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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2010
| o | 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 (State of incorporation or organization) |
36-3873352 (I.R.S. Employer Identification No.) |
727 North Bank Lane
Lake Forest, Illinois 60045
(Address of principal executive offices)
Lake Forest, Illinois 60045
(Address of principal executive offices)
Registrant’s telephone number, including area code: (847) 615-4096
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 o 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. o 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 o 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 o 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. o Yes o 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 o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30,
2010 (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 $33.34, as reported by the NASDAQ Global
Select Market, was $1,015,807,187.
As of February 23, 2011, the registrant had 34,939,523 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
26, 2011 are incorporated by reference into Part III.
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Table of Contents
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 Lake Forest, Illinois, with total
assets of approximately $14.0 billion as of December 31, 2010. 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 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 our wholly-owned subsidiary, Wintrust Mortgage
Corporation (“WMC”). For the years ended December 31, 2010, 2009 and 2008, the community banking
segment had net revenues of $520 million, $393 million and $309 million, respectively, and net
income (loss) of $71 million, $(26 million) and $38 million, respectively. The community banking
segment had total assets of $13.3 billion, $12.0 billion and $10.4 billion as of December 31, 2010,
2009 and 2008, respectively. The community banking segment accounted for 85% of our net revenues
for the year ended December 31, 2010. All of these measurements are based on our reportable
segments and do not reflect intersegment eliminations.
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 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,
2010, 2009 and 2008, the specialty finance segment had net revenues of $104 million, $249 million
and $80 million, respectively, and net income of $46 million, $121 million and $35 million,
respectively. The specialty finance segment had total assets of $2.9 billion, $2.2 billion and $1.4
billion as of December 31, 2010, 2009 and 2008, respectively. It accounted for 17% of our net
revenues for the year ended December 31, 2010. All of these measurements are based on our
reportable segments and do not reflect intersegment eliminations.
We provide a full range of wealth management services primarily to customers in the Chicago
metropolitan area and in southeastern Wisconsin through three separate subsidiaries, including The
Chicago Trust Company, N.A. (“CTC”), Wayne Hummer Investments, LLC (“WHI”) and Wintrust Capital
Management, LLC (“WCM”). For the years ended December 31, 2010, 2009 and 2008, the wealth
management segment had net revenues of $58 million, $51 million and $47 million, respectively, and
net income of $7 million, $6 million and $5 million, respectively. The wealth management segment
had total assets of $65 million, $62 million and $56 million as of December 31, 2010, 2009 and
2008, respectively. It accounted for 9% of our net revenues for the year ended December 31, 2010.
All of these measurements are based on our reportable segments and do not reflect intersegment
eliminations.
Our Business
Community Banking
Through our banks, we provide community-oriented, personal and commercial banking services to
customers located in the Chicago metropolitan area and in southeastern Wisconsin. 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
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our larger and smaller competitors. The 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.
We developed our banking franchise through de novo organization of nine banks and the purchase of
seven banks, one of which was merged into an existing Wintrust bank. 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. We furthered our growth
strategy in 2010 by purchasing, through certain of our banking subsidiaries, seven banking
locations through three FDIC-assisted transactions. As of December 31, 2010, we had 86 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
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 and Trust Company, N.A. (“Barrington Bank”), Crystal Lake Bank & Trust Company,
N.A. (“Crystal Lake Bank”), Advantage National Bank Group (“Advantage 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 our wholly owned subsidiary, WMC, and provide other loan closing services to a
network of mortgage brokers. Mortgage banking operations are also performed within each of the
banks. WMC 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. WMC maintains principal origination offices in a number of other
states, including Illinois, and originates loans in states through correspondent channels.
WMC 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 WMC and the banks to better
utilize existing operational capacity and improve the product offering for the banks’ customers. In
December 2008, WMC acquired certain assets and assumed certain liabilities of the mortgage banking
business of Professional Mortgage Partners (“PMP”).
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 which 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 have restarted loans under this
program as market conditions have become more favorable. These other specialty loans generated
through divisions of the banks comprised approximately 4.2% of our loan and lease portfolio at
December 31, 2010.
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.
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FIFC makes 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 assist FIFC in arranging each commercial premium finance loan between the borrower
and FIFC. FIFC evaluates each loan request according to its 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, 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 may either forward the financed amount of the remaining policy premiums directly to the
insurance carrier or to the agent or broker for remittance to the insurance carrier on FIFC’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 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 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.
However, 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 our premium financing
subsidiary, increased both our net charge-offs and provision for credit losses by $15.7 million.
Actions have been taken by us to decrease the likelihood of this type of loss from recurring in
this line of business for us. We have conducted a thorough review of the premium
finance—commercial portfolio and found no signs of similar situations.
In 2007, FIFC expanded and began financing life insurance policy premiums for high net-worth
individuals. These loans are originated directly with the borrowers with assistance from life
insurance carriers, independent insurance agents, financial advisors and legal counsel. 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. In 2009, FIFC significantly expanded its life
insurance premium finance business by purchasing a portfolio of domestic life insurance premium
finance loans with an aggregate unpaid principal balance of approximately $1.0 billion and certain
related assets from two affiliates of American International Group, Inc. (“AIG”), for an aggregate
purchase price of $745.9 million.
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 2010, Tricom processed payrolls with associated client billings of
approximately $300.9 million and contributed approximately $6.3 million to our revenue, net of
interest expense.
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. In
February 2002, we acquired WHI and Wayne Hummer Asset Management Company (“WHAMC”), later renamed
as WCM, which are headquartered in Chicago. Soon thereafter, in order to further expand our wealth
management business, we acquired Lake Forest Capital Management Company, a registered investment
advisor with approximately $300 million of assets under management at the time of acquisition and,
in 2009, further added to our capabilities in this area with the purchase of certain assets and
assumption of certain liabilities of Advanced Investment Partners, LLC which specializes in the
active management of domestic equity investment strategies and expands WCM’s institutional
investment business. At December 31, 2010, the Company’s wealth management subsidiaries had
approximately $10.2 billion of assets under management, which includes $1.5 billion of assets owned
by the Company and its subsidiary banks.
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.
WHI, our registered broker/dealer subsidiary, has been in operations 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, 2010, 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.
WCM, our registered investment adviser, provides money management services and advisory services to
individuals, mutual funds and institutional municipal and tax-exempt organizations. WCM 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.
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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. In August 2008, we raised $50 million of private equity. This investment was
followed shortly by an investment by the U.S. Department of Treasury (“Treasury”) of $250 million
through the Capital Purchase Program (“CPP”). The CPP investment was not necessary for our short-or
long-term health. However, the CPP investment presented an opportunity for the Company. By
providing us with a significant source of relatively inexpensive capital, the Treasury’s CPP
investment allowed us to accelerate our growth cycle, expand lending and meet former Treasury
Secretary Paulson’s stated purpose for the program, which was “designed to attract broad
participation by healthy institutions” that “have plenty of capital to get through this period, but
are not positioned to lend as widely as is necessary to support our economy.”
With this additional $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 and 2010 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 and certain collateralized mortgage obligations; and |
| • | Purchasing banks and banking assets either directly or through the FDIC—assisted process in areas key to our geographic expansion |
In March 2010, we further strengthened our capital position through a public offering of 6,670,000
shares of our common stock at $33.25 per share. Our net proceeds totaled $210.3 million. In
December 2010, we sold an additional 3,685,897
shares of our common stock at $30.00 per share and 4.6 million 7.5% tangible equity units at a
public offering price of $50.00 per unit (“the concurrent offerings”). We received net proceeds of
$327.5 million from the concurrent offerings. Together, our capital offerings aggregated nearly
$540 million in net proceeds.
On December 22, 2010, we repurchased all 250,000 shares of our Fixed Rate Cumulative Perpetual
Preferred Stock, Series B (the “Series B Preferred Stock”) which we issued to the Treasury under
the Troubled Asset Relief Program (“TARP”) CPP. The Series B Preferred Stock was repurchased at a
price of $251.3 million, which included accrued and unpaid
dividends of $1.3 million.
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 added more than 50 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.
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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
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.
WMC, as well as the mortgage banking functions within the banks, competes with large mortgage
brokers as well as other banking organizations. The mortgage banking business is very competitive
and significantly impacted by changes in mortgage interest rates. We believe that mortgage banking
revenue will be a continuous source of revenue, but the level of revenue will be impacted by
changes in and the general level of mortgage interest rates.
In 2010, 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 seven new banking locations, five in Chicago, one in Mount
Prospect and one in Naperville, Illinois. Each of these acquisitions allowed us to expand our
franchise into strategic locations on a cost-effective basis. In addition, our wholly-owned
subsidiary bank, Wheaton Bank, agreed to acquire a branch located in Naperville, Illinois. 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.
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 WCM) 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.
Employees
At December 31, 2010, the Company and its subsidiaries employed a total of 2,588
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 Securities and
Exchange Commission (“SEC”).
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Supervision and Regulation
Bank holding companies, banks and investment firms are extensively regulated under federal and
state law. References under this heading to applicable statutes or regulations are brief summaries
or portions thereof which do not purport to be complete and which are qualified in their entirety
by reference to those statutes and regulations and regulatory interpretations thereof. Any change
in applicable laws or regulations may have a material effect on the business of commercial banks
and bank holding companies, including the Company, the banks, FIFC, CTC, WHI, WCM, Tricom and WMC.
The supervision, regulation and examination of banks and bank holding companies by bank regulatory
agencies are intended primarily for the protection of depositors rather than stockholders of banks
and bank holding companies. This section discusses recent regulatory developments impacting the
Company and its subsidiaries, including the Emergency Economic Stabilization Act and the Temporary
Liquidity Guarantee Program (“TLGP”). Following that presentation, the discussion turns to the
regulation and supervision of the Company and its subsidiaries under various federal and state
rules and regulations applicable to bank holding companies, broker-dealer and investment advisors.
Extraordinary Government Programs
During the past three 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. The Company
participated in three such programs. Two of these programs, the CPP of the Treasury and the New
York Fed’s Term Asset-Backed Securities Loan Facility (“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.
Capital Purchase Program. In October 2008, the Treasury announced that it intended to use a portion
of the initial funds allocated to it pursuant to the Emergency Economic Stabilization Act of 2008,
to invest directly in financial institutions through the newly-created CPP which was “designed to
attract broad participation by healthy institutions” which “have plenty of capital to get through
this period, but are not positioned to lend as widely as is necessary to support our economy.” In
December 2008, the Company sold the Treasury $250 million in the Company’s Series B Preferred
Stock, and warrants to purchase the Company’s common stock.
On December 22, 2010, the Company
repurchased all the shares of Series B Preferred Stock. The Series B Preferred Stock was
repurchased at a price of $251.3 million, which included accrued and unpaid dividends of $1.3
million. In addition, on February 14, 2011, the Treasury sold, through an underwritten public
offering to purchasers other than the Company, 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 the Company, including limitations on
the ability to increase dividends and restrictions on the compensation of its employees and
executives. Participation in the CPP also subjected the Company to increased oversight by the
Treasury, banking regulators and Congress. As a result of the Company’s exit from the CPP, these
restrictions have been terminated.
TALF-Eligible Issuance. 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 are 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.
Increased FDIC Insurance for Non-Interest-Bearing Transaction Accounts. Each of our bank
subsidiaries have also benefited from federal programs which provide increased FDIC insurance
coverage for certain deposit accounts. At present, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) and implementing regulations issued by the FDIC provide
unlimited federal insurance of the net amount of certain non-interest-bearing transaction accounts
at all insured depository institutions, including our bank subsidiaries, through December 31, 2012.
After December 31, 2012, depositors will receive federal insurance up to the standard maximum
deposit insurance amount of $250,000, which increased amount was made permanent by the Dodd-Frank
Act.
For more information regarding our participation in these programs, see “Management’s Discussion
and Analysis of Financial Conditions and Results of Operations—Federal Government, Federal Reserve
and FDIC Programs.”
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Bank Regulation; Bank Holding Company and Subsidiary Regulations
General. Lake Forest Bank, Hinsdale Bank, North Shore Bank, Libertyville Bank, Northbrook Bank,
Village Bank, Wheaton Bank, State Bank of The Lakes and St. Charles Bank are Illinois-chartered
banks and as such they and their subsidiaries are subject to supervision and examination by the
Illinois Secretary. Each of these Illinois-chartered banks is a member of the Federal Reserve and,
as such, is subject to additional examination by the Federal Reserve as their primary federal
regulator. Barrington Bank, Crystal Lake Bank, Advantage Bank, Beverly Bank, Old Plank Trail Bank
and CTC are federally-chartered and are subject to supervision and examination by the OCC pursuant
to the National Bank Act and regulations promulgated thereunder. Town Bank is a Wisconsin-chartered
bank and a member of the Federal Reserve, and as such is subject to supervision by the Wisconsin
Department and the Federal Reserve.
Financial Holding Company Regulations. The Company has elected to be treated by the Federal Reserve
as a financial holding company for purposes of the Bank Holding Company Act of 1956, as amended,
including regulations promulgated by the Federal Reserve (the “BHC Act”), as augmented by the
provisions of the Gramm-Leach-Bliley Act (the “GLB Act”), which established a comprehensive
framework to permit affiliations among commercial banks, insurance companies and securities firms.
The Company became a financial holding company in 2002. Bank holding companies that elect to be
treated as financial holding companies may engage in an expanded range of activities, including the
businesses conducted by the wealth management subsidiaries. Financial holding companies, unlike
traditional bank holding companies, can engage in certain activities without prior Federal Reserve
approval, subject to certain post-commencement notice procedures. Effective July 2011, the
Dodd-Frank Act requires a bank holding company that elects treatment as a financial holding
company, including us, to be both well-capitalized and well-managed. This is in addition to the
existing requirement that a financial holding company’s subsidiary banks be well-capitalized and
well-managed as defined in the applicable regulatory standards. If these conditions are not
maintained, and the financial holding company fails to correct any deficiency within 180 days, the
Federal Reserve may require the Company to either divest control of its banking subsidiaries or, at
the election of the Company, cease to engage in any activities not permissible for a bank holding
company that is not a financial holding company. Moreover, during the period of non-compliance, the
Federal Reserve can place any limitations on the financial holding company that it believes to be
appropriate. Furthermore, if the Federal Reserve determines that a financial holding company has
not maintained at least a satisfactory rating under the Community Reinvestment Act at all of its
controlled banking subsidiaries, the Company will not be able to commence any new financial
activities or acquire a company that engages in such activities, although the Company will still be
allowed to engage in activities closely related to banking and make investments in the ordinary
course of conducting merchant banking activities. In April 2008, the Company was notified that one
of its bank subsidiaries received a needs to improve rating, therefore, the Company is subject to
restrictions on further expansion in certain situations.
Federal Reserve Regulations. The Company continues to be subject to supervision and regulation by
the Federal Reserve under the BHC Act. The Company is required to file with the Federal Reserve
periodic reports and such additional information as the Federal Reserve may require pursuant to the
BHC Act. The Federal Reserve examines the Company and may examine the banks and the Company’s other
subsidiaries.
The BHC Act requires prior Federal Reserve approval for, among other things, the acquisition by a
bank holding company of direct or indirect ownership or control of more than 5% of the voting
shares or substantially all the assets of any bank, or for a merger or consolidation of a bank
holding company with another bank holding company. With certain exceptions for financial holding
companies, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership
or control of voting shares of any company which is not a business that is financial in nature or
incidental thereto, and from engaging directly or indirectly in any activity that is not financial
in nature or incidental thereto. Also, as discussed below, the Federal Reserve expects bank holding
companies to maintain strong capital positions while experiencing growth. The Federal Reserve, as a
matter of policy, may require a bank holding company to be well-capitalized at the time of filing
an acquisition application and upon consummation of the acquisition.
Under the BHC Act and Federal Reserve regulations, the banks are prohibited from engaging in
certain tying arrangements in connection with an extension of credit, lease, sale of property or
furnishing of services. That means that, except with respect to traditional banking products
(loans, deposits or trust services), the banks may not condition a customer’s purchase of services
on the purchase of other services from any of the banks or other subsidiaries of the Company.
It has been the policy of the Federal Reserve that the Company is expected to act as a source of
financial and managerial strength to its subsidiaries, and to commit resources to support the
subsidiaries. The Federal Reserve has taken the position that in implementing this policy, it may
require the Company to provide such support even when the Company otherwise would not consider
itself able to do so. The Dodd-Frank Act
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codified the requirement of holding companies, like the Company, to serve as a source of financial
strength to their subsidiary depository institutions, which statutory requirement will go into
effect in July 2011.
Interstate Acquisitions. The Dodd-Frank Act amended the BHC Act to require that a bank holding
company be well-capitalized and well-managed, not merely adequately capitalized and adequately
managed, in order to acquire a bank located outside of the bank holding company’s home state. This
amendment will take effect in July 2011.
Federal Reserve Capital Requirements. The Federal Reserve has adopted risk-based capital
requirements for assessing capital adequacy of all bank holding companies, including financial
holding companies. These standards 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. Under the Federal Reserve’s risk-based guidelines, capital is classified into two
categories. For bank holding companies, Tier 1 capital, or “core” capital, consists of common
stockholders’ equity, qualifying noncumulative perpetual preferred stock including related surplus,
qualifying cumulative perpetual preferred stock including related surplus (subject to certain
limitations), minority interests in the common equity accounts of consolidated subsidiaries and
qualifying trust preferred securities, and is reduced by goodwill, specified intangible assets and
certain other items (“Tier 1 Capital”). Tier 2 capital, or “supplementary” capital, consists of the following
items, all of which are subject to certain conditions and limitations: 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.
Under the Federal Reserve’s capital guidelines, bank holding companies 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. The Federal Reserve also requires a minimum leverage ratio
of Tier 1 Capital to total assets of 3.0% for strong bank holding companies (those rated a
composite “1” under the Federal Reserve’s rating system). For all other bank holding companies, the
minimum ratio of Tier 1 Capital to total assets is 4%. In addition, the Federal Reserve continues
to consider the Tier 1 leverage ratio (Tier 1 capital to average quarterly assets) in evaluating
proposals for expansion or new activities.
In its capital adequacy guidelines, the Federal Reserve emphasizes that the foregoing standards are
supervisory minimums and that banking organizations generally are expected to operate well above
the minimum ratios. These guidelines also provide that banking organizations experiencing growth, whether internally or through acquisition, are
expected to maintain strong capital positions substantially above the minimum levels. In light of
the recent financial turmoil, it is generally expected that capital requirements will be revisited
on a national and international basis.
As of December 31, 2010, the Company’s total capital to risk-weighted assets ratio was 13.8%, its
Tier 1 Capital to risk-weighted asset ratio was 12.5% and its leverage ratio was 10.1%. Capital
requirements for the banks generally parallel the capital requirements previously noted for bank
holding companies. Each of the banks is subject to applicable capital requirements on a separate
company basis. The federal banking regulators must take prompt corrective action with respect to
FDIC-insured depository institutions that do not meet minimum capital requirements. There are five
capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” and “critically undercapitalized.” As of December 31, 2010, 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.
Dividend Limitations. Because the Company’s consolidated net income consists largely of net income
of the banks and its non-bank subsidiaries, the Company’s ability to pay dividends depends upon its
receipt of dividends from these entities. Federal and state statutes and regulations impose
restrictions on the payment of dividends by the Company, the banks and its non-bank subsidiaries.
(See Financial Institution Regulation Generally — Dividends for further discussion of dividend
limitations.)
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. Additionally, the Federal Reserve possesses
enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability to prohibit or limit the payment of dividends by
bank holding companies.
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Bank Regulation; Federal Deposit Insurance Act
General. The deposits of the banks are insured by the Deposit Insurance Fund under the provisions
of the Federal Deposit Insurance Act, as amended (the “FDIA”), and the banks are, therefore, also
subject to supervision and examination by the FDIC. The FDIA requires that the appropriate federal
regulatory authority (the Federal Reserve in the case of Lake Forest Bank, North Shore Bank,
Hinsdale Bank, Libertyville Bank, Northbrook Bank, Village Bank, Wheaton Bank, State Bank of The
Lakes, Town Bank and St. Charles Bank and the OCC in the case of Barrington Bank, Crystal Lake
Bank, Advantage Bank, Beverly Bank, Old Plank Trail Bank, and CTC) approve any merger and/or
consolidation by or with an insured bank, as well as the establishment or relocation of any bank or
branch office and any change-in-control of an insured bank that is not subject to review by the
Federal Reserve as a holding company regulator. The FDIA also gives the Federal Reserve, the OCC
and the other federal bank regulatory agencies power to issue cease and desist orders against
banks, holding companies or persons regarded as “institution affiliated parties.” A cease and
desist order can either prohibit such entities from engaging in certain unsafe and unsound bank
activity or can require them to take certain affirmative action. The appropriate federal regulatory
authority with respect to each bank also supervises compliance with the provisions of federal law
and regulations which, in addition to other requirements, place restrictions on loans by
FDIC-insured banks to their directors, executive officers and principal shareholders.
Prompt Corrective Action. The FDIA requires the federal banking regulators to take prompt
corrective action with respect to depository institutions that fall below minimum capital standards
and prohibits any depository institution from making any capital distribution that would cause it
to be undercapitalized. Institutions that are not adequately capitalized may be subject to a
variety of supervisory actions including, but not limited to, restrictions on growth, investment
activities, capital distributions and management fees and will be required to submit a capital
restoration plan which, to be accepted by the regulators, must be guaranteed in part by any company
having control of the institution (such as the Company). In other respects, the FDIA provides for
enhanced supervisory authority, including authority for the appointment of a conservator or
receiver for undercapitalized institutions. The capital-based prompt corrective action provisions
of the FDIA and their implementing regulations generally apply to all FDIC-insured depository
institutions. However, federal banking agencies have indicated that, in regulating bank holding
companies, the agencies may take appropriate action at the holding company level based on their
assessment of the effectiveness of supervisory actions imposed upon subsidiary insured depository
institutions pursuant to the prompt corrective action provisions of the FDIA.
Standards for Safety and Soundness. The FDIA 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, among other things, 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. Additional
restrictions on compensation applied to the Company as a result of its participation in the CPP. As
a result of the Company’s exit from the CPP, these restrictions have been terminated. See
“—Extraordinary Government Programs — Capital Purchase Program.” However, the Dodd-Frank Act also
imposes restrictions on and additional disclosure regarding incentive compensation. In addition,
each of the Federal Reserve and the OCC adopted regulations that authorize, but do not require, the
Federal Reserve or the OCC, as the case may be, to order an institution that has been given notice
by the Federal Reserve or the OCC, as the case may be, that it is not satisfying any of such safety
and soundness standards to submit a compliance plan. If, after being so notified, an institution
fails to submit an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan, the Federal Reserve or the OCC, as the case may be, must issue an order
directing action to correct the deficiency and may issue an order directing other actions of the
types to which an under-capitalized association is subject under the “prompt corrective action”
provisions of the FDIA. If an institution fails to comply with such an order, the Federal Reserve
or the OCC, as the case may be, may seek to enforce such order in judicial proceedings and to
impose civil money penalties. The Federal Reserve, the OCC and the other federal bank regulatory
agencies also adopted guidelines for asset quality and earnings standards.
Other FDIA Provisions. A range of other provisions in the FDIA include requirements applicable to:
closure of branches; 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; modification of
accounting standards to conform to generally accepted accounting principles including the reporting
of off-balance sheet items and supplemental disclosure of estimated
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fair market value of assets and liabilities in financial statements filed with the banking
regulators; increased penalties in making or failing to file assessment reports with the FDIC;
greater restrictions on extensions of credit to directors, officers and principal shareholders; and
increased reporting requirements on agricultural loans and loans to small businesses.
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, federal regulators and the FDIC 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 agency 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.
Insurance of Deposit Accounts. Under the FDIA, as an FDIC-insured institution, each of the banks is
required to pay deposit insurance premiums based on the risk it poses to the Deposit Insurance Fund
(“DIF”). Each institution’s assessment rate depends on 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, 2009 and 2010 and the temporary increase of general deposit insurance limits to
$250,000 per depositor (made permanent by the Dodd-Frank Act), the DIF incurred substantial losses
during the last three years. Accordingly, the FDIC took action during 2009 to revise its risk-based
assessment system, to collect certain special assessments, and to accelerate the payment of
assessments. Under the current risk-based assessment system, adjusted deposit insurance assessments
can range from a low of 7 basis points to a high of 77.5 basis points. In addition, on September
30, 2009, the FDIC collected a special assessment from each insured institution, and on November
12, 2009, the FDIC approved a final rule requiring that insured institutions prepay 13 quarters of
deposit insurance premiums. The banks made their prepayments of $59.8 million on December 30, 2009.
These prepaid premiums are recorded as a prepaid expense on our financial statements. As a result
of all these actions, the banks paid a total of $77.8 million in deposit insurance premiums in
2009. The Dodd-Frank Act also contains several provisions that affect deposit insurance premiums,
including a change in the assessment base for federal deposit insurance from the amount of insured
deposits to average total consolidated assets less average tangible equity and an increase in the
minimum reserve ratio of the DIF from 1.15% to 1.35% of insured deposits (with the FDIC having
until September 30, 2020 to meet the new minimum). On February 7, 2011, the FDIC adopted a final
rule implementing these deposit insurance provisions of the Dodd-Frank Act. Under the final rule,
which will go into effect on April 1, 2011, the change in the assessment base definition is
accompanied by a change in assessment rates, which will initially range from 2.5 basis points to 45
basis points. The FDIC has indicated that these changes will generally not require an increase in
the level of assessments, and may result in decreased assessments, for depository institutions
(such as each of our bank subsidiaries) with less than $10 billion in assets. 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.
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 amount assessed is in addition to the amount, if any, paid for deposit insurance
under the FDIC’s risk-related assessment rate schedule. FICO assessment rates may be adjusted
quarterly to reflect a change in assessment base. The FICO annualized assessment rate is 1.02 cents
per $100 of deposits for the first quarter of 2011.
Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Such
terminations can only occur, if contested, following judicial review through the federal courts.
The management of each of the banks does not know of any practice, condition or violation that
might lead to termination of deposit insurance.
Under the “cross-guarantee” provision of the FDIA, as augmented by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), insured depository institutions such as
the banks may be liable to the FDIC with respect to any loss or reasonably anticipated loss
incurred by the FDIC resulting from the default of, or FDIC assistance to, any commonly controlled
insured depository institution. The banks are commonly controlled within the meaning of the FIRREA
cross-guarantee provision.
De Novo Branching. The Dodd-Frank Act amended the FDIA and the National Bank Act to allow national
banks and state banks to establish de novo branches in states other than the bank’s home state.
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Bank Regulation; Additional Regulation of Dividends
As Illinois state-chartered banks, Lake Forest Bank, North Shore Bank, Hinsdale Bank, Libertyville
Bank, Northbrook Bank, Village Bank, Wheaton Bank, State Bank of The Lakes and St. Charles Bank,
each may not pay dividends in an amount greater than its current net profits after deducting bad
debts out of undivided profits provided that its surplus equals or exceeds its capital. For the
purpose of determining the amount of dividends that an Illinois bank may pay, bad debts are defined
as debts upon which interest is past due and unpaid for a period of six months or more unless such
debts are well-secured and in the process of collection. As a Wisconsin state-chartered bank, Town
Bank may declare dividends out of its undivided profits, after provision for payment of all
expenses, losses, required reserves, taxes and interest. In addition, if Town Bank’s dividends
declared and paid in either of the prior two years exceeded net income for such year, then the bank
may not declare a dividend that exceeds year-to-date net income except with written consent of the
Wisconsin Division of Financial Institutions. Furthermore, federal regulations also prohibit any
Federal Reserve member bank, including each of the Company’s Illinois-chartered banks and Town
Bank, from declaring dividends in any calendar year in excess of its net income for the year plus
the retained net income for the preceding two years, less any required transfers to the surplus
account unless there is approval by the Federal Reserve. Similarly, as national associations
supervised by the OCC, Barring-ton Bank, Crystal Lake Bank, Beverly Bank, Advantage Bank, Old Plank
Trail Bank and CTC may not declare dividends in any year in excess of its net income for the year
plus the retained net income for the preceding two years, minus the sum of any transfers required
by the OCC and any transfers required to be made to a fund for the retirement of any preferred
stock, nor may any of them declare a dividend in excess of undivided profits. Furthermore, the OCC
may, after notice and opportunity for hearing, prohibit the payment of a dividend by a national
bank if it determines that such payment would constitute an unsafe or unsound practice or if it
determines that the institution is undercapitalized.
In addition to the foregoing, the ability of the Company, the banks and CTC to pay dividends may be
affected by the various minimum capital requirements and the capital and noncapital standards
established under the FDIA, as described above. The right of the Company, its shareholders and its
creditors to participate in any distribution of the assets or earnings of its subsidiaries is
further subject to the prior claims of creditors of the respective subsidiaries. The Company’s
ability to pay dividends is likely to be dependent on the amount of dividends paid by the banks. No
assurance can be given that the banks will, in any circumstances, pay dividends to the Company.
Bank Regulation; Other Regulation of Financial Institutions
Anti-Money Laundering. On October 26, 2001, the USA PATRIOT Act of 2001 (the “PATRIOT Act”) was
enacted into law, amending in part the Bank Secrecy Act (“BSA”). The BSA and the PATRIOT Act
contain anti-money laundering (“AML”) and financial transparency laws as well as enhanced
information collection tools and enforcement mechanics for the U.S. government, including:
standards for verifying customer identification at account opening; rules to promote cooperation
among financial institutions, regulators, and law enforcement entities in identifying parties that
may be involved in terrorism or money laundering; reports by nonfinancial entities and businesses
filed with the Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10,000;
and due diligence requirements for financial institutions that administer, maintain, or manage
private bank accounts or correspondence accounts for non-U.S. persons. Each Bank is subject to the
PATRIOT Act 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. The Company has established policies, procedures and internal controls that are
designed to comply with these AML requirements.
