, financial condition and results of operations.
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De novo operations and branch openings often involve significant expenses and delayed returns and may negatively impact Wintrust's profitability.
Our financial results have been and will continue to be impacted by our strategy of de novo bank formations and branch openings. While the recent financial crisis and interest rate environment has caused us to open fewer de novo banks, we expect to undertake additional de novo bank formations or branch openings when market conditions improve. Based on our experience, we believe that it generally takes over 13 months for de novo banks to first achieve operational profitability, depending on the number of banking facilities opened, 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. However, it may take longer than expected or than the amount of time Wintrust has historically experienced for new banks and/or banking facilities to reach profitability, and there can be no guarantee that these new banks or branches will ever be profitable. Moreover, the FDIC's recent issuance extending the enhanced supervisory period for de novo banks from three to seven years, including higher capital requirements during this period, could also delay a new bank's ability to contribute to the Company's earnings and impact the Company's willingness to expand through de novo bank formation. To the extent we undertake additional de novo bank, branch and business formations, our level of reported net income, return on average equity and return on average assets will be impacted by startup costs associated with such operations, and it is likely to continue to experience the effects of higher expenses relative to operating income from the new operations. These expenses may be higher than we expected or than our experience has shown, which could have a material adverse effect on our business, financial condition and results of operations.
We are subject to examinations and challenges by tax authorities, and changes in federal and state tax laws and changes in interpretation of existing laws can impact our financial results.
In the normal course of business, we, as well as our subsidiaries, are routinely subject to examinations from federal and state tax authorities regarding the amount of taxes due in connection with investments we have made and the businesses in which we have engaged. Recently, federal and state tax authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to among other things tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by tax authorities may result in adjustments to the timing or amount of taxable income or deductions or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have a material adverse effect on our financial condition and results of operations. Given the current economic and political environment and ongoing budgetary pressures, the enactment of new federal or state tax legislation may occur. The enactment of such legislation, or changes in the interpretation of existing law, including provisions impacting tax rates, apportionment, consolidation or combination, income, expenses and credits may have a material adverse effect on our business, financial condition and results of operations.
Changes in accounting policies or accounting standards could materially adversely affect how we report our financial results and financial condition.
Our accounting policies are fundamental to understanding our financial results and financial condition. Some of these policies require use of estimates and assumptions that affect the value of our assets or liabilities and financial results. Some of our accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are incorrect, we may experience material losses. From time to time, the Financial Accounting Standards Board ("FASB") and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
We are a bank holding company, and our sources of funds, including to pay dividends, are limited.
We are a bank holding company and our operations are primarily conducted by and through our 15 operating banks, which are subject to significant federal and state regulation. Cash available to pay dividends to our shareholders, repurchase our shares or repay our indebtedness is derived primarily from dividends received from our banks and our ability to receive dividends from our subsidiaries is restricted. Various statutory provisions restrict the amount of dividends our banks can pay to us without regulatory approval. The banks may not pay cash dividends if that payment could reduce the amount of their capital below that necessary to meet the “adequately capitalized” level in accordance with regulatory capital requirements. It is also possible that, depending upon the financial condition of the banks and other factors, regulatory authorities could conclude that payment of dividends or other payments, including payments to us, is an unsafe or unsound practice and impose restrictions or prohibit such payments. Our inability to receive dividends from our banks could adversely affect our business, financial condition and results of operations.
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Anti-takeover provisions could negatively impact our shareholders.
Certain provisions of our articles of incorporation, by-laws and Illinois law may have the effect of impeding the acquisition of control of Wintrust by means of a tender offer, a proxy fight, open-market purchases or otherwise in a transaction not approved by our board of directors. For example, our board of directors may issue additional authorized shares of our capital stock to deter future attempts to gain control of Wintrust, including the authority to determine the terms of any one or more series of preferred stock, such as voting rights, conversion rates and liquidation preferences. As a result of the ability to fix voting rights for a series of preferred stock, the board has the power, to the extent consistent with its fiduciary duty, to issue a series of preferred stock to persons friendly to management in order to attempt to block a merger or other transaction by which a third party seeks control, and thereby assist the incumbent board of directors and management to retain their respective positions. In addition, our articles of incorporation expressly elect to be governed by the provisions of Section 7.85 of the Illinois Business Corporation Act, which would make it more difficult for another party to acquire us without the approval of our board of directors.
The ability of a third party to acquire us is also limited under applicable banking regulations. The Bank Holding Company Act of 1956 requires any “bank holding company” (as defined in that Act) to obtain the approval of the Federal Reserve prior to acquiring more than 5% of our outstanding common stock. Any person other than a bank holding company is required to obtain prior approval of the Federal Reserve to acquire 10% or more of our outstanding common stock under the Change in Bank Control Act of 1978. Any holder of 25% or more of our outstanding common stock, other than an individual, is subject to regulation as a bank holding company under the Bank Holding Company Act. For purposes of calculating ownership thresholds under these banking regulations, bank regulators would likely at least take the position that the minimum number of shares, and could take the position that the maximum number of shares, of Wintrust common stock that a holder is entitled to receive pursuant to securities convertible into or settled in Wintrust common stock, including pursuant to Wintrust's tangible equity units or warrants to purchase Wintrust common stock held by such holder, must be taken into account in calculating a shareholder's aggregate holdings of Wintrust common stock.
These provisions may have the effect of discouraging a future takeover attempt that is not approved by our board of directors but which our individual shareholders may deem to be in their best interests or in which our shareholders may receive a substantial premium for their shares over then-current market prices. As a result, shareholders who might desire to participate in such a transaction may not have an opportunity to do so. Such provisions will also render the removal of our current board of directors or management more difficult.
Risks Related to Our Regulatory Environment
If we fail to meet our regulatory capital ratios, we may be forced to raise capital or sell assets.
As a banking institution, we are subject to regulations that require us to maintain certain capital ratios, such as the ratio of our Tier 1 capital to our risk-based assets. If our regulatory capital ratios decline, as a result of decreases in the value of our loan portfolio or otherwise, we will be required to improve such ratios by either raising additional capital or by disposing of assets. If we choose to dispose of assets, we cannot be certain that we will be able to do so at prices that we believe to be appropriate, and our future operating results could be negatively affected. If we choose to raise additional capital, we may accomplish this by selling additional shares of common stock, or securities convertible into or exchangeable for common stock, which could significantly dilute the ownership percentage of holders of our common stock and cause the market price of our common stock to decline. Additionally, events or circumstances in the capital markets generally may increase our capital costs and impair our ability to raise capital at any given time.
Legislative and regulatory actions taken now or in the future regarding the financial services industry may significantly increase our costs or limit our ability to conduct our business in a profitable manner.
We are already subject to extensive federal and state regulation and supervision. The cost of compliance with such laws and regulations can be substantial and adversely affect our ability to operate profitably. While we are unable to predict the scope or impact of any potential legislation or regulatory action until it becomes final, it is possible that changes in applicable laws, regulations or interpretations hereof could significantly increase our regulatory compliance costs, impede the efficiency of our internal business processes, negatively impact the recoverability of certain of our recorded assets, require us to increase our regulatory capital, interfere with our executive compensation plans, or limit our ability to pursue business opportunities in an efficient manner including our plan for de novo growth and growth through acquisitions.
The Dodd-Frank Act, enacted in 2010, significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, including heightened capital requirements, and to prepare numerous studies and reports for Congress. Although many of these rules and studies are not yet completed, and the final impact of the Dodd-Frank Act will depend, in part, on the final form of the still to be rules and regulations, we have already experienced significant increases in compliance related costs and we expect compliance with the Dodd-Frank Act and its
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implementing regulations to further increase our cost of doing business, and may reduce our ability to generate revenue-producing assets.
The Dodd-Frank Act amended the laws governing federal preemption of state laws as applied to national banks, and eliminated federal preemption for subsidiaries of national banks. These changes may subject our national banks and their subsidiaries and divisions, including Wintrust Mortgage, to additional state regulation. With regard to mortgage lending, the Dodd-Frank Act imposed new requirements regarding the origination and servicing of residential mortgage loans. The law created a variety of new consumer protections, including limitations on the manner by which loan originators may be compensated and an obligation of the part of lenders to assess and verify a borrower's “ability to repay” a residential mortgage loan.
The Dodd-Frank Act also enhanced provisions relating to affiliate and insider lending restrictions and loans-to-one-borrower limitations. Federal and state banking laws impose limits on the amount of credit a bank can extend to any one person (or group of related persons). The Dodd-Frank Act expanded the scope of these restrictions for national banks under federal law to include credit exposure arising from derivative transactions, repurchase agreements, and securities lending and borrowing transactions. Provisions of the Dodd-Frank Act also amended the FDIA to prohibit state-chartered banks (including certain of our banking subsidiaries) from engaging in derivative transactions unless the state lending limit laws take into account credit exposure to such transactions.
Additional provisions of the Dodd-Frank Act are described in this report under “Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview and Strategy-Financial Regulatory Reform.”
Given the uncertainty associated with the manner in which many provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of the impact that its requirements will have on our operations is unclear. However, its requirements may, individually or in the aggregate, have a material adverse effect upon the Company's business, results of operations, cash flows and financial position.
Financial reform legislation may reduce our ability to market our products to consumers and may limit our ability to profitably operate our mortgage business.
The Dodd-Frank Act also established the Bureau of Consumer Financial Protection (the “Bureau”) within the Federal Reserve, which now regulates consumer financial products and services. On July 21, 2011, many of the consumer financial protection functions previously assigned to other federal agencies shifted to the Bureau. The Bureau now has broad rulemaking authority over a wide range of consumer protection laws that apply to banks and other providers of consumer financial services, including the authority to prohibit “unfair, deceptive or abusive acts or practices,” and to enact regulations to ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent and competitive. The Dodd-Frank Act also required the Bureau to adopt a number of new specific regulatory requirements. These new rules may increase the costs of engaging in these activities for all market participants, including our subsidiaries. Additionally, the Bureau has broad supervisory, examination and enforcement authority. Although we and our subsidiary banks are not subject to Bureau examination, the actions taken by the Bureau may influence enforcement actions and positions taken by other federal and state regulators, including those with jurisdiction over us and our subsidiaries. Finally, the Dodd-Frank Act authorizes state attorneys general and other state officials to enforce certain consumer protection rules issued by the Bureau.
Regulatory initiatives regarding bank capital requirements may require heightened capital.