Protection of Client Information. Many aspects of the Company’s business are subject to
increasingly comprehensive legal requirements concerning the use and protection of certain client
information including those adopted pursuant to the GLB Act as well as the Fair and Accurate Credit
Transactions Act of 2003 (the “FACT Act”). Provisions of the GLB Act require a financial
institution to disclose its privacy policy to customers and consumers, and require that such
customers or consumers be given a choice (through an opt-out notice) to forbid the sharing of
nonpublic personal information about them with certain nonaffiliated third persons. The Company and
each of the banks have a written privacy notice that is delivered to each of their customers when
customer relationships begin, and annually thereafter, in compliance with the GLB Act. In
accordance with that privacy notice, the Company and each of the banks protect the security of
information about their customers, educate their employees about the importance of protecting
customer privacy, and allow their customers to remove their names from the solicitation lists they
use and share with others. The Company and each of the banks require business partners with whom
they share such information to have adequate security safeguards and to abide by the redisclosure
and reuse provisions of the GLB Act. The Company and each of the banks have developed and
implemented programs to fulfill the expressed requests of customers and consumers to opt out of
information sharing subject to the GLB Act. The federal banking regulators have interpreted the
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requirements of the GLB Act to require banks to take, and the Company and the banks are subject to
state law requirements that require them to take, certain actions in the event that certain
information about customers is compromised. If the federal or state regulators of the financial
subsidiaries establish further guidelines for addressing customer privacy issues, the Company
and/or each of the banks may need to amend their privacy policies and adapt their internal
procedures. The Company and the banks may also be subject to additional requirements under state
laws.
Moreover, like other lending institutions, each of the banks utilizes credit bureau data in their
underwriting activities. Use of such data is regulated under the Fair Credit Report Act (the
“FCRA”), including credit reporting, prescreening, sharing of information between affiliates, and
the use of credit data. The FCRA was amended by the FACT Act in 2003, which imposes a number of
regulatory requirements, some of which have become effective, some of which became effective in
2008, and some of which are still in the process of being implemented by federal regulators. In
particular, in 2008, compliance with new rules restricting the ability of corporate affiliates to
share certain customer information for marketing purposes became mandatory, as did compliance with
rules requiring institutions to develop and implement written identity theft prevention programs.
The Company and the banks may also be subject to additional requirements under state laws.
Community Reinvestment. Under the Community Reinvestment Act (“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. However, institutions are rated on their performance in meeting the needs of their
communities. Performance is judged in three areas: (a) a lending test, to evaluate the
institution’s record of making loans in its assessment areas; (b) an investment test, to evaluate
the institution’s record of investing in community development projects, affordable housing and
programs benefiting low or moderate income individuals and business; and (c) a service test, to
evaluate the institution’s delivery of services through its branches, ATMs and other offices. The
CRA requires each federal banking agency, in connection with its examination of a financial
institution, to assess and assign one of four ratings to the institution’s record of meeting the
credit needs of its community and to take such record into account in its evaluation of 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 make public disclosure of their CRA
ratings. Each of the banks received a “satisfactory” rating from the Federal Reserve, the OCC or
the FDIC on their most recent CRA performance evaluations except for one Bank that received a
“needs improvement” rating. Because one of the banks received a “needs improvement” rating on its
most recent CRA performance evaluation, and given the Company’s financial holding company status,
the Company is now subject to restrictions on further expansion of the Company’s or the banks’
activities.
Federal Reserve System. 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 30, 2010, the first $10.7 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 $10.7 million up
to and including $58.8 million and a 10% reserve ratio applies to balances in excess of $58.8
million.
Brokered Deposits. Well capitalized institutions are not subject to limitations on brokered
deposits, while adequately capitalized institutions are able to accept, renew or rollover brokered
deposits only with a waiver from the FDIC and subject to certain restrictions on the rate paid on
such deposits. Undercapitalized institutions are not permitted to accept brokered deposits. An
adequately capitalized institution that receives a waiver is not permitted to offer interest rates
on brokered deposits significantly exceeding the market rates in the institution’s home area or
nationally, and undercapitalized institutions may not solicit any deposits by offering such rates.
Each of the banks is eligible to accept brokered deposits (as a result of their capital levels) and
may use this funding source from time to time when management deems it appropriate from an
asset/liability management perspective.
Enforcement Actions. Federal and state statutes and regulations provide financial institution
regulatory agencies with great flexibility to undertake enforcement action against an institution
that fails to comply with regulatory requirements, particularly capital requirements. Possible
enforcement actions include the imposition of a capital plan and capital directive to civil money
penalties, cease and desist orders, receivership, conservatorship or the termination of deposit
insurance.
Compliance with Consumer Protection Laws. The banks 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 Fair Credit Reporting Act, the Electronic Fund Transfer Act,
the Federal Trade Commission Act and analogous state statutes, the Fair Housing Act, the Real
Estate Settlement Procedures Act, the
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Soldiers’ and Sailors’ Civil Relief Act and the Home Mortgage Disclosure Act. WMC must also comply
with many of these consumer protection statutes and regulations. Violation of these statutes can
lead to significant potential liability, in litigation by consumers as well as enforcement actions
by regulators. Among other things, these acts:
| • | require creditors to disclose credit terms in accordance with legal requirements; |
| • | require banks to disclose deposit account terms and electronic fund transfer terms in accordance with legal requirements; | ||
| • | limit consumer liability for unauthorized transactions; |
| • | impose requirements and limitations on the users of credit reports and those who provide information to credit reporting agencies; |
| • | prohibit discrimination against an applicant in any consumer or business credit transaction; |
| • | prohibit unfair or deceptive acts or practices; |
| • | require banks 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; |
| • | prohibit certain lending practices and limit escrow amounts with respect to real estate transactions; and |
| • | prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations. |
During the past three years, federal regulators finalized a number of significant amendments to the
regulations implementing these statutes. Among other things, the Federal Reserve has adopted new
rules applicable to the banks (and in some cases, WMC) that govern various aspects of consumer
credit and rules that govern practices and disclosures with respect to overdraft programs. These
rules may affect the profitability of our consumer banking activities.
There are currently pending proposals to further amend some of these statutes and their
implementing regulations, and there may be additional proposals or final amendments in 2011 or
beyond. In addition, federal and state regulators have issued, and may in the future issue,
guidance on these requirements, or other aspects of the Company’s business. The developments may
impose additional burdens on the Company and its subsidiaries.
Transactions with Affiliates. Transactions between a bank and its holding company or other
affiliates are subject to various restrictions imposed by state and federal regulatory agencies.
Such transactions include loans and other extensions of credit,
purchases of or investments in securities and other assets, and payments of fees or other
distributions. In general, these restrictions limit the amount of transactions between an
institution and an affiliate of such institution, as well as the aggregate amount of transactions
between an institution and all of its affiliates, and require transactions with affiliates to be on
terms comparable to those for transactions with unaffiliated entities. Transactions between banking
affiliates may be subject to certain exemptions under applicable federal law.
Limitations on Ownership. Under the Illinois Banking Act, any person who acquires 25% or more of
the Company’s stock may be required to obtain the prior approval of the Illinois Secretary.
Similarly, under the Federal Change in Bank Control Act, a person must give 60 days written notice
to the Federal Reserve and may be required to obtain the prior regulatory consent of the Federal
Reserve before acquiring control of 10% or more of any class of the Company’s outstanding stock.
Generally, an acquisition of more than 10% of the Company’s stock by a corporate entity, including
a corporation, partnership or trust, and more than 5% of the Company’s stock by a bank holding
company, would require prior Federal Reserve approval under the BHC Act.
Enhanced Supervisory Procedures for De Novo Banks. In August 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.
Broker-Dealer and Investment Adviser Regulation
WHI and WCM 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 WCM are registered as investment advisers with the SEC. In
addition, WHI is a member of several self-regulatory organizations (“SRO”), including the Financial
Industry Regulatory Authority (“FINRA”), the Chicago Stock Exchange and the NASDAQ Stock Market.
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 WCM are registered only with the SEC as investment advisers, but certain of their
advisory personnel are subject to regulation by state securities regulatory agencies.
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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 and the net capital
requirements of various SROs. 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.
WCM, and 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 stockholders 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.
Monetary Policy and Economic Conditions. The earnings of banks and bank holding companies are
affected by general economic conditions and also by the credit policies of the Federal Reserve.
Through open market transactions, variations in the discount rate and the establishment of reserve
requirements, the Federal Reserve exerts considerable influence over the cost and availability of
funds obtainable for lending or investing. The Federal Reserve’s monetary policies and other
government programs have affected the operating results of all commercial banks in the past and are
expected to do so in the future. The Company and the banks cannot fully predict the nature or the
extent of any effects which fiscal or monetary policies may have on their business and earnings.
Beginning in 2008 and continuing into 2010, there was significant disruption of credit markets on a
national and global scale. Liquidity in credit markets was severely depressed. Major financial
institutions sought bankruptcy protection, and a number of banks have failed and been placed into
receivership or acquired. Other major financial institutions — including Fannie Mae, Freddie Mac,
and AIG — have been entirely or partially nationalized by the federal government. The economic
conditions in 2008 and 2009 have also affected consumers and businesses, including their ability to
repay loans. This has been particularly true in the mortgage area. Real estate values have
decreased in many areas of the country. There has been a large increase in mortgage defaults and
foreclosure filings on a nationwide basis.
In response to these events, there have also been an unprecedented number of governmental
initiatives designed to respond to the stresses experienced in financial markets in 2008 and 2009.
Treasury, the Federal Reserve, the FDIC and other agencies have taken a number of steps to enhance
the liquidity support available to financial institutions. The Company and the banks have
participated in some of these programs, such as the CPP under the TARP. There have been other
initiatives that have had an effect on credit markets generally, even though the Company has not
participated. Most of these programs were discontinued in 2010. Federal and state regulators have
also issued guidance encouraging banks and other mortgage lenders to make accommodations and
re-work mortgage loans in order to avoid foreclosure. Additional guidance and other modifications
issued under these foreclosure mitigation programs may affect the Company in 2011.
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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 carrying value of the Company’s available-for-sale securities
portfolio, by investment category, as of December 31, 2010, 2009 and 2008 (in thousands):
| 2010 | 2009 | 2008 | ||||||||||
U.S. Treasury |
$ | 96,097 | 110,816 | — | ||||||||
U.S. Government agencies |
884,055 | 576,176 | 298,729 | |||||||||
Municipal |
52,303 | 65,336 | 59,295 | |||||||||
Corporate notes and other: |
||||||||||||
Financial issuers |
187,007 | 41,746 | 9,052 | |||||||||
Retained subordinated securities |
— | 47,702 | — | |||||||||
Other |
74,908 | — | 23,434 | |||||||||
Mortgage-backed: |
||||||||||||
Agency |
158,653 | 216,544 | 281,094 | |||||||||
Non-agency CMOs |
3,028 | 107,984 | 4,213 | |||||||||
Non-agency CMOs — Alt A |
— | 50,778 | — | |||||||||
Other equity securities |
40,251 | 37,984 | 37,787 | |||||||||
Total available-for-sale securities |
$ | 1,496,302 | 1,255,066 | 713,604 | ||||||||
Tables presenting the carrying amounts and gross unrealized gains and losses for securities
available-for-sale at December 31, 2010 and 2009 are included by reference to Note 3 to the
Consolidated Financial Statements included in the 2010 Annual Report to Shareholders, which is
incorporated herein by reference. The fair value of available-for-sale securities as of December
31, 2010, by maturity distribution, is as follows (in thousands):
| From 5 | ||||||||||||||||||||||||||||
| Within | From 1 | to 10 | After | Mortgage- | Other | |||||||||||||||||||||||
| 1 year | to 5 years | years | 10 years | backed | Equities | Total | ||||||||||||||||||||||
U.S. Treasury |
$ | — | 2,011 | 94,086 | — | — | — | 96,097 | ||||||||||||||||||||
U.S. Government agencies |
555,393 | 202,497 | 18,182 | 107,983 | — | — | 884,055 | |||||||||||||||||||||
Municipal |
13,393 | 15,129 | 10,242 | 13,539 | — | — | 52,303 | |||||||||||||||||||||
Corporate notes and other: |
||||||||||||||||||||||||||||
Financial issuers |
29,237 | 66,082 | 63,428 | 28,260 | — | — | 187,007 | |||||||||||||||||||||
Other |
49,964 | 24,944 | — | — | — | — | 74,908 | |||||||||||||||||||||
Mortgage-backed: (1) |
||||||||||||||||||||||||||||
Agency |
— | — | — | — | 158,653 | — | 158,653 | |||||||||||||||||||||
Non-agency CMOs |
— | — | — | — | 3,028 | — | 3,028 | |||||||||||||||||||||
Other equity securities |
— | — | — | — | — | 40,251 | 40,251 | |||||||||||||||||||||
Total available-for-sale securities |
$ | 647,987 | 310,663 | 185,938 | 149,782 | 161,681 | 40,251 | 1,496,302 | ||||||||||||||||||||
| (1) | Consisting entirely of residential mortgage-backed securities, none of which are subprime. |
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The weighted average yield for each range of maturities of securities, on a tax-equivalent basis,
is shown below as of December 31, 2010:
| From 5 | ||||||||||||||||||||||||||||
| Within | From 1 | to 10 | After | Mortgage- | Other | |||||||||||||||||||||||
| 1 year | to 5 years | years | 10 years | backed | Equities | Total | ||||||||||||||||||||||
U.S. Treasury |
— | 0.32 | % | 2.34 | % | — | — | — | 2.30 | % | ||||||||||||||||||
U.S. Government agencies |
0.43 | % | 0.61 | % | 0.54 | % | 4.13 | % | — | — | 0.92 | % | ||||||||||||||||
Municipal |
2.75 | % | 5.11 | % | 5.67 | % | 3.84 | % | — | — | 4.28 | % | ||||||||||||||||
Corporate notes and other: |
||||||||||||||||||||||||||||
Financial issuers |
0.90 | % | 3.20 | % | 4.16 | % | 5.77 | % | — | — | 3.56 | % | ||||||||||||||||
Other |
0.66 | % | 2.29 | % | — | — | — | — | 1.20 | % | ||||||||||||||||||
Mortgage-backed: (1) |
||||||||||||||||||||||||||||
Agency |
— | — | — | — | 5.37 | % | — | 5.37 | % | |||||||||||||||||||
Non-agency CMOs |
— | — | — | — | 4.37 | % | — | 4.37 | % | |||||||||||||||||||
Other equity securities |
— | — | — | — | — | 2.99 | % | 2.99 | % | |||||||||||||||||||
Total available-for-sale securities |
0.51 | % | 1.52 | % | 2.95 | % | 4.45 | % | 5.35 | % | 2.99 | % | 2.04 | % | ||||||||||||||
| (1) | Consisting entirely of residential mortgage-backed securities, none of which are subprime. |
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 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.
Difficult economic conditions have adversely affected our company and the financial services
industry in general and further deterioration may adversely affect our financial condition and
results of operations.
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. Net charge-offs were $109.7 million in 2010 and $137.4 million in 2009. Non-performing
loans increased to $142.1 million as of December 31, 2010 from $131.8 million as of December 31,
2009 and our balance of other real estate owned (“OREO”) was $71.2 million at December 31, 2010 and
$80.2 million at December 31, 2009. 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.
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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 recent 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 much lower. Further declines in economic conditions, including
inflation, recession, unemployment, changes in securities markets or other factors with impact on
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
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.
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
in the case of continued adverse changes in the economy, market
conditions, or events that adversely affect specific customers. For example, in 2010, we charged
off $109.7 million in loans (net of recoveries) and increased our allowance for loan losses from
$98.3 million at December 31, 2009 to $113.9 million at December 31, 2010 as a result of the
economic recession and financial crisis. Our allowance for loan losses, excluding covered loans,
represents 1.19% of total loans outstanding at December 31, 2010, compared to 1.17% at December 31,
2009. Estimating loan loss allowances for our newer banks is more difficult because rapidly growing
and de novo bank loan portfolios are, by their nature, unseasoned. Therefore, our newer bank
subsidiaries may be more susceptible to changes in estimates, and to losses exceeding estimates,
than banks with more seasoned loan portfolios.
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 “Allowance for Loan Losses” under
Management’s Discussion and Analysis of 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. Net interest income represents our largest source of net income, and
was $415.8 million and $311.9 million for the years ended December 31, 2010 and 2009, respectively.
In particular, 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.
Each of our businesses may be affected differently by a given change in interest rates. For
example, we expect 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 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.
For example, with the relatively low interest rates that prevailed in past 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 $29.0 million for the
year ended December 31, 2008. However, during 2010 and 2009, we had fewer opportunities to use this
mitigation methodology due to lower than acceptable security yields and related option pricing and
recorded fee income of approximately $2.2 million and $2.0 million for the years ended December 31,
2010 and 2009, 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.
In addition, effective one year from the date of enactment, the Dodd-Frank Act eliminates U.S.
federal prohibitions on paying interest on demand deposits, thus allowing businesses to have
interest bearing checking accounts. Depending upon market response, this change could have an
adverse impact on our interest expense.
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 occurs. If our liquidity becomes limited,
it may have a material adverse effect on our results of operations and financial condition.
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, bills that would result in significant changes to financial institutions have
been introduced in Congress and it is possible that such legislation or implementing regulations
could significantly increase our regulatory compliance costs, impede the efficiency of our internal
business processes, negatively impact the
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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.
President Obama signed into law the Dodd-Frank Act on July 21, 2010. This new law will
significantly change the current bank regulatory structure and affect 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 the impact of the Dodd-Frank Act will depend, in part, on the form of these
rules and regulations, we expect compliance with the new law to increase our cost of doing
business, and may reduce our ability to generate revenue-producing assets.
The Dodd-Frank Act weakens federal preemption available for national banks and eliminates federal
preemption for subsidiaries of national banks, which may subject the Company’s national banks and
their subsidiaries, including WMC, to additional state regulation. With regard to mortgage lending,
the Dodd-Frank Act imposes new requirements regarding the origination and servicing of residential
mortgage loans. The law creates 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 enhances provisions relating to affiliate and insider lending restrictions
and loans to one borrower limitations. Federal banking law currently limits a national bank’s
ability to extend credit to one person (or group of related persons) in an amount exceeding certain
thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit exposure
arising from derivative transactions, repurchase agreements, and securities lending and borrowing
transactions. It also eventually will prohibit state-chartered banks (including certain of the
Company’s 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 the 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 an adverse effect upon the Company’s 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 establishes the Bureau of Consumer Financial Protection (the “Bureau”)
within the Federal Reserve, which will regulate consumer financial products and services. On July
21, 2011, the consumer financial protection functions currently assigned to the federal banking and
other designated agencies will shift to the Bureau. The Bureau will have broad rulemaking authority
over a wide range of consumer protection laws that apply to banks and thrifts, 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 that such markets are fair,
transparent and competitive. In particular, the Bureau may enact sweeping reforms in the mortgage
broker industry which may increase the costs of engaging in these activities for all market
participants, including our subsidiaries. The Bureau will have broad supervisory, examination and
enforcement authority. In addition, state attorneys general and other state officials will be
authorized to enforce consumer protection rules issued by the Bureau.
Recently enacted financial reform legislation will result in heightened capital requirements and is
expected to increase our costs of doing business.
The Dodd-Frank Act requires the issuance of new banking regulations regarding the establishment of
minimum leverage and risk-based capital requirements for bank holding companies and banks. These
regulations, which are required to be effective within 18 months from the enactment of the
Dodd-Frank Act, are required to be no less stringent than current capital requirements applied to
insured depository institutions and may, in fact, be higher when established by the agencies.
Although Wintrust’s outstanding trust preferred securities will remain eligible for Tier 1 capital
treatment, any future issuances of trust preferred securities will not be Tier 1 capital. The
Dodd-Frank Act also requires the regulatory agencies to seek to make capital requirements for bank
holding companies and insured institutions countercyclical, so that capital requirements increase
in times of economic expansion and decrease in
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times of economic contraction. The Dodd-Frank Act may also require us to conduct annual stress
tests, in accordance with future regulations. Any such testing would result in increased compliance
costs.
International initiatives regarding bank capital requirements may require heightened capital
In December 2010 and January 2011, the Basel Committee on Banking Supervision published reforms
regarding changes to bank capital, leverage and liquidity requirements, commonly referred to as
“Basel III.” If implemented without change by U.S. banking regulators, the provisions of Basel III may have
significant impact on requirements including heightened requirements regarding Tier 1 common
equity, and alterations to bank liquidity standards. For more detail, regarding the Basel III
initiative, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Overview and Strategy— Recent Actions Related to Capital and Liquidity.”
We are not able to predict at this time the content of capital and liquidity guidelines or
regulations that may be adopted by regulatory agencies having authority over us and our
subsidiaries or the impact that any changes in regulation would have on us. If new standards
require us or our banking subsidiaries to maintain 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.
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. The FDIC expects a higher rate of insured institution failures in the next
few years compared to recent years; thus, the reserve ratio may continue to decline. In addition,
the Emergency Economic Stabilization Act of 2008, as amended, increased the limit on FDIC coverage
to $250,000 through December 31, 2013 (made permanent by the Dodd-Frank Act).
These developments have caused our FDIC insurance premiums to increase, and may cause additional
increases. On September 30, 2009, the FDIC collected a special assessment from each insured
institution, and additional assessments are possible. In addition, on November 12, 2009, the FDIC
approved a final rule requiring that insured institutions prepay 13 quarters of estimated deposit
insurance premiums. The banks made their prepayments on December 30, 2009. These prepaid premiums
are recorded as a prepaid expense on our financial statements.
Certain provisions of the Dodd-Frank Act may further effect 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 total consolidated assets less 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%, which will generally require an increase in the level of
assessments for institutions with assets in excess of $10 billion. The applicability of increased
assessments to the Company may depend upon regulations issued by banking regulators, who are
granted significant rulemaking discretion by the Dodd-Frank Act.
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
position, results of operation 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 position, results of operations or cash flows.
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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. 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. 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 financial condition and results of
operations.
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. |
Failure to perform in any of these areas could significantly weaken our competitive position, which
could adversely affect our growth and profitability, which, in turn, could have a material adverse
effect on our financial condition and results of operations.
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, First Insurance Funding Corporation
(“FIFC”). 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,
2010, we had $1.3 billion of commercial insurance premium finance loans outstanding, which
represented 13% of our total loan portfolio as of such date.
FIFC 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
FIFC’s risk management procedures and controls will prevent losses from fraudulent activity. We may
be exposed to the risk of loss in our premium finance business because of fraud, the possibility of
insolvency of insurance carriers that are in possession of unearned insurance premiums that
represent our collateral or that our collateral value is not ultimately enough to cover our
outstanding balance in the event that a borrower defaults, which could result in a material adverse
effect on our financial condition and results of operations. 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. There can be no assurance that FIFC will be able to
continue to compete successfully in its markets.
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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 may continue to make such acquisitions in
the future. Win-trust seeks merger or acquisition partners that are culturally similar and have
experienced management and 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 Win-trust’s tangible book value and net income per common share may
occur in connection with any future transaction. 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. Furthermore, we may face competition from other financial
institutions with respect to proposed FDIC-assisted transactions.
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 Lincoln Park Bank, Wheatland Bank, Ravenswood Bank and Community First Bank-Chicago 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 and
share ownership.
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
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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.
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.
FIFC’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. To the extent that commercial or life insurance providers
experience widespread difficulties or credit downgrades, the value of our collateral will be
reduced. 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.
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.
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 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.
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 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, executive compensation restrictions such
as those we were subject to during our participation in the CPP, as well any restrictions we may
subject to in the future, 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,
operating results and financial condition.
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If we fail to comply with certain of our covenants under our securitization facility, the
holders of the related notes could declare a rapid amortization event, which would require us
to repay any outstanding amounts immediately, which could significantly impair our liquidity.
In September 2009, our indirect subsidiary, FIFC Premium Funding I, LLC, sold $600 million in
aggregate principal amount of its Series 2009-A Premium Finance Asset Backed Notes, Class A (the
“Notes”), which were issued in a securitization transaction sponsored by FIFC. The related
indenture contains certain financial and other covenants that must be met in order to continue to
sell notes into the facility. In addition, if any of these covenants are breached, the holders of
the Notes may, under certain circumstances, declare a rapid amortization event, which would require
us to repay any outstanding notes immediately. Such an event could significantly impair our
liquidity.
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 financial condition and results of operations.
Failures of our operational systems may adversely effect our operations.
We are increasingly depending upon computer and other information technology systems to manage our
business. We rely upon information technology systems to process, record and monitor and
disseminate information about our operations. In some cases, we depend on third parties to provide
or maintain these systems. 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 operations.
Changes in accounting policies or accounting standards could materially adversely affect how we
report our financial results and condition.
Our accounting policies are fundamental to understanding our financial results and 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 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.
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Anti-takeover provisions could negatively impact our stockholders.
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 stockholder’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.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company’s executive offices are located in the banking facilities of Lake Forest Bank. Certain
corporate functions are also located at the various bank subsidiaries.
The Company’s banks operate through 86 banking facilities, the majority of which are owned. The
Company owns 133 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
various banks. WMC has 27 locations in eight states, all of which are leased, as well as office
locations at various banks. FIFC has one location in Northbrook, Illinois which is owned and three
which are leased. Tricom has one location in Menomonee Falls, Wisconsin which is owned. WITS has
one location in Villa Park, Illinois which is owned as well as an office location at one of the
banks. 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. [REMOVED AND RESERVED.]
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 2010 and 2009.
| 2010 | 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
Fourth Quarter |
$ | 33.97 | $ | 28.40 | $ | 33.87 | $ | 25.00 | ||||||||
Third Quarter |
37.25 | 27.79 | 29.73 | 14.66 | ||||||||||||
Second Quarter |
44.93 | 33.05 | 22.75 | 11.80 | ||||||||||||
First Quarter |
38.47 | 29.86 | 20.90 | 9.70 | ||||||||||||
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.
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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.
Total
Return Performance
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||
Wintrust Financial Corporation |
100.00 | 87.98 | 61.44 | 39.22 | 58.33 | 62.74 | ||||||||||||||||||
NASDAQ — Total US |
100.00 | 109.84 | 119.14 | 57.41 | 82.53 | 97.95 | ||||||||||||||||||
NASDAQ — Bank Index |
100.00 | 112.23 | 88.95 | 64.86 | 54.35 | 64.29 | ||||||||||||||||||
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Approximate Number of Equity Security Holders
As of February 23, 2011 there were approximately 1,505 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 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 entered into on October 29, 2010, 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 2010 and 2009:
| Dividend | ||||||
| Record Date | Payable Date | per Share | ||||
February 12, 2009 |
February 26, 2009 | $ | 0.18 | |||
August 13, 2009 |
August 27, 2009 | $ | 0.09 | |||
February 11, 2010 |
February 25, 2010 | $ | 0.09 | |||
August 12, 2010 |
August 26, 2010 | $ | 0.09 | |||
In January 2011, the Company’s Board of Directors approved a semi-annual dividend of $0.09 per
share. The dividend was paid on February 24, 2011 to shareholders of record as of February 10,
2011.
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 depends upon its
receipt of dividends from these entities. The banks’ ability to pay dividends is regulated by
banking statutes. See “Bank Regulation; Additional Regulation of Dividends” on page 13 of this Form
10-K. During 2010, 2009 and 2008, the banks paid $11.5 million, $100.0 million and $73.2 million,
respectively, in dividends to the Company.
Reference is 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, 2010. 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, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (dollars in thousands, except per share data) | ||||||||||||||||||||
Selected Financial Condition Data (at end of year): |
||||||||||||||||||||
Total assets |
$ | 13,980,156 | $ | 12,215,620 | $ | 10,658,326 | $ | 9,368,859 | $ | 9,571,852 | ||||||||||
Total loans, excluding covered loans |
9,599,886 | 8,411,771 | 7,621,069 | 6,801,602 | 6,496,480 | |||||||||||||||
Total deposits |
10,803,673 | 9,917,074 | 8,376,750 | 7,471,441 | 7,869,240 | |||||||||||||||
Junior subordinated debentures |
249,493 | 249,493 | 249,515 | 249,662 | 249,828 | |||||||||||||||
Total shareholders’ equity |
1,436,549 | 1,138,639 | 1,066,572 | 739,555 | 773,346 | |||||||||||||||
Selected Statements of Income Data: |
||||||||||||||||||||
Net interest income |
$ | 415,836 | $ | 311,876 | $ | 244,567 | $ | 261,550 | $ | 248,886 | ||||||||||
Net revenue (1) |
607,996 | 629,523 | 344,245 | 341,493 | 339,926 | |||||||||||||||
Core pre-tax earnings (2) |
196,544 | 122,803 | 94,410 | 95,552 | 102,566 | |||||||||||||||
Net income |
63,329 | 73,069 | 20,488 | 55,653 | 66,493 | |||||||||||||||
Net income per common share — Basic |
1.08 | 2.23 | 0.78 | 2.31 | 2.66 | |||||||||||||||
Net income per common share — Diluted |
1.02 | 2.18 | 0.76 | 2.24 | 2.56 | |||||||||||||||
Selected Financial Ratios and Other Data: |
||||||||||||||||||||
Performance Ratios: |
||||||||||||||||||||
Net interest margin (2) |
3.37 | % | 3.01 | % | 2.81 | % | 3.11 | % | 3.10 | % | ||||||||||
Non-interest income to average assets |
1.42 | 2.78 | 1.02 | 0.85 | 1.02 | |||||||||||||||
Non-interest expense to average assets |
2.82 | 3.01 | 2.63 | 2.57 | 2.56 | |||||||||||||||
Net overhead ratio (3) |
1.40 | 0.23 | 1.60 | 1.72 | 1.54 | |||||||||||||||
Efficiency ratio (2)(4) |
63.77 | 54.44 | 73.00 | 71.05 | 66.94 | |||||||||||||||
Return on average assets |
0.47 | 0.64 | 0.21 | 0.59 | 0.74 | |||||||||||||||
Return on average common equity |
3.01 | 6.70 | 2.44 | 7.64 | 9.47 | |||||||||||||||
Average total assets |
$ | 13,556,612 | $ | 11,415,322 | $ | 9,753,220 | $ | 9,442,277 | $ | 8,925,557 | ||||||||||
Average total shareholders’ equity |
1,352,135 | 1,081,792 | 779,437 | 727,972 | 701,794 | |||||||||||||||
Average loans to average deposits ratio
(excluding covered loans) |
91.1 | % | 90.5 | % | 94.3 | % | 90.1 | % | 82.2 | % | ||||||||||
Average loans to average deposits ratio
(including covered loans) |
93.4 | % | 90.5 | % | 94.3 | % | 90.1 | % | 82.2 | % | ||||||||||
Common Share Data (at end of year): |
||||||||||||||||||||
Market price per common share |
$ | 33.03 | $ | 30.79 | $ | 20.57 | $ | 33.13 | $ | 48.02 | ||||||||||
Book value per common share (2) |
$ | 32.73 | $ | 35.27 | $ | 33.03 | $ | 31.56 | $ | 30.38 | ||||||||||
Tangible common book value per share (2) |
$ | 25.80 | $ | 23.22 | $ | 20.78 | $ | 19.02 | $ | 18.97 | ||||||||||
Common shares outstanding |
34,864,068 | 24,206,819 | 23,756,674 | 23,430,490 | 25,457,935 | |||||||||||||||
Other Data (at end of year): (8) |
||||||||||||||||||||
Leverage ratio |
10.1 | % | 9.3 | % | 10.6 | % | 7.7 | % | 8.2 | % | ||||||||||
Tier 1 capital to risk-weighted assets |
12.5 | 11.0 | 11.6 | 8.7 | 9.8 | |||||||||||||||
Total capital to risk-weighted assets |
13.8 | 12.4 | 13.1 | 10.2 | 11.3 | |||||||||||||||
Tangible common equity ratio (TCE) (2)(7) |
8.0 | 4.7 | 4.8 | 4.9 | 5.2 | |||||||||||||||
Allowance for credit losses (5) |
$ | 118,037 | $ | 101,831 | $ | 71,353 | $ | 50,882 | $ | 46,512 | ||||||||||
Credit discounts on purchased premium
finance receivables — life insurance (6) |
23,227 | 37,323 | — | — | — | |||||||||||||||
Non-performing loans |
142,132 | 131,804 | 136,094 | 71,854 | 36,874 | |||||||||||||||
Allowance for credit losses to total loans (5) |
1.23 | % | 1.21 | % | 0.94 | % | 0.75 | % | 0.72 | % | ||||||||||
Non-performing loans to total loans |
1.48 | 1.57 | 1.79 | 1.06 | 0.57 | |||||||||||||||
Number of: |
||||||||||||||||||||
Bank subsidiaries |
15 | 15 | 15 | 15 | 15 | |||||||||||||||
Non-bank subsidiaries |
8 | 8 | 7 | 8 | 8 | |||||||||||||||
Banking offices |
86 | 78 | 79 | 77 | 73 | |||||||||||||||
| (1) | Net revenue is net interest income plus non-interest income. | |
| (2) | See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures/Ratios,” of the Company’s 2010 | |
| Form 10-K 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 and dividing by that period’s average total 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. | |
| (5) | The allowance for credit losses includes both the allowance for loan losses and the allowance for unfunded lending-related commitments. | |
| (6) | Represents the credit discounts on purchased life insurance premium finance loans. | |
| (7) | Total shareholders’ equity minus preferred stock and total intangible assets divided by total assets minus total intangible assets | |
| (8) | 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 18 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; | ||
| • | 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; | ||
| • | 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 resulting from the Basel II and III initiatives; | ||
| • | increases in the Company’s FDIC insurance premiums, or the collection of special assessments by the FDIC; | ||
| • | losses incurred in connection with repurchases and indemnification payments related to mortgages; | ||
| • | 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); | ||
| • | delinquencies or fraud with respect to the Company’s premium finance business; | ||
| • | 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; | ||
| • | credit downgrades among commercial and life insurance providers that could negatively affect the value of collateral securing the Company’s premium finance loans; | ||
| • | any negative perception of the Company’s reputation or financial strength; | ||
| • | the loss of customers as a result of technological changes allowing consumers to complete their financial transactions without the use of a bank; | ||
| • | the ability of the Company to attract and retain senior management experienced in the banking and financial services industries; | ||
| • | the Company’s ability to comply with covenants under its securitization facility and credit facility; | ||
| • | unexpected difficulties or unanticipated developments related to the Company’s strategy of de novo bank formations and openings, which typically require over 13 months of operations before becoming profitable due to the impact of organizational and overhead expenses, startup phase of generating deposits and the time lag typically involved in redeploying deposits into attractively priced loans and other higher yielding earning assets; |
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| • | changes in accounting standards, rules and interpretations and the impact on the Company’s financial statements; | ||
| • | adverse effects on our operational systems resulting from failures, human error or tampering; | ||
| • | significant litigation involving the Company; and | ||
| • | the ability of the Company to receive dividends from its subsidiaries. |
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.
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, 2010. 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 (dollars in thousands, except per share data):
| % or | % or | |||||||||||||||||||
| Years Ended | basis point | basis point | ||||||||||||||||||
| December 31, | (bp)change | (bp)change | ||||||||||||||||||
| 2010 | 2009 | 2008 | 2009 to 2010 | 2008 to 2009 | ||||||||||||||||
Net income |
$ | 63,329 | $ | 73,069 | $ | 20,488 | (13 | )% | 257 | % | ||||||||||
Net income per common share — Diluted |
$ | 1.02 | $ | 2.18 | $ | 0.76 | (53 | )% | 187 | % | ||||||||||
Core pre-tax earnings (1) |
$ | 196,544 | $ | 122,803 | $ | 94,410 | 60 | % | 30 | % | ||||||||||
Net revenue (2) |
$ | 607,996 | $ | 629,523 | $ | 344,245 | (3 | )% | 83 | % | ||||||||||
Net interest income |
$ | 415,836 | $ | 311,876 | $ | 244,567 | 33 | % | 28 | % | ||||||||||
Net interest margin (1) |
3.37 | % | 3.01 | % | 2.81 | % | 36 bp | 20 bp | ||||||||||||
Net overhead ratio (3) |
1.40 | % | 0.23 | % | 1.60 | % | 117 bp | (137)bp | ||||||||||||
Efficiency
ratio (1)(4) |
63.77 | % | 54.44 | % | 73.00 | % | 933 bp | (1,856)bp | ||||||||||||
Return on average assets |
0.47 | % | 0.64 | % | 0.21 | % | (17)bp | 43 bp | ||||||||||||
Return on average common equity |
3.01 | % | 6.70 | % | 2.44 | % | (369)bp | 426 bp | ||||||||||||
At end of period: |
||||||||||||||||||||
Total assets |
$ | 13,980,156 | $ | 12,215,620 | $ | 10,658,326 | 14 | % | 15 | % | ||||||||||
Total loans,excluding covered loans |
$ | 9,599,886 | $ | 8,411,771 | $ | 7,621,069 | 14 | % | 10 | % | ||||||||||
Total loans, including loans held-for sale, excluding covered loans |
$ | 9,971,333 | $ | 8,687,486 | $ | 7,682,185 | 15 | % | 13 | % | ||||||||||
Total deposits |
$ | 10,803,673 | $ | 9,917,074 | $ | 8,376,750 | 9 | % | 18 | % | ||||||||||
Total shareholders’ equity |
$ | 1,436,549 | $ | 1,138,639 | $ | 1,066,572 | 26 | % | 7 | % | ||||||||||
Book value per common share (1) |
$ | 32.73 | $ | 35.27 | $ | 33.03 | (7 | )% | 7 | % | ||||||||||
Tangible
book value per common share (1) |
$ | 25.80 | $ | 23.22 | $ | 20.78 | 11 | % | 12 | % | ||||||||||
Market price per common share |
$ | 33.03 | $ | 30.79 | $ | 20.57 | 7 | % | 50 | % | ||||||||||
| (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 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 (excluding 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 the Company 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) and the
efficiency ratio. Management believes that these measures and ratios provide users of the
Company’s financial information with 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 the 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. These measures are computed excluding the
impact of preferred stock and intangible assets. Core pre-tax earnings is a significant metric in
assessing the Company’s core operating performance.
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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 5 years.
| Years Ended December 31, | ||||||||||||||||||||
| (Dollars and shares in thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Calculation of Net Interest Margin and Efficiency Ratio (A) Interest income (GAAP) |
$ | 593,107 | 527,614 | 514,723 | 611,557 | 557,945 | ||||||||||||||
Taxable-equivalent adjustment |
||||||||||||||||||||
- Loans |
334 | 462 | 645 | 826 | 409 | |||||||||||||||
- Liquidity management assets |
1,377 | 1,720 | 1,795 | 2,388 | 1,195 | |||||||||||||||
- Other earnings assets |
17 | 38 | 47 | 13 | 17 | |||||||||||||||
Interest
income - FTE |
$ | 594,835 | 529,834 | 517,210 | 614,784 | 559,566 | ||||||||||||||
(B) Interest Expense (GAAP) |
177,271 | 215,738 | 270,156 | 350,007 | 309,059 | |||||||||||||||
Net interest
income - FTE |
$ | 417,564 | 314,096 | 247,054 | 264,777 | 250,507 | ||||||||||||||
(C) Net interest income (GAAP) (A minus B) |
$ | 415,836 | 311,876 | 244,567 | 261,550 | 248,886 | ||||||||||||||
(D) Net interest margin (GAAP) |
3.35 | % | 2.99 | % | 2.78 | % | 3.07 | % | 3.07 | % | ||||||||||
Net interest
margin - FTE |
3.37 | % | 3.01 | % | 2.81 | % | 3.11 | % | 3.10 | % | ||||||||||
(E) Efficiency ratio (GAAP) |
63.95 | % | 54.64 | % | 73.52 | % | 71.74 | % | 67.28 | % | ||||||||||
Efficiency
ratio - FTE |
63.77 | % | 54.44 | % | 73.00 | % | 71.06 | % | 66.96 | % | ||||||||||
Calculation of Tangible Common Equity ratio (at period end) |
||||||||||||||||||||
Total shareholders’ equity |
$ | 1,436,549 | 1,138,639 | 1,066,572 | 739,555 | 773,346 | ||||||||||||||
Less: Preferred stock |
(49,640 | ) | (284,824 | ) | (281,873 | ) | — | — | ||||||||||||
Less: Intangible assets |
(293,765 | ) | (291,649 | ) | (290,918 | ) | (293,941 | ) | (290,535 | ) | ||||||||||
(F) Total tangible common shareholders’ equity |
$ | 1,093,144 | 562,166 | 493,781 | 445,614 | 482,811 | ||||||||||||||
Total assets |
$ | 13,980,156 | 12,215,620 | 10,658,326 | 9,368,859 | 9,571,852 | ||||||||||||||
Less: Intangible assets |
(293,765 | ) | (291,649 | ) | (290,918 | ) | (293,941 | ) | (290,535 | ) | ||||||||||
(G) Total tangible assets |
$ | 13,686,391 | 11,923,971 | 10,367,408 | 9,074,918 | 9,281,317 | ||||||||||||||
Tangible common equity ratio (F/G) |
8.0 | % | 4.7 | % | 4.8 | % | 4.9 | % | 5.2 | % | ||||||||||
Calculation of Core Pre-Tax Earnings |
||||||||||||||||||||
Income before taxes |
$ | 100,807 | 117,504 | 30,641 | 83,824 | 104,241 | ||||||||||||||
Add: Provision for credit losses |
124,664 | 167,932 | 57,441 | 14,879 | 7,057 | |||||||||||||||
Add: OREO expenses, net |
19,331 | 18,963 | 2,023 | 111 | 36 | |||||||||||||||
Add: Recourse obligation on loans previously sold |
10,970 | 937 | — | — | — | |||||||||||||||
Less: Gain on bargain purchases |
(44,231 | ) | (156,013 | ) | — | — | — | |||||||||||||
Less: Trading (gains) losses |
(5,165 | ) | (26,788 | ) | 134 | (265 | ) | (8,751 | ) | |||||||||||
Less: (Gains) losses on available-for-sale securities, net |
(9,832 | ) | 268 | 4,171 | (2,997 | ) | (17 | ) | ||||||||||||
Core pre-tax earnings |
$ | 196,544 | 122,803 | 94,410 | 95,552 | 102,566 | ||||||||||||||
Calculation of book value per common share |
||||||||||||||||||||
Total shareholders’ equity |
$ | 1,436,549 | 1,138,639 | 1,066,572 | 739,555 | 773,346 | ||||||||||||||
Less: Preferred stock |
(49,640 | ) | (284,824 | ) | (281,873 | ) | — | — | ||||||||||||
(H) Total common equity |
$ | 1,386,909 | 853,815 | 784,699 | 739,555 | 773,346 | ||||||||||||||
Actual common shares outstanding |
34,864 | 24,207 | 23,757 | 23,430 | 25,458 | |||||||||||||||
Add: Tangible equity unit conversion shares |
7,512 | — | — | — | — | |||||||||||||||
(I) Common shares for book value calculation |
42,376 | 24,207 | 23,757 | 23,430 | 25,458 | |||||||||||||||
Book value per common share (H/I) |
$ | 32.73 | 35.27 | 33.03 | 31.56 | 30.38 | ||||||||||||||
Tangible book value per common share (F/I) |
$ | 25.80 | 23.22 | 20.78 | 19.02 | 18.97 | ||||||||||||||
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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 through several non-bank subsidiaries. Additionally,
Wintrust offers a full array of wealth management services primarily to customers in the Chicago
metropolitan area and southeastern Wisconsin.
The Current Economic Environment
Both the U.S. economy and the Company’s local markets faced challenging conditions in 2010. The
credit crisis that began in 2008 continued, resulting in high unemployment and depressed home
values throughout the Chicago metropolitan area and southeastern Wisconsin. The stress of the
existing economic environment and the depressed real estate valuations in the Company’s markets
continued to impact the Company’s business in 2010. In response to these conditions, Management
continued 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 created a dedicated division in 2008, the Managed Assets Division, to focus on resolving problem asset situations. Comprised of experienced lenders, the Managed Assets Division takes control of managing the Company’s more significant problem assets and also conducts ongoing reviews and evaluations of all significant problem assets, including the formulation of action plans and updates on recent developments. | ||
| • | The Company’s 2010 provision for credit losses totaled $124.7 million, a decrease of $43.3 million when compared to 2009. Net charge-offs decreased to $109.7 million in 2010 (of which $78.4 million related to commercial and commercial real estate loans), compared to $137.4 million in 2009 (of which $122.9 million related to commercial and commercial real estate loans). | ||
| • | The Company increased its allowance for loan losses to $113.9 million at December 31, 2010, reflecting an increase of $15.6 million, or 16%, when compared to 2009. At December 31, 2010, approximately $62.5 million, or 55%, of the allowance for loan losses was associated with commercial real estate loans and another $31.8 million, or 28%, was associated with commercial loans. | ||
| • | Wintrust has significant exposure to commercial real estate. At December 31, 2010, $3.3 billion, or 34%, of our loan portfolio was commercial real estate, with more than 91% located in the Chicago metropolitan area and southeastern Wisconsin market areas. The commercial real estate loan portfolio was comprised of $487.8 million related to land, residential and commercial construction, $535.3 million related to office buildings loans, $510.5 million related to retail loans, $500.3 million related to industrial use loans, $291.0 million related to multi-family loans and $1.0 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, 2010, the Company had approximately $94.0 million of non-performing commercial real estate loans representing approximately 3% of the total commercial real estate loan portfolio. $49.4 million, or 53%, 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 $142.1 million (of which $94.0 million, or 66%, was related to commercial real estate) at December 31, 2010, an increase of $10.3 million compared to December 31, 2009. Non-performing loans increased as a result of deteriorating real estate conditions and stress in the overall economy in 2010. | ||
| • | The Company’s other real estate owned, excluding covered other real estate owned, decreased by $9.0 million, to $71.2 million during 2010, from $80.2 million at December 31, 2009. These changes were largely caused by disposal and resolution of properties in 2010. Specifically, the $71.2 million of other real estate owned as of December 31, 2010 was comprised of $17.8 million of residential real estate development property, $47.7 million of commercial real estate property and $5.7 million of residential real estate property. | ||
| • | Following the acquisition of banks in FDIC-assisted transactions, the Company created a dedicated division called the Purchased Assets Division to manage the loan portfolios acquired in such transactions. These loan portfolios are covered by loss sharing agreements with the FDIC, and recovery under these agreements requires detailed reporting on at least a quarterly basis. Comprised of experienced lenders and finance staff, the Purchased Assets Division enables the Company to effectively and efficiently manage the special risk associated with these transactions. |
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During 2009, Management implemented a strategic effort 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 continued in 2010. 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 believed that the distressed macro-economic conditions would
continue to exist in 2010 and that the banking industry’s increase in non-performing loans would
eventually 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, during 2009 and continuing through 2010, the Company 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 $146.9 million as of December 31 2010, increasing $38.3 million compared to the balance of
$108.6 million as of December 31, 2009. 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 2010, 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, 2010, approximately $101.2 million in loans had terms modified, with $81.1 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.
An acceleration or significantly extended continuation in real estate valuation and macroeconomic
deterioration could result in higher default levels, a significant increase in foreclosure
activity, a material decline in the value of the Company’s assets, or any combination of more than
one of these trends could have a material adverse effect on the Company’s financial condition or
results of operations.
A positive result of the economic environment was that our mortgage banking operation benefited
from the low interest rate environment during 2009 and 2010 as demand for mortgage loans increased
due to the fall in interest rates. The interest rate environment coupled with the acquisition of
additional staff and infrastructure resulted in the higher levels of loan originations and loan
sales in 2009. Though loan originations were lower in 2010 compared to 2009, the Company realized
an increase in gains on sales of loans, which was driven by better pricing realized as a result of
the Company utilizing mandatory execution of forward commitments with investors in 2010. The
increase in gains on sales was partially offset by changes in the fair market value of mortgage
servicing rights, valuation fluctuations of mortgage banking derivatives, fair value accounting for
certain residential mortgage loans held for sale and an increase in loss indemnification claims by
purchasers of the Company’s 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 Company recognized an additional $11.0
million of expense related to loss indemnification claims in 2010 for loans previously sold, an
increase of $10.1 million compared to 2009 primarily as a result of increased repurchase demands
from investors. The Company has established an $8.9 million estimated liability, as of December 31,
2010 on loans expected to be repurchased from loans sold to investors, which is based on trends in
repurchase and indemnification requests, actual loss experience, known and inherent risks in the
loan and current economic conditions.
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In total, the Company increased its loan portfolio, excluding covered loans, from $8.4 billion at
December 31, 2009 to $9.6 billion at December 31, 2010. This increase was primarily a result of
the change in accounting method for the Company’s securitization transaction which is accounted
for as a secured borrowing as of January 1, 2010, the Company’s commercial banking initiative, as
well as growth in the premium finance receivables — life insurance portfolio. 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
Consolidated Financial Statements.
Management considers the maintenance of adequate liquidity to be important to the management of
risk. Accordingly, during 2009 and 2010, 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 exceptional sources provided or facilitated by the federal government for the benefit of
U.S. financial institutions. Among such sources was the New York Fed’s TALF. In September 2009 the
Company securitized a portion of its property and casualty premium finance loan portfolio of $600
million, which was facilitated by the premium finance loans being eligible collateral under the
TALF. The New York Fed ceased making new loans under the TALF on June 30, 2010.
The Company also benefited from its maintenance of fifteen separate banking charters, which allow
the Company to offer its MaxSafe® product. Through the MaxSafe® product, the Company offers its
customers the ability to maintain a depository account at each of the Company’s banking charters
and thus receive fifteen times the ordinary FDIC limit, with the Company attending to much of the
administrative difficulties this would ordinarily require. While the FDIC insurance limit, formerly
$100,000 per depositor at each banking charter, has been raised by the FDIC to $250,000 per
depositor at each banking charter, the MaxSafe® product has allowed the Company to attract large
amounts of high quality deposits as financial distress has affected a number of banking
institutions. At December 31, 2010, the Company had over $1 billion in overnight liquid funds and
interest-bearing deposits with banks.
Community Banking
As of December 31, 2010, our community banking franchise consisted of 15 community banks with 86
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 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 the historically low interest rate levels in place 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 quarters.
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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. This revenue is significantly impacted by the level of interest rates associated
with home mortgages. In 2010, interest rates have been historically low and customer refinancings
have been high, although not as high as in 2009. Additionally, in December 2008, we acquired
certain assets and assumed certain liabilities of the mortgage banking business of PMP. As a result
of the acquisition, we significantly increased the capacity of our mortgage-origination operations,
primarily in the Chicago metropolitan market. The PMP transaction also changed the mix of our
mortgage origination business in the Chicago market, resulting in a relatively greater portion of
that business being retail, rather than wholesale, oriented. Costs in the mortgage business are
variable as they primarily relate to commissions paid to originators.
Establishment of de novo 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 during the past
three years has been at a level below earlier periods in our history, we have resumed the formation of additional branches and acquisitions of
additional banks. On April 23, 2010, two of the Company’s wholly-owned subsidiary banks, Northbrook
Bank and Wheaton Bank, in two FDIC-assisted transactions, respectively acquired certain assets and
liabilities and the banking operations of Lincoln Park Savings Bank (“Lincoln Park”) and Wheatland
Bank (“Wheatland”). On August 6, 2010, Northbrook Bank, in an FDIC-assisted transaction, acquired
certain assets and liabilities and the banking operations of Ravenswood Bank (“Ravenswood”).
Additionally, on October 22, 2010, Wheaton Bank acquired certain assets and liabilities of the
banking operations of a branch located in Naperville, Illinois. This branch operates as Naperville
Bank & Trust (“Naperville”).
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, with an immediate
enhancement of 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. 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.
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Financing of Commercial Insurance Premiums
FIFC originated approximately $3.2 billion in commercial insurance premium finance receivables in
2010. FIFC makes loans to businesses to finance the insurance premiums they pay on their commercial
insurance policies. The loans are originated by FIFC working through independent medium and large
insurance agents and brokers located throughout the United States. 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 our premium
financing subsidiary, 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 has conducted a thorough
review of the premium finance — commercial portfolio and found no signs of similar situations.
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
initially 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.
Subsequent to December 31, 2009, this securitization transaction is accounted for as a secured
borrowing and the securitization entity is treated as a consolidated subsidiary of the Company.
Accordingly, beginning on January 1, 2010, all of the assets and liabilities of the securitization
entity are included directly on the Company’s Consolidated Statements of Condition.
The primary driver of profitability related to the financing of commercial 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. 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 either through the securitization facility described above or
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 for high net-worth
individuals. 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 $456.5 million in life insurance premium finance receivables in 2010.
These loans are originated directly with the borrowers with assistance from life insurance
carriers, independent insurance agents, financial advisors and/or legal counsel. 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.
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.
Wealth Management Activities
We currently offer a full range of wealth management services including trust and investment
services, asset management and securities brokerage services, through three separate subsidiaries
including WHI, CTC and WCM. 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, the Company’s asset management company, Wayne Hummer Asset Management Company,
changed its name to Wintrust Capital Management, 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 resultant increase
or decrease in the value of our client accounts on which our fees are based. The
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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.
Federal Government, Federal Reserve and FDIC Programs
During the last several 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. The Company has participated in three of such programs: the
CPP, administered by the Treasury, the TALF, created by the New York Fed, and the TLGP, created by
the FDIC. The Company also benefits from provisions of the Dodd-Frank Act which increase the
deposit insurance limit on certain depository accounts at its bank subsidiaries. A summary of the
Company’s participation in each of these programs follows.
Participation in Capital Purchase Program. In October 2008, the Treasury announced that it intended
to use a portion of the initial funds allocated to it pursuant to the Emergency Economic
Stabilization Act of 2008, to invest directly in financial institutions through the newly-created
CPP. In December 2008, the Company entered into an agreement with the U.S. Department of the
Treasury to participate in the CPP, pursuant to which the Company issued and sold 250,000 shares of
its Series B Preferred Stock and a warrant (the “warrant”) to purchase 1,643,295 shares of its
common stock to Treasury in exchange for aggregate consideration of $250 million (the “CPP
investment”).
As a result of the CPP investment, our total risk based capital ratio as of December 31, 2008
increased from 10.3% to 13.1%. To be considered “well capitalized,” we must maintain a total
risk-based capital ratio in excess of 10%. The terms of our agreement with Treasury imposed
significant restrictions upon us, including increased scrutiny by Treasury, banking regulators and
Congress, additional corporate governance requirements, restrictions upon our ability to repurchase
stock and pay dividends and, as a result of increasingly stringent regulations issued by Treasury
following the closing of the CPP investment, significant restrictions upon executive compensation.
On December 22, 2010, the Company repurchased all the shares of Series B Preferred Stock from
Treasury at a price of $251.3 million, which included accrued and unpaid dividends of $1.3 million.
For additional information on the terms of the preferred stock and the warrant, see Notes 24 and 29
of the Consolidated Financial Statements.
TALF-Eligible Issuance. In September 2009, the Company’s indirect subsidiary, FIFC Premium Funding
I, LLC, sold $600 million in aggregate principal amount of its Series 2009-A Premium Finance Asset
Backed Notes, Class A (the “Notes”), which were issued in a securitization transaction sponsored by
FIFC. FIFC Premium Funding I, LLC’s obligations under the Notes are secured by premium finance
receivables made to buyers of property and casualty insurance policies to finance the related
premiums payable by the buyers to the insurance companies for the policies. At the time of
issuance, the 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. Although, 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, the Company’s management views the
TALF-eligible securitization as a mechanism to accelerate the Company’s growth plan, rather than
one essential to the maintenance of the Company’s “well capitalized” status.
Increased FDIC Insurance for Non-Interest-Bearing Transaction Accounts. Each of our bank
subsidiaries have also benefited from two federal programs which provide increased FDIC insurance
coverage for certain deposit accounts. From December 2008 until the termination of the program in
December 2010, our subsidiary banks participated in the FDIC’s Transaction Account Guarantee
(“TAG”) program, which provided unlimited FDIC insurance coverage for the entire account balance in
exchange for an additional insurance premium to be paid by the depository institution for certain
accounts with balances in excess of the current FDIC insurance limit of $250,000. Although the TAG
expired in 2010, the Dodd-Frank Act and implementing regulations issued by the FDIC presently
provide unlimited Federal insurance of the net amount of certain non-interest-bearing transaction
accounts at all insured depository institutions through December 31, 2012. After December 31, 2012,
depositors will receive Federal insurance up to the standard maximum deposit insurance amount of
$250,000, which increased amount was made permanent by the Dodd-Frank Act.
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Financial Regulatory Reform
In July 2010, the President signed into law the Dodd-Frank Act, which contains a comprehensive set
of provisions designed to govern the practices and oversight of financial institutions and other
participants in the financial markets. While final rulemaking under the Dodd-Frank Act will occur
over the course of several years, changes mandated by the Dodd-Frank Act, as well as other
legislative and regulatory changes, 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. These changes may also require us to
invest significant management attention and resources in order to comply with new statutory and
regulatory requirements. Given the uncertainty associated with the manner in which the provisions
of the Dodd-Frank Act will be implemented by the various regulatory agencies, the full extent of
the impact that such requirements will have on our operations is unclear.
The Dodd-Frank Act also addresses risks to the economy and the financial system. It contemplates
enhanced regulation of derivatives, restrictions on and additional disclosure of executive
compensation, additional corporate governance requirements, and oversight of credit rating
agencies. It also strengthens the ability of the regulatory agencies to supervise and examine bank
holding companies and their subsidiaries. Effective July 2011, the Dodd-Frank Act requires a bank
holding company that elects treatment as a financial holding company, including us, to be both
well-capitalized and well-managed in addition to the existing requirement that a financial holding
company’s subsidiary banks be well-capitalized and well-managed. Bank holding companies and banks
must also be both well-capitalized and well-managed in order to engage in interstate bank
acquisitions.
Among other things, the Dodd-Frank Act requires the issuance of new banking regulations regarding
the establishment of minimum leverage and risk-based capital requirements for bank holding
companies and banks. These regulations, which are required to be effective within 18 months from
the enactment of the Dodd-Frank Act, are required to be no less stringent than current capital
requirements applied to insured depository institutions and may, in fact, be higher when
established by the agencies. Although Wintrust’s outstanding trust preferred securities will remain
eligible for Tier 1 capital treatment, any future issuances of trust preferred securities will not
be Tier 1 capital. The Dodd-Frank Act also requires the regulatory agencies to seek to make capital
requirements for bank holding companies and insured institutions countercyclical, so that capital
requirements increase in times of economic expansion and decrease in
times of economic contraction. The Dodd-Frank Act may also require us to conduct annual stress
tests, in accordance with future regulations. Any such testing would result in increased compliance
costs.