In June 2012, the banking agencies proposed comprehensive revisions to their regulatory capital rules through three concurrent proposals which incorporate the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act as well as changes made by the Basel III international capital standards. The first proposal would increase the quantity and quality of capital required and add a requirement for a capital conservation buffer. In addition, proposed changes in regulatory capital standards would phase-out trust preferred securities as a component of tier 1 capital commencing January 1, 2013. The second proposal would revise rules for calculating risk-weighted assets and apply an alternative to the use of credit ratings for calculating risk weighted assets with respect to residential mortgages, securitization exposures, and counterparty credit risk. The final proposal includes additional measures for the largest banking institutions as well as for those with significant international exposure, which would not apply to us. The proposal received extensive comments. In a joint press release issued in November 2012, the banking agencies stated that they do not expect any of the proposed rules to become effective on the original target date of January 1, 2013. Further guidance on the status of the proposed rules is expected in early 2013.
There is no guarantee that the capital requirements or the standardized risk weighted assets rules will be adopted in their current form, whether any changes will be made before adoption, when final rules will be published or when they will be effective. If the new standards require us or our banking subsidiaries to maintain materially more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities in order to comply with formulaic liquidity
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requirements, such regulation could significantly impact our return on equity, financial condition, operations, capital position and ability to pursue business opportunities.
In October 2012, the Federal Reserve published a final rule implementing the stress test requirements under the Dodd-Frank Act, which are designed to evaluate the sufficiency of a banking organization's capital to support its operations during periods of stress. As a bank holding company with between $10 billion and $50 billion in total consolidated assets, we will be required to conduct annual stress tests based on scenarios provided by the Federal Reserve, beginning in the fall of 2013, and to publicly disclose the results of our stress tests beginning in 2014. This stress test requirement is expected to increase our compliance costs.
Our FDIC insurance premiums may increase, which could negatively impact our results of operations.
Recent insured institution failures, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline of its deposit insurance fund to historical lows. In addition, the Dodd-Frank Act made permanent a temporary increase in the limit on FDIC coverage to $250,000 per depositor. These developments have caused our FDIC insurance premiums to increase, and may cause additional increases. Certain provisions of the Dodd-Frank Act may further affect our FDIC insurance premiums. The Dodd-Frank Act includes provisions that change the assessment base for federal deposit insurance from the amount of insured deposits to average total consolidated assets less average tangible capital, eliminate the maximum size of the DIF, eliminate the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds, and increase the minimum reserve ratio of the DIF from 1.15% to 1.35%. Beginning in late 2010, the FDIC has issued regulations implementing some of these changes. The FDIC has indicated that the changes to the assessment base, and accompanying changes to the assessment rates, will generally not require an increase in the level of assessments, and may result in decreased assessments, for depository institutions with less than $10 billion in assets (such as each of our bank subsidiaries). However, there is a risk that the banks' deposit insurance premiums will continue to increase if failures of insured depository institutions continue to deplete the DIF. Any such increase may negatively impact our financial condition and results of operations.
Risks Related to Our Niche Businesses
Our premium finance business may involve a higher risk of delinquency or collection than our other lending operations, and could expose us to losses.
We provide financing for the payment of commercial insurance premiums and life insurance premiums on a national basis through our wholly owned subsidiary, FIFC, and financing for the payment of commercial insurance premiums in Canada through our wholly owned subsidiary, FIFC Canada. Commercial insurance premium finance loans involve a different, and possibly higher, risk of delinquency or collection than life insurance premium finance loans and the loan portfolios of our bank subsidiaries because these loans are issued primarily through relationships with a large number of unaffiliated insurance agents and because the borrowers are located nationwide. As a result, risk management and general supervisory oversight may be difficult. As of December 31, 2012, we had $2.0 billion of commercial insurance premium finance loans outstanding, of which $1.7 billion were originated in the U.S. by FIFC and $267.9 were originated in Canada by FIFC Canada. Together, these loans represented 16% of our total loan portfolio as of such date.
FIFC and FIFC Canada may also be more susceptible to third party fraud with respect to commercial insurance premium finance loans because these loans are originated and many times funded through relationships with unaffiliated insurance agents and brokers. In the second quarter of 2010, fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of FIFC, increased both the Company's net charge-offs and provision for credit losses by $15.7 million. Acts of fraud are difficult to detect and deter, and we cannot assure investors that our risk management procedures and controls will prevent losses from fraudulent activity.
FIFC may be exposed to the risk of loss in our life insurance premium finance business because of fraud. While FIFC maintains a policy prohibiting the knowing financing of stranger-originated life insurance and has established procedures to identify and prevent the company from financing such policies, FIFC cannot be certain that it will never provide loans with respect to such a policy. In the event such policies were financed, a carrier could potentially put at risk the cash surrender value of a policy, which serves as FIFC's primary collateral, by challenging the validity of the insurance contract for lack of an insurable interest.
See the below risk factor “Widespread financial difficulties or credit downgrades among commercial and life insurance providers could lessen the value of the collateral securing our premium finance loans and impair the financial condition and liquidity of FIFC and FIFC Canada” for a discussion of further risks associated with our insurance premium finance activities.
While FIFC is licensed as required and carefully monitors compliance with regulation of each of its businesses, there can be no assurance that FIFC will not be negatively impacted by material changes in the regulatory environment. FIFC Canada is not
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required to be licensed in most providences of Canada, but there can be no assurance that future regulations which impact the business of FIFC Canada will not be enacted.
Additionally, to the extent that affiliates of insurance carriers, banks, and other lending institutions add greater service and flexibility to their financing practices in the future, our competitive position and results of operations could be adversely affected. FIFC's life insurance premium finance business could be materially negatively impacted by changes in the federal or state estate tax provisions. There can be no assurance that FIFC will be able to continue to compete successfully in its markets.
Widespread financial difficulties or credit downgrades among commercial and life insurance providers could lessen the value of the collateral securing our premium finance loans and impair the financial condition and liquidity of FIFC and FIFC Canada.
FIFC and FIFC Canada's premium finance loans are primarily secured by the insurance policies financed by the loans. These insurance policies are written by a large number of insurance companies geographically dispersed throughout the country. Our premium finance receivables balances finance insurance policies which are spread among a large number of insurers; however, one of the insurers represents approximately 11% of such balances and two additional insurers each of which represents approximately 4% of such balances. FIFC and FIFC Canada consistently monitors carrier ratings and financial performance of our carriers. While FIFC and FIFC Canada can mitigate its risks as a result of this monitoring to the extent that commercial or life insurance providers experience widespread difficulties or credit downgrades, the value of our collateral will be reduced. FIFC and FIFC Canada are also subject to the possibility of insolvency of insurance carriers in the commercial and life insurance businesses that are in possession of our collateral. If one or more large nationwide insurers were to fail, the value of our portfolio could be significantly negatively impacted. A significant downgrade in the value of the collateral supporting our premium finance business could impair our ability to create liquidity for this business, which, in turn could negatively impact our ability to expand.
Our Wealth Management Business in general, and WHI's brokerage operation, in particular, exposes us to certain risks associated with the securities industry.
Our wealth management business in general, and WHI's brokerage operations in particular, present special risks not borne by community banks that focus exclusively on community banking. For example, the brokerage industry is subject to fluctuations in the stock market that may have a significant adverse impact on transaction fees, customer activity and investment portfolio gains and losses. Likewise, additional or modified regulations may adversely affect our wealth management operations. Each of our wealth management operations is dependent on a small number of professionals whose departure could result in the loss of a significant number of customer accounts. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect our results of operations. In addition, we are subject to claim arbitration risk arising from customers who claim their investments were not suitable or that their portfolios were inappropriately traded. These risks increase when the market, as as a whole, declines. The risks associated with retail brokerage may not be supported by the income generated by our wealth management operations.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company’s executive offices are located at 9700 W. Higgins Road, Rosemont, Illinois. The Company’s banks operate through 111 banking facilities, the majority of which are owned. The Company owns 166 automatic teller machines, the majority of which are housed at banking locations. The banking facilities are located in communities throughout the Chicago metropolitan area and southern Wisconsin. Excess space in certain properties is leased to third parties.
The Company’s wealth management subsidiaries have one location in downtown Chicago, one in Appleton, Wisconsin, and one in Florida, all of which are leased, as well as office locations at several of our banks. Wintrust Mortgage, a division of Barrington Bank, is headquartered in our corporate headquarters in Rosemont, Illinois and has 40 locations in nine states, all of which are leased, as well as office locations at several of our banks. FIFC has one location in Northbrook, Illinois which is owned and locations in Jersey City, New Jersey and Long Island, New York which are leased. FIFC Canada has two locations in Canada that are leased, located in Toronto, Ontario and Vancouver, British Columbia. Tricom has one location in Menomonee Falls, Wisconsin which is owned. In addition, the Company owns other real estate acquired for further expansion that, when considered in the aggregate, is not material to the Company’s financial position.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, from time to time, are subject to pending and threatened legal action and proceedings arising in the ordinary course of business. Any such litigation currently pending against the Company or its subsidiaries is incidental to the Company's business and, based on information currently available to management, management believes the outcome of such actions or proceedings will not have a material adverse effect on the operations or financial position of the Company.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company’s common stock is traded on The NASDAQ Global Select Stock Market under the symbol WTFC. The following table sets forth the high and low sales prices reported on NASDAQ for the common stock by fiscal quarter during 2012 and 2011.
2012 | 2011 | |||||||||||||||
High | Low | High | Low | |||||||||||||
Fourth Quarter | $ | 39.81 | $ | 34.40 | $ | 30.34 | $ | 24.30 | ||||||||
Third Quarter | 39.04 | 34.51 | 34.87 | 25.68 | ||||||||||||
Second Quarter | 36.85 | 31.67 | 37.34 | 30.08 | ||||||||||||
First Quarter | 36.57 | 28.61 | 36.97 | 31.13 | ||||||||||||
Performance Graph
The following performance graph compares the five-year percentage change in the Company’s cumulative shareholder return on common stock compared with the cumulative total return on composites of (1) all NASDAQ Global Select Market stocks for United States companies (broad market index) and (2) all NASDAQ Global Select Market bank stocks (peer group index). Cumulative total return is computed by dividing the sum of the cumulative amount of dividends for the measurement period and the difference between the Company’s share price at the end and the beginning of the measurement period by the share price at the beginning of the measurement period. The NASDAQ Global Select Market for United States companies’ index comprises all domestic common shares traded on the NASDAQ Global Select Market and the NASDAQ Small-Cap Market. The NASDAQ Global Select Market bank stocks index comprises all banks traded on the NASDAQ Global Select Market and the NASDAQ Small-Cap Market.