Certain provisions of the Dodd-Frank Act have near-term effect on the Company. In particular,
effective one year from the date of enactment, the Dodd-Frank Act eliminates U.S. federal
prohibitions on paying interest on demand deposits, thus allowing businesses to have interest
bearing checking accounts. Depending upon market response, this change could have an adverse impact
on our interest expense. In addition, 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 deposit
insurance fund (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%. The FDIC adopted a final rule implementing these changes to
the DIF on February 7, 2011. The FDIC has indicated that these changes will generally not require
an increase in the level of assessments, and may result in decreased assessments, for depository
institutions (such as each of our bank subsidiaries) with less than $10 billion in assets.
In addition, the Dodd-Frank Act gave the Federal Reserve Board the authority to establish rules
regarding interchange fees charged for electronic debit transactions by payment card issuers, such
as our bank subsidiaries, and to enforce a new statutory requirement that such fees be reasonable
and proportional to the actual cost of a transaction to the issuer. The Federal Reserve recently
proposed capping such fees at seven to 12 cents, subject to adjustment for fraud prevention costs.
Additionally, the Dodd-Frank Act establishes the Bureau within the Federal Reserve, which will
regulate consumer financial products and services. On July 21, 2011, many of the consumer financial
protection functions currently assigned to the federal banking and other designated agencies will
shift to the Bureau. The Bureau will have broad rulemaking authority over a wide range of consumer
protection laws that apply to banks and thrifts, 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 that such markets are fair, transparent and competitive. In
particular, the Bureau may enact sweeping reforms in the mortgage broker industry which may
increase the costs of engaging in these activities for all market participants, including our
subsidiaries. The Bureau will have broad supervisory, examination and enforcement authority. In
addition, state attorneys general and other state officials will be authorized to enforce consumer
protection rules issued by the Bureau.
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The Dodd-Frank Act weakens federal preemption available for national banks and eliminates federal
preemption for subsidiaries of national banks, which may subject the Company’s national banks and
their subsidiaries, including WMC, to additional state regulation. With regard to mortgage
lending, the Dodd-Frank Act imposes new requirements regarding the origination and servicing of
residential mortgage loans. The law creates a variety of new consumer protections, including
limitations on the manner by which loan originators may be compensated and an obligation on the
part of lenders to assess and verify a borrower’s “ability to repay” a residential mortgage loan.
The Dodd-Frank Act also enhances provisions relating to affiliate and insider lending restrictions
and loans to one borrower limitations. Federal banking law currently limits a national bank’s
ability to extend credit to one person (or group of related persons) in an amount exceeding
certain thresholds. The Dodd-Frank Act expands the scope of these restrictions to include credit
exposure arising from derivative transactions, repurchase agreements, and securities lending and
borrowing transactions. It also eventually will prohibit state-chartered banks (including certain
of the Company’s banking subsidiaries) from engaging in derivative transactions unless the state
lending limit laws take into account credit exposure to such transactions.
Recent Actions Related to Capital and Liquidity
In December 2010 and January 2011, the Basel Committee on Banking
Supervision published reforms regarding changes to bank capital, leverage and liquidity requirements, commonly referred to
as “Basel III.” If implemented without change by U.S. banking regulators, the provisions of Basel III may have significant
impact on requirements including heightened requirements regarding Tier 1 common equity, and alterations to bank liquidity standards.
While the U.S. federal banking agencies have expressed support for the
Basel III initiative, implementation of any final provisions of Basel III in the U.S. will require implementing regulations and
guidelines by U.S. banking regulators, which may differ in significant ways from the recommendations published by the Basel Committee.
For example, it is unclear how U.S. banking regulators would define “well-capitalized” in any implementation of Basel III.
We are not able to predict at this time the content of capital and
liquidity guidelines or regulations that may be adopted by regulatory agencies having authority over us and our subsidiaries or the
impact that any changes in regulation would have on us. If new standards require us or our banking subsidiaries to maintain 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.
Acquisition of the Life Insurance Premium Finance Business
Overview
As previously described, on July 28, 2009 our subsidiary FIFC purchased the majority of the U.S.
life insurance premium finance assets of subsidiaries of American International Group, Inc. Life
insurance premium finance loans are generally used for estate planning purposes of high net worth
borrowers, and, as described below, are collateralized by life insurance policies and their related
cash surrender value and are often additionally secured by letters of credit, annuities, cash and
marketable securities.
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Credit Risk
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.
Fair Market Valuation at Date of Purchase and Allowance for Loan Losses
ASC 805, “Business Combinations” (ASC 805), requires acquired loans to be recorded at fair market
value. The application of ASC 805 requires incorporation of credit related factors directly into
the fair value of the loans recorded at the acquisition date, thereby eliminating separate
recognition of the acquired allowance for loan losses on the acquirer’s balance sheet.
Accordingly, the Company established a credit discount for each loan as part of the determination
of the fair market value of such loan in accordance with those accounting principles at the date
of acquisition. Any adverse changes in the deemed collectible nature of a loan would subsequently
be provided through a charge to the income statement through a provision for credit losses and a
corresponding establishment of an allowance for loan losses. There was no allowance for loan
losses associated with this portfolio of loans at December 31, 2010 compared to an allowance of
$615,000 at December 31, 2009.
FDIC-Assisted Transactions — Acquisition of Lincoln Park Bank, Wheatland Bank and Ravenswood Bank
On August 6, 2010, Northbrook Bank acquired the banking operations of Ravenswood in an
FDIC-assisted transaction. Northbrook Bank acquired assets with a fair value of approximately $174
million, and assumed liabilities with a fair value of approximately $123 million. Additionally, on
April 23, 2010, the Company acquired the banking operations of two entities in FDIC-assisted
transactions. Northbrook Bank acquired assets with a fair value of approximately $157 million and
assumed liabilities with a fair value of approximately $192 million of Lincoln Park. Wheaton Bank
acquired assets with a fair value of approximately $344 million and assumed liabilities with a fair
value of approximately $416 million of Wheatland.
Loans comprise the majority of the assets acquired in these transactions and are subject to loss
sharing agreements with the FDIC whereby the FDIC has agreed to reimburse the Company for 80% of
losses incurred on the purchased loans, other real estate owned (“OREO”), and certain other assets.
The Company refers to the loans subject to this loss-sharing agreements as “covered loans.” Covered
assets include covered loans, covered OREO and certain other covered assets. At each acquisition
date, the Company estimated the fair value of the reimbursable losses to be approximately $44.0
million for the Ravenswood acquisition, and $113.8 million for the Lincoln Park and Wheatland
acquisitions. The agreements with the FDIC require that the Company follow certain servicing
procedures or risk losing the FDIC reimbursement of covered asset losses.
The loans covered by the loss sharing agreements are classified and presented as covered loans and
the estimated reimbursable losses are recorded as FDIC indemnification asset, both in the
Consolidated Statements of Condition. The Company recorded the acquired assets and liabilities at
their estimated fair values at the acquisition date. The fair value for loans reflected expected
credit losses at the acquisition date, therefore the Company will only recognize a provision for
credit losses and charge-offs on the acquired loans for any further credit deterioration. These
transactions resulted in a bargain purchase gains of $33.3 million, $6.8 million for Ravenswood,
$22.3 million for Wheat-land, and $4.2 million for Lincoln Park, and is shown as a component of
non-interest income on the Company’s Consolidated Statements of Income.
The Company created a dedicated division in 2010, the Purchased Assets Division. Comprised of
experienced lenders and finance staff, the Purchased Asset Division is responsible for managing the
loan portfolios acquired in FDIC-assisted transactions in addition to managing the financial and
regulatory reporting of these transactions. For operations acquired in FDIC-assisted transactions,
detailed reporting needs to be submitted to the FDIC on at least a quarterly basis for any assets
which are subject to the loss-sharing agreements mentioned above. Reporting on the status of
covered assets may continue for five to ten years from the date of acquisition depending on the
type of assets acquired.
Acquisition of a branch of the First National Bank of Brookfield
On October 22, 2010, the Company’s wholly-owned subsidiary bank, Wheaton Bank, acquired a branch of
First National Bank of Brookfield that is located in Naperville, Illinois. Through this
transaction, Wheaton Bank acquired approximately $23 million of deposits, approximately $11 million
of performing loans, the property, bank facility and various other assets. This branch operates as
Naperville Bank & Trust.
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SUMMARY OF CRITICAL ACCOUNTING POLICIES
The Company’s Consolidated Financial Statements are prepared in accordance with generally accepted
accounting principles in the United States and prevailing practices of the banking industry.
Application of these principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying notes. Certain
policies and accounting principles inherently have a greater reliance on the use of estimates,
assumptions and judgments, and as such have a greater possibility that changes in those estimates
and assumptions could produce financial results that are materially different than originally
reported. Estimates, assumptions and judgments are necessary when assets and liabilities are
required to be recorded at fair value, when a decline in the value of an asset not carried on the
financial statements at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon a future event, are
based on information available as of the date of the financial statements; accordingly, as
information changes, the financial statements could reflect different estimates and assumptions.
A summary of the Company’s significant accounting policies is presented in Note 1 to the
Consolidated Financial Statements. These policies, along with the disclosures presented in the
other financial statement notes and in this Management’s Discussion and Analysis section, provide
information on how significant assets and liabilities are valued in the financial statements and
how those values are determined. Management views critical accounting policies to be those which
are highly dependent on subjective or complex judgments, estimates and assumptions, and where
changes in those estimates and assumptions could have a significant impact on the financial
statements. Management currently views critical accounting policies to include the determination
of the allowance for loan losses and the allowance for losses on lending-related commitments,
estimations of fair value, the valuations required for impairment testing of goodwill, the
valuation and accounting for derivative instruments and income taxes as the accounting areas that
require the most subjective and complex judgments, and as such could be most subject to revision
as new information becomes available.
Allowance for Loan Losses and Allowance for Losses on Lending-Related Commitments
The allowance for loan losses represents management’s estimate of probable credit losses inherent
in the loan portfolio. Determining the amount of the allowance for loan losses is considered a
critical accounting estimate because it requires significant judgment and the use of estimates
related to the amount and timing of expected future cash flows on impaired loans, estimated losses
on pools of homogeneous loans based on historical
loss experience, and consideration of current economic trends and conditions, all of which are
susceptible to significant change. The loan portfolio also represents the largest asset type on the
consolidated balance sheet. The Company also maintains an allowance for lending-related
commitments, specifically unfunded loan commitments and letters of credit, which relates to certain
amounts the Company is committed to lend but for which funds have not yet been disbursed. See Note
1 to the Consolidated Financial Statements and the section titled “Credit Risk and Asset Quality”
later in this report for a description of the methodology used to determine the allowance for loan
losses and the allowance for lending-related commitments.
Estimations of Fair Value
A portion of the Company’s assets and liabilities are carried at fair value on the Consolidated
Statements of Condition, with changes in fair value recorded either through earnings or other
comprehensive income in accordance with applicable accounting principles generally accepted in the
United States. These include the Company’s trading account securities, available-for-sale
securities, derivatives, mortgage loans held-for-sale, mortgage servicing rights and retained
interests from the sale of premium finance receivables. The estimation of fair value also affects
certain other mortgage loans held-for-sale, which are not recorded at fair value but at the lower
of cost or market. The determination of fair value is important for certain other assets,
including goodwill and other intangible assets, impaired loans, and other real estate owned that
are periodically evaluated for impairment using fair value estimates.
Fair value is generally defined as the amount at which an asset or liability could be exchanged in
a current transaction between willing, unrelated parties, other than in a forced or liquidation
sale. Fair value is based on quoted market prices in an active market, or if market prices are not
available, is estimated using models employing techniques such as matrix pricing or discounting
expected cash flows. The significant assumptions used in the models, which include assumptions for
interest rates, discount rates, prepayments and credit losses, are independently verified against
observable market data where possible. Where observable market data is not available, the estimate
of fair value becomes more subjective and involves a high degree of judgment. In this circumstance,
fair value is estimated based on management’s judgment regarding the value that market participants
would assign to the asset or liability. This valuation process takes into consideration factors
such as market illiquidity. Imprecision in estimating these factors can impact the amount recorded
on the balance sheet for a particular asset or liability with related impacts to earnings or other
comprehensive income. See Note 23 to the Consolidated Financial Statements later in this report for
a further discussion of fair value measurements.
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Table of Contents
Impairment Testing of Goodwill
The Company performs impairment testing of goodwill on an annual basis or more frequently when
events warrant. Valuations are estimated in good faith by management through the use of publicly
available valuations of comparable entities or discounted cash flow models using internal
financial projections in the reporting unit’s business plan.
The goodwill impairment analysis involves a two-step process. The first step is a comparison of the
reporting unit’s fair value to its carrying value. If the carrying value of a reporting unit was
determined to have been higher than its fair value, the second step would have to be performed to
measure the amount of impairment loss. The second step allocates the fair value to all of the
assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a
hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair
value of goodwill is less than the recorded goodwill, the Company would record an impairment charge
for the difference.
The goodwill impairment analysis requires management to make subjective judgments in determining if
an indicator of impairment has occurred. Events and factors that may significantly affect the
analysis include: a significant decline in the Company’s expected future cash flows, a substantial
increase in the discount factor, a sustained, significant decline in the Company’s stock price and
market capitalization, a significant adverse change in legal factors or in the business climate.
Other factors might include changing competitive forces, customer behaviors and attrition, revenue
trends, cost structures, along with specific industry and market conditions. Adverse change in
these factors could have a significant impact on the recoverability of intangible assets and could
have a material impact on the Company’s consolidated financial statements.
Derivative Instruments
The Company utilizes derivative instruments to manage risks such as interest rate risk or market
risk. The Company’s policy prohibits using derivatives for speculative purposes.
Accounting for derivatives differs significantly depending on whether a derivative is designated
as a hedge, which is a transaction intended to reduce a risk associated with a specific asset or
liability or future expected cash flow at the time it is purchased. In order to qualify as a
hedge, a derivative must be designated as such by management. Management must also continue to
evaluate whether the instrument effectively reduces the risk associated with that item. To
determine if a derivative instrument continues to be an effective hedge, the Company must make
assumptions and judgments about the continued effectiveness of the hedging strategies and the
nature and timing of forecasted transactions. If the Company’s hedging strategy were to become
ineffective, hedge accounting would no longer apply and the reported results of operations or
financial condition could be materially affected.
Income Taxes
The Company is subject to the income tax laws of the U.S., its states and other jurisdictions where
it conducts business. These laws are complex and subject to different interpretations by the
taxpayer and the various taxing authorities. In determining the provision for income taxes,
management must make judgments and estimates about the application of these inherently complex
laws, related regulations and case law. In the process of preparing the Company’s tax returns,
management attempts to make reasonable interpretations of the tax laws. These interpretations are
subject to challenge by the tax authorities upon audit or to reinterpretation based on management’s
ongoing assessment of facts and evolving case law. Management reviews its uncertain tax positions
and recognition of the benefits of such positions on a regular basis.
On a quarterly basis, management assesses the reasonableness of its effective tax rate based upon
its current best estimate of net income and the applicable taxes expected for the full year.
Deferred tax assets and liabilities are reassessed on a quarterly basis, if business events or
circumstances warrant.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion of Wintrust’s results of operations requires an understanding that a
majority of the Company’s bank subsidiaries have been started as new banks since December 1991.
Wintrust is still a relatively young company that has a strategy of continuing to build its
customer base and securing broad product penetration in each marketplace that it serves. The
Company has expanded its banking franchise from three banks with five offices in 1994 to 15 banks
with 86 offices at the end of 2010. FIFC has matured from its limited operations in 1991 to a
company that generated, on a national basis, $3.7 billion in premium finance receivables in 2010.
In addition, the wealth management companies have been building a team of experienced professionals
who are located within a majority of the banks. These expansion activities have understandably
suppressed faster, opportunistic earnings. However, as the Company matures and its existing banks
become more profitable, the start-up costs associated with bank and branch openings and other new
financial services ventures will not have as significant an impact on earnings as in prior periods.
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Earnings Summary
Net income for the year ended December 31, 2010, totaled $63.3 million, or $1.02 per diluted
common share, compared to $73.1 million, or $2.18 per diluted common share, in 2009, and $20.5
million, or $0.76 per diluted common share, in 2008. During 2010, net income decreased by $9.8
million while earnings per diluted common share decreased by $1.16. During 2009, net income
increased by $52.6 million while earnings per diluted common share increased by $1.42. Financial
results in 2010 decreased from 2009 as a result of fewer bargain purchase gains in 2010 partially
offset by increases in interest income on loans as well as decreases in the provision for credit
losses. Financial results in 2009 were driven by growth in earning assets, gains on bargain
purchases of acquired life insurance premium finance loans, record mortgage banking revenues,
partially offset by higher provision for credit losses, FDIC insurance premiums, and OREO
expenses.
Net Interest Income
The primary source of the Company’s 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 the liabilities to fund those assets, including interest bearing deposits and
other borrowings. The amount of net interest income is affected by both changes in the level of
interest rates and the amount and composition of earning assets and interest bearing liabilities.
In order to compare the tax-exempt asset yields to taxable yields, interest income in the
following discussion and tables is adjusted to tax-equivalent yields based on the marginal
corporate Federal tax rate of 35%.
Tax-equivalent net interest income in 2010 totaled $417.6 million, up from $314.1 million in 2009
and $247.1 million in 2008, representing an increase of $103.5 million, or 33%, in 2010 and an
increase of $67.0 million, or 27%, in 2009. The table presented later in this section, titled
“Changes in Interest Income and Expense,” presents the dollar amount of changes in interest income
and expense, by major category, attributable to changes in the volume of the balance sheet category
and changes in the rate earned or paid with respect to that category of assets or liabilities for
2010 and 2009. Average earning assets increased $2.0 billion, or 19%, in 2010 and $1.6 billion, or
19%, in 2009. Loans are the most significant component of the earning asset base as they earn
interest at a higher rate than the other earning assets. Average loans, excluding covered loans,
increased $1.1 billion, or 14%, in 2010 and $1.1 billion, or 15%, in 2009. Total average loans,
excluding covered loans, as a percentage of total average earning assets were 76%, 80% and 82% in
2010, 2009 and 2008, respectively. The average yield on loans, excluding covered loans, was 5.67%
in 2010, 5.59% in 2009 and 6.13% in 2008, reflecting an increase of 8 basis points in 2010
and a decrease of 54 basis points in 2009. The higher loan yield in 2010 compared to 2009 resulted
primarily from higher accretion on the purchased life insurance portfolio as more prepayments
occurred in 2010. The lower loan yield in 2009 compared to 2008 was a result of the low interest
rate environment. The average rate paid on interest bearing deposits, the largest component of the
Company’s interest bearing liabilities, was 1.32% in 2010, 2.03% in 2009 and 3.13% in 2008,
representing a decrease of 71 basis points in 2010 and 110 basis points in 2009. The lower level
of interest bearing deposits rate in 2010 was due to downward re-pricing of retail deposits during
the year. The lower level of interest bearing deposits rate in 2009 was due to a record low
interest rate environment throughout the year compared to 2008. In 2008, the Company also expanded
its MaxSafe® suite of products (primarily certificates of deposit and money market accounts)
which, due to the Company’s fifteen individual bank charters, offer a customer higher FDIC
insurance than a customer can achieve at a single charter bank. These MaxSafe® products can
typically be priced at lower rates than other certificates of deposit or money market accounts due
to the convenience of obtaining the higher FDIC insurance coverage by visiting only one location.
Net interest margin, which reflects net interest income as a percent of average earning assets,
increased to 3.37% in 2010 compared to 3.01% in 2009. The increase in net interest margin in 2010
compared to 2009 was primarily caused by lower costs for interest-bearing deposits (increased net interest margin by
58 basis points), an additional $24.4 million of accretion on the purchased
life insurance portfolio as more prepayments occurred throughout 2010 (increased net interest
margin by 23 points) and lower costs for wholesale funding (increased net interest margin by 10 basis
points), offset by higher balances and lower yields on liquidity management assets, including the
negative impact of selling certain collateralized mortgage obligations (reduced net interest
margin by 33 basis points), lower yields on loans (reduced net interest margin by 17 basis points)
and lower contribution from net free funds (reduced net interest margin by five basis points).
Net interest income and net interest margin were also affected by amortization of valuation
adjustments to earning assets and interest-bearing liabilities of acquired businesses. Under the
acquisition method of accounting, assets and liabilities of acquired businesses are required to be
recognized at their estimated fair value at the date of acquisition. These valuation adjustments
represent the difference between the estimated fair value and the carrying value of assets and
liabilities acquired. These adjustments are amortized into interest income and interest expense
based upon the estimated remaining lives of the assets and liabilities acquired, typically on an
accelerated basis.
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Table of Contents
Average Balance Sheets, Interest Income and Expense, and Interest Rate Yields and Costs
The following table sets forth the average balances, the interest earned or paid thereon, and the
effective interest rate, yield or cost for each major category of interest-earning assets and
interest-bearing liabilities for the years ended December 31, 2010, 2009 and 2008. The yields and
costs include loan origination fees and certain direct origination costs that are considered
adjustments to yields. Interest income on non-accruing loans is reflected in the year that it is
collected, to the extent it is not applied to principal. Such amounts are not material to net
interest income or the net change in net interest income in any year. Non-accrual loans are
included in the average balances. Net interest income and the related net interest margin have
been adjusted to reflect tax-exempt income, such as interest on municipal securities and loans, on
a tax-equivalent basis. This table should be referred to in conjunction with this analysis and
discussion of the financial condition and results of operations (dollars in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Interest bearing deposits with banks |
$ | 1,202,750 | 5,171 | 0.43 | % | $ | 605,644 | 3,574 | 0.59 | % | $ | 28,677 | $ | 341 | 1.19 | % | ||||||||||||||||||||
Securities |
1,402,255 | 40,211 | 2.87 | 1,392,346 | 59,091 | 4.24 | 1,439,642 | 69,895 | 4.86 | |||||||||||||||||||||||||||
Federal funds sold and securities
purchased under resale agreements |
49,008 | 157 | 0.32 | 88,663 | 271 | 0.31 | 63,963 | 1,333 | 2.08 | |||||||||||||||||||||||||||
Total liquidity management assets
(1)(6) |
2,654,013 | 45,539 | 1.72 | 2,086,653 | 62,936 | 3.02 | 1,532,282 | 71,569 | 4.67 | |||||||||||||||||||||||||||
Other earning assets
(1)(2)(6) |
45,021 | 1,067 | 2.37 | 23,979 | 659 | 2.75 | 23,052 | 1,147 | 4.98 | |||||||||||||||||||||||||||
Loans, net of unearned income
(1)(3)(6) |
9,473,589 | 537,534 | 5.67 | 8,335,421 | 466,239 | 5.59 | 7,245,609 | 444,494 | 6.13 | |||||||||||||||||||||||||||
Covered loans |
232,206 | 10,695 | 4.61 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Total earning assets(6) |
12,404,829 | 594,835 | 4.80 | 10,446,053 | 529,834 | 5.07 | 8,800,943 | 517,210 | 5.88 | |||||||||||||||||||||||||||
Allowance for loan losses |
(111,503 | ) | (82,029 | ) | (57,656 | ) | ||||||||||||||||||||||||||||||
Cash and due from banks |
137,547 | 108,471 | 117,923 | |||||||||||||||||||||||||||||||||
Other assets |
1,125,739 | 942,827 | 892,010 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 13,556,612 | $ | 11,415,322 | $ | 9,753,220 | ||||||||||||||||||||||||||||||
Liabilities and Shareholders’ Equity |
||||||||||||||||||||||||||||||||||||
Deposits — interest bearing: |
||||||||||||||||||||||||||||||||||||
NOW accounts |
$ | 1,508,063 | 8,840 | 0.59 | % | $ | 1,136,008 | 8,168 | 0.72 | % | $ | 1,011,402 | $ | 13,101 | 1.30 | % | ||||||||||||||||||||
Wealth management deposits |
734,837 | 2,263 | 0.31 | 907,013 | 6,301 | 0.69 | 622,842 | 14,583 | 2.34 | |||||||||||||||||||||||||||
Money market accounts |
1,666,554 | 12,196 | 0.73 | 1,375,767 | 17,779 | 1.29 | 904,245 | 20,357 | 2.25 | |||||||||||||||||||||||||||
Savings accounts |
619,024 | 3,655 | 0.59 | 457,139 | 4,385 | 0.96 | 319,128 | 3,164 | 0.99 | |||||||||||||||||||||||||||
Time deposits |
4,881,472 | 96,825 | 1.98 | 4,543,154 | 134,626 | 2.96 | 4,156,600 | 168,232 | 4.05 | |||||||||||||||||||||||||||
Total interest bearing deposits |
9,409,950 | 123,779 | 1.32 | 8,419,081 | 171,259 | 2.03 | 7,014,217 | 219,437 | 3.13 | |||||||||||||||||||||||||||
Federal Home Loan Bank advances |
418,981 | 16,520 | 3.94 | 434,520 | 18,002 | 4.14 | 435,761 | 18,266 | 4.19 | |||||||||||||||||||||||||||
Notes payable and other borrowings |
229,569 | 5,943 | 2.59 | 258,322 | 7,064 | 2.73 | 387,377 | 10,718 | 2.77 | |||||||||||||||||||||||||||
Secured borrowings — owed to
securitization investors |
600,000 | 12,365 | 2.06 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Subordinated notes |
56,370 | 995 | 1.74 | 66,205 | 1,627 | 2.42 | 74,589 | 3,486 | 4.60 | |||||||||||||||||||||||||||
Junior subordinated debentures |
249,493 | 17,668 | 6.98 | 249,497 | 17,786 | 7.03 | 249,575 | 18,249 | 7.19 | |||||||||||||||||||||||||||
Total interest bearing liabilities |
10,964,363 | 177,270 | 1.61 | 9,427,625 | 215,738 | 2.29 | 8,161,519 | 270,156 | 3.31 | |||||||||||||||||||||||||||
Non-interest bearing deposits |
984,416 | 788,034 | 672,924 | |||||||||||||||||||||||||||||||||
Other liabilities |
255,698 | 117,871 | 139,340 | |||||||||||||||||||||||||||||||||
Equity |
1,352,135 | 1,081,792 | 779,437 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity |
$ | 13,556,612 | $ | 11,415,322 | $ | 9,753,220 | ||||||||||||||||||||||||||||||
Interest rate spread(4)(6) |
3.19 | % | 2.78 | % | 2.57 | % | ||||||||||||||||||||||||||||||
Net free funds/contribution (5) |
$ | 1,440,466 | 0.18 | % | $ | 1,018,428 | 0.23 | % | $ | 639,424 | 0.24 | % | ||||||||||||||||||||||||
Net interest income/Net interest margin (6) |
$ | 417,565 | 3.37 | % | $ | 314,096 | 3.01 | % | $ | 247,054 | 2.81 | % | ||||||||||||||||||||||||
| (1) | Interest income on tax-advantaged loans, trading account securities and securities reflects a tax-equivalent adjustment based on a marginal federal corporate tax rate of 35%. The total adjustments for the twelve months ended December 31, 2010 and 2009 were $1.7 million and $2.2 million, respectively. | |
| (2) | Other earning assets include brokerage customer receivables and trading account securities. | |
| (3) | Loans, net of unearned income, include mortgages held-for-sale and non-accrual loans. | |
| (4) | Interest rate spread is the difference between the yield earned on earning assets and the rate paid on interest-bearing liabilities. | |
| (5) | Net free funds are the difference between total average earning assets and total average interest-bearing liabilities. The estimated contribution to net interest margin from net free funds is calculated using the rate paid for total interest-bearing liabilities. | |
| (6) | See “Supplemental Financial Measures/Ratios” for additional information on this performance measure/ratio. |
48
Table of Contents
Changes In Interest Income and Expense
The following table shows the dollar amount of changes in interest income (on a tax-equivalent
basis) and expense by major categories of interest-earning assets and interest-bearing liabilities
attributable to changes in volume or rate for the periods indicated (in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 Compared to 2009 | 2009 Compared to 2008 | |||||||||||||||||||||||
| Change | Change | Change | Change | |||||||||||||||||||||
| Due to | Due to | Total | Due to | Due to | Total | |||||||||||||||||||
| Rate | Volume | Change | Rate | Volume | Change | |||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Interest bearing deposits with banks |
$ | (1,176 | ) | 2,773 | 1,597 | $ | (256 | ) | 3,490 | 3,234 | ||||||||||||||
Securities |
(19,188 | ) | 308 | (18,880 | ) | (8,441 | ) | (2,363 | ) | (10,804 | ) | |||||||||||||
Federal funds sold and securities purchased
under resale agreement |
8 | (122 | ) | (114 | ) | (1,434 | ) | 371 | (1,063 | ) | ||||||||||||||
Total liquidity management assets |
(20,356 | ) | 2,959 | (17,397 | ) | (10,131 | ) | 1,498 | (8,633 | ) | ||||||||||||||
Other earning assets |
(102 | ) | 510 | 408 | (530 | ) | 42 | (488 | ) | |||||||||||||||
Loans, net of unearned income |
6,758 | 64,537 | 71,295 | (40,751 | ) | 62,496 | 21,745 | |||||||||||||||||
Covered loans |
— | 10,695 | 10,695 | — | — | — | ||||||||||||||||||
Total interest income |
(13,700 | ) | 78,701 | 65,001 | (51,412 | ) | 64,036 | 12,624 | ||||||||||||||||
Interest expense: |
||||||||||||||||||||||||
Deposits — interest bearing: |
||||||||||||||||||||||||
NOW accounts |
(1,822 | ) | 2,494 | 672 | (6,366 | ) | 1,432 | (4,934 | ) | |||||||||||||||
Wealth management deposits |
(1,982 | ) | (2,056 | ) | (4,038 | ) | (13,058 | ) | 4,776 | (8,282 | ) | |||||||||||||
Money market accounts |
(8,806 | ) | 3,223 | (5,583 | ) | (10,659 | ) | 8,082 | (2,577 | ) | ||||||||||||||
Savings accounts |
(2,000 | ) | 1,270 | (730 | ) | (99 | ) | 1,320 | 1,221 | |||||||||||||||
Time deposits |
(48,078 | ) | 10,277 | (37,801 | ) | (47,950 | ) | 14,344 | (33,606 | ) | ||||||||||||||
Total interest expense — deposits |
(62,688 | ) | 15,208 | (47,480 | ) | (78,132 | ) | 29,954 | (48,178 | ) | ||||||||||||||
Federal Home Loan Bank advances |
(851 | ) | (631 | ) | (1,482 | ) | (173 | ) | (91 | ) | (264 | ) | ||||||||||||
Notes payable and other borrowings |
(398 | ) | (723 | ) | (1,121 | ) | 1,963 | (5,617 | ) | (3,654 | ) | |||||||||||||
Secured borrowings — owed to |
||||||||||||||||||||||||
securitization investors |
— | 12,365 | 12,365 | — | — | — | ||||||||||||||||||
Subordinated notes |
(413 | ) | (219 | ) | (632 | ) | (1,496 | ) | (364 | ) | (1,860 | ) | ||||||||||||
Junior subordinated debentures |
(118 | ) | — | (118 | ) | (407 | ) | (56 | ) | (463 | ) | |||||||||||||
Total interest expense |
(64,468 | ) | 26,000 | (38,468 | ) | (78,245 | ) | 23,826 | (54,419 | ) | ||||||||||||||
Net interest income |
$ | 50,768 | 52,701 | 103,469 | $ | 26,833 | 40,210 | 67,043 | ||||||||||||||||
The changes in net interest income are created by changes in both interest rates and volumes. In
the table above, volume variances are computed using the change in volume multiplied by the
previous year’s rate. Rate variances are computed using the change in rate multiplied by the
previous year’s volume. The change in interest due to both rate and volume has been allocated
between factors in proportion to the relationship of the absolute dollar amounts of the change in
each. The change in interest in 2009 compared to 2008 due to one less day resulting from the 2008
leap year has been allocated entirely to the change due to volume.