This graph and other information furnished in the section titled “Performance Graph” under this Part II, Item 5 of this Form 10-K shall not be deemed to be “soliciting” materials or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |||||||||||||
Wintrust Financial Corporation | 100.00 | 63.18 | 94.84 | 102.15 | 87.66 | 114.31 | ||||||||||||
NASDAQ — Total US | 100.00 | 61.17 | 87.93 | 104.13 | 104.69 | 123.85 | ||||||||||||
NASDAQ — Bank Index | 100.00 | 72.91 | 60.66 | 72.13 | 64.51 | 77.18 | ||||||||||||
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Approximate Number of Equity Security Holders
As of February 22, 2013 there were approximately 1,538 shareholders of record of the Company’s common stock.
Dividends on Common Stock
The Company’s Board of Directors approved the first semiannual dividend on the Company’s common stock in January 2000 and has continued to approve a semi-annual dividend since that time. The payment of dividends is subject to statutory restrictions and restrictions arising under the terms of our 8.00% Non-Cumulative Perpetual Convertible Preferred Stock, Series A (the “Series A Preferred Stock”), the terms of the Company's 5.00% Non-Cumulative Perpetual Convertible Preferred Stock, Series C (the "Series C Preferred Stock"), the terms of the Company’s Trust Preferred Securities offerings, the Company’s 7.5% tangible equity units and under certain financial covenants in the Company’s credit agreement. Under the terms of the Company’s revolving credit facility amended on October 26, 2012, the Company is prohibited from paying dividends on any equity interests, including its common stock and preferred stock, if such payments would cause the Company to be in default under its credit facility.
Following is a summary of the cash dividends paid in 2012 and 2011:
Record Date | Payable Date | Dividend per Share | ||
February 10, 2011 | February 24, 2011 | $0.09 | ||
August 11, 2011 | August 25, 2011 | $0.09 | ||
February 9, 2012 | February 23, 2012 | $0.09 | ||
August 9, 2012 | August 23, 2012 | $0.09 | ||
In January 2013, the Company’s Board of Directors approved a semi-annual dividend of $0.09 per share. The dividend was paid on February 21, 2013 to shareholders of record as of February 7, 2013.
Because the Company’s consolidated net income consists largely of net income of the banks and certain wealth management subsidiaries, the Company’s ability to pay dividends generally depends upon its receipt of dividends from these entities. The banks’ ability to pay dividends is regulated by banking statutes. See “Supervision and Regulation - Payment of Dividends and Share Repurchases” on page 10 of this Form 10-K. During 2012, 2011 and 2010, the banks paid $45.0 million, $27.8 million and $11.5 million, respectively, in dividends to the Company.
Reference is also made to Note 20 to the Consolidated Financial Statements and “Liquidity and Capital Resources” contained in this Form 10-K for a description of the restrictions on the ability of certain subsidiaries to transfer funds to the Company in the form of dividends.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
No purchases of the Company’s common shares were made by or on behalf of the Company or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, during the year ended December 31, 2012. There is currently no authorization to repurchase shares of outstanding common stock.
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ITEM 6. | SELECTED FINANCIAL DATA |
Years Ended December 31, | ||||||||||||||||||||
(Dollars in thousands, except per share data) | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Selected Financial Condition Data (at end of year): | ||||||||||||||||||||
Total assets | $ | 17,519,613 | $ | 15,893,808 | $ | 13,980,156 | $ | 12,215,620 | $ | 10,658,326 | ||||||||||
Total loans, excluding covered loans | 11,828,943 | 10,521,377 | 9,599,886 | 8,411,771 | 7,621,069 | |||||||||||||||
Total deposits | 14,428,544 | 12,307,267 | 10,803,673 | 9,917,074 | 8,376,750 | |||||||||||||||
Junior subordinated debentures | 249,493 | 249,493 | 249,493 | 249,493 | 249,515 | |||||||||||||||
Total shareholders’ equity | 1,804,705 | 1,543,533 | 1,436,549 | 1,138,639 | 1,066,572 | |||||||||||||||
Selected Statements of Income Data: | ||||||||||||||||||||
Net interest income | $ | 519,516 | $ | 461,377 | $ | 415,836 | $ | 311,876 | $ | 244,567 | ||||||||||
Net revenue (1) | 745,608 | 651,075 | 607,996 | 629,523 | 344,245 | |||||||||||||||
Pre-tax adjusted earnings (2) | 273,486 | 220,778 | 196,078 | 122,665 | 94,644 | |||||||||||||||
Net income | 111,196 | 77,575 | 63,329 | 73,069 | 20,488 | |||||||||||||||
Net income per common share – Basic | 2.81 | 2.08 | 1.08 | 2.23 | 0.78 | |||||||||||||||
Net income per common share – Diluted | 2.31 | 1.67 | 1.02 | 2.18 | 0.76 | |||||||||||||||
Selected Financial Ratios and Other Data: | ||||||||||||||||||||
Performance Ratios: | ||||||||||||||||||||
Net interest margin (2) | 3.49 | % | 3.42 | % | 3.37 | % | 3.01 | % | 2.81 | % | ||||||||||
Non-interest income to average assets | 1.37 | % | 1.27 | % | 1.42 | % | 2.78 | % | 1.02 | % | ||||||||||
Non-interest expense to average assets | 2.96 | % | 2.82 | % | 2.82 | % | 3.01 | % | 2.63 | % | ||||||||||
Net overhead ratio (2) (3) | 1.59 | % | 1.55 | % | 1.40 | % | 0.23 | % | 1.60 | % | ||||||||||
Net overhead ratio - pre-tax adjusted earnings (2) (3) | 1.49 | % | 1.61 | % | 1.62 | % | 1.66 | % | 1.54 | % | ||||||||||
Efficiency ratio (2) (4) | 65.85 | % | 64.58 | % | 63.77 | % | 54.44 | % | 73.00 | % | ||||||||||
Efficiency ratio - pre-tax adjusted earnings (2) (4) | 62.50 | % | 63.75 | % | 64.70 | % | 72.25 | % | 72.35 | % | ||||||||||
Return on average assets | 0.67 | % | 0.52 | % | 0.47 | % | 0.64 | % | 0.21 | % | ||||||||||
Return on average common equity | 6.60 | % | 5.11 | % | 3.01 | % | 6.70 | % | 2.44 | % | ||||||||||
Average total assets | $ | 16,529,617 | $ | 14,920,160 | $ | 13,556,612 | $ | 11,415,322 | $ | 9,753,220 | ||||||||||
Average total shareholders’ equity | 1,696,276 | 1,484,720 | 1,352,135 | 1,081,792 | 779,437 | |||||||||||||||
Average loans to average deposits ratio (excluding covered loans) | 87.8 | % | 88.3 | % | 91.1 | % | 90.5 | % | 94.3 | % | ||||||||||
Average loans to average deposits ratio (including covered loans) | 92.6 | 92.8 | 93.4 | 90.5 | 94.3 | |||||||||||||||
Common Share Data at end of year: | ||||||||||||||||||||
Market price per common share | $ | 36.70 | $ | 28.05 | $ | 33.03 | $ | 30.79 | $ | 20.57 | ||||||||||
Book value per common share (2) | $ | 37.78 | $ | 34.23 | $ | 32.73 | $ | 35.27 | $ | 33.03 | ||||||||||
Tangible common book value per share (2) | $ | 29.28 | $ | 26.72 | $ | 25.80 | $ | 23.22 | $ | 20.78 | ||||||||||
Common shares outstanding | 36,858,355 | 35,978,349 | 34,864,068 | 24,206,819 | 23,756,674 | |||||||||||||||
Other Data at end of year: (7) | ||||||||||||||||||||
Leverage Ratio | 10.0 | % | 9.4 | % | 10.1 | % | 9.3 | % | 10.6 | % | ||||||||||
Tier 1 Capital to risk-weighted assets | 12.1 | % | 11.8 | % | 12.5 | % | 11.0 | % | 11.6 | % | ||||||||||
Total Capital to risk-weighted assets | 13.1 | % | 13.0 | % | 13.8 | % | 12.4 | % | 13.1 | % | ||||||||||
Tangible Common Equity ratio (TCE) (2) (6) | 7.4 | % | 7.5 | % | 8.0 | % | 4.7 | % | 4.8 | % | ||||||||||
Tangible Common Equity ratio, assuming full conversion of preferred stock (2) (6) | 8.4 | % | 7.8 | % | 8.3 | % | 7.1 | % | 7.5 | % | ||||||||||
Allowance for credit losses (5) | $ | 121,988 | $ | 123,612 | $ | 118,037 | $ | 101,831 | $ | 71,353 | ||||||||||
Non-performing loans | 118,083 | 120,084 | 141,958 | 131,804 | 136,094 | |||||||||||||||
Allowance for credit losses(5) to total loans, excluding covered loans | 1.03 | % | 1.17 | % | 1.23 | % | 1.21 | % | 0.94 | % | ||||||||||
Non-performing loans to total loans, excluding covered loans | 1.00 | % | 1.14 | % | 1.48 | % | 1.57 | % | 1.79 | % | ||||||||||
Number of: | ||||||||||||||||||||
Bank subsidiaries | 15 | 15 | 15 | 15 | 15 | |||||||||||||||
Non-bank subsidiaries | 8 | 7 | 8 | 8 | 7 | |||||||||||||||
Banking offices | 111 | 99 | 86 | 78 | 79 | |||||||||||||||
(1) | Net revenue includes net interest income and non-interest income |
(2) | See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures/Ratios,” for a reconciliation of this performance measure/ratio to GAAP. |
(3) | The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s total average assets. A lower ratio indicates a higher degree of efficiency. |
(4) | The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenue (less securities gains or losses). A lower ratio indicates more efficient revenue generation. |
(5) | The allowance for credit losses includes both the allowance for loan losses and the allowance for unfunded lending-related commitments, but excluding the allowance for covered loan losses. |
(6) | Total shareholders’ equity minus preferred stock and total intangible assets divided by total assets minus total intangible assets |
(7) | Asset quality ratios exclude covered loans. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Forward Looking Statements
This document contains forward-looking statements within the meaning of federal securities laws. Forward-looking information can be identified through the use of words such as “intend,” “plan,” “project,” “expect,” “anticipate,” “believe,” “estimate,” “contemplate,” “possible,” “point,” “will,” “may,” “should,” “would” and “could.” Forward-looking statements and information are not historical facts, are premised on many factors and assumptions, and represent only management’s expectations, estimates and projections regarding future events. Similarly, these statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict, which may include, but are not limited to, those listed below and the Risk Factors discussed in Item 1A on page 17 of this Form 10-K. 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 the Company’s future financial performance, the performance of its loan portfolio, the expected amount of future credit reserves and charge-offs, delinquency trends, growth plans, regulatory developments, securities that the Company may offer from time to time, and management’s long-term performance goals, as well as statements relating to the anticipated effects on financial condition and results of operations from expected developments or events, the Company’s business and growth strategies, including future acquisitions of banks, specialty finance or wealth management businesses, internal growth and plans to form additional de novo banks or branch offices. Actual results could differ materially from those addressed in the forward-looking statements as a result of numerous factors, including the following:
• | negative economic conditions that adversely affect the economy, housing prices, the job market and other factors that may affect the Company’s liquidity and the performance of its loan portfolios, particularly in the markets in which it operates; |
• | the extent of defaults and losses on the Company’s loan portfolio, which may require further increases in its allowance for credit losses; |
• | estimates of fair value of certain of the Company’s assets and liabilities, which could change in value significantly from period to period; |
• | the financial success and economic viability of the borrowers of our commercial loans; |
• | market conditions in the commercial real estate market in the Chicago metropolitan area; |
• | the extent of commercial and consumer delinquencies and declines in real estate values, which may require further increases in the Company’s allowance for loan and lease losses; |
• | changes in the level and volatility of interest rates, the capital markets and other market indices that may affect, among other things, the Company’s liquidity and the value of its assets and liabilities; |
• | competitive pressures in the financial services business which may affect the pricing of the Company’s loan and deposit products as well as its services (including wealth management services); |
• | failure to identify and complete favorable acquisitions in the future or unexpected difficulties or developments related to the integration of recent or future acquisitions; |
• | unexpected difficulties and losses related to FDIC-assisted acquisitions, including those resulting from our loss-sharing arrangements with the FDIC; |
• | any negative perception of the Company’s reputation or financial strength; |
• | ability to raise additional capital on acceptable terms when needed; |
• | disruption in capital markets, which may lower fair values for the Company’s investment portfolio; |
• | ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations; |
• | adverse effects on our information technology systems resulting from failures, human error or tampering; |
• | accuracy and completeness of information the Company receives about customers and counterparties to make credit decisions; |
• | the ability of the Company to attract and retain senior management experienced in the banking and financial services industries; |
• | environmental liability risk associated with lending activities; |
• | the impact of any claims or legal actions, including any effect on our reputation; |
• | losses incurred in connection with repurchases and indemnification payments related to mortgages; |
• | the loss of customers as a result of technological changes allowing consumers to complete their financial transactions without the use of a bank; |
• | the soundness of other financial institutions; |
• | the possibility that certain European Union member states will default on their debt obligations, which may affect the Company’s liquidity, financial conditions and results of operations; |
• | examinations and challenges by tax authorities; |
• | changes in accounting standards, rules and interpretations and the impact on the Company’s financial statements; |
• | the ability of the Company to receive dividends from its subsidiaries; |
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• | a decrease in the Company’s regulatory capital ratios, including as a result of further declines in the value of its loan portfolios, or otherwise; |
• | legislative or regulatory changes, particularly changes in regulation of financial services companies and/or the products and services offered by financial services companies, including those resulting from the Dodd-Frank Act; |
• | restrictions upon our ability to market our products to consumers and limitations on our ability to profitably operate our mortgage business resulting from the Dodd-Frank Act; |
• | increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including the Dodd-Frank Act; |
• | changes in capital requirements; |
• | increases in the Company’s FDIC insurance premiums, or the collection of special assessments by the FDIC; |
• | delinquencies or fraud with respect to the Company’s premium finance business; |
• | credit downgrades among commercial and life insurance providers that could negatively affect the value of collateral securing the Company’s premium finance loans; |
• | the Company’s ability to comply with covenants under its credit facility; and |
• | fluctuations in the stock market, which may have an adverse impact on the Company’s wealth management business and brokerage operation. |
Therefore, there can be no assurances that future actual results will correspond to these forward-looking statements. The reader is cautioned not to place undue reliance on any forward-looking statement made by or on behalf of Wintrust. Any such statement speaks only as of the date the statement was made or as of such date that may be referenced within the statement. The Company undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this Form 10-K. Persons are advised, however, to consult further disclosures management makes on related subjects in its reports filed with the SEC and in its press releases.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion highlights the significant factors affecting the operations and financial condition of Wintrust for the three years ended December 31, 2012. This discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto, and Selected Financial Highlights appearing elsewhere within this Form 10-K.
OPERATING SUMMARY
Wintrust’s key measures of profitability and balance sheet changes are shown in the following table:
Years Ended December 31, | % or Basis Point (bp)change | % or Basis Point (bp)change | ||||||||||||||
(Dollars in thousands, except per share data) | 2012 | 2011 | 2010 | 2011 to 2012 | 2010 to 2011 | |||||||||||
Net income | $ | 111,196 | $ | 77,575 | $ | 63,329 | 43% | 22% | ||||||||
Net income per common share — Diluted | 2.31 | 1.67 | 1.02 | 38 | 64 | |||||||||||
Pre-tax adjusted earnings (1) | 273,486 | 220,778 | 196,078 | 24 | 13 | |||||||||||
Net revenue (2) | 745,608 | 651,075 | 607,996 | 15 | 7 | |||||||||||
Net interest income | 519,516 | 461,377 | 415,836 | 13 | 11 | |||||||||||
Net interest margin (1) | 3.49 | % | 3.42 | % | 3.37 | % | 7bp | 5bp | ||||||||
Net overhead ratio (1) (3) | 1.59 | 1.55 | 1.40 | 4 | 15 | |||||||||||
Net overhead ratio, based on pre-tax adjusted earnings (1) (3) | 1.49 | 1.61 | 1.62 | (12) | (1) | |||||||||||
Efficiency ratio (1) (4) | 65.85 | 64.58 | 63.77 | 127 | 81 | |||||||||||
Efficiency ratio, based on pre-tax adjusted earnings (1) (4) | 62.50 | 63.75 | 64.70 | (125) | (95) | |||||||||||
Return on average assets | 0.67 | 0.52 | 0.47 | 15 | 5 | |||||||||||
Return on average common equity | 6.60 | 5.11 | 3.01 | 149 | 210 | |||||||||||
At end of period | ||||||||||||||||
Total assets | $ | 17,519,613 | $ | 15,893,808 | $ | 13,980,156 | 10% | 14% | ||||||||
Total loans, excluding loans held-for-sale, excluding covered loans | 11,828,943 | 10,521,377 | 9,599,886 | 12 | 10 | |||||||||||
Total loans, including loans held-for-sale, excluding covered loans | 12,241,143 | 10,841,901 | 9,971,333 | 13 | 9 | |||||||||||
Total deposits | 14,428,544 | 12,307,267 | 10,803,673 | 17 | 14 | |||||||||||
Total shareholders’ equity | 1,804,705 | 1,543,533 | 1,436,549 | 17 | 7 | |||||||||||
Tangible common equity ratio (TCE) (1) | 7.4 | % | 7.5 | % | 8.0 | % | (10)bp | (50)bp | ||||||||
Tangible common equity ratio, assuming full conversion of preferred stock (1) | 8.4 | % | 7.8 | % | 8.3 | % | 60bp | (50)bp | ||||||||
Book value per common share (1) | 37.78 | 34.23 | 32.73 | 10% | 5% | |||||||||||
Tangible common book value per common share (1) | 29.28 | 26.72 | 25.80 | 10 | 4 | |||||||||||
Market price per common share | 36.70 | 28.05 | 33.03 | 31 | (15) | |||||||||||
(1) | See “Non-GAAP Financial Measures/Ratios” for additional information on this performance measure/ratio |
(2) | Net revenue is net interest income plus non-interest income |
(3) | The net overhead ratio is calculated by netting total non-interest expense and total non-interest income, annualizing this amount, and dividing by that period’s total average assets. A lower ratio indicates a higher degree of efficiency. |
(4) | The efficiency ratio is calculated by dividing total non-interest expense by tax-equivalent net revenues (less securities gains or losses). A lower ratio indicates more efficient revenue generation. |
Please refer to the Consolidated Results of Operations section later in this discussion for an analysis of the Company’s operations for the past three years.
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NON-GAAP FINANCIAL MEASURES/RATIOS
The accounting and reporting policies of Wintrust conform to generally accepted accounting principles (“GAAP”) in the United States and prevailing practices in the banking industry. However, certain non-GAAP performance measures and ratios are used by management to evaluate and measure the Company’s performance. These include taxable-equivalent net interest income (including its individual components), net interest margin (including its individual components), the efficiency ratio, tangible common equity ratio, tangible common book value per share and pre-tax adjusted earnings. Management believes that these measures and ratios provide users of the Company’s financial information a more meaningful view of the performance of the interest-earning assets and interest-bearing liabilities and of the Company’s operating efficiency. Other financial holding companies may define or calculate these measures and ratios differently.
Management reviews yields on certain asset categories and the net interest margin of the Company and its banking subsidiaries on a fully taxable-equivalent (“FTE”) basis. In this non-GAAP presentation, net interest income is adjusted to reflect tax-exempt interest income on an equivalent before-tax basis. This measure ensures comparability of net interest income arising from both taxable and tax-exempt sources. Net interest income on a FTE basis is also used in the calculation of the Company’s efficiency ratio. The efficiency ratio, which is calculated by dividing non-interest expense by total taxable-equivalent net revenue (less securities gains or losses), measures how much it costs to produce one dollar of revenue. Securities gains or losses are excluded from this calculation to better match revenue from daily operations to operational expenses. Management considers the tangible common equity ratio and tangible book value per common share as useful measurements of the Company’s equity. Pre-tax adjusted earnings is a significant metric in assessing the Company’s operating performance. Pre-tax adjusted earnings is calculated by adjusting income before taxes to exclude the provision for credit losses and certain significant items.