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Table of Contents
Non-Interest Income
Non-interest income totaled $192.2 million in 2010, $317.6 million in 2009 and $99.7 million in
2008, reflecting a decrease of 40% in 2010 compared to 2009 and an increase of 219% in 2009
compared to 2008.
The following table presents non-interest income by category for 2010, 2009 and 2008 (in
thousands):
| Years ended December 31, | 2010 compared to 2009 | 2009 compared to 2008 | ||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
Brokerage |
$ | 23,713 | 17,726 | 18,649 | $ | 5,987 | 34 | % | $ | (923 | ) | (5 | )% | |||||||||||||||
Trust and asset management |
13,228 | 10,631 | 10,736 | 2,597 | 24 | (105 | ) | (1 | ) | |||||||||||||||||||
Total wealth management |
36,941 | 28,357 | 29,385 | 8,584 | 30 | (1,028 | ) | (3 | ) | |||||||||||||||||||
Mortgage banking |
61,378 | 68,527 | 21,258 | (7,149 | ) | (10 | ) | 47,269 | 222 | |||||||||||||||||||
Service charges on deposit accounts |
13,433 | 13,037 | 10,296 | 396 | 3 | 2,741 | 27 | |||||||||||||||||||||
Gain on sales of premium
finance receivables |
— | 8,576 | 2,524 | (8,576 | ) | (100 | ) | 6,052 | 240 | |||||||||||||||||||
Gains
(losses) on available - for-sale securities |
9,832 | (268 | ) | (4,171 | ) | 10,100 | NM | 3,903 | 94 | |||||||||||||||||||
Fees from covered call options |
2,235 | 1,998 | 29,024 | 237 | 12 | (27,026 | ) | (93 | ) | |||||||||||||||||||
Gain on bargain purchases |
44,231 | 156,013 | — | (111,782 | ) | (72 | ) | 156,013 | NM | |||||||||||||||||||
Trading gains |
5,165 | 26,788 | (134 | ) | (21,623 | ) | (81 | ) | 26,922 | NM | ||||||||||||||||||
Other: |
||||||||||||||||||||||||||||
Bank Owned Life Insurance |
2,404 | 2,044 | 1,622 | 360 | 18 | 422 | 26 | |||||||||||||||||||||
Administrative services |
2,749 | 1,975 | 2,941 | 774 | 39 | (966 | ) | (33 | ) | |||||||||||||||||||
Miscellaneous |
13,792 | 10,600 | 6,933 | 3,192 | 30 | 3,667 | 53 | |||||||||||||||||||||
Total other |
18,945 | 14,619 | 11,496 | 4,326 | 30 | 3,123 | 27 | |||||||||||||||||||||
Total non-interest income |
$ | 192,160 | 317,647 | 99,678 | $ | (125,487 | ) | (40 | )% | $ | 217,969 | 219 | % | |||||||||||||||
| NM — Not Meaningful | ||
Wealth management is comprised of the trust and asset management revenue of the CTC, the asset
management fees, brokerage commissions, trading commissions and insurance product commissions at
WHI and WCM.
Brokerage revenue is directly impacted by trading volumes. In 2010, brokerage revenue totaled
$23.7 million, reflecting an increase of $6.0 million, or 34%, compared to 2009. The increase in
brokerage revenue can be attributed to the improvement in equity markets resulting in increased
customer trading activity. In 2009, brokerage revenue totaled $17.7 million reflecting a decrease
of $923,000, or 5%, compared to 2008 as a result of overall uncertainties surrounding the equity
markets in 2009.
Trust and asset management revenue totaled $13.2 million in 2010, an increase of $2.6 million, or
24%, compared to 2009. In 2009, trust and asset management fees totaled $10.6 million and
decreased $105,000, or 1%, compared to 2008. Trust and asset management fees are based primarily
on the market value of the assets under management or administration. Increased asset valuations
due to equity market improvements helped growth from trust and asset management activities in
2010. Starting in 2008 and continuing into 2009, decreased asset valuations due to equity market
declines hindered the revenue growth from trust and asset management activities.
Mortgage banking revenue includes revenue from activities related to originating, selling and
servicing residential real estate loans for the secondary market. Mortgage banking revenue totaled
$61.4 million in 2010, $68.5 million in 2009, and $21.3 million in 2008, reflecting a decrease of
$7.1 million, or 10%, in 2010, and an increase of $47.3 million, or 222%, in 2009. Mortgages
originated and sold totaled $3.7 billion in 2010 compared to $4.7 billion in 2009 and $1.6 billion
in 2008. The decrease in mortgage banking revenue in 2010 compared to 2009 resulted primarily from
an increase in loss indemnification claims, as described below, and lower origination volumes,
partially offset by higher margins on sales of loans primarily driven by utilizing mandatory
execution of forward commitments with investors in 2010. The Company enters into residential
mortgage loan sale agreements with investors in the normal course of business. 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 Company recognized an
additional $11.0 million of recourse expense related to loss indemnification claims in 2010 for
loans previously sold, an increase of $10.1 million over the $0.9 million of such expense recorded
in 2009. This liability for loans expected to be repurchased is based on trends in repurchase and
indemnification requests, actual loss experience, known and inherent risks in the loans that have
been sold, and current economic conditions.
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A summary of mortgage banking activities is shown below:
| Years Ended December 31, | ||||||||||||
| (Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Mortgage loans originated and sold |
$ | 3,746,127 | 4,666,506 | 1,553,929 | ||||||||
Mortgage loans serviced for others |
$ | 942,224 | 738,372 | 527,450 | ||||||||
Fair value of mortgage servicing rights (MSRs) |
$ | 8,762 | 6,745 | 3,990 | ||||||||
MSRs as a percentage of loans serviced |
0.93 | % | 0.91 | 0.76 | ||||||||
Gains on sales of loans and other fees |
$ | 75,303 | 71,495 | 23,622 | ||||||||
Mortgage servicing rights fair value adjustments |
(2,955 | ) | (2,031 | ) | (2,364 | ) | ||||||
Recourse obligation on loans previously sold |
(10,970 | ) | (937 | ) | — | |||||||
Total mortgage banking revenue |
$ | 61,378 | 68,527 | 21,258 | ||||||||
Gain on sales of loans and other fees as a percentage of loans sold |
2.01 | % | 1.53 | 1.52 | ||||||||
Service charges on deposit accounts totaled $13.4 million in 2010, $13.0 million in 2009 and $10.3
million in 2008, reflecting an increase of 3% in 2010 and 27% in 2009. The majority of deposit
service charges relate to customary fees on overdrawn accounts and returned items. The level of
service charges received is substantially below peer group levels, as management believes in the
philosophy of providing high quality service without encumbering that service with numerous
activity charges.
As a result of the new accounting requirements beginning January 1, 2010, loans transferred into
the securitization facility are accounted for as a secured borrowing rather than a sale.
Therefore, the Company no longer recognizes gains on sales of premium finance receivables for
loans transferred into the securitization. Gain on sales of premium finance receivables of $8.6
million in 2009 is mainly attributable to the transfer of $1.2 billion of premium finance
receivables — commercial to a revolving securitization during the year. The gain on sales of
premium finance receivables of $2.5 million in 2008 relate to the sale of premium finance
receivables to unrelated third parties.
The Company recognized $9.8 million of net gains on available-for-sale securities in 2010 compared
to a net loss of $268,000 in 2009 and a net loss of $4.2 million
in 2008. The net gains in 2010
primarily relate to the sale of certain collateralized mortgage obligations. Included in net gains
(losses) on available-for-sale securities are non-cash other-than-temporary-impairment (“OTTI”)
charges recognized in income. The Company did not have any OTTI charges in 2010. OTTI charges on
certain corporate debt investment securities were $2.6 million in 2009 and $8.2 million in 2008.
Fees from covered call option transactions totaled $2.2 million in 2010, $2.0 million in 2009 and
$29.0 million in 2008. The Company has typically written call options with terms of less than
three months against certain U.S. Treasury and agency securities held in its portfolio for
liquidity and other purposes. Historically, Management has effectively entered into these
transactions with the goal of enhancing its overall return on its investment portfolio by using
fees generated from these options to compensate for net interest margin compression. These option
transactions are designed to increase the total return associated with holding certain investment
securities and do not qualify as hedges pursuant to accounting guidance. In 2010 and 2009,
Management chose to engage in minimal covered call option activity due to lower than acceptable
security yields. In 2008, the interest rate environment was conducive to entering into a
significantly higher level of covered call option transactions. There were no outstanding call
option contracts at December 31, 2010, December 31, 2009 or December 31, 2008.
Gain on bargain purchases totaled $44.2 million in 2010, a decrease of $111.8 million from the
$156.0 million of bargain purchase gains recognized in 2009. In 2010, the gains on bargain
purchases primarily resulted from three FDIC-assisted bank acquisitions as well as the acquisition
of the life insurance premium finance receivable portfolio. In 2010, third party consents were
received and all remaining funds held in escrow for the purchase of the life insurance premium
finance receivable portfolio were released, resulting in recognition of the remaining deferred
bargain purchase gain. The gain on bargain purchase of $156.0 million recognized in 2009 resulted
from the acquisition of the life insurance premium finance receivable portfolio. See Note 8 —
Business Combinations for a discussion of the transaction and gain calculation.
The Company recognized $5.2 million of trading gains in 2010, $26.8 million in 2009 and a trading
loss of $134,000 in 2008. The decrease in trading gains in 2010 compared to 2009 resulted
primarily from realizing larger market value increases in 2009 on certain collateralized mortgage
obligations which were sold in July 2010. The Company purchased these securities at a significant
discount in
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the first quarter of 2009. These securities increased in value after their purchase due to market
spreads tightening, increased mortgage prepayments due to the favorable mortgage rate environment
and lower than projected default rates.
Bank owned life insurance (“BOLI”) generated non-interest income of $2.4 million in 2010, $2.0
million in 2009 and $1.6 million in 2008. This income typically represents adjustments to the cash
surrender value of BOLI policies. The Company initially purchased BOLI to consolidate existing
term life insurance contracts of executive officers and to mitigate the mortality risk associated
with death benefits provided for in executive employment contracts and in connection with certain
deferred compensation arrangements. The Company has also assumed additional BOLI since then as the
result of the acquisition of certain banks. The cash surrender value of BOLI totaled $92.2 million
at December 31, 2010 and $89.0 million at December 31, 2009, and is included in other assets.
Administrative services revenue generated by Tricom was $2.7 million in 2010, $2.0 million in 2009
and $2.9 million in 2008. This revenue comprises income from administrative services, such as data
processing of payrolls, billing and cash management services, to temporary staffing service
clients located throughout the United States. Tricom also earns interest and fee income from
providing high-yielding, short-term accounts receivable financing to this same client base, which
is included in the net interest income category.
Miscellaneous other non-interest income totaled $13.8 million in 2010, $10.6 million in 2009 and
$6.9 million in 2008. Miscellaneous income includes loan servicing fees, service charges, swap
fees and other fees. The increase in miscellaneous other income in recent years can be primarily
attributed to increases in ATM fees and swap fees.
Non-Interest Expense
Non-interest expense totaled $382.5 million in 2010, and increased $38.4 million, or 11%, compared
to 2009. In 2009, non-interest expense totaled $344.1 million, and increased $87.9 million, or
34%, compared to 2008.
The following table presents non-interest expense by category for 2010, 2009 and 2008 (in
thousands):
| Years ended December 31, | 2010 compared to 2009 | 2009 compared to 2008 | ||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | $ Change | % Change | $ Change | % Change | ||||||||||||||||||||||
Salaries and employee benefits: |
||||||||||||||||||||||||||||
Salaries |
$ | 120,210 | 108,847 | 95,172 | $ | 11,363 | 10 | % | $ | 13,675 | 14 | % | ||||||||||||||||
Commissions and bonus |
58,107 | 45,503 | 23,055 | 12,604 | 28 | 22,448 | 97 | |||||||||||||||||||||
Benefits |
37,449 | 32,528 | 26,860 | 4,921 | 15 | 5,668 | 21 | |||||||||||||||||||||
Total salaries and employee benefits |
215,766 | 186,878 | 145,087 | 28,888 | 15 | 41,791 | 29 | |||||||||||||||||||||
Equipment |
16,529 | 16,119 | 16,215 | 410 | 3 | (96 | ) | (1 | ) | |||||||||||||||||||
Occupancy, net |
24,444 | 23,806 | 22,918 | 638 | 3 | 888 | 4 | |||||||||||||||||||||
Data processing |
15,355 | 12,982 | 11,573 | 2,373 | 18 | 1,409 | 12 | |||||||||||||||||||||
Advertising and marketing |
6,315 | 5,369 | 5,351 | 946 | 18 | 18 | — | |||||||||||||||||||||
Professional fees |
16,394 | 13,399 | 8,824 | 2,995 | 22 | 4,575 | 52 | |||||||||||||||||||||
Amortization of other intangible assets |
2,739 | 2,784 | 3,129 | (45 | ) | (2 | ) | (345 | ) | (11 | ) | |||||||||||||||||
FDIC Insurance |
18,028 | 21,199 | 5,600 | (3,171 | ) | (15 | ) | 15,599 | 279 | |||||||||||||||||||
OREO expenses, net |
19,331 | 18,963 | 2,023 | 368 | 2 | 16,940 | NM | |||||||||||||||||||||
Other: |
||||||||||||||||||||||||||||
Commissions - 3rd party brokers |
4,003 | 3,095 | 3,769 | 908 | 29 | (674 | ) | (18 | ) | |||||||||||||||||||
Postage |
4,813 | 4,833 | 4,120 | (20 | ) | — | 713 | 17 | ||||||||||||||||||||
Stationery and supplies |
3,374 | 3,189 | 3,005 | 185 | 6 | 184 | 6 | |||||||||||||||||||||
Miscellaneous |
35,434 | 31,471 | 24,549 | 3,963 | 13 | 6,922 | 28 | |||||||||||||||||||||
Total other |
47,624 | 42,588 | 35,443 | 5,036 | 12 | 7,145 | 20 | |||||||||||||||||||||
Total non-interest expense |
$ | 382,525 | 344,087 | 256,163 | $ | 38,438 | 11 | % | $ | 87,924 | 34 | % | ||||||||||||||||
| NM — Not Meaningful | ||
Salaries and employee benefits is the largest component of non-interest expense, accounting for
56% of the total in 2010, 54% of the total in 2009 and 57% in 2008. For the year ended December
31, 2010, salaries and employee benefits totaled $215.8 million and increased $28.9 million, or
15%, compared to 2009. This increase can be attributed to a $12.6 million increase in commissions
and bonus as variable pay based revenue increased (primarily wealth management revenue and
mortgage banking revenue from gains on loans sold), an $11.4 million increase in salaries
resulting from additional employees from the three FDIC-assisted transactions and larger staffing
as the company grows, and a $4.9 million increase in employee benefits (primarily health plan
related). For the year
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ended December 31, 2009, salaries and employee benefits totaled $186.9 million, and increased
$41.8 million, or 29%, compared to 2008. Salaries and employee benefits increased in 2009 as
compared to 2008 as a result of a $22.4 million increase in commissions and bonus, a $13.7 million
increase in salaries and a $5.7 million increase in employee benefits. Specifically, WMC accounted
for approximately $22.0 million of the increase in variable pay commissions and bonus and
approximately $10.0 million of the increase in salaries, both primarily due to the increase in
mortgage origination volumes and the impact of the PMP transaction.
Equipment expense, which includes furniture, equipment and computer software, depreciation and
repairs and maintenance costs, totaled $16.5 million in 2010, $16.1 million in 2009 and $16.2
million in 2008, reflecting an increase of 3% in 2010 and a decrease of 1% in 2009.
Occupancy expense for the years 2010, 2009 and 2008 was $24.4 million, $23.8 million and $22.9
million, respectively, reflecting increases of 3% in 2010 and 4% in 2009. Occupancy expense
includes depreciation on premises, real estate taxes, utilities and maintenance of premises, as
well as net rent expense for leased premises. The increase in 2010 is primarily the result of rent
expense on additional leased premises and depreciation on owned locations which were obtained in
the three FDIC-asssisted acqusitions.
Data processing expenses totaled $15.4 million in 2010, $13.0 million in 2009 and $11.6 million in
2008, representing increases of 18% in 2010 and 12% in 2009. The increases are primarily due to
the overall growth of loan and deposit accounts as well as additional expenses incurred for
FDIC-assisted transactions in 2010.
Advertising and marketing expenses totaled $6.3 million for 2010, $5.4 million for 2009 and $5.4
million for 2008. Marketing costs are necessary to promote the Company’s commercial banking
capabilities, the Company’s MaxSafe® suite of products, to announce new branch openings as well as
the expansion of the wealth management business, to continue to promote community-based products
and to attract loans and deposits. The level of marketing expenditures depends on the type of
marketing programs utilized which are determined based on the market area, targeted audience,
competition and various other factors. Management continues to utilize mass market media
promotions as well as targeted marketing programs in certain market areas.
Professional fees include legal, audit and tax fees, external loan review costs and normal
regulatory exam assessments. These fees totaled $16.4 million in 2010, $13.4 million in 2009 and
$8.8 million in 2008. The increases for 2010 and 2009 are primarily related to increased legal
costs related to non-performing assets and acquisition related activities.
Amortization of other intangibles assets relates to the amortization of core deposit premiums and
customer list intangibles established in connection with certain business combinations. See Note 9
of the Consolidated Financial Statements for further information on these intangible assets.
FDIC insurance totaled $18.0 million in 2010, $21.2 million in 2009 and $5.6 million in 2008. The
decrease in 2010 compared to 2009 is a result of an industry-wide special assessment imposed on
financial institutions by the FDIC in the second quarter of 2009. Additionally, on December 30,
2009, FDIC insured institutions were required to prepay 13 quarters of estimated deposit insurance
premiums. The Company recorded the prepaid deposit insurance premiums as an asset and is expensing
them over the three year assessment period.
OREO expenses include all costs associated with obtaining, maintaining and selling other real
estate owned properties. This expense was $19.3 million in 2010, $19.0 million in 2009, and $2.0
million in 2008. While relatively unchanged in 2010 compared to 2009, OREO expenses increased
significantly in 2009 compared to 2008 due to the declining real estate market which resulted in a
higher number of OREO properties as well as losses on sales of OREO properties.
Commissions paid to third party brokers primarily represent the commissions paid on revenue
generated by WHI through its network of unaffiliated banks. The increase in this expense
corresponds with the increase in brokerage revenue.
Miscellaneous non-interest expense includes ATM expenses, correspondent banking charges,
directors’ fees, telephone, travel and entertainment, corporate insurance, dues and subscriptions
and lending origination costs that are not deferred. This category increased $4.0 million, or 13%,
in 2010 and increased $6.9 million, or 28%, in 2009. The increase in 2010 compared to 2009 is
mainly attributable to the general growth in the Company’s business. The increase in 2009 compared
to 2008 is primarily attributable to increased loan expenses related to mortgage banking
activities, a higher level of problem loan expenses and general growth in the Company’s business.
Income Taxes
The Company recorded income tax expense of $37.5 million in 2010, $44.4 million in 2009 and $10.2
million in 2008. The effective tax rates were 37.2%, 37.8% and 33.1% in 2010, 2009 and 2008,
respectively. The lower effective tax rate in 2008 compared to 2009 and 2010 is primarily a result
of a lower level of pre-tax net income in 2008 relative to tax-advantaged earnings than in 2009 and
2010. Please refer to Note 18 to the Consolidated Financial Statements for further discussion and
analysis of the Company’s tax position, including a reconciliation of the tax expense computed at
the statutory tax rate to the Company’s actual tax expense.
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Operating Segment Results
As described in Note 25 to the Consolidated Financial Statements, the Company’s operations consist
of three primary segments: community banking, specialty finance and wealth management. The
Company’s profitability is primarily dependent on the net interest income, provision for credit
losses, non-interest income and operating expenses of its community banking segment. The net
interest income of the community banking segment includes interest income and related interest
costs from portfolio loans that were purchased from the specialty finance segment. For purposes of
internal segment profitability analysis, management reviews the results of its specialty finance
segment as if all loans originated and sold to the community banking segment were retained within
that segment’s operations. Similarly, for purposes of analyzing the contribution from the wealth
management segment, management allocates a portion of the net interest income earned by the
community banking segment on deposit balances of customers of the wealth management segment to the
wealth management segment. (See “wealth management deposits” discussion in the Deposits and Other
Funding Sources section of this report for more information on these deposits.)
The community banking segment’s net interest income for the year ended December 31, 2010 totaled
$386.6 million as compared to $300.6 million for the same period in 2009, an increase of $86.0
million, or 29%. The increase in 2010 compared to 2009 was primarily attributable to the three
FDIC-assisted bank acquisitions and the ability to gather interest-bearing deposits at more
reasonable rates. The increase in net interest income in 2009 when compared to the total of $237.4
million in 2008 was $63.2 million, or 27%. The increase in 2009 compared to 2008 was primarily
attributable to the acquisition of the life insurance premium finance portfolio and lower costs of
interest-bearing deposits. Total loans, excluding covered loans, increased 5% in 2010, and 18% in
2009. Provision for credit losses decreased to $105.0 million in 2010 compared to $165.3 million in
2009 and $56.6 million in 2008. Provision for credit losses decreased in 2010 compared to 2009
because of improved credit quality ratios in 2010. The community banking segment’s non-interest
income totaled $133.1 million in 2010, an increase of $40.5 million, or 44%, when compared to the
2009 total of $92.6 million. This increase was primarily attributable to bargain purchase gains
from the three FDIC-assisted acquisitions. In 2009, non-interest income for the community banking
segment increased $21.4 million, or 30% when compared to the
2008 total of $71.2 million. This
increase was primarily attributable to an increase in mortgage banking revenue offset by lower
levels of fees from covered call options. The community banking segment’s net income for the year
ended December 31, 2010 totaled $71.4 million, an increase of $97.3 million, compared to a net loss
of $25.9 million in 2009. Net loss for the year ended December 31, 2009 of $25.9 million was a
$63.9 million decrease in net income as compared to net income in 2008 of $38.0 million.
The specialty finance segment’s net interest income totaled $89.9 million for the year ended
December 31, 2010, an increase of $20.0 million, or 29%, over the $69.9 million in 2009. The
decrease in net interest income in 2009 when compared to the total of $74.3 million in 2008 was
$4.4 million, or 6%. The specialty finance segment’s non-interest income totaled $13.6 million for
the year ended December 31, 2010 and decreased $148.5 million from the $162.1 million in 2009. The
decrease in non-interest income in 2010 is primarily a result of the bargain purchase gain
recognized in 2009 from the acquisition of the life insurance premium finance receivable portfolio
and the gains recognized on the securitization of commercial premium finance receivables. See the
“Overview and Strategy – Specialty Finance” section of this report and Note 8 of the Consolidated
Financial Statements for a discussion of the bargain purchase. Net after-tax profit of the
specialty finance segment totaled $45.6 million, $120.4 million and $34.9 million for the years
ended December 31, 2010, 2009 and 2008, respectively. The decrease in net income in 2010 compared
to 2009 is a result of the life insurance premium finance receivable bargain purchase gain in 2009
and, 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 our premium financing subsidiary,
which increased the provision for credit losses by $15.7 million.
The
wealth management segment reported net interest income of
$12.3 million for 2010 and 2009 compared to $10.4 million for 2008. Net interest income is comprised of the net
interest earned on brokerage customer receivables at WHI and an allocation of a portion of the net
interest income earned by the community banking segment on non-interest bearing and
interest-bearing wealth management customer account balances on deposit at the banks. The allocated
net interest income included in this segment’s profitability was $11.8 million ($7.3 million after
tax) in 2010, $11.8 million ($7.3 million after tax) in 2009 and $9.4 million ($5.9 million after
tax) in 2008. The increase in 2009 compared to 2008 is mainly due to the equity market improvements
that have helped revenue growth from trust and asset management activities. During the fourth
quarter of 2009, the contribution attributable to the wealth management deposits was redefined to
measure the value as an alternative source of funding for each bank. In previous periods, the
contribution from these deposits was measured as the full net interest income contribution. The
redefined measure better reflects the value of these deposits to the Company.
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Wealth management customer account balances on deposit at the banks averaged $617.4 million,
$634.4 million and $624.4 million in 2010, 2009 and 2008, respectively. This segment recorded
non-interest income of $45.4 million for 2010 as compared to $38.3 million for 2009 and $36.3
million for 2008. Distribution of wealth management services through each bank continues to be a
focus of the Company as the number of brokers in its banks continues to increase. Wintrust is
committed to growing the wealth management segment in order to better service its customers and
create a more diversified revenue stream. This segment reported net income of $6.9 million for
2010 compared to $5.6 million for 2009 and $5.3 million for 2008.
ANALYSIS OF FINANCIAL CONDITION
Total assets were $14.0 billion at December 31, 2010, representing an increase of $1.8 billion, or
14%, when compared to December 31, 2009. Total funding, which includes deposits, all notes and
advances, including secured borrowings and the junior subordinated debentures, was $12.4 billion
at December 31, 2010 and $10.9 billion at December 31, 2009. See Notes 3, 4, and 11 through 15 of
the Consolidated Financial Statements for additional period-end detail on the Company’s
interest-earning assets and funding liabilities.
Interest-Earning Assets
The following table sets forth, by category, the composition of average earning assets and the
relative percentage of each category to total average earning assets for the periods presented
(dollars in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Average | Percent | Average | Percent | Average | Percent | |||||||||||||||||||
| Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||
Loans: |
||||||||||||||||||||||||
Commercial |
$ | 1,828,897 | 15 | % | $ | 1,584,868 | 15 | % | $ | 1,359,600 | 15 | % | ||||||||||||
Commercial real estate |
3,332,850 | 27 | 3,405,136 | 33 | 3,220,924 | 37 | ||||||||||||||||||
Home equity |
922,907 | 7 | 919,233 | 9 | 772,361 | 9 | ||||||||||||||||||
Residential real estate (1) |
587,629 | 5 | 503,910 | 5 | 335,714 | 4 | ||||||||||||||||||
Premium finance receivables (2) |
2,622,935 | 21 | 1,653,786 | 16 | 1,178,421 | 13 | ||||||||||||||||||
Indirect consumer loans |
70,295 | 1 | 134,757 | 1 | 215,453 | 2 | ||||||||||||||||||
Other loans |
108,076 | 1 | 133,731 | 1 | 163,136 | 2 | ||||||||||||||||||
Total loans, net of unearned income
excluding covered loans (3) |
9,473,589 | 77 | 8,335,421 | 80 | 7,245,609 | 82 | ||||||||||||||||||
Covered loans |
232,206 | 2 | — | — | — | — | ||||||||||||||||||
Total loans, net of
unearned income (3) |
9,705,795 | 79 | 8,335,421 | 80 | 7,245,609 | 82 | ||||||||||||||||||
Liquidity
management assets (4) |
2,654,013 | 21 | 2,086,653 | 20 | 1,532,282 | 18 | ||||||||||||||||||
Other earning assets (5) |
45,021 | — | 23,979 | — | 23,052 | — | ||||||||||||||||||
Total average earning assets |
$ | 12,404,829 | 100 | % | $ | 10,446,053 | 100 | % | $ | 8,800,943 | 100 | % | ||||||||||||
Total average assets |
$ | 13,556,612 | $ | 11,415,322 | $ | 9,753,220 | ||||||||||||||||||
Total average earning assets to
total average assets |
92 | % | 92 | % | 90 | % | ||||||||||||||||||
| (1) | Includes mortgage loans held-for-sale | |
| (2) | Includes premium finance receivables held-for-sale | |
| (3) | Includes mortgage loans held-for-sale, premium finance receivables held-for-sale and non-accrual loans | |
| (4) | Liquidity management assets include available-for-sale securities, other securities, interest earning deposits with banks, federal funds sold and securities purchased under resale agreements | |
| (5) | Other earning assets include brokerage customer receivables and trading account securities |
Average earning assets increased $2.0 billion, or 19%, in 2010 and $1.6 billion, or 19%, in 2009.