The net overhead ratio and the efficiency ratio are primarily reviewed by the Company based on pre-tax adjusted earnings. The Company believes that these measures provide a more meaningful view of the Company’s operating efficiency and expense management. The net overhead ratio, based on pre-tax adjusted earnings, is calculated by netting total adjusted non-interest expense and total adjusted non-interest income, annualizing this amount, and dividing it by total average assets. Adjusted noninterest expense is calculated by subtracting OREO expenses, covered loan collection expense, defeasance cost and fees to terminate repurchase agreements. Adjusted non-interest income is calculated by adding back the recourse obligation on loans previously sold and subtracting gains or adding back losses on foreign currency remeasurement, investment partnerships, bargain purchase, trading and available-for-sale securities activity.
The efficiency ratio, based on pre-tax adjusted earnings, is calculated by dividing adjusted non-interest expense by adjusted taxable-equivalent net revenue. Adjusted taxable-equivalent net revenue is comprised of fully taxable equivalent net interest income and adjusted non-interest income.
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The following table presents a reconciliation of certain non-GAAP performance measures and ratios used by the Company to evaluate and measure the Company’s performance to the most directly comparable GAAP financial measures for the last five years.
Years Ended December 31, | ||||||||||||||||||||
(Dollars and shares in thousands, except per share data) | 2012 | 2011 | 2010 | 2009 | 2008 | |||||||||||||||
Calculation of Net Interest Margin and Efficiency Ratio | ||||||||||||||||||||
(A) Interest Income (GAAP) | $ | 627,021 | $ | 605,793 | $ | 593,107 | $ | 527,614 | $ | 514,723 | ||||||||||
Taxable-equivalent adjustment: | ||||||||||||||||||||
-Loans | 576 | 458 | 334 | 462 | 645 | |||||||||||||||
-Liquidity management assets | 1,363 | 1,224 | 1,377 | 1,720 | 1,795 | |||||||||||||||
-Other earning assets | 8 | 12 | 17 | 38 | 47 | |||||||||||||||
Interest Income — FTE | $ | 628,968 | $ | 607,487 | $ | 594,835 | $ | 529,834 | $ | 517,210 | ||||||||||
(B) Interest Expense (GAAP) | 107,505 | 144,416 | 177,271 | 215,738 | 270,156 | |||||||||||||||
Net interest income — FTE | $ | 521,463 | $ | 463,071 | $ | 417,564 | $ | 314,096 | $ | 247,054 | ||||||||||
(C) Net Interest Income (GAAP) (A minus B) | $ | 519,516 | $ | 461,377 | $ | 415,836 | $ | 311,876 | $ | 244,567 | ||||||||||
(D) Net interest margin (GAAP) | 3.47 | % | 3.41 | % | 3.35 | % | 2.99 | % | 2.78 | % | ||||||||||
Net interest margin — FTE | 3.49 | % | 3.42 | % | 3.37 | % | 3.01 | % | 2.81 | % | ||||||||||
(E) Efficiency ratio (GAAP) | 66.02 | % | 64.75 | % | 63.95 | % | 54.64 | % | 73.52 | % | ||||||||||
Efficiency ratio — FTE | 65.85 | % | 64.58 | % | 63.77 | % | 54.44 | % | 73.00 | % | ||||||||||
Efficiency ratio — Based on pre-tax adjusted earnings | 62.50 | % | 63.75 | % | 64.70 | % | 72.25 | % | 72.35 | % | ||||||||||
(F) Net overhead ratio (GAAP) | 1.59 | % | 1.55 | % | 1.40 | % | 0.23 | % | 1.60 | % | ||||||||||
Net overhead ratio — Based on pre-tax adjusted earnings | 1.49 | % | 1.61 | % | 1.62 | % | 1.66 | % | 1.54 | % | ||||||||||
Calculation of Tangible Common Equity ratio (at period end) | ||||||||||||||||||||
Total shareholders' equity | $ | 1,804,705 | $ | 1,543,533 | $ | 1,436,549 | $ | 1,138,639 | $ | 1,066,572 | ||||||||||
(G) Less: Preferred stock | (176,406 | ) | (49,768 | ) | (49,640 | ) | (284,824 | ) | (281,873 | ) | ||||||||||
Less: Intangible assets | (366,348 | ) | (327,538 | ) | (293,765 | ) | (291,649 | ) | (290,918 | ) | ||||||||||
(H) Total tangible common shareholders’ equity | $ | 1,261,951 | $ | 1,166,227 | $ | 1,093,144 | $ | 562,166 | $ | 493,781 | ||||||||||
Total assets | $ | 17,519,613 | $ | 15,893,808 | $ | 13,980,156 | $ | 12,215,620 | $ | 10,658,326 | ||||||||||
Less: Intangible assets | (366,348 | ) | (327,538 | ) | (293,765 | ) | (291,649 | ) | (290,918 | ) | ||||||||||
(I) Total tangible assets | $ | 17,153,265 | $ | 15,566,270 | $ | 13,686,391 | $ | 11,923,971 | $ | 10,367,408 | ||||||||||
Tangible common equity ratio (H/I) | 7.4 | % | 7.5 | % | 8.0 | % | 4.7 | % | 4.8 | % | ||||||||||
Tangible common equity ratio, assuming full conversion of preferred stock ((H-G)/I) | 8.4 | % | 7.8 | % | 8.3 | % | 7.1 | % | 7.5 | % | ||||||||||
Calculation of Pre-Tax Adjusted Earnings | ||||||||||||||||||||
Income before taxes | $ | 180,132 | $ | 128,033 | $ | 100,807 | $ | 117,504 | $ | 30,641 | ||||||||||
Add: Provision for credit losses | 76,436 | 102,638 | 124,664 | 167,932 | 57,441 | |||||||||||||||
Add: OREO expenses, net | 22,103 | 26,340 | 19,331 | 18,963 | 2,023 | |||||||||||||||
Add: Recourse obligation on loans previously sold | — | 439 | 10,970 | 937 | — | |||||||||||||||
Add: Covered loan collection expense | 4,759 | 2,831 | 689 | — | — | |||||||||||||||
Add: Defeasance cost | 996 | — | — | — | — | |||||||||||||||
Add: Gain on foreign currency remeasurement | (1 | ) | — | — | — | — | ||||||||||||||
Add: Fees for termination of repurchase agreements | 2,110 | — | — | — | — | |||||||||||||||
Less: (Gain) loss from investment partnerships | (2,551 | ) | 600 | (1,155 | ) | (138 | ) | 234 | ||||||||||||
Less: Gain on bargain purchases, net | (7,503 | ) | (37,974 | ) | (44,231 | ) | (156,013 | ) | — | |||||||||||
Less: Trading losses (gains), net | 1,900 | (337 | ) | (5,165 | ) | (26,788 | ) | 134 | ||||||||||||
Less: (Gains) losses on available-for-sale securities, net | (4,895 | ) | (1,792 | ) | (9,832 | ) | 268 | 4,171 | ||||||||||||
Pre-tax adjusted earnings | $ | 273,486 | $ | 220,778 | $ | 196,078 | $ | 122,665 | $ | 94,644 | ||||||||||
Calculation of book value per share | ||||||||||||||||||||
Total shareholders’ equity | $ | 1,804,705 | $ | 1,543,533 | $ | 1,436,549 | $ | 1,138,639 | $ | 1,066,572 | ||||||||||
Less: Preferred stock | (176,406 | ) | (49,768 | ) | (49,640 | ) | (284,824 | ) | (281,873 | ) | ||||||||||
(J) Total common equity | $ | 1,628,299 | $ | 1,493,765 | $ | 1,386,909 | $ | 853,815 | $ | 784,699 | ||||||||||
Actual common shares outstanding | 36,858 | 35,978 | 34,864 | 24,207 | 23,757 | |||||||||||||||
Add: TEU conversion shares | 6,241 | 7,666 | 7,512 | — | — | |||||||||||||||
(K) Common shares used for book value calculation | 43,099 | 43,644 | 42,376 | 24,207 | 23,757 | |||||||||||||||
Book value per share (J/K) | $ | 37.78 | $ | 34.23 | $ | 32.73 | $ | 35.27 | $ | 33.03 | ||||||||||
Tangible common book value per share (H/K) | $ | 29.28 | $ | 26.72 | $ | 25.80 | $ | 23.22 | $ | 20.78 | ||||||||||
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OVERVIEW AND STRATEGY
Wintrust is a financial holding company that provides traditional community banking services, primarily in the Chicago metropolitan area and southeastern Wisconsin, and operates other financing businesses on a national basis and Canada through several non-bank subsidiaries. Additionally, Wintrust offers a full array of wealth management services primarily to customers in our Market Area.
2012 Highlights
The Company recorded net income of $111.2 million for the year of 2012 compared to $77.6 million and $63.3 million for the years of 2011 and 2010, respectively. The results for 2012 demonstrate continued operating strengths as loans outstanding increased, credit quality measures improved, net interest margin remained stable and our deposit funding base continued its beneficial shift toward an aggregate lower cost of funds. The Company also continues to take advantage of the opportunities that have resulted from distressed credit markets – specifically, a dislocation of assets, banks and people in the overall market.
The Company increased its loan portfolio, excluding covered loans, from $10.5 billion at December 31, 2011 to $11.8 billion at December 31, 2012. This increase was primarily a result of the Company’s commercial banking initiative, growth in the premium finance receivables – commercial insurance portfolio as well as acquisition transactions. The Company continues to make new loans, including in the commercial and commercial real estate sector, where opportunities that meet our underwriting standards exist. The withdrawal of many banks in our area from active lending combined with our strong local relationships has presented us with opportunities to make new loans to well qualified borrowers who have been displaced from other institutions. For more information regarding changes in the Company’s loan portfolio, see “Analysis of Financial Condition – Interest Earning Assets” and Note 4 “Loans” of the Financial Statements presented under Item 8 of this report.
Management considers the maintenance of adequate liquidity to be important to the management of risk. Accordingly, during 2012, the Company continued its practice of maintaining appropriate funding capacity to provide the Company with adequate liquidity for its ongoing operations. In this regard, the Company benefited from its strong deposit base, a liquid short-term investment portfolio and its access to funding from a variety of external funding sources, including the Company's first quarter 2012 issuance of preferred stock, see "Stock Offerings" below. At December 31, 2012, the Company had overnight liquid funds and interest-bearing deposits with banks of $1.4 billion compared to $919.0 million at December 31, 2011.
The Company recorded net interest income of $519.5 million in 2012 compared to $461.4 million and $415.8 million in 2011 and 2010, respectively. The higher level of net interest income recorded in 2012 compared to 2011 resulted from an increase in average earning assets of $1.4 billion. This average earning asset growth was primarily a result of the $1.4 billion increase in average loans, excluding covered loans and $117.1 million of average covered loan growth from the FDIC-assisted bank acquisitions partially offset by a $75.6 million decrease in liquidity management and other earning assets. The majority of the increase in average loans consisted of increases of $487.4 million in commercial loans, $230.3 million in commercial real estate loans, $223.1 million in U.S.-originated commercial premium finance receivables, $140.4 million in Canadian-originated commercial premium finance receivables, $65.3 million in life premium finance receivables and $239.6 million in mortgage loans held-for-sale, partially offset by a $61.0 million decrease in home equity loans. The average earning asset growth of $1.4 billion over the past 12 months was primarily funded by a $1.1 billion increase in the average balances of interest-bearing deposits and an increase in the average balance of net free funds of $643.6 million, partially offset by a decrease of $283.7 million of wholesale funding.
Non-interest income totaled $226.1 million in 2012, increasing $36.4 million, or 19%, compared to 2011. The change is primarily attributable to higher mortgage banking and wealth management revenues, partially offset by lower bargain purchase gains recorded in 2012 relating to FDIC-assisted acquisitions than during the prior year. The increase in mortgage banking revenue in the current year as compared to 2011 resulted primarily from an increase in gains on sales of loans, which was driven by higher origination volumes in the current year due to a favorable mortgage interest rate environment. Non-interest income totaled $189.7 million in 2011, decreasing $2.5 million, or 1%, compared to 2010. The decrease in 2011 compared to 2010 was primarily attributable to lower bargain purchase gains recorded during 2011 related to the FDIC-assisted transactions than during the comparable period as well as lower net gains on available-for-sale securities in 2011, partially offset by higher wealth management revenues and fees from covered call options in 2011.
Non-interest expense totaled $489.0 million in 2012, increasing $68.6 million, or 16%, compared to 2011. The increase compared to 2011 was primarily attributable to a $50.8 million increase in salaries and employee benefits. The increase in salaries and employee benefits was, in turn, attributable to a $28.5 million increase in bonus expense and commissions attributable to variable pay based revenue, a $17.3 million increase in salaries resulting from additional employees from acquisitions and larger staffing as the company grows, and the Company's long-term incentive program and a $5.0 million increase in employee benefits (primarily health plan and payroll taxes related). Non-interest expense totaled $420.4 million in 2011, increasing $37.9 million, or 10%, compared to 2010. The increase compared to 2010 was primarily attributable to a $22.0 million increase in salaries and employee benefits. The increase in salaries and employee benefits was, in turn, attributable to an $18.2 million increase in salaries resulting
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from additional employees from acquisitions and larger staffing as the company grows and a $6.2 million increase in employee benefits (primarily health plan and payroll taxes related), partially offset by a $2.4 million decrease in bonus expense and commissions attributable to variable pay based revenue.
The Current Economic Environment
The Company’s results during 2012 reflect an improvement in credit quality metrics as compared to the previous year. The Company has continued to be disciplined in its approach to growth and has not sacrificed asset quality. However, the Company's results continue to be impacted by the existing stressed economic environment and depressed real estate valuations that affected both the U.S. economy, generally, and the Company’s local markets, specifically. In response to these conditions, Management continues to carefully monitor the impact on the Company of the financial markets, the depressed values of real property and other assets, loan performance, default rates and other financial and macro-economic indicators in order to navigate the challenging economic environment.
In particular:
• | The Company’s 2012 provision for credit losses, excluding covered loans, totaled $72.4 million, a decrease of $25.5 million when compared to 2011 and a decrease of $52.3 million when compared to 2010. Net charge-offs, excluding covered loans, decreased to $74.8 million in 2012 (of which $58.1 million related to commercial and commercial real estate loans), compared to $103.3 million in 2011 (of which $92.0 million related to commercial and commercial real estate loans) and $109.7 million in 2010 (of which $78.4 million related to commercial and commercial real estate loans). |
• | The Company decreased its allowance for loan losses, excluding covered loans, to $107.4 million at December 31, 2012, reflecting a decrease of $3.0 million, or 3%, when compared to 2011. At December 31, 2012, approximately $52.1 million, or 49%, of the allowance for loan losses, excluding covered loans, was associated with commercial real estate loans and another $28.8 million, or 27%, was associated with commercial loans. The decrease in the allowance for loan losses, |
excluding covered loans, in the current period compared to the prior year period reflects the improvements in credit quality metrics in 2012.
• | Wintrust has significant exposure to commercial real estate. At December 31, 2012, $3.9 billion, or 31%, of our loan portfolio was commercial real estate, with more than 88% located in our Market Area. The commercial real estate loan portfolio was comprised of $345.6 million related to land, residential and commercial construction, $569.7 million million related to office buildings loans, $568.9 million related to retail loans, $577.9 million related to industrial use loans, $396.7 million related to multi-family loans and 1.4 billion related to mixed use and other use types. In analyzing the commercial real estate market, the Company does not rely upon the assessment of broad market statistical data, in large part because the Company’s market area is diverse and covers many communities, each of which is impacted differently by economic forces affecting the Company’s general market area. As such, the extent of the decline in real estate valuations can vary meaningfully among the different types of commercial and other real estate loans made by the Company. The Company uses its multi-chartered structure and local management knowledge to analyze and manage the local market conditions at each of its banks. Despite these efforts, as of December 31, 2012, the Company had approximately $50.0 million of non-performing commercial real estate loans representing approximately 1% of the total commercial real estate loan portfolio. $16.6 million, or 33%, of the total non-performing commercial real estate loan portfolio related to the land, residential and commercial construction sector which remains under stress due to the significant oversupply of new homes in certain portions of our market area. |
• | Total non-performing loans (loans on non-accrual status and loans more than 90 days past due and still accruing interest), excluding covered loans, were $118.1 million (of which $50.0 million, or 42%, was related to commercial real estate) at December 31, 2012, a decrease of $2.0 million compared to December 31, 2011. Non-performing loans decreased as a result of the Company’s efforts to resolve problem loans through liquidation. |
• | The Company’s other real estate owned, excluding covered other real estate owned, decreased by $23.6 million, to $62.9 million during 2012, from $86.5 million at December 31, 2011. The decrease in other real estate owned is primarily a result of disposals during 2012. The $62.9 million of other real estate owned as of December 31, 2012 was comprised of $12.1 million of residential real estate development property, $41.7 million of commercial real estate property and $9.1 million of residential real estate property. |
During 2012, Management continued its efforts to aggressively resolve problem loans through liquidation, rather than retention, of loans or real estate acquired as collateral through the foreclosure process. This strategic effort was implemented in 2009. Management believes that some financial institutions have taken a longer term view of problem loan situations, hoping to realize higher values on acquired collateral through extended marketing efforts or an improvement in market conditions. Management
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believed that the distressed macro-economic conditions would continue to exist in 2012 and that the banking industry’s continued elevated levels in non-performing loans would lead to many properties being sold by financial institutions, thus saturating the market and possibly driving fair values of non-performing loans and foreclosed collateral further downwards. Accordingly, since 2009 the Company has attempted to liquidate as many non-performing loans and assets as possible. Management believes these actions will serve the Company well in the future by providing some protection for the Company from further valuation deterioration and permitting Management to spend less time on resolution of problem loans and more time on growing the Company’s core business and the evaluation of other opportunities presented by this volatile economic environment. The Company continues to take advantage of the opportunities that many times result from distressed credit markets — specifically, a dislocation of assets, banks and people in the overall market.
The level of loans past due 30 days or more and still accruing interest, excluding covered loans, totaled $152.0 million as of December 31, 2012, increasing $4.1 million compared to the balance of $147.9 million as of December 31, 2011. Management is very cognizant of the volatility in and the fragile nature of the national and local economic conditions and that some borrowers can experience severe difficulties and default suddenly even if they have never previously been delinquent in loan payments. Accordingly, Management believes that the current economic conditions will continue to apply stress to the quality of the Company’s loan portfolio. Accordingly, Management plans to continue to direct significant attention toward the prompt identification, management and resolution of problem loans.
Additionally in 2012, the Company restructured certain loans by providing economic concessions to borrowers to better align the terms of their loans with their current ability to pay. At December 31, 2012, approximately $126.5 million in loans had terms modified, with $106.1 million of these modified loans in accruing status. These actions helped financially stressed borrowers maintain their homes or businesses and kept these loans in an accruing status for the Company. The Company considers restructuring loans when it appears that both the borrower and the Company can benefit and preserve a solid and sustainable relationship. See Note 5 – Allowance for Loan Losses, Allowance for Losses on Lending-Related Commitments and Impaired Loans for additional discussion of restructured loans.
The Company enters into residential mortgage loan sale agreements with investors in the normal course of business. The Company’s practice is generally not to retain long-term fixed rate mortgages on its balance sheet in order to mitigate interest rate risk, and consequently sells most of such mortgages into the secondary market. These agreements provide recourse to investors through certain representations concerning credit information, loan documentation, collateral and insurability. Investors request the Company to indemnify them against losses on certain loans or to repurchase loans which the investors believe do not comply with applicable representations. An increase in requests for loss indemnification can negatively impact mortgage banking revenue as additional recourse expense. The liability for estimated losses on repurchase and indemnification claims for residential mortgage loans previously sold to investors was $4.3 million and $2.5 million at December 31, 2012 and 2011, respectively. Losses charged against the liability were $284,000 and $8.0 million for 2012 and 2011, respectively. These losses primarily relate to mortgages obtained through wholesale and correspondent channels which experienced early payment and other defaults meeting certain representation and warranty recourse requirements.
Community Banking
As of December 31, 2012, our community banking franchise consisted of 15 community banks with 111 locations. Through these banks, we provide banking and financial services primarily to individuals, small to mid-sized businesses, local governmental units and institutional clients residing primarily in the banks’ local service areas. These services include traditional deposit products such as demand, NOW, money market, savings and time deposit accounts, as well as a number of unique deposit products targeted to specific market segments. The banks also offer home equity, home mortgage, consumer, real estate and commercial loans, safe deposit facilities, ATMs, internet banking and other innovative and traditional services specially tailored to meet the needs of customers in their market areas. Profitability of our community banking franchise is primarily driven by our net interest income and margin, our funding mix and related costs, the level of non-performing loans and other real estate owned, the amount of mortgage banking revenue and our history of acquiring banking operations and establishing de novo banks.