Average earning assets comprised 92% of average total assets in 2010 and 2009, and 90% of average
total assets in 2008.
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Loans.
Average total loans, net of unearned income, totaled $9.7 billion
and increased $1.4 billion, or 16%, in 2010 and
$1.1 billion, or 15%, in 2009. Average commercial loans totaled $1.8 billion in 2010, and increased
$244.0 million, or 15%, over the average balance in 2009, while average commercial real estate
loans totaled $3.3 billion in 2010, slightly decreasing $72.3 million, or 2%, since 2009. From 2008
to 2009, average commercial loans increased $225.3 million, or 17%, while average commercial real
estate loans increased $184.2 million, or 6%. The growth realized in these categories for 2010 and
2009 is primarily attributable to increased business development efforts. Combined, these
categories comprised 42% of the average loan portfolio in 2010 and 48% in 2009.
Home equity loans averaged $922.9 million in 2010, and increased $3.7 million, or 0.4%, when
compared to the average balance in 2009. Home equity loans averaged $919.2 million in 2009, and
increased $146.9 million, or 19%, when compared to the average balance in 2008. Unused commitments
on home equity lines of credit totaled $829.9 million at December 31, 2010 and $854.2 million at
December 31, 2009. The 19% increase in average home equity loans in 2009 was primarily a result of
new loan originations and borrowers exhibiting a greater propensity to borrow on their existing
lines of credit. As a result of economic conditions, the Company has been actively managing its
home equity portfolio to ensure that diligent pricing, appraisal and other underwriting activities
continue to exist.
Residential real estate loans averaged $587.6 million in 2010, and increased $83.7 million, or 17%,
from the average balance in 2009. In 2009, residential real estate loans averaged $503.9 million,
and increased $168.2 million, or 50%, from the average balance of $335.7 million in 2008. This
category includes mortgage loans held-for-sale. By selling residential mortgage loans into the
secondary market, the Company eliminates the interest-rate risk associated with these loans, as
they are predominantly long-term fixed rate loans, and provides a source of non-interest revenue.
The majority of the increase in residential mortgage loans in the last two years is a result of
higher mortgage loan originations. The increase in originations resulted from the interest rate
environment and the positive impact of the PMP transaction, completed at the end of 2008.
Average premium finance receivables totaled $2.6 billion in 2010, and accounted for 21% of the
Company’s average total loans. In 2010, average premium finance receivables increased $969.1
million, or 59%, from the average balance of $1.7 billion in 2009. In 2009, average premium finance
receivables increased $475.4 million, or 40%, compared to 2008. The increase in the average balance
of premium finance receivables in 2010 is a result of recording the securitization receivables on
the statement of condition effective January 1, 2010 and significant originations within the
portfolio during the period. The increase in the average balance of premium finance receivables in
2009 compared to 2008 is primarily a result of FIFC’s purchase of a portfolio of domestic life
insurance premium finance loans in 2009 with a fair value of $910.9 million. Historically, the
majority of premium finance receivables, commercial and life insurance, were 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. FIFC originations of commercial premium finance
receivables that were not purchased by the banks were typically sold to unrelated third parties
with servicing retained. During the third quarter of 2009, FIFC initially 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 commercial
premium finance receivables in a securitization transaction sponsored by FIFC. Under the terms of
the securitization, FIFC has the right, but not the obligation, to securitize additional
receivables in the future and is responsible for the servicing, administration and collection of
securitized receivables and related security in accordance with FIFC’s credit and collection
policy. FIFC’s obligations under the securitization are subject to customary covenants, including
the obligation to file and amend financing statements; the obligation to pay costs and expenses;
the obligation to indemnify other parties for its breach or failure to perform; the obligation to
defend the right, title and interest of the transferee of the conveyed receivables against third
party claims; the obligation to repurchase the securitized receivables if certain representations
fail to be true and correct and receivables are materially and adversely affected thereby; the
obligation to maintain its corporate existence and licenses to operate; and the obligation to
qualify the securitized notes under the securities laws. In the event of a default by FIFC under
certain of these obligations, the ability to add loans to securitization facility could terminate.
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Indirect consumer loans are comprised primarily of automobile loans originated at Hinsdale Bank.
These loans are financed from networks of unaffiliated automobile dealers located throughout the
Chicago metropolitan area with which the Company had established relationships. The risks
associated with the Company’s portfolios are diversified among many individual borrowers. Like
other consumer loans, the indirect consumer loans are subject to the banks’ established credit
standards. Management regards substantially all of these loans as prime quality loans. In the third
quarter of 2008, as a result of competitive pricing pressures, the Company ceased the origination
of indirect automobile loans through Hinsdale Bank. However, as a result of current favorable
pricing opportunities coupled with reduced competition in the indirect consumer automobile lending
business, the Company re-entered this business with originations through Hinsdale Bank in the
fourth quarter of 2010. At December 31, 2010, the average maturity of indirect automobile loans is
estimated to be approximately 27 months. During 2010, 2009 and 2008 average indirect consumer loans
totaled $70.3 million, $134.8 million and $215.5 million, respectively.
Other loans represent a wide variety of personal and consumer loans to individuals as well as
high-yielding short-term accounts receivable financing to clients in the temporary staffing
industry located throughout the United States. Consumer loans generally have shorter terms and
higher interest rates than mortgage loans but generally involve more credit risk due to the type
and nature of the collateral. Additionally, short-term accounts receivable financing may also
involve greater credit risks than generally associated with the loan portfolios of more traditional
community banks depending on the marketability of the collateral.
Covered loans represent loans acquired in FDIC-assisted transactions in the second and third
quarters of 2010. These loans are subject to loss sharing agreements with the FDIC. The FDIC has
agreed to reimburse the Company for 80% of losses incurred on the purchased loans, foreclosed real
estate, and certain other assets. See Note 8 — Business Combinations for a discussion of these
acquisitions.
Liquidity Management Assets. Funds that are not utilized for loan originations are used to purchase
investment securities and short-term money market investments, to sell as federal funds and to
maintain in interest-bearing deposits with banks. The balances of these assets fluctuate frequently
based on deposit inflows, the level of other funding services and loan demand. Average liquidity
management assets accounted for 21% of total average earning assets in 2010, 20% in 2009 and 18% in
2008. Average liquidity management assets increased $567.4 million in 2010 compared to 2009, and
increased $554.4 million in 2009 compared to 2008. The balances of liquidity management assets can
fluctuate based on management’s ongoing effort to manage liquidity and for asset liability
management purposes.
Other earning assets. Other earning assets include brokerage customer receivables and trading
account securities at WHI. In the normal course of business, WHI activities involve the execution,
settlement, and financing of various securities transactions. WHI’s customer securities activities
are transacted on either a cash or margin basis. In margin transactions, WHI, under an agreement
with the out-sourced securities firm, extends credit to its customers, subject to various
regulatory and internal margin requirements, collateralized by cash and securities in customer’s
accounts. In connection with these activities, WHI executes and the out-sourced firm clears
customer transactions relating to the sale of securities not yet purchased, substantially all of
which are transacted on a margin basis subject to individual exchange regulations. Such
transactions may expose WHI to off-balance-sheet risk, particularly in volatile trading markets, in
the event margin requirements are not sufficient to fully cover losses that customers may incur. In
the event a customer fails to satisfy its obligations, WHI under an agreement with the outsourced
securities firm, may be required to purchase or sell financial instruments at prevailing market
prices to fulfill the customer’s obligations. WHI seeks to control the risks associated with its
customers’ activities by requiring customers to maintain margin collateral in compliance with
various regulatory and internal guidelines. WHI monitors required margin levels daily and, pursuant
to such guidelines, requires customers to deposit additional collateral or to reduce positions when
necessary.
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Deposits and Other Funding Sources
The dynamics of community bank balance sheets are generally dependent upon the ability of
management to attract additional deposit accounts to fund the growth of the institution. As the
banks and branch offices are still relatively young, the generation of new deposit relationships to
gain market share and establish themselves in the community as the bank of choice is particularly
important. When determining a community to establish a de novo bank, the Company generally will
enter a community where it believes the new bank can gain the number one or two position in deposit
market share. This is usually accomplished by initially paying competitively high deposit rates to
gain the relationship and then by introducing the customer to the Company’s unique way of providing
local banking services.
Deposits. Total deposits at December 31, 2010, were $10.8 billion, increasing $886.6 million, or
9%, compared to the $9.9 billion at December 31, 2009. Average deposit balances in 2010 were $10.4
billion, reflecting an increase of $1.2 billion, or 13%, compared to the average balances in 2009.
During 2009, average deposits increased $1.5 billion, or 20%, compared to the prior year.
The increase in year end and average deposits in 2010 over 2009 reflects the Company’s efforts to
increase its deposit base. During 2010, a majority of the increase can be attributed to the
Company’s acqusitions including approximately $400 million of deposits in the Wheatland
acquisition, approximately $160 million of deposits in the Lincoln Park acquisition and
approximately $120 million of deposits in the Ravenswood acquisition.
The following table presents the composition of average deposits by product category for each of
the last three years (dollars in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Average | Percent | Average | Percent | Average | Percent | |||||||||||||||||||
| Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||
Non-interest bearing deposits |
$ | 984,416 | 9 | % | $ | 788,034 | 9 | % | $ | 672,924 | 9 | % | ||||||||||||
NOW accounts |
1,508,063 | 15 | 1,136,008 | 12 | 1,011,402 | 13 | ||||||||||||||||||
Wealth management deposits |
734,837 | 7 | 907,013 | 10 | 622,842 | 8 | ||||||||||||||||||
Money market accounts |
1,666,554 | 16 | 1,375,767 | 15 | 904,245 | 12 | ||||||||||||||||||
Savings accounts |
619,024 | 6 | 457,139 | 5 | 319,128 | 4 | ||||||||||||||||||
Time certificates of deposit |
4,881,472 | 47 | 4,543,154 | 49 | 4,156,600 | 54 | ||||||||||||||||||
Total deposits |
$ | 10,394,366 | 100 | % | $ | 9,207,115 | 100 | % | $ | 7,687,141 | 100 | % | ||||||||||||
Wealth management deposits are funds from the brokerage customers of WHI, the trust and asset
management customers of CTC and brokerage customers from unaffiliated companies which have been
placed into deposit accounts (primarily money market accounts) of the banks (“wealth management
deposits” in table above). Average wealth management deposits decreased $172.2 million in 2010, of
which $157.0 million was attributable to brokerage customers from unaffiliated companies.
Consistent with reasonable interest rate risk parameters, the funds have generally been invested in
loan production of the banks as well as other investments suitable for banks.
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The following table presents average deposit balances for each Bank and the relative percentage of
total consolidated average deposits held by each Bank during each of the past three years (dollars
in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Average | Percent | Average | Percent | Average | Percent | |||||||||||||||||||
| Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||
Lake Forest Bank |
$ | 1,411,511 | 14 | % | $ | 1,146,196 | 12 | % | $ | 1,046,069 | 14 | % | ||||||||||||
Hinsdale Bank |
1,116,568 | 11 | 1,086,748 | 12 | 949,658 | 12 | ||||||||||||||||||
North Shore Bank |
1,136,925 | 11 | 980,079 | 11 | 768,081 | 10 | ||||||||||||||||||
Libertyville Bank |
904,783 | 9 | 882,366 | 10 | 781,708 | 10 | ||||||||||||||||||
Barrington Bank |
886,261 | 8 | 776,009 | 8 | 694,471 | 9 | ||||||||||||||||||
Northbrook Bank |
845,114 | 8 | 692,329 | 8 | 570,401 | 7 | ||||||||||||||||||
Village Bank |
634,211 | 6 | 592,043 | 6 | 463,433 | 6 | ||||||||||||||||||
Town Bank |
595,454 | 6 | 571,568 | 6 | 483,331 | 6 | ||||||||||||||||||
Wheaton Bank |
593,409 | 6 | 353,845 | 4 | 268,174 | 4 | ||||||||||||||||||
State Bank of The Lakes |
562,418 | 5 | 546,774 | 6 | 467,857 | 6 | ||||||||||||||||||
Crystal Lake Bank |
555,920 | 5 | 536,091 | 6 | 469,022 | 6 | ||||||||||||||||||
Advantage Bank |
370,890 | 4 | 353,938 | 4 | 286,722 | 4 | ||||||||||||||||||
Beverly Bank |
297,878 | 3 | 246,474 | 3 | 169,732 | 2 | ||||||||||||||||||
Old Plank Trail Bank |
257,336 | 2 | 248,121 | 3 | 166,675 | 2 | ||||||||||||||||||
St. Charles Bank |
225,688 | 2 | 194,534 | 1 | 101,807 | 2 | ||||||||||||||||||
Total deposits |
$ | 10,394,366 | 100 | % | $ | 9,207,115 | 100 | % | $ | 7,687,141 | 100 | % | ||||||||||||
Percentage increase from prior year |
13 | % | 20 | % | 5 | % | ||||||||||||||||||
Other Funding Sources. Although deposits are the Company’s primary source of funding its
interest-earning assets, the Company’s ability to manage the types and terms of deposits is
somewhat limited by customer preferences and market competition. As a result, in addition to
deposits and the issuance of equity securities, as well as the retention of earnings, the Company
uses several other funding sources to support its growth. These other sources include short-term
borrowings, notes payable, FHLB advances, subordinated debt, secured borrowings and junior
subordinated debentures. The Company evaluates the terms and unique characteristics of each source,
as well as its asset-liability management position, in determining the use of such funding sources.
The composition of average other funding sources in 2010, 2009 and 2008 is presented in the
following table (dollars in thousands):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Average | Percent | Average | Percent | Average | Percent | |||||||||||||||||||
| Balance | of Total | Balance | of Total | Balance | of Total | |||||||||||||||||||
Notes payable |
$ | 1,000 | — | % | $ | 1,000 | — | % | $ | 50,799 | 4 | % | ||||||||||||
Federal Home Loan Bank advances |
418,981 | 27 | 434,520 | 43 | 435,761 | 38 | ||||||||||||||||||
Subordinated notes |
56,370 | 4 | 66,205 | 7 | 74,589 | 7 | ||||||||||||||||||
Secured borrowings — owed to
securitization investors |
600,000 | 39 | — | — | — | — | ||||||||||||||||||
Short-term borrowings |
226,028 | 14 | 255,504 | 25 | 334,714 | 29 | ||||||||||||||||||
Junior subordinated debentures |
249,493 | 16 | 249,497 | 25 | 249,575 | 22 | ||||||||||||||||||
Other |
2,541 | — | 1,818 | — | 1,863 | — | ||||||||||||||||||
Total other funding sources |
$ | 1,554,413 | 100 | % | $ | 1,008,544 | 100 | % | $ | 1,147,301 | 100 | % | ||||||||||||
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Notes payable balances represent the balances on a credit agreement with an unaffiliated
bank. This $51 million credit facility is available for corporate purposes such as to provide
capital to fund continued growth at existing bank subsidiaries, possible future acquisitions and
for other general corporate matters. At December 31, 2010 and 2009, the Company had $1.0 million of
notes payable outstanding. See Note 12 to the Consolidated Financial Statements for further
discussion of the terms of this credit facility.
FHLB advances provide the banks with access to fixed rate funds which are useful in mitigating
interest rate risk and achieving an acceptable interest rate spread on fixed rate loans or
securities. FHLB advances to the banks totaled $423.5 million at December 31, 2010, and $431.0
million at December 31, 2009. See Note 13 to the Consolidated Financial Statements for further
discussion of the terms of these advances.
The Company borrowed $75.0 million under three separate $25.0 million subordinated note agreements.
Each subordinated note requires annual principal payments of $5.0 million beginning in the sixth
year of the note and has terms of ten years with final maturity dates in 2012, 2013 and 2015. These
notes qualify as Tier II regulatory capital. Subordinated notes totaled $50.0 million and $60.0
million at December 31, 2010 and 2009, respectively. See Note 14 to the Consolidated Financial
Statements for further discussion of the terms of the notes.
Beginning in 2010, the Company accounted for its third quarter 2009 securitization transaction as a
secured borrowing. Secured borrowings totaled $600.0 million at December 31, 2010 and $0 at
December 31, 2009. See Note 6 to the Consolidated Financial Statements for further discussion.
Short-term borrowings include securities sold under repurchase agreements and federal funds
purchased. These borrowings totaled $217.3 million and $245.6 million at December 31, 2010 and
2009, respectively. Securities sold under repurchase agreements represent sweep accounts for
certain customers in connection with master repurchase agreements at the banks as well as
short-term borrowings from banks and brokers. This funding category fluctuates based on customer
preferences and
daily liquidity needs of the banks, their customers and the banks’ operating subsidiaries. See Note
15 to the Consolidated Financial Statements for further discussion of these borrowings.
The Company has $249.5 million of junior subordinated debentures outstanding as of December 31,
2010 and 2009. The amounts reflected on the balance sheet represent the junior subordinated
debentures issued to nine trusts by the Company and equal the amount of the preferred and common
securities issued by the trusts. See Note 16 of the Consolidated Financial Statements for further
discussion of the Company’s junior subordinated debentures. Junior subordinated debentures, subject
to certain limitations, currently qualify as Tier 1 regulatory capital. Interest expense on these
debentures is deductible for tax purposes, resulting in a cost-efficient form of regulatory
capital.
Debt issued by the Company in conjunction with its tangible equity unit offering in December 2010
is recorded within other borrowings. The total proceeds attributed to the debt component of the
offering, net of issuance costs, was $43.3 million. See Note 24 to the Consolidated Financial Statements for further
discussion of these units.
Shareholders’ Equity. Total shareholders’ equity was $1.4 billion at December 31, 2010, an increase
of $297.9 million from the December 31, 2009 total of $1.1 billion. The increase in 2010 was
primarily the result of $494.4 million from the issuance of common stock and tangible equity units in March
and December of 2010, $42.1 million of earnings (net income of $63.3 million less preferred and common stock dividends of $21.2 million),
offset by a reduction in preferred stock of $250.0 million.
Changes in shareholders’ equity from 2008 to 2009 included approximately $50.0 million of earnings
(net income of $73.1 million less preferred stock dividends of $16.6 million and common stock
dividends of $6.5 million), $11.7 million increase from the issuance of shares of the Company’s
common stock (and related tax benefit) pursuant to various stock compensation plans and $6.9
million credited to surplus for stock-based compensation costs, and $4.0 million in net unrealized
gains from available-for-sale securities and cash flow hedges, net of tax.
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LOAN PORTFOLIO AND ASSET QUALITY
Loan Portfolio
The following table shows the Company’s loan portfolio by category as of December 31 for each of
the five previous fiscal years (in thousands):
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
| Amount | Total | Amount | Total | Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||||||||||||||
Commercial |
$ | 2,049,326 | 21 | % | 1,743,209 | 21 | 1,423,583 | 19 | 1,321,960 | 20 | 1,300,221 | 20 | ||||||||||||||||||||||||||||
Commercial real estate |
3,338,007 | 34 | 3,296,697 | 39 | 3,355,081 | 44 | 3,086,701 | 45 | 2,768,216 | 43 | ||||||||||||||||||||||||||||||
Home equity |
914,412 | 9 | 930,482 | 11 | 896,438 | 12 | 678,298 | 10 | 666,471 | 10 | ||||||||||||||||||||||||||||||
Residential real estate |
353,336 | 3 | 306,296 | 4 | 262,908 | 3 | 226,686 | 3 | 207,059 | 35 | ||||||||||||||||||||||||||||||
Premium finance receivables — commercial |
1,265,500 | 13 | 730,144 | 9 | 1,243,858 | 16 | 1,069,781 | 16 | 1,165,846 | 18 | ||||||||||||||||||||||||||||||
Premium finance receivables — life insurance |
1,521,886 | 15 | 1,197,893 | 14 | 102,728 | 2 | 8,404 | — | — | — | ||||||||||||||||||||||||||||||
Indirect consumer loans |
51,147 | 1 | 98,134 | 1 | 175,955 | 2 | 241,393 | 4 | 249,534 | 4 | ||||||||||||||||||||||||||||||
Consumer and other |
106,272 | 1 | 108,916 | 1 | 160,518 | 2 | 168,379 | 2 | 139,133 | 2 | ||||||||||||||||||||||||||||||
Total loans, net of unearned income,
excluding covered loans |
$ | 9,599,886 | 97 | % | 8,411,771 | 100 | 7,621,069 | 100 | 6,801,602 | 100 | 6,496,480 | 100 | ||||||||||||||||||||||||||||
Covered loans |
334,353 | 3 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total loans, net of unearned income |
$ | 9,934,239 | 100 | % | 8,411,771 | 100 | 7,621,069 | 100 | 6,801,602 | 100 | 6,496,480 | 100 | ||||||||||||||||||||||||||||
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The tables below set forth information regarding the types, amounts and performance of our
loans within the commercial and commercial real estate portfolios as of December 31, 2010 and 2009:
| >90 Days | Allowance | |||||||||||||||||||
| As of December 31, 2010 | % of | Non- | Past Due and | for Loan Losses | ||||||||||||||||
| (Dollars in thousands) | Balance | Total Loans | accrual | still accruing | Allocation | |||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | 1,653,394 | 17.2 | % | $ | 16,339 | $ | 478 | $ | 28,316 | ||||||||||
Franchise |
119,488 | 1.2 | — | — | 1,153 | |||||||||||||||
Mortgage warehouse lines of credit |
131,306 | 1.4 | — | — | 1,177 | |||||||||||||||
Community Advantage — homeowner associations |
75,542 | 0.8 | — | — | 323 | |||||||||||||||
Aircraft |
24,618 | 0.3 | — | — | 315 | |||||||||||||||
Other |
44,978 | 0.5 | 43 | — | 493 | |||||||||||||||
Total Commercial |
$ | 2,049,326 | 21.4 | % | $ | 16,382 | $ | 478 | $ | 31,777 | ||||||||||
Commercial Real Estate: |
||||||||||||||||||||
Residential construction |
$ | 95,947 | 1.0 | % | $ | 10,010 | $ | — | $ | 2,597 | ||||||||||
Commercial construction |
131,672 | 1.4 | 1,820 | — | 4,035 | |||||||||||||||
Land |
260,189 | 2.7 | 37,602 | — | 14,261 | |||||||||||||||
Office |
535,331 | 5.6 | 12,718 | — | 8,005 | |||||||||||||||
Industrial |
500,301 | 5.2 | 3,480 | — | 5,213 | |||||||||||||||
Retail |
510,527 | 5.3 | 3,265 | — | 5,985 | |||||||||||||||
Multi-family |
290,954 | 3.0 | 4,794 | — | 5,479 | |||||||||||||||
Mixed use and other |
1,013,086 | 10.6 | 20,274 | — | 17,043 | |||||||||||||||
Total Commercial Real Estate Loans |
$ | 3,338,007 | 34.8 | % | $ | 93,963 | $ | — | $ | 62,618 | ||||||||||
Total Commercial and Commercial Real Estate |
$ | 5,387,333 | 56.2 | % | $ | 110,345 | $ | 478 | $ | 94,395 | ||||||||||
Commercial Real Estate—collateral location by state: |
||||||||||||||||||||
Illinois |
$ | 2,695,581 | 80.8 | % | ||||||||||||||||
Wisconsin |
356,696 | 10.7 | ||||||||||||||||||
Total primary markets |
$ | 3,052,277 | 91.5 | % | ||||||||||||||||
Florida |
52,457 | 1.6 | ||||||||||||||||||
Arizona |
42,100 | 1.3 | ||||||||||||||||||
Indiana |
47,828 | 1.4 | ||||||||||||||||||
Other (no individual state greater than 0.5%) |
143,345 | 4.2 | ||||||||||||||||||
Total |
$ | 3,338,007 | 100.0 | % | ||||||||||||||||
| >90 Days | Allowance | |||||||||||||||||||
| As of December 31, 2009 | % of | Non- | Past Due and | for Loan Losses | ||||||||||||||||
| (Dollars in thousands) | Balance | Total Loans | accrual | still accruing | Allocation | |||||||||||||||
Commercial: |
||||||||||||||||||||
Commercial and industrial |
$ | 1,361,225 | 16.2 | % | $ | 15,094 | $ | 561 | $ | 22,579 | ||||||||||
Franchise |
133,953 | 1.6 | — | — | 2,118 | |||||||||||||||
Mortgage warehouse lines of credit |
121,781 | 1.4 | — | — | 1,643 | |||||||||||||||
Community Advantage — homeowner associations |
67,086 | 0.8 | — | — | 161 | |||||||||||||||
Aircraft |
41,654 | 0.5 | — | — | 167 | |||||||||||||||
Other |
17,510 | 0.2 | 1,415 | — | 1,344 | |||||||||||||||
Total Commercial |
$ | 1,743,209 | 20.7 | % | $ | 16,509 | $ | 561 | $ | 28,012 | ||||||||||
Commercial Real Estate: |
||||||||||||||||||||
Residential construction |
$ | 174,423 | 2.1 | % | $ | 14,065 | $ | — | $ | 5,065 | ||||||||||
Commercial construction |
308,580 | 3.5 | 5,232 | — | 6,304 | |||||||||||||||
Land |
326,720 | 3.9 | 41,297 | — | 12,228 | |||||||||||||||
Office |
467,587 | 5.6 | 2,675 | — | 5,221 | |||||||||||||||
Industrial |
444,891 | 5.3 | 3,753 | — | 5,612 | |||||||||||||||
Retail |
452,760 | 5.4 | 431 | — | 4,959 | |||||||||||||||
Multi-family |
241,710 | 2.9 | 288 | — | 1,565 | |||||||||||||||
Mixed use and other |
880,026 | 10.5 | 12,898 | — | 9,998 | |||||||||||||||
Total Commercial Real Estate Loans |
$ | 3,296,697 | 39.2 | % | $ | 80,639 | $ | — | $ | 50,952 | ||||||||||
Total Commercial and Commercial Real Estate |
$ | 5,039,906 | 59.9 | % | $ | 97,148 | $ | 561 | $ | 78,964 | ||||||||||
Commercial Real Estate—collateral location by state: |
||||||||||||||||||||
Illinois |
$ | 2,641,291 | 80.1 | % | ||||||||||||||||
Wisconsin |
366,862 | 11.1 | ||||||||||||||||||
Total primary markets |
$ | 3,008,153 | 91.2 | % | ||||||||||||||||
Florida |
45,655 | 1.4 | ||||||||||||||||||
Arizona |
46,257 | 1.4 | ||||||||||||||||||
Indiana |
46,099 | 1.4 | ||||||||||||||||||
Other (no individual state greater than 0.9%) |
150,533 | 4.6 | ||||||||||||||||||
Total |
$ | 3,296,697 | 100.0 | % | ||||||||||||||||
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Our commercial real estate loans are generally secured by a first mortgage lien and
assignment of rents on the property. Since most of our bank branches are located in the Chicago
metropolitan area and southeastern Wisconsin, 91.5% of our commercial real estate loan portfolio is
located in this region. Commercial real estate market conditions continued to be under stress in
2010, and we expected this trend to continue. As of December 31, 2010, our allowance for loan
losses related to this portfolio is $62.6 million.
We make commercial loans for many purposes, including: working capital lines, which are generally
renewable annually and supported by business assets, personal guarantees and additional collateral;
loans to condominium and homeowner associations originated through Barrington Bank’s Community
Advantage program; small aircraft financing, an earning asset niche developed at Crystal Lake Bank;
and franchise lending at Lake Forest Bank. Commercial business lending is generally considered to
involve a higher degree of risk than traditional consumer bank lending, and as a result of the
economic recession, allowance for loan losses in our commercial loan portfolio is $31.8 million as
of December 31, 2010. The Company also participates in mortgage warehouse lending by providing
interim funding to unaffiliated mortgage bankers to finance residential mortgages originated by
such bankers for sale into the secondary market. The Company’s loans to the mortgage bankers are
secured by the business assets of the mortgage companies as well as the specific mortgage loans
funded by the Company, after they have been pre-approved for purchase by third party end lenders.
End lender re-payments are sent directly to the Company upon end-lenders’ acceptance of final loan
documentation. The Company may also provide interim financing for packages of mortgage loans on a
bulk basis in circumstances where the mortgage bankers desire to competitively sell a number of
mortgages as a package in the secondary market. Typically, the Company will serve as sole funding
source for its mortgage warehouse lending customers under short-term revolving credit agreements.
Amounts advanced with respect to any particular mortgage loan are usually required to be repaid
within 21 days.