Net interest income and margin. The primary source of our revenue is net interest income. Net interest income is the difference between interest income and fees on earning assets, such as loans and securities, and interest expense on liabilities to fund those assets, including deposits and other borrowings. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings.
Funding mix and related costs. Our most significant source of funding is core deposits, which are comprised of non-interest bearing deposits, non-brokered interest-bearing transaction accounts, savings deposits and domestic time deposits. Our branch network is our principal source of core deposits, which generally carry lower interest rates than wholesale funds of comparable maturities. Our profitability has been bolstered in recent quarters as fixed term certificates of deposit have been renewing at lower rates given
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the historically low interest rate levels in the marketplace recently and growth in non-interest bearing deposits as a result of the Company’s commercial banking initiative.
Level of non-performing loans and other real estate owned. The level of non-performing loans and other real estate owned can significantly impact our profitability as these loans and other real estate owned do not accrue any income, can be subject to charge-offs and write-downs due to deteriorating market conditions and generally result in additional legal and collections expenses. Given the current economic conditions, these costs, specifically problem loan expenses, have been at elevated levels in recent years.
Mortgage banking revenue. Our community banking franchise is also influenced by the level of fees generated by the origination of residential mortgages and the sale of such mortgages into the secondary market. The Company recognized increased mortgage banking revenue in 2012 compared to 2011 as a result of an increase in gains on sales of loans, which was driven by higher origination volumes in the current year due to a favorable mortgage interest rate environment. 2011 was characterized by the continuation of an industry wide decline in real-estate loan originations which resulted in a decrease in the Company’s real-estate loan originations in 2011 as compared to 2010. The decrease in mortgage banking revenue in the 2011 as compared to 2010 resulted primarily from a decrease in gain on sales of loans and other fees, which was driven by lower origination volumes in the current year. Partially offsetting the decrease in gains on sales of loans and other fees was a $10.5 million positive impact from lower recourse obligation adjustments as the number of indemnification requests from investors declined as well as lower loss estimates on future indemnification requests.
Expansion of banking operations. Our historical financial performance has been affected by costs associated with growing market share in deposits and loans, establishing and acquiring banks, opening new branch facilities and building an experienced management team. Our financial performance generally reflects the improved profitability of our banking subsidiaries as they mature, offset by the costs of establishing and acquiring banks and opening new branch facilities. From our experience, it generally takes over 13 months for new banks to achieve operational profitability depending on the number and timing of branch facilities added.
In determining the timing of the formation of de novo banks, the opening of additional branches of existing banks, and the acquisition of additional banks, we consider many factors, particularly our perceived ability to obtain an adequate return on our invested capital driven largely by the then existing cost of funds and lending margins, the general economic climate and the level of competition in a given market. We began to slow the rate of growth of new locations in 2007 due to tightening net interest margins on new business which, in the opinion of management, did not provide enough net interest spread to be able to garner a sufficient return on our invested capital. From the second quarter of 2008 to the first quarter of 2010, we did not establish a new banking location either through a de novo opening or through an acquisition, due to the financial system crisis and recessionary economy and our decision to utilize our capital to support our existing franchise rather than deploy our capital for expansion through new locations which tend to operate at a loss in the early months of operation. Thus, while expansion activity from 2007 through 2009 had been at a level below earlier periods in our history, we have resumed the formation of additional branches and acquisitions of additional banks. See discussion of 2011 and 2012 acquisition activity in the “Recent Acquisition Transactions” section below.
In addition to the factors considered above, before we engage in expansion through de novo branches or banks we must first make a determination that the expansion fulfills our objective of enhancing shareholder value through potential future earnings growth and enhancement of the overall franchise value of the Company. Generally, we believe that, in normal market conditions, expansion through de novo growth is a better long-term investment than acquiring banks because the cost to bring a de novo location to profitability is generally substantially less than the premium paid for the acquisition of a healthy bank. Each opportunity to expand is unique from a cost and benefit perspective. FDIC-assisted acquisitions offer a unique opportunity for the Company to expand into new and existing markets in a non-traditional manner. Potential FDIC-assisted acquisitions are reviewed in a similar manner as a de novo branch or bank opportunities, however, FDIC-assisted acquisitions have the ability to immediately enhance shareholder value. Factors including the valuation of our stock, other economic market conditions, the size and scope of the particular expansion opportunity and competitive landscape all influence the decision to expand via de novo growth or through acquisition.
Specialty Finance
Through our specialty finance segment, we offer financing of insurance premiums for businesses and individuals; accounts receivable financing, value-added, out-sourced administrative services; and other specialty finance businesses. Our wholly owned subsidiary, FIFC, engages in the premium finance receivables business, our most significant specialized lending niche, including commercial insurance premium finance and life insurance premium finance. We also engage in commercial insurance premium finance in Canada through our newly acquired wholly owned subsidiary FIFC Canada. We conduct the remainder of our specialty finance businesses through indirect subsidiaries, which are subsidiaries of our banks.
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Financing of Commercial Insurance Premiums
FIFC and FIFC Canada originated approximately $4.0 billion and $375.9 million, respectively, in commercial insurance premium finance receivables in 2012. FIFC and FIFC Canada make loans to businesses to finance the insurance premiums they pay on their commercial insurance policies. The loans are originated by FIFC and FIFC Canada working through independent medium and large insurance agents and brokers located throughout the United States and Canada. The insurance premiums financed are primarily for commercial customers’ purchases of liability, property and casualty and other commercial insurance. This lending involves relatively rapid turnover of the loan portfolio and high volume of loan originations. Because of the indirect nature of this lending and because the borrowers are located nationwide, this segment is more susceptible to third party fraud than relationship lending. In the second quarter of 2010, fraud perpetrated against a number of premium finance companies in the industry, including the property and casualty division of FIFC, increased both the Company’s net charge-offs and provision for credit losses by $15.7 million. Actions have been taken by the Company to decrease the likelihood of this type of loss from recurring in this line of business for the Company by the enhancement of various control procedures to mitigate the risks associated with this lending. The Company conducted a thorough review of the FIFC premium finance — commercial portfolio and found no signs of similar situations. In the second quarter of 2011, the Company recovered $5.0 million from insurance coverage of the $15.7 million fraud loss. The Company continues to pursue additional recoveries, but does not anticipate any significant additional recoveries.
The majority of these loans are purchased by the banks in order to more fully utilize their lending capacity as these loans generally
provide the banks with higher yields than alternative investments. Historically, FIFC originations that were not purchased by the banks were sold to unrelated third parties with servicing retained. However, during the third quarter of 2009, FIFC sold $695 million in commercial premium finance receivables to our indirect subsidiary, FIFC Premium Funding I, LLC, which in turn sold $600 million in aggregate principal amount of notes backed by such premium finance receivables in a securitization transaction sponsored by FIFC. On August 15, 2012 all outstanding notes sold to investors were paid off by the securitization entity.
The primary driver of profitability related to the financing of commercial insurance premiums is the net interest spread that FIFC and FIFC Canada can produce between the yields on the loans generated and the cost of funds allocated to the business unit. The commercial insurance premium finance business is a competitive industry and yields on loans are influenced by the market rates offered by our competitors. We fund these loans through our deposits, the cost of which is influenced by competitors in the retail banking markets in the Chicago and Milwaukee metropolitan areas.
Financing of Life Insurance Premiums
In 2007, FIFC began financing life insurance policy premiums generally used for estate planning purposes of high net-worth borrowers. In 2009, FIFC expanded this niche lending business segment when it purchased a portfolio of domestic life insurance premium finance loans for an aggregate purchase price of $745.9 million.
FIFC originated approximately $412.1 million in life insurance premium finance receivables in 2012. These loans are originated directly with the borrowers with assistance from life insurance carriers, independent insurance agents, financial advisors and/or legal counsel. The cash surrender value of the life insurance policy is the primary form of collateral. In addition, these loans often are secured with a letter of credit, marketable securities or certificates of deposit. In some cases, FIFC may make a loan that has a partially unsecured position. Similar to the commercial insurance premium finance receivables, the majority of life insurance premium finance receivables are purchased by the banks in order to more fully utilize their lending capacity as these loans generally provide the banks with higher yields than alternative investments.
The Company believes that its life insurance premium finance loans have a lower level of risk and delinquency than the Company’s commercial and residential real estate loans because of the nature of the collateral. The life insurance policy is the primary form of collateral. If cash surrender value is not sufficient, then letters of credit, marketable securities or certificates of deposit are used to provide additional security. Since the collateral is highly liquid and generally has a value in excess of the loan amount, any defaults or delinquencies are generally cured relatively quickly by the borrower or the collateral is generally liquidated in an expeditious manner to satisfy the loan obligation. Greater than 95% of loans are fully secured. However, less than 5% of the loans are partially unsecured and in those cases, a greater risk exists for default. No loans are originated on a fully unsecured basis.
As with the commercial premium finance business, the primary driver of profitability related to the financing of life insurance premiums is the net interest spread that FIFC can produce between the yields on the loans generated and the cost of funds allocated to the business unit. Profitability of financing both commercial and life insurance premiums is also meaningfully impacted by leveraging information technology systems, maintaining operational efficiency and increasing average loan size, each of which allows us to expand our loan volume without significant capital investment.
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Wealth Management Activities
We currently offer a full range of wealth management services including trust and investment services, asset management services and securities brokerage services, through three separate subsidiaries including WHI, CTC and Great Lakes Advisors. In October 2010, the Company changed the name of its trust and investment services subsidiary, Wayne Hummer Trust Company, N.A., to the Chicago Trust Company, N.A. Additionally, in July 2011, the Company’s asset management company, Wayne Hummer Asset Management Company, changed its name to Great Lakes Advisors, LLC.
The primary influences on the profitability of the wealth management business can be associated with the level of commission received related to the trading performed by the brokerage customers for their accounts and the amount of assets under management for which asset management and trust units receive a management fee for advisory, administrative and custodial services. As such, revenues are influenced by a rise or fall in the debt and equity markets and the resulting increase or decrease in the value of our client accounts on which our fees are based. The commissions received by the brokerage unit are not as directly influenced by the directionality of the debt and equity markets but rather the desire of our customers to engage in trading based on their particular situations and outlooks of the market or particular stocks and bonds. Profitability in the brokerage business is impacted by commissions which fluctuate over time.
Financial Regulatory Reform
The Dodd-Frank Act, enacted in 2010, contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. To date, many final rulemakings under the Dodd-Frank Act have not yet been completed, and the evolving regulatory environment causes uncertainty with respect to the manner in which many of the changes required by the Dodd-Frank Act ultimately will be implemented by the various regulatory entities, and the ultimate impact of those changes. Our banking regulators have introduced, and continue to introduce, new regulations, supervisory guidance, and enforcement actions. We are unable to predict the nature, extent, or impact of any additional changes to statutes or regulations, including the interpretation, implementation, or enforcement thereof, which may occur in the future.
The exact impact of the changing regulatory environment on our business and operations depends upon the final implementing regulations and the actions of our competitors, customers, and other market participants. However, the changes mandated by the Dodd-Frank Act, as well as other possible legislative and regulatory changes, generally could have a significant impact on us by, for example, requiring us to change our business practices; requiring us to meet more stringent capital, liquidity and leverage ratio requirements; limiting our ability to pursue business opportunities; imposing additional costs on us; limiting fees we can charge for services; impacting the value of our assets; or otherwise adversely affecting our businesses. We have already experienced significant increases in compliance related costs and we expect that compliance with the Dodd-Frank Act and its' implementing regulations will require us to invest significant additional management attention and resources.
Recent Rules Regarding Mortgage Origination and Servicing
The Bureau has indicated that the mortgage industry is an area of supervisory focus. The Bureau recently released final regulations governing a wide variety of mortgage origination and servicing practices, to implement provisions of the Dodd-Frank Act. Among other things, the new regulations require mortgage lenders to assess and verify borrowers' “ability to pay” and establish a safe harbor for mortgages that meet certain criteria. For mortgages that do not meet the safe harbor's criteria, the Dodd-Frank Act provides for enhanced liability for the mortgage lender as well as assignees. The Bureau's new regulations also cover compensation of loan officers and brokers, escrow accounts for payment of taxes and insurance, mortgage billing statements, force-placed insurance, and servicing practices with respect to delinquent borrowers and loss mitigation procedures. We are evaluating the impact of these requirements on our mortgage business.
During 2012 the nation's largest mortgage lenders and servicers entered into settlements with federal and state regulators regarding mortgage origination and servicing practices. While the Company, the banks and Wintrust Mortgage were not parties to these settlements, and are not subject to examination by the Bureau, the terms of the settlements may influence regulators' future actions and expectations of mortgage lenders generally.
There are proposals to further amend some of these statutes and their implementing regulations, and there may be additional proposals or final amendments in 2013 or beyond. For example, proposals to reform the residential mortgage market may include changes to the operations of Fannie Mae and Freddie Mac (including potential winding down of operations), and reduction of mortgage loan products available in Federal Housing Administration (FHA) programs.
Developments Related to Capital and Liquidity
In June 2012, the Federal Reserve, OCC, and FDIC proposed comprehensive revisions to their regulatory capital rules to implement the requirements of the Dodd-Frank Act as well as the provisions of the Basel III regulatory capital reforms that would be applicable
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to us and our subsidiary banks. The proposed rules would increase the quantity and quality of capital required to be maintained by banks and bank holding companies, and would add a requirement for a capital conservation buffer. In addition, trust preferred securities would be phased out as a component of Tier 1 capital. The proposal also would revise rules for calculating risk-weighted assets and apply an alternative to the use of credit ratings for calculating risk weighted assets with respect to residential mortgages, securitization exposures, and counterparty credit risk. The proposal also includes additional measures for the largest banking institutions as well as for those with significant international exposure, which would not apply to us.
The proposal received extensive comments. In a joint press release issued in November 2012, the banking agencies stated that they do not expect any of the proposed rules to become effective on the original target date of January 1, 2013. Further guidance on the status of the proposed rules is expected in early 2013.
There is no guarantee that the capital requirements or the standardized risk weighted assets rules will be adopted in their current form, whether any changes will be made before adoption, when final rules will be published or when they will be effective. If the new standards require us or our banking subsidiaries to maintain materially more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities in order to comply with formulaic liquidity requirements, such regulation could significantly impact our return on equity, financial condition, operations, capital position and ability to pursue business opportunities.
In October 2012, the Federal Reserve published a final rule implementing the stress test requirements under the Dodd-Frank Act, which are designed to evaluate the sufficiency of a banking organization's capital to support its operations during periods of stress. As a bank holding company with between $10 billion and $50 billion in total consolidated assets, we will be required to conduct annual stress tests based on scenarios provided by the Federal Reserve, beginning in the fall of 2013. Beginning with our 2014 stress test, we will also be required to publicly disclose the results of our stress tests. While depository institutions that meet certain asset thresholds are subject to the stress test requirements, currently none of our subsidiary banks will be subject to the recent stress test rules.
Extraordinary Government Programs
In recent years, the federal government, the New York Fed and the FDIC have made a number of programs available to banks and other financial institutions in an effort to ensure a well-functioning U.S. financial system. Two of these programs, Treasury's CPP and the New York Fed's TALF, have provided the Company with a significant amount of relatively inexpensive funding, which the Company used to accelerate its growth cycle and expand lending.
In December 2008, we sold to the Treasury $250 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the "Series B Preferred Stock") and warrants to purchase the Company's common stock under the CPP. In December 2010, we repurchased all of the shares of Series B Preferred Stock at a price of $251.3 million, which included accrued and unpaid dividends of $1.3 million. In addition, in February 2011, the Treasury sold, through an underwritten public offering to purchasers other than us, all of the Company's warrants that it had received in connection with the CPP investment. Participation in the CPP placed a number of restrictions on our operations, including limitations on our ability to increase dividends and restrictions on the compensation of our employees and executives, and subjected us to increased oversight by the Treasury, banking regulators and Congress. Since we no longer participate in the CPP program, we are no longer subject to these restrictions.
In addition, in September 2009, one of the Company's subsidiaries sold $600 million in aggregate principal amount of its asset-backed notes in a securitization transaction sponsored by FIFC. The asset backed notes were eligible collateral under TALF and certain investors therefore received non-recourse funding from the New York Fed in order to purchase the notes. As a result, FIFC believes it received greater proceeds at lower interest rates from the securitization than it otherwise would have received in non-TALF-eligible transactions. In the third quarter of 2012, we completely paid off the outstanding notes issued in the securitization.
Recent Acquisition Transactions
FDIC-Assisted Transactions
On September 28, 2012, the Company’s wholly-owned subsidiary Old Plank Trail Bank, acquired certain assets and liabilities and the banking operations of First United Bank in an FDIC-assisted transaction. First United Bank operated four locations in Illinois; one in Crete, two in Frankfort and one in Steger, as well as one location in St. John, Indiana and had approximately $328.4 million in total assets and $316.9 million in total deposits as of the acquisition date. Old Plank Trail Bank acquired substantially all of First United Bank's assets at a discount of approximately 9.3% and assumed all of the non-brokered deposits at a premium of 0.60%. In connection with the acquisition, Old Plank Trail Bank entered into a loss sharing agreement with the FDIC whereby Old Plank Trail Bank will share in losses with the FDIC on certain loans and foreclosed real estate at First United Bank.
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On July 20, 2012, the Company’s wholly-owned subsidiary Hinsdale Bank, assumed the deposits and banking operations of Second Federal in an FDIC-assisted transaction. Second Federal operated three locations in Illinois; two in Chicago (Brighton Park and Little Village neighborhoods) and one in Cicero, and had $169.1 million in total deposits as of the acquisition date. Hinsdale Bank assumed substantially all of Second Federal's non-brokered deposits at a premium of $100,000. See "Divestiture of Previous FDIC-Assisted Acquisition" below.
On February 10, 2012, the Company announced that its wholly-owned subsidiary bank, Barrington Bank, acquired certain assets and liabilities and the banking operations of Charter National in an FDIC-assisted transaction. Charter National operated two locations: one in Hoffman Estates and one in Hanover Park and had approximately $92.4 million in total assets and $90.1 million in total deposits as of the acquisition date. Barrington Bank acquired substantially all of Charter National’s assets at a discount of approximately 4.1% and assumed all of the non-brokered deposits at no premium. In connection with the acquisition, Barrington Bank entered into a loss sharing agreement with the FDIC whereby Barrington Bank will share in losses with the FDIC on certain loans and foreclosed real estate at Charter National.
On July 8, 2011, the Company announced that its wholly-owned subsidiary bank, Northbrook Bank, acquired certain assets and liabilities and the banking operations of First Chicago Bank & Trust ("First Chicago") in an FDIC-assisted transaction. First Chicago operated seven locations in Illinois: three in Chicago, one each in Bloomingdale, Itasca, Norridge and Park Ridge, and had approximately $768.9 million in total assets and $667.8 million in total deposits as of the acquisition date. Northbrook Bank acquired substantially all of First Chicago’s assets at a discount of approximately 12% and assumed all of the non-brokered deposits at a premium of approximately 0.5%. In connection with the acquisition, Northbrook Bank entered into a loss sharing agreement with the FDIC whereby Northbrook Bank will share in losses with the FDIC on certain loans and foreclosed real estate at First Chicago.
On March 25, 2011, the Company announced that its wholly-owned subsidiary bank, Schaumburg Bank, acquired certain assets and liabilities and the banking operations of The Bank of Commerce (“TBOC”) in an FDIC-assisted transaction. TBOC operated one location in Wood Dale, Illinois and had approximately $174.0 million in total assets and $164.7 million in total deposits as of the acquisition date. Schaumburg Bank acquired substantially all of TBOC’s assets at a discount of approximately 14% and assumed all of the non-brokered deposits at a premium of approximately 0.1%. In connection with the acquisition, Schaumburg Bank entered into a loss sharing agreement with the FDIC whereby Schaumburg Bank will share in losses with the FDIC on certain loans and foreclosed real estate at TBOC.
On February 4, 2011, the Company announced that its wholly-owned subsidiary bank, Northbrook Bank, acquired certain assets and liabilities and the banking operations of Community First Bank-Chicago (“CFBC”) in an FDIC-assisted transaction. CFBC operated one location in Chicago and had approximately $50.9 million in total assets and $48.7 million in total deposits as of the acquisition date. Northbrook Bank acquired substantially all of CFBC’s assets at a discount of approximately 8% and assumed all of the non-brokered deposits at a premium of approximately 0.5%. In connection with the acquisition, Northbrook Bank entered into a loss sharing agreement with th