Despite poor economic conditions generally, and the particularly difficult conditions in the U.S.
residential real estate market experienced since 2008, our mortgage warehouse lending business has
expanded due to the high demand for mortgage re-financings given the historically low interest rate
environment and the fact that many of our competitors exited the market in late 2008 and early
2009. The expansion of this business has caused our mortgage warehouse lines to increase to $131.3
million as of December 31, 2010 from $121.8 million as of December 31, 2009. Our
allowance for loan losses with respect to these loans is $1.2 million as of December 31, 2010.
Since the inception of this business, the Company has not suffered any related loan losses on these
loans.
Home equity loans. Our home equity loans and lines of credit are originated by each of our banks in
their local markets where we have a strong understanding of the underlying real estate value. Our
banks monitor and manage these loans, and we conduct an automated review of all home equity loans
and lines of credit at least twice per year. This review collects current credit performance for
each home equity borrower and identifies situations where the credit strength of the borrower is
declining, or where there are events that may influence repayment, such as tax liens or judgments.
Our banks use this information to manage loans that may be higher risk and to determine whether to
obtain additional credit information or updated property valuations. As a result of this work and
general market conditions, we have modified our home equity offerings and changed our policies
regarding home equity renewals and requests for subordination. In a limited number of situations,
the unused availability on home equity lines of credit was frozen.
The rates we offer on new home equity lending are based on several factors, including appraisals
and valuation due diligence, in order to reflect inherent risk, and we place additional scrutiny on
larger home equity requests. In a limited number of cases, we issue home equity credit together
with first mortgage financing, and requests for such financing are evaluated on a combined basis.
It is not our practice to advance more than 85% of the appraised value of the underlying asset,
which ratio we refer to as the loan-to-value ratio, or LTV ratio, and a majority of the credit we
previously extended, when issued, had an LTV ratio of less than 80%.
Our home equity loan portfolio has performed well in light of the deterioration in the overall
residential real estate market. The number of new home equity line of credit commitments originated
by us has decreased due to declines in housing valuations that have decreased the amount of equity
against which homeowners may borrow, and a decline in homeowners’ desire to use their remaining
equity as collateral.
Residential real estate mortgages. Our residential real estate portfolio predominantly includes
one- to four-family adjustable rate mortgages that have repricing terms generally from one to three
years, construction loans to individuals and bridge financing loans for qualifying customers. As of
December 31, 2010, our residential loan portfolio totaled $353.3 million, or 3% of our total
outstanding loans.
Our adjustable rate mortgages relate to properties located principally in the Chicago metropolitan
area and southeastern Wisconsin or vacation homes owned by local residents, and may have terms
based on differing indexes. These adjustable rate mortgages are often non-agency conforming because
the outstanding balance of these loans exceeds the maximum balance that can be sold into the
secondary market. Adjustable rate mortgage loans decrease the interest rate risk we face on our
mortgage portfolio. However, this risk is not eliminated because,
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among other things, such loans generally provide for periodic and lifetime limits on the interest
rate adjustments. Additionally, adjustable rate mortgages may pose a higher risk of delinquency and
default because they require borrowers to make larger payments when interest rates rise. To date,
we have not seen a significant elevation in delinquencies and foreclosures in our residential loan
portfolio. As of December 31, 2010, $6.1 million of our residential real estate mortgages, or 1.7%
of our residential real estate loan portfolio, were classified as nonaccrual, $10.1 million were 30
to 89 days past due (2.8%) and $337.2 million were current (95.5%). We believe that since our loan
portfolio consists primarily of locally originated loans, and since the majority of our borrowers
are longer-term customers with lower LTV ratios, we face a relatively low risk of borrower default
and delinquency.
While we generally do not originate loans for our own portfolio with long-term fixed rates due to
interest rate risk considerations, we can accommodate customer requests for fixed rate loans by
originating such loans and then selling them into the secondary market, for which we receive fee
income, or by selectively retaining certain of these loans within the banks’ own portfolios where
they are non-agency conforming, or where the terms of the loans make them favorable to retain. A
portion of the loans we sold into the secondary market were sold with the servicing of those loans
retained. The amount of loans serviced for others as of December 31, 2010 and 2009 was $937.7
million and $738.4 million, respectively. All other mortgage loans sold into the secondary market
were sold without the retention of servicing rights.
It is not our practice to underwrite, and we have no plans to underwrite, subprime, Alt A, no or
little documentation loans, or option ARM loans. As of December 31, 2010, approximately $46.6
million of our mortgages consist of interest-only loans. To date, we have not participated in any
mortgage modification programs.
Premium finance receivables — commercial. FIFC originated approximately $3.2 billion in commercial
insurance premium finance receivables during 2010. FIFC makes loans to businesses to finance the
insurance premiums they pay on their commercial insurance policies. The loans are originated by
FIFC working through independent medium and large insurance agents and brokers located throughout
the United States. 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, a fraud perpetrated against a number of premium finance companies in the
industry, including the property and casualty division of our premium financing subsidiary,
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 has conducted a thorough review of
the premium finance — commercial portfolio and found no signs of similar situations.
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
initially 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.
Subsequent to December 31, 2009, this securitization transaction is accounted for as a secured
borrowing and the securitization entity is treated as a consolidated subsidiary of the Company. See
Note 6 of the Consolidated Financial Statements presented under Item 8 of this report for further
discussion of this securitization transaction. Accordingly, beginning on January 1, 2010, all of
the assets and liabilities of the securitization entity are included directly on the Company’s
Consolidated Statements of Condition.
Premium finance receivables — life insurance. In 2007, FIFC began financing life insurance policy
premiums generally for high net-worth individuals. In 2009, FIFC expanded this niche lending
business segment when it purchased a portfolio of domestic life insurance premium finance loans for
a total aggregate purchase price of
$745.9 million. See Note 8 of the Consolidated Financial Statements presented under Item 8 of this
report for further discussion of this business combination.
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FIFC originated approximately $456.5 million in life insurance premium finance receivables in 2010.
These loans are originated directly with the borrowers with assistance from life insurance
carriers, independent insurance agents, financial advisors and legal counsel. 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.
Indirect consumer loans. As part of its strategy to pursue specialized earning asset niches to
augment loan generation within the banks’ target markets, the Company established fixed-rate
automobile loan financing at Hinsdale Bank funded indirectly through unaffiliated automobile
dealers. The risks associated with the Company’s portfolios are diversified among many individual
borrowers. Like other consumer loans, the indirect consumer loans are subject to the banks’
established credit standards. Management regards substantially all of these loans as prime quality
loans. In the third quarter of 2008, the Company, as a result of competitive pricing pressures,
ceased the origination of indirect automobile loans through Hinsdale Bank. However, as a result of
current favorable pricing opportunities coupled with reduced competition in the indirect consumer
auto business, the Company re-entered this business in the fourth quarter of 2010 with originations
through Hinsdale Bank. At December 31, 2010, the average actual maturity of indirect automobile
loans is estimated to be approximately 27 months.
Other Loans. Included in the other loan category is a wide variety of personal and consumer loans
to individuals as well as high yielding short-term accounts receivable financing to clients in the
temporary staffing industry located throughout the United States. The banks originate consumer
loans in order to provide a wider range of financial services to their customers.
Consumer loans generally have shorter terms and higher interest rates than mortgage loans but
generally involve more credit risk than mortgage loans due to the type and nature of the
collateral. Additionally, short-term accounts receivable financing may also involve greater credit
risks than generally associated with the loan portfolios of more traditional community banks
depending on the marketability of the collateral.
Foreign. The Company had no loans to businesses or governments of foreign countries at any time
during 2010.
Maturities and Sensitivities of Loans to Changes In Interest Rates
The following table classifies the commercial loan portfolios at December 31, 2010 by date at
which the loans reprice (in thousands):
| One year | From one | Over | ||||||||||||||
| or less | to five years | five years | Total | |||||||||||||
Commercial |
$ | 1,690,079 | 301,141 | 58,106 | 2,049,326 | |||||||||||
Commercial real estate |
2,455,291 | 842,771 | 39,945 | 3,338,007 | ||||||||||||
Total premium finance receivables, net of unearned income (1) |
1,558,137 | — | 22,845 | 1,580,982 | ||||||||||||
| (1) | Includes the commercial portion of the premium finance receivables — life insurance portfolio. |
Of those loans repricing after one year, approximately $1.1 billion have fixed rates.
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Past Due Loans and Non-performing Assets
Our ability to manage credit risk depends in large part on our ability to properly identify and
manage problem loans. To do so, we operate a credit risk rating system under which our credit
management personnel assign a credit risk rating to each loan at the time of origination and review
loans on a regular basis to determine each loan’s credit risk rating on a scale of 1 through 10
with higher scores indicating higher risk. The credit risk rating structure used is shown below:
1 Rating
|
— | Minimal Risk (Loss Potential — none or extremely low) (Superior asset quality, excellent liquidity, minimal leverage) |
2 Rating
|
— | Modest Risk (Loss Potential demonstrably low) (Very good asset quality and liquidity, strong leverage capacity) |
3 Rating
|
— | Average Risk (Loss Potential low but no longer refutable) (Mostly satisfactory asset quality and liquidity, good leverage capacity) |
4 Rating
|
— | Above Average Risk (Loss Potential variable, but some potential for deterioration) (Acceptable asset quality, little excess liquidity, modest leverage capacity) |
5 Rating
|
— | Management Attention Risk (Loss Potential moderate if corrective action not taken) (Generally acceptable asset quality, somewhat strained liquidity, minimal leverage capacity) |
6 Rating
|
— | Special Mention (Loss Potential moderate if corrective action not taken) (Assets in this category are currently protected, potentially weak, but not to the point of substandard classification) |
7 Rating
|
— | Substandard Accrual (Loss Potential distinct possibility that the bank may sustain some loss, but no discernable impairment) (Must have well defined weaknesses that jeopardize the liquidation of the debt) |
8 Rating
|
— | Substandard Non-accrual (Loss Potential well documented probability of loss, including potential impairment) (Must have well defined weaknesses that jeopardize the liquidation of the debt) |
9 Rating
|
— | Doubtful (Loss Potential extremely high) (These assets have all the weaknesses in those classified “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly improbable) |
10 Rating
|
— | Loss (fully charged-off) (Loans in this category are considered fully uncollectible.) |
In the first quarter of 2010, the Company modified its credit risk rating scale to the above 1
through 10 risk ratings. Prior to this, the Company employed a 1 through 9 credit risk rating
scale. The main change is that the Company now has two separate credit risk ratings for substandard
loans. They are Substandard — Accrual (credit risk rating 7) and Substandard — Nonaccrual (credit
risk rating 8). Previously, there was only one risk rating for loans classified as substandard.
This change allows the Company to better monitor the credit risk of the portfolio.
Each loan officer is responsible for monitoring his or her loan portfolio, recommending a credit
risk rating for each loan in his or her portfolio and ensuring the credit risk ratings are
appropriate. These credit risk ratings are then ratified by the bank’s chief credit officer or the
directors’ loan committee. Credit risk ratings are determined by evaluating a number of factors
including, a borrower’s financial strength, cash flow coverage, collateral protection and
guarantees. A third party loan review firm independently reviews a significant portion of the loan
portfolio at each of the Company’s subsidiary banks to evaluate the appropriateness of the
management-assigned credit risk ratings. These ratings are subject to further review at each of our
bank subsidiaries by the applicable regulatory authority, including the Federal Reserve Bank of
Chicago, the OCC, the State of Illinois and the State of Wisconsin and our internal audit staff.
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The Company’s Problem Loan Reporting system automatically includes all loans with credit risk
ratings of 6 through 9. This system is designed to provide an on-going detailed tracking mechanism
for each problem loan. Once management determines that a loan has deteriorated to a point where it
has a credit risk rating of 6 or worse, the Company’s Managed Asset Division performs an overall
credit and collateral review. As part of this review, all underlying collateral is identified and
the valuation methodology is analyzed and tracked. As a result of this initial review by the
Company’s Managed Asset Division, the credit risk rating is reviewed and a portion of the
outstanding loan balance may be deemed uncollectible or an impairment reserve may be established.
The Company’s impairment analysis utilizes an independent re-appraisal of the collateral (unless
such a third-party evaluation is not possible due to the unique nature of the collateral, such as a
closely-held business or thinly traded securities). In the case of commercial real estate
collateral, an independent third party appraisal is ordered by the Company’s Real Estate Services
Group to determine if there has been any change in the underlying collateral value. These
independent appraisals are reviewed by the Real Estate Services Group and sometimes by independent
third party valuation experts and may be adjusted depending upon market conditions. An appraisal is
ordered at least once a year for these loans, or more often if market conditions dictate. In the
event that the underlying value of the collateral cannot be easily determined, a detailed valuation
methodology is prepared by the Managed Asset Division. A summary of this analysis is provided to
the directors’ loan committee of the bank which originated the credit for approval of a charge-off,
if necessary.
Through the credit risk rating process, loans are reviewed to determine if they are performing in
accordance with the original contractual terms. If the borrower has failed to comply with the
original contractual terms, further action may be required by the Company, including a downgrade in
the credit risk rating, movement to non-accrual status, a charge-off or the establishment of a
specific impairment reserve. In the event a collateral shortfall is identified during the credit
review process, the Company will work with the borrower for a principal reduction and/or a pledge
of additional collateral and/or additional guarantees. In the event that these options are not
available, the loan may be subject to a downgrade of the credit risk rating. If we determine that a
loan amount, or portion thereof, is uncollectible, the loan’s credit risk rating is immediately
downgraded to an 8 or 9 and the uncollectible amount is charged-off. Any loan that has a partial
charge-off continues to be assigned a credit risk rating of an 8 or 9 for the duration of time that
a balance remains outstanding. The Managed Asset Division undertakes a thorough and ongoing
analysis to determine if additional impairment and/or charge-offs are appropriate and to begin a
workout plan for the credit to minimize actual losses.
If, based on current information and events, it is probable that the Company will be unable to
collect all amounts due to it according to the contractual terms of the loan agreement, a loan is
considered impaired, and a specific impairment reserve analysis is performed and if necessary, a
specific reserve is established. In determining the appropriate reserve for collateral-dependent
loans, the Company considers the results of appraisals for the associated collateral.
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Non-Performing Assets, excluding covered assets
The following table sets forth Wintrust’s non-performing assets, excluding covered assets, as of
the dates shown:
(Dollars in thousands)
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Loans past due greater than 90 days and still accruing: |
||||||||||||||||||||
Commercial |
$ | 478 | 561 | 65 | 806 | 908 | ||||||||||||||
Commercial real estate |
— | — | 14,588 | 13,877 | 7,010 | |||||||||||||||
Home equity |
— | — | 617 | 51 | 211 | |||||||||||||||
Residential real estate |
— | 412 | — | — | 97 | |||||||||||||||
Premium finance receivables – commercial |
8,096 | 6,271 | 9,339 | 8,703 | 4,306 | |||||||||||||||
Premium finance receivables – life insurance |
— | — | — | — | — | |||||||||||||||
Indirect consumer |
318 | 461 | 679 | 517 | 297 | |||||||||||||||
Consumer and other |
1 | 95 | 97 | 59 | 536 | |||||||||||||||
Total loans past due greater than 90 days
and still accruing |
8,893 | 7,800 | 25,385 | 24,013 | 13,365 | |||||||||||||||
Non-accrual loans: |
||||||||||||||||||||
Commercial |
16,382 | 16,509 | 8,651 | 8,037 | 3,274 | |||||||||||||||
Commercial real estate |
93,963 | 80,639 | 83,147 | 24,869 | 9,659 | |||||||||||||||
Home equity |
7,425 | 8,883 | 828 | 1,325 | 619 | |||||||||||||||
Residential real estate |
6,085 | 3,779 | 5,700 | 1,890 | 1,119 | |||||||||||||||
Premium finance receivables – commercial |
8,587 | 11,878 | 11,454 | 10,725 | 8,112 | |||||||||||||||
Premium finance receivables – life insurance |
354 | 704 | — | — | — | |||||||||||||||
Indirect consumer |
191 | 995 | 913 | 560 | 376 | |||||||||||||||
Consumer and other |
252 | 617 | 16 | 435 | 350 | |||||||||||||||
Total non-accrual |
133,239 | 124,004 | 110,709 | 47,841 | 23,509 | |||||||||||||||
Total non-performing loans: |
||||||||||||||||||||
Commercial |
16,860 | 17,070 | 8,716 | 8,843 | 4,182 | |||||||||||||||
Commercial real estate |
93,963 | 80,639 | 97,735 | 38,746 | 16,669 | |||||||||||||||
Home equity |
7,425 | 8,883 | 1,445 | 1,376 | 830 | |||||||||||||||
Residential real estate |
6,085 | 4,191 | 5,700 | 1,890 | 1,216 | |||||||||||||||
Premium finance receivables – commercial |
16,683 | 18,149 | 20,793 | 19,428 | 12,418 | |||||||||||||||
Premium finance receivables – life insurance |
354 | 704 | — | — | — | |||||||||||||||
Indirect consumer |
509 | 1,456 | 1,592 | 1,077 | 673 | |||||||||||||||
Consumer and other |
253 | 712 | 113 | 494 | 886 | |||||||||||||||
Total non-performing loans |
142,132 | 131,804 | 136,094 | 71,854 | 36,874 | |||||||||||||||
Other real estate owned |
71,214 | 80,163 | 32,572 | 3,858 | 572 | |||||||||||||||
Total non-performing assets |
213,346 | 211,967 | 168,666 | 75,712 | 37,446 | |||||||||||||||
Total non-performing loans by category
as a percent of its own respective category’s |
||||||||||||||||||||
year end balance: |
||||||||||||||||||||
Commercial |
0.82 | % | 0.98 | % | 0.61 | % | 0.67 | % | 0.32 | % | ||||||||||
Commercial real estate |
2.81 | 2.45 | 2.91 | 1.26 | 0.60 | |||||||||||||||
Home equity |
0.81 | 0.95 | 0.16 | 0.20 | 0.12 | |||||||||||||||
Residential real estate |
1.72 | 1.37 | 2.17 | 0.83 | 0.59 | |||||||||||||||
Premium finance receivables – commercial |
1.32 | 2.49 | 1.67 | 1.82 | 1.07 | |||||||||||||||
Premium finance receivables – life insurance |
0.02 | 0.06 | — | — | — | |||||||||||||||
Indirect consumer |
0.99 | 1.48 | 0.90 | 0.45 | 0.27 | |||||||||||||||
Consumer and other |
0.24 | 0.65 | 0.07 | 0.29 | 0.64 | |||||||||||||||
Total non-performing loans |
1.48 | % | 1.57 | % | 1.79 | % | 1.06 | % | 0.57 | % | ||||||||||
Total non-performing assets, excluding covered
assets, as a percentage of total assets |
1.53 | % | 1.74 | % | 1.58 | % | 0.81 | % | 0.39 | % | ||||||||||
Allowance for loan losses as a
percentage of non-performing loans |
80.14 | % | 74.56 | % | 51.26 | % | 70.13 | % | 124.90 | % | ||||||||||
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Non-performing Commercial and Commercial Real Estate
The commercial non-performing loan category totaled $16.9 million as of December 31, 2010 compared
to $17.1 million as of December 31, 2009, while the commercial real estate loan category totaled
$94.0 million as of December 31, 2010 compared to $80.6 million as of December 31, 2009.
Management is pursuing the resolution of all credits in this category. At this time, management
believes reserves are adequate to absorb inherent losses that may occur upon the ultimate
resolution of these credits.
Non-performing Residential Real Estate and Home Equity
The non-performing residential real estate and home equity loans totaled $13.5 million as of
December 31, 2010. The balance increased $436,000 from December 31, 2009. The December 31, 2010
non-performing balance is comprised of $6.1 million of residential real estate (22 individual
credits) and $7.4 million of home equity loans (26 individual credits). On average, this is
approximately three non-performing residential real estate loans and home equity loans per
chartered bank within the Company. The Company believes control and collection of these loans is
very manageable. At this time, management believes reserves are adequate to absorb inherent losses
that may occur upon the ultimate resolution of these credits.
Non-performing Commercial Premium Finance Receivables
The table below presents the level of non-performing property and casualty premium finance
receivables as of December 31, 2010 and 2009, and the amount of net charge-offs for the years then
ended.
(Dollars in thousands)
| December 31, | ||||||||
| 2010 | 2009 | |||||||
Non-performing premium finance receivables — commercial |
$ | 16,683 | $ | 18,149 | ||||
- as a percent of premium finance receivables — commercial outstanding |
1.32 | % | 2.49 | % | ||||
Net charge-offs of premium finance receivables — commercial |
$ | 22,224 | $ | 7,502 | ||||
- as a percent of average premium finance receivables — commercial |
1.74 | % | 0.67 | % | ||||
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Fluctuations in this category may occur due to timing and nature of account collections from
insurance carriers. The Company’s underwriting standards, regardless of the condition of the
economy, have remained consistent. We anticipate that net charge-offs and non-performing asset
levels in the near term will continue to be at levels that are within acceptable operating ranges
for this category of loans. Management is comfortable with administering the collections at this
level of non-performing property and casualty premium finance receivables and believes reserves are
adequate to absorb inherent losses that may occur upon the ultimate resolution of these credits. 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 our premium financing subsidiary,
increased both our net charge-offs and our provision for credit losses by $15.7 million. The
remaining net charge-offs of premium finance receivables were $6.5 million for 2010, which is 0.51%
of average premium finance receivables.
Non-performing Indirect Consumer Loans
Total non-performing indirect consumer loans were $509,000 at December 31, 2010, compared to $1.5
million at December 31, 2009. The ratio of these non-performing loans to total indirect consumer
loans was 0.99% at December 31, 2010 compared to 1.48% at December 31, 2009. Net charge-offs as a
percent of total indirect consumer loans were 1.09% for the year ended December 31, 2010 compared
to 1.24% in the same period in 2009. The indirect consumer loan portfolio has decreased 48% since
December 31, 2009 to a balance of $51.1 million at December 31, 2010.
Loan
Portfolio Aging
The following table shows, as of December 31, 2010, only 1.5% of the entire portfolio, excluding
covered loans, is in a non-performing (non-accrual or greater than 90 days past due and still
accruing interest) with only 1.5% either one or two payments past due. In total, 97% of the
Company’s total loan portfolio, excluding covered loans, as of December 31, 2010 is current
according to the original contractual terms of the loan agreements.
70
Table of Contents
The tables below show the aging of the Company’s loan portfolio at December 31, 2010 and
2009:
As of December 31, 2010
(Dollars in thousands)
| 90+ days | ||||||||||||||||||||||||
| Non- | and still | 60-89 days | 30-59 days | |||||||||||||||||||||
| Accrual | accruing | past due | past due | Current | Total Loans | |||||||||||||||||||
Loan Balances: |
||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||
Commercial and industrial |
$ | 16,339 | 478 | 4,577 | 12,774 | 1,619,226 | 1,653,394 | |||||||||||||||||
Franchise |
— | — | — | 2,250 | 117,238 | 119,488 | ||||||||||||||||||
Mortgage warehouse lines of credit |
— | — | — | — | 131,306 | 131,306 | ||||||||||||||||||
Community
Advantage – homeowners association |
— | — | — | — | 75,542 | 75,542 | ||||||||||||||||||
Aircraft |
— | — | 178 | 1,000 | 23,440 | 24,618 | ||||||||||||||||||
Other |
43 | — | — | — | 44,935 | 44,978 | ||||||||||||||||||
Total commercial |
16,382 | 478 | 4,755 | 16,024 | 2,011,687 | 2,049,326 | ||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Residential construction |
10,010 | — | 96 | 1,801 | 84,040 | 95,947 | ||||||||||||||||||
Commercial construction |
1,820 | — | — | 1,481 | 128,371 | 131,672 | ||||||||||||||||||
Land |
37,602 | — | 6,815 | 11,915 | 203,857 | 260,189 | ||||||||||||||||||
Office |
12,718 | — | 9,121 | 3,202 | 510,290 | 535,331 | ||||||||||||||||||
Industrial |
3,480 | — | 686 | 2,276 | 493,859 | 500,301 | ||||||||||||||||||
Retail |
3,265 | — | 4,088 | 3,839 | 499,335 | 510,527 | ||||||||||||||||||
Multi-family |
4,794 | — | 1,573 | 3,062 | 281,525 | 290,954 | ||||||||||||||||||
Mixed use and other |
20,274 | — | 8,481 | 15,059 | 969,272 | 1,013,086 | ||||||||||||||||||
Total commercial real estate |
$ | 93,963 | — | 30,860 | 42,635 | 3,170,549 | 3,338,007 | |||||||||||||||||
Home equity loans |
7,425 | — | 2,181 | 7,098 | 897,708 | 914,412 | ||||||||||||||||||
Residential real estate loans |
6,085 | — | 1,836 | 8,224 | 337,191 | 353,336 | ||||||||||||||||||
Premium finance receivables |
||||||||||||||||||||||||
Commercial insurance loans |
8,587 | 8,096 | 6,076 | 16,584 | 1,226,157 | 1,265,500 | ||||||||||||||||||
Life insurance loans |
180 | — | — | — | 826,119 | 826,299 | ||||||||||||||||||
Purchased life insurance loans |
174 | — | — | — | 695,413 | 695,587 | ||||||||||||||||||
Indirect consumer |
191 | 318 | 301 | 918 | 49,419 | 51,147 | ||||||||||||||||||
Consumer and other |
252 | 1 | 109 | 379 | 105,531 | 106,272 | ||||||||||||||||||
Total loans, net of unearned income,
excluding covered loans |
$ | 133,239 | 8,893 | 46,118 | 91,862 | 9,319,774 | 9,599,886 | |||||||||||||||||
Covered loans |
— | 117,161 | 7,352 | 22,744 | 187,096 | 334,353 | ||||||||||||||||||
Total loans, net of unearned income |
$ | 133,239 | 126,054 | 53,470 | 114,606 | 9,506,870 | 9,934,239 | |||||||||||||||||
Aging as a % of Loan Balance: |
||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||
Commercial and industrial |
1.0 | % | — | % | 0.3 | % | 0.8 | % | 97.9 | % | 100.0 | % | ||||||||||||
Franchise |
— | — | — | 1.9 | 98.1 | 100.0 | ||||||||||||||||||
Mortgage warehouse lines of credit |
— | — | — | — | 100.0 | 100.0 | ||||||||||||||||||
Community
Advantage – homeowners association |
— | — | — | — | 100.0 | 100.0 | ||||||||||||||||||
Aircraft |
— | — | 0.7 | 4.1 | 95.2 | 100.0 | ||||||||||||||||||
Other |
0.1 | — | — | — | 99.9 | 100.0 | ||||||||||||||||||
Total commercial |
0.8 | — | 0.2 | 0.8 | 98.2 | 100.0 | ||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Residential construction |
10.4 | — | 0.1 | 1.9 | 87.6 | 100.0 | ||||||||||||||||||
Commercial construction |
1.4 | — | — | 1.1 | 97.5 | 100.0 | ||||||||||||||||||
Land |
14.5 | — | 2.6 | 4.6 | 78.3 | 100.0 | ||||||||||||||||||
Office |
2.4 | — | 1.7 | 0.6 | 95.3 | 100.0 | ||||||||||||||||||
Industrial |
0.7 | — | 0.1 | 0.5 | 98.7 | 100.0 | ||||||||||||||||||
Retail |
0.6 | — | 0.8 | 0.8 | 97.8 | 100.0 | ||||||||||||||||||
Multi-family |
1.6 | — | 0.5 | 1.1 | 96.8 | 100.0 | ||||||||||||||||||
Mixed use and other |
2.0 | — | 0.8 | 1.5 | 95.7 | 100.0 | ||||||||||||||||||
Total commercial real estate |
2.8 | — | 0.9 | 1.3 | 95.0 | 100.0 | ||||||||||||||||||
Home equity |
0.8 | — | 0.2 | 0.8 | 98.2 | 100.0 | ||||||||||||||||||
Residential real estate |
1.7 | — | 0.5 | 2.3 | 95.5 | 100.0 | ||||||||||||||||||
Premium finance receivables |
||||||||||||||||||||||||
Commercial insurance loans |
0.7 | 0.6 | 0.5 | 1.3 | 96.9 | 100.0 | ||||||||||||||||||
Life insurance loans |
— | — | — | — | 100.0 | 100.0 | ||||||||||||||||||
Purchased life insurance loans |
— | — | — | — | 100.0 | 100.0 | ||||||||||||||||||
Indirect consumer |
0.4 | 0.6 | 0.6 | 1.8 | 96.6 | 100.0 | ||||||||||||||||||
Consumer and other |
0.2 | — | 0.1 | 0.4 | 99.3 | 100.0 | ||||||||||||||||||
Total loans, net of unearned income,
excluding covered loans |
1.4 | % | 0.1 | % | 0.5 | % | 1.0 | % | 97.0 | % | 100.0 | % | ||||||||||||
Covered loans |
— | 35.0 | 2.2 | 6.8 | 56.0 | 100.0 | ||||||||||||||||||
Total loans, net of unearned income |
1.3 | % | 1.3 | % | 0.5 | % | 1.2 | % | 95.7 | % | 100.0 | % | ||||||||||||
71
Table of Contents
As of December 31, 2009
(Dollars in thousands)
| 90+ days | ||||||||||||||||||||||||
| Non- | and still | 60-89 days | 30-59 days | |||||||||||||||||||||
| Accrual | accruing | past due | past due | Current | Total Loans | |||||||||||||||||||
Loan Balances: |
||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||
Commercial and industrial |
$ | 15,094 | 561 | 5,526 | 2,990 | 1,337,054 | 1,361,225 | |||||||||||||||||
Franchise |
— | — | — | — | 133,953 | 133,953 | ||||||||||||||||||
Mortgage warehouse lines of credit |
— | — | — | — | 121,781 | 121,781 | ||||||||||||||||||
Community
Advantage – homeowners association |
— | — | — | — | 67,086 | 67,086 | ||||||||||||||||||
Aircraft |
— | — | — | 178 | 41,476 | 41,654 | ||||||||||||||||||
Other |
1,415 | — | 1,220 | — | 14,875 | 17,510 | ||||||||||||||||||
Total commercial |
16,509 | 561 | 6,746 | 3,168 | 1,716,225 | 1,743,209 | ||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Residential construction |
14,065 | — | 1,877 | 6,332 | 152,149 | 174,423 | ||||||||||||||||||
Commercial construction |
5,232 | — | — | 15,070 | 288,278 | 308,580 | ||||||||||||||||||
Land |
41,297 | — | 8,548 | 2,468 | 274,407 | 326,720 | ||||||||||||||||||
Office |
2,675 | — | — | 1,324 | 463,588 | 467,587 | ||||||||||||||||||
Industrial |
3,753 | — | — | 1,141 | 439,997 | 444,891 | ||||||||||||||||||
Retail |
431 | — | 2,978 | 1,050 | 448,301 | 452,760 | ||||||||||||||||||
Multi-family |
288 | — | 627 | 9,372 | 231,423 | 241,710 | ||||||||||||||||||
Mixed use and other |
12,898 | — | 4,517 | 4,464 | 858,147 | 880,026 | ||||||||||||||||||
Total commercial real estate |
$ | 80,639 | — | 18,547 | 41,221 | 3,156,290 | 3,296,697 | |||||||||||||||||
Home equity loans |
8,883 | — | 894 | 2,107 | 918,598 | 930,482 | ||||||||||||||||||
Residential real estate loans |
3,779 | 412 | 406 | 3,043 | 298,656 | 306,296 | ||||||||||||||||||
Premium finance receivables |
||||||||||||||||||||||||
Commercial insurance loans |
11,878 | 6,271 | 3,975 | 9,639 | 698,381 | 730,144 | ||||||||||||||||||
Life insurance loans |
— | — | — | — | 365,555 | 365,555 | ||||||||||||||||||
Purchased life insurance loans |
704 | — | 5,385 | 1,854 | 824,395 | 832,338 | ||||||||||||||||||
Indirect consumer |
995 | 461 | 614 | 2,143 | 93,921 | 98,134 | ||||||||||||||||||
Consumer and other |
617 | 95 | 511 | 537 | 107,156 | 108,916 | ||||||||||||||||||
Total loans, net of unearned income,
excluding covered loans |
$ | 124,004 | 7,800 | 37,078 | 63,712 | 8,179,177 | 8,411,771 | |||||||||||||||||
Covered loans |
— | — | — | — | — | — | ||||||||||||||||||
Total loans, net of unearned income |
$ | 124,004 | 7,800 | 37,078 | 63,712 | 8,179,177 | 8,411,771 | |||||||||||||||||
Aging as a % of Loan Balance: |
||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||
Commercial and industrial |
1.1 | % | — | % | 0.4 | % | 0.2 | % | 98.3 | % | 100.0 | % | ||||||||||||
Franchise |
— | — | — | — | 100.0 | 100.0 | ||||||||||||||||||
Mortgage warehouse lines of credit |
— | — | — | — | 100.0 | 100.0 | ||||||||||||||||||
Community
Advantage – homeowners association |
— | — | — | — | 100.0 | 100.0 | ||||||||||||||||||
Aircraft |
— | — | — | 0.4 | 99.6 | 100.0 | ||||||||||||||||||
Other |
8.1 | — | 7.0 | — | 84.9 | 100.0 | ||||||||||||||||||
Total commercial |
0.9 | — | 0.4 | 0.2 | 98.5 | 100.0 | ||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Residential construction |
8.1 | — | 1.1 | 3.6 | 87.2 | 100.0 | ||||||||||||||||||
Commercial construction |
1.7 | — | — | 4.9 | 93.4 | 100.0 | ||||||||||||||||||
Land |
12.6 | — | 2.6 | 0.8 | 84.0 | 100.0 | ||||||||||||||||||
Office |
0.6 | — | — | 0.3 | 99.1 | 100.0 | ||||||||||||||||||
Industrial |
0.8 | — | — | 0.3 | 98.9 | 100.0 | ||||||||||||||||||
Retail |
0.1 | — | 0.7 | 0.2 | 99.0 | 100.0 | ||||||||||||||||||
Multi-family |
0.1 | — | 0.3 | 3.9 | 95.7 | 100.0 | ||||||||||||||||||
Mixed use and other |
1.5 | — | 0.5 | 0.5 | 97.5 | 100.0 | ||||||||||||||||||
Total commercial real estate |
2.4 | — | 0.6 | 1.3 | 95.7 | 100.0 | ||||||||||||||||||
Home equity |
1.0 | — | 0.1 | 0.2 | 98.7 | 100.0 | ||||||||||||||||||
Residential real estate |
1.2 | 0.1 | 0.1 | 1.0 | 97.6 | 100.0 | ||||||||||||||||||
Premium finance receivables |
||||||||||||||||||||||||
Commercial insurance loans |
1.6 | 0.9 | 0.5 | 1.3 | 95.7 | 100.0 | ||||||||||||||||||
Life insurance loans |
— | — | — | — | 100.0 | 100.0 | ||||||||||||||||||
Purchased life insurance loans |
0.1 | — | 0.6 | 0.2 | 99.1 | 100.0 | ||||||||||||||||||
Indirect consumer |
1.0 | 0.5 | 0.6 | 2.2 | 95.7 | 100.0 | ||||||||||||||||||
Consumer and other |
0.6 | 0.1 | 0.5 | 0.5 | 98.3 | 100.0 | ||||||||||||||||||
Total loans, net of unearned income,
excluding covered loans |
1.5 | % | 0.1 | % | 0.4 | % | 0.8 | % | 97.2 | % | 100.0 | % | ||||||||||||
Covered loans |
— | — | — | — | — | — | ||||||||||||||||||
Total loans, net of unearned income |
1.5 | % | 0.1 | % | 0.4 | % | 0.8 | % | 97.2 | % | 100.0 | % | ||||||||||||
72
Table of Contents
As of December 31, 2010, only $46.1 million of
all loans, excluding covered loans, or 0.5%, were 60
to 89 days past due and $91.9 million, or 1.0%, were
30 to 59 days (or one payment) past due. As of
December 31, 2009, $37.1 million of all loans,
excluding covered loans, or 0.4%, were 60 to 89 days
past due and $63.7 million, or 0.8%, were 30 to 59
days (or one payment) past due.
The majority of the commercial and commercial real
estate loans shown as 60 to 89 days and 30 to 59
days
past due are included on the Company’s internal
problem loan reporting system. Loans on this system
are closely monitored by management on a monthly
basis. Near-term delinquencies (30 to 59 days past
due) increased $14.3 million since December 31,
2009.
The Company’s home equity and residential loan
portfolios continue to exhibit low delinquency
ratios. Home equity loans at December 31, 2010 that
are current with regard to the contractual terms of
the loan agreement represent 98.2% of the total home
equity portfolio. Residential real estate loans at
December 31, 2010 that are current with regards to
the contractual terms of the loan agreements
comprise 95.5% of total residential real estate
loans outstanding.
The ratio of non-performing commercial premium
finance receivables fluctuates throughout the year
due to the nature and timing of canceled account
collections from insurance carriers. Due to the
nature of collateral for commercial premium finance
receivables, it customarily takes 60-150 days to
convert the collateral into cash. Accordingly, the
level of non-performing commercial premium finance
receivables is not necessarily indicative of the
loss inherent in the portfolio. In the event of
default, Wintrust has the power to cancel the
insurance policy and collect the unearned portion of
the premium from the insurance
carrier. In the event of cancellation, the cash
returned in payment of the unearned premium by the
insurer should generally be sufficient to cover the
receivable balance, the interest and other charges
due. Due to notification requirements and processing
time by most insurance carriers, many receivables
will become delinquent beyond 90 days while the
insurer is processing the return of the unearned
premium. Management continues to accrue interest
until maturity as the unearned premium is ordinarily
sufficient to pay-off the outstanding balance and
contractual interest due.
Non-performing Loans Rollforward
The table below presents a summary of non-performing
loans, excluding covered loans, as of December 31,
2010 and shows the changes in the balance during
2010:
(Dollars in thousands)
| December 31, | ||||
| 2010 | ||||
Balance at beginning of period |
$ | 131,804 | ||
Additions, net |
173,461 | |||
Return to performing status |
(4,914 | ) | ||
Payments received |
(30,513 | ) | ||
Transfer to OREO |
(68,663 | ) | ||
Charge-offs |
(55,220 | ) | ||
Net change for niche loans (1) |
(3,823 | ) | ||
Balance at end of period |
$ | 142,132 | ||
| (1) | Includes activity for premium finance receivables, mortgages held for investment by WMC and indirect consumer loans. |
73
Table of Contents
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of the probable and reasonably
estimable loan losses that our loan portfolio is expected to incur. The allowance for loan losses
is determined quarterly using a methodology that incorporates important risk characteristics of
each loan, as described below under “How We Determine the Allowance for Credit Losses.” This
process is subject to review at each of our bank subsidiaries by the applicable regulatory
authority, including the Federal Reserve Bank of Chicago, the OCC, the State of Illinois and the
State of Wisconsin.
The following table sets forth the allocation of the allowance for loan losses and the allowance
for losses on lending-related commitments by major loan type and the percentage of loans in each
category to total loans for the past five fiscal years (dollars in thousands):
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||||
| % of Loan | % of Loan | % of Loan | % of Loan | % of Loan | ||||||||||||||||||||||||||||||||||||
| Type to | Type to | Type to | Type to | Type to | ||||||||||||||||||||||||||||||||||||
| Total | Total | Total | Total | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | |||||||||||||||||||||||||||||||
Allowance for loan losses
allocation: |
||||||||||||||||||||||||||||||||||||||||
Commercial |
$ | 31,777 | 21 | % | $ | 28,012 | 21 | % | $ | 17,495 | 19 | % | $ | 16,185 | 20 | % | $ | 15,224 | 20 | % | ||||||||||||||||||||
Commercial real estate |
62,618 | 34 | 50,952 | 39 | 39,490 | 44 | 22,810 | 45 | 17,719 | 43 | ||||||||||||||||||||||||||||||
Home equity |
6,213 | 9 | 9,013 | 11 | 3,067 | 12 | 2,057 | 10 | 1,985 | 10 | ||||||||||||||||||||||||||||||
Residential real estate |
5,107 | 3 | 3,139 | 4 | 1,698 | 3 | 1,290 | 3 | 1,381 | 3 | ||||||||||||||||||||||||||||||
Consumer and other |
1,343 | 1 | 1,977 | 1 | 1,661 | 2 | 1,475 | 2 | 1,889 | 2 | ||||||||||||||||||||||||||||||
Premium
finance receivables –
commercial |
5,482 | 13 | 2,836 | 9 | 4,358 | 16 | 3,643 | 16 | 4,838 | 18 | ||||||||||||||||||||||||||||||
Premium
finance receivables –
life insurance |
837 | 15 | 980 | 14 | 308 | 2 | 29 | — | — | — | ||||||||||||||||||||||||||||||
Indirect consumer loans |
526 | 1 | 1,368 | 1 | 1,690 | 2 | 2,900 | 4 | 3,019 | 4 | ||||||||||||||||||||||||||||||
Covered loans |
— | 3 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total allowance for loan losses |
$ | 113,903 | 100 | % | $ | 98,277 | 100 | % | $ | 69,767 | 100 | % | $ | 50,389 | 100 | % | $ | 46,055 | 100 | % | ||||||||||||||||||||
Allowance category as a percent of total
allowance: |
||||||||||||||||||||||||||||||||||||||||
Commercial |
28 | % | 29 | % | 25 | % | 32 | % | 33 | % | ||||||||||||||||||||||||||||||
Commercial real estate |
55 | 52 | 57 | 45 | 39 | |||||||||||||||||||||||||||||||||||
Home equity |
5 | 9 | 5 | 4 | 4 | |||||||||||||||||||||||||||||||||||
Residential real estate |
4 | 3 | 2 | 3 | 3 | |||||||||||||||||||||||||||||||||||
Consumer and other |
1 | 2 | 2 | 3 | 4 | |||||||||||||||||||||||||||||||||||
Premium
finance receivables –
commercial |
5 | 3 | 6 | 7 | 10 | |||||||||||||||||||||||||||||||||||
Premium
finance receivables –
life insurance |
1 | 1 | 1 | — | — | |||||||||||||||||||||||||||||||||||
Indirect consumer loans |
1 | 1 | 2 | 6 | 7 | |||||||||||||||||||||||||||||||||||
Covered loans |
— | — | — | — | — | |||||||||||||||||||||||||||||||||||
Total allowance for loan losses |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||||||||||
Allowance for losses on lending-related
commitments: |
||||||||||||||||||||||||||||||||||||||||
Commercial and commercial real
estate |
$ | 4,134 | $ | 3,554 | $ | 1,586 | $ | 493 | $ | 457 | ||||||||||||||||||||||||||||||
Total allowance for credit losses |
$ | 118,037 | $ | 101,831 | $ | 71,353 | $ | 50,882 | $ | 46,512 | ||||||||||||||||||||||||||||||
Management has determined that the allowance for loan losses was appropriate at December 31,
2010, and that the loan portfolio is well diversified and well secured, without undue concentration
in any specific risk area. While this process involves a high degree of management judgment, the
allowance for credit losses is based on a comprehensive, well documented, and consistently applied
analysis of the Company’s loan portfolio. This analysis takes into consideration all available
information existing as of the financial statement date, including environmental factors such as
economic, industry, geographical and political factors. The relative level of allowance for credit
losses is reviewed and compared to industry peers. This review encompasses the levels of
nonperforming loans, the ratio of nonperforming loans to the allowance for credit losses and the
overall levels of net charge-offs. Historical trending of both the Company’s results and the
industry peers is also reviewed to analyze comparative significance.
74
Table of Contents
Allowance for Credit Losses
The following tables summarize the activity in our allowance for credit losses during the last five
fiscal years.
(Dollars in thousands)
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Allowance for loan losses at beginning of year |
$ | 98,277 | 69,767 | 50,389 | 46,055 | 40,283 | ||||||||||||||
Provision for credit losses |
124,664 | 167,932 | 57,441 | 14,879 | 7,057 | |||||||||||||||
Allowance acquired in business combinations |
— | — | — | 362 | 3,852 | |||||||||||||||
Adjustment for change in accounting for loan
securization |
1,943 | — | — | — | — | |||||||||||||||
Reclassification from/(to) allowance for
lending-related commitments |
(1,301 | ) | (2,037 | ) | (1,093 | ) | (36 | ) | 92 | |||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial |
18,592 | 35,022 | 10,066 | 4,806 | 3,154 | |||||||||||||||
Commercial real estate |
61,873 | 89,114 | 20,403 | 4,152 | 1,380 | |||||||||||||||
Home equity |
5,926 | 4,605 | 284 | 289 | 97 | |||||||||||||||
Residential real estate |
1,143 | 1,067 | 1,631 | 147 | 81 | |||||||||||||||
Premium
finance receivables – commercial |
23,005 | 8,153 | 4,073 | 2,425 | 2,760 | |||||||||||||||
Premium
finance receivables – life insurance |
233 | — | — | — | — | |||||||||||||||
Indirect consumer |
967 | 1,848 | 1,322 | 873 | 584 | |||||||||||||||
Consumer and other |
1,141 | 644 | 618 | 845 | 421 | |||||||||||||||
Total charge-offs |
112,880 | 140,453 | 38,397 | 13,537 | 8,477 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial |
1,140 | 450 | 299 | 803 | 1,273 | |||||||||||||||
Commercial real estate |
914 | 792 | 197 | 929 | 1,026 | |||||||||||||||
Home equity |
24 | 815 | 1 | 61 | 31 | |||||||||||||||
Residential real estate |
12 | — | — | 6 | 2 | |||||||||||||||
Premium
finance receivables – commercial |
781 | 651 | 662 | 514 | 567 | |||||||||||||||
Premium
finance receivables – life insurance |
— | — | — | — | — | |||||||||||||||
Indirect consumer |
198 | 179 | 173 | 172 | 191 | |||||||||||||||
Consumer and other |
131 | 181 | 95 | 181 | 158 | |||||||||||||||
Total recoveries |
3,200 | 3,068 | 1,427 | 2,666 | 3,248 | |||||||||||||||
Net charge-offs (excluding covered loans) |
(109,680 | ) | (137,385 | ) | (36,970 | ) | (10,871 | ) | (5,229 | ) | ||||||||||
Covered loans |
— | — | — | — | — | |||||||||||||||
Net charge-offs |
(109,680 | ) | (137,385 | ) | (36,970 | ) | (10,871 | ) | (5,229 | ) | ||||||||||
Allowance for loan losses at end of year |
$ | 113,903 | 98,277 | 69,767 | 50,389 | 46,055 | ||||||||||||||
Allowance for lending-related commitments at
end of year |
4,134 | 3,554 | 1,586 | 493 | 457 | |||||||||||||||
Allowance for credit losses at end of year |
$ | 118,037 | 101,831 | 71,353 | 50,882 | 46,512 | ||||||||||||||
Net charge-offs by category as a percentage
of its own respective category’s average: |
||||||||||||||||||||
Commercial |
0.95 | % | 2.18 | % | 0.72 | % | 0.31 | % | 0.16 | % | ||||||||||
Commercial real estate |
1.83 | 2.59 | 0.63 | 0.11 | 0.01 | |||||||||||||||
Home equity |
0.64 | 0.41 | 0.04 | 0.04 | 0.01 | |||||||||||||||
Residential real estate |
0.19 | 0.21 | 0.49 | 0.04 | 0.02 | |||||||||||||||
Premium
finance receivables – commercial |
1.74 | 0.67 | 0.29 | 0.15 | 0.22 | |||||||||||||||
Premium
finance receivables – life insurance |
0.02 | — | — | — | — | |||||||||||||||
Indirect consumer |
1.09 | 1.24 | 0.53 | 0.28 | 0.17 | |||||||||||||||
Consumer and other |
0.93 | 0.35 | 0.32 | 0.47 | 0.19 | |||||||||||||||
Total loans, net of unearned income,
excluding
covered loans |
1.16 | % | 1.65 | % | 0.51 | % | 0.16 | % | 0.09 | % | ||||||||||
Covered loans |
— | — | — | — | — | |||||||||||||||
Total loans, net of unearned income |
1.13 | % | 1.65 | % | 0.51 | % | 0.16 | % | 0.09 | % | ||||||||||
Net charge-offs as a percentage of the provision
for credit losses |
87.98 | % | 81.81 | % | 64.36 | % | 73.07 | % | 74.10 | % | ||||||||||
Year-end total loans (excluding covered loans) |
$ | 9,599,886 | 8,411,771 | 7,621,069 | 6,801,602 | 6,496,480 | ||||||||||||||
Allowance for loan losses as a percentage
of loans at end of year |
1.19 | % | 1.17 | % | 0.92 | % | 0.74 | % | 0.71 | % | ||||||||||
Allowance for credit losses as a percentage
of loans at end of year |
1.23 | % | 1.21 | % | 0.94 | % | 0.75 | % | 0.72 | % | ||||||||||
Year-end total loans (including covered loans) |
$ | 9,934,239 | 8,411,771 | 7,621,069 | 6,801,602 | 6,496,480 | ||||||||||||||
Allowance for loan losses as a percentage
of loans at end of year |
1.15 | % | 1.17 | % | 0.92 | % | 0.74 | % | 0.71 | % | ||||||||||
Allowance for credit losses as a percentage
of loans at end of year |
1.19 | % | 1.21 | % | 0.94 | % | 0.75 | % | 0.72 | % | ||||||||||
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The allowance for credit losses is comprised
of an allowance for loan losses, which is determined
with respect to loans that we have originated, and
an allowance for lending-related commitments. Our
allowance for lending-related commitments is
determined with respect to funds that we have
committed to lend but for which funds have not yet
been disbursed and is computed using a methodology
similar to that used to determine the allowance for
loan losses. Additions to the allowance for loan
losses are charged to earnings through the provision
for credit losses. Charge-offs represent the amount
of loans that have been determined to be
uncollectible during a given period, and are
deducted from the allowance for loan losses, and
recoveries represent the amount of collections
received from loans that had previously been charged
off, and are credited to the allowance for loan
losses.
How We Determine the Allowance for Credit Losses
The allowance for loan losses includes an
element for estimated probable but undetected losses
and for imprecision in the credit risk models used
to calculate the allowance. As part of the Problem
Loan Reporting system review, the Company analyzes
the loan for purposes of calculating our specific
impairment reserves and a general reserve.
Specific Impairment Reserves:
Loans with a credit risk rating of a 6 through 9 are
reviewed on a monthly basis to determine if (a) an
amount is deemed uncollectible (a charge-off) or (b)
it is probable that the Company will be unable to
collect amounts due in accordance with the original
contractual terms of the loan (impaired loan). If a
loan is impaired, the carrying amount of the loan is
compared to the expected payments to be reserved,
discounted at the loan’s original rate, or for
collateral dependent loans, to the fair value of the
collateral. Any shortfall is recorded as a specific
reserve.
General Reserves:
For loans
with a credit risk rating of 1 through 7,
reserves are established based on the type of loan
collateral, if any, and the assigned credit risk
rating. Determination of the allowance is
inherently subjective as it requires significant
estimates, including the amounts and timing of
expected future cash flows on impaired loans,
estimated losses on pools of homogeneous loans based
on historical loss experience, and consideration of
current environmental factors and economic trends,
all of which may be susceptible to significant
change.
We determine this component of the allowance for
loan losses by classifying each loan into (i)
categories based on the type of collateral that
secures the loan (if any), and (ii) categories based
on the credit risk rating of the loan, as described
above under “Past Due Loans and Non-Performing
Assets.” Each combination of collateral and credit
risk rating is then assigned a specific loss factor
that incorporates the following factors:
| • | historical loss experience; |
| • | changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; |
| • | changes in national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio; |
| • | changes in the nature and volume of the portfolio and in the terms of the loans; |
| • | changes in the experience, ability, and depth of lending management and other relevant staff; |
| • | changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; |
| • | changes in the quality of the bank’s loan review system; |
| • | changes in the underlying collateral for collateral dependent loans; | ||
| • | the existence and effect of any concentrations of credit, and changes in the level of such concentrations; and |
| • | the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the bank’s existing portfolio. |
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Home Equity and Residential Real Estate Loans:
The determination of the appropriate allowance for
loan losses for residential real estate and home
equity loans differs slightly from the process used
for commercial and commercial real estate loans. The
same credit risk rating system, Problem Loan
Reporting system, collateral coding methodology and
loss factor assignment are used. The only
significant difference is in how the credit risk
ratings are assigned to these loans.
The home equity loan portfolio is reviewed on a loan
by loan basis by analyzing current FICO scores of
the borrowers, line availability, recent line usage
and the aging status of the loan. Certain of these
factors, or combination of these factors, may cause
a portion of the credit risk ratings of home equity
loans across all banks to be downgraded. Similar to
commercial and commercial real estate loans, once a
home equity loan’s credit risk rating is downgraded
to a 6 through 9, the Company’s Managed Asset
Division reviews and advises the banks as to
collateral valuations and as to the ultimate
resolution of the credits that deteriorate to a
non-accrual status to minimize losses.
Residential real estate loans that are downgraded to
a credit risk rating of 6 through 9 also enter the
Problem Loan Reporting system and have the
underlying collateral evaluated by the Managed
Assets Division.
Premium Finance Receivables and Indirect Consumer Loans:
The determination of the appropriate allowance for
loan losses for premium finance receivables and
indirect consumer loans is based solely on the aging
(collection status) of the portfolios. Due to the
large number of generally smaller sized and
homogenous credits in these portfolios, these loans
are not individually assigned a credit risk rating.
Loss factors are assigned to each delinquency
category in order to calculate an allowance for loan
losses. The allowance for loan losses for these
categories is entirely a general reserve.
Effects of Economic Recession and Real Estate Market:
The Company’s primary markets, which are mostly in
Chicago metropolitan area, have not experienced the
same levels of credit deterioration in residential
mortgage and home equity loans as certain other
major metropolitan markets, such as Miami, Phoenix
or Southern California, however the Company’s
markets
have clearly been under stress. As of December 31,
2010, home equity loans and residential mortgages
comprised 9% and
3%, respectively, of the Company’s total loan
portfolio. At December 31, 2010 (excluding covered loans),
approximately only 2.2% of all of the Company’s
residential mortgage loans and approximately only
1.7% of all of the Company’s home equity loans are
more than one payment past due. Although there is
stress in the Chicago metropolitan and southeastern
Wisconsin markets, our portfolios of residential
mortgages and home equity loans are performing
reasonably well as reflected in the aging of the
Company’s loan portfolio table shown earlier in this
section.
Methodology in Assessing Impairment and Charge-off Amounts
In determining the amount of impairment or
charge-offs associated with collateral dependent
loans, the Company values the loan generally by
starting with a valuation obtained from an appraisal
of the underlying collateral and then deducting
estimated selling costs to arrive at a net appraised
value. We obtain the appraisals of the underlying
collateral from one of a pre-approved list of
independent, third party appraisal firms.
In many cases, the Company simultaneously values the
underlying collateral by marketing the property to
market participants interested in purchasing
properties of the same type. If the Company receives
offers or indications of interest, we will analyze
the price and review market conditions to assess
whether in light of such information the appraised
value overstates the likely price and that a lower
price would be a better assessment of the market
value of the property and would enable us to
liquidate the collateral. Additionally, the Company
takes into account the strength of any guarantees
and the ability of the borrower to provide value
related to those guarantees in determining the
ultimate charge-off or reserve associated with any
impaired loans. Accordingly, the Company may
charge-off a loan to a value below the net appraised
value if it believes that an expeditious liquidation
is desirable in the circumstance and it has
legitimate offers or other indications of interest
to support a value that is less than the net
appraised value. Alternatively, the Company may
carry a loan at a value that is in excess of the
appraised value if the Company has a guarantee from
a borrower that the Company believes has realizable
value. In evaluating the strength of any guarantee,
the Company evaluates the financial wherewithal of
the guarantor, the guarantor’s reputation, and the
guarantor’s willingness and desire
to work with the Company. The Company then conducts
a review of the strength of a guarantee on a
frequency established as the circumstances and
conditions of the borrower warrant.
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Table of Contents
In circumstances where the Company has received an
appraisal but has no third party offers or
indications of interest, the Company may enlist the
input of realtors in the local market as to the
highest valuation that the realtor believes would
result in a liquidation of the property given a
reasonable marketing period of approximately 90
days. To the extent that the realtors’ indication of
market clearing price under such scenario is less
than the net appraised valuation, the Company may
take a charge-off on the loan to a valuation that is
less than the net appraised valuation.
The Company may also charge-off a loan below the net
appraised valuation if the Company holds a junior
mortgage position in a piece of collateral whereby
the risk to acquiring control of the property
through the purchase of the senior mortgage position
is deemed to potentially increase the risk of loss
upon liquidation due to the amount of time to
ultimately market the property and the volatile
market conditions. In such cases, the Company may
abandon its junior mortgage and charge-off the loan
balance in full.
In other cases, the Company may allow the borrower
to conduct a “short sale,” which is a sale where the
Company allows the borrower to sell the property at
a value less than the amount of the loan. Many
times, it is possible for the current owner to
receive a better price than if the property is
marketed by a financial institution which the market
place perceives to have a greater desire to
liquidate the property at a lower price. To the
extent that we allow a short sale at a price below
the value indicated by an appraisal, we may take a
charge-off beyond the value that an appraisal would
have indicated.
Other market conditions may require a reserve to
bring the carrying value of the loan below the net
appraised valuation such as litigation surrounding
the borrower and/or property securing our loan or
other market conditions impacting the value of the
collateral.
Having determined the net value based on the factors
such as those noted above and compared that value to
the book value of the loan, the Company may arrive
at a charge-off amount or a specific reserve
included in the allowance for loan losses. In
summary, for collateral dependent loans, appraisals
are used as the
fair value starting point in the estimate of net
value. Estimated costs to sell are deducted from the
appraised value to arrive at the net appraised
value. Although an external appraisal is the primary
source of valuation utilized for charge-offs on
collateral dependent loans, we may utilize values
obtained through purchase and sale agreements,
legitimate indications of interest, negotiated short
sales, realtor price opinions, sale of the note or
support from guarantors as the basis for
charge-offs. These alternative sources of value are
used only if deemed to be more representative of
value based on updated information regarding
collateral resolution. In addition, if an appraisal
is not deemed current, a discount to appraised value
may be utilized. Any adjustments from appraised
value to net value are detailed and justified in an
impairment analysis, which is reviewed and approved
by the Company’s Managed Assets Division.
Restructured Loans
The table below presents a summary of
restructured loans for the respective periods,
presented by loan category and accrual status:
(Dollars in thousands)
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Accruing: |
||||||||
Commercial |
$ | 14,163 | 10,946 | |||||
Commercial real estate |
65,419 | 20,573 | ||||||
Residential real estate |
1,562 | 234 | ||||||
Total accrual |
$ | 81,144 | 31,753 | |||||
Non-accrual: (1) |
||||||||
Commercial |
$ | 3,865 | — | |||||
Commercial real estate |
15,947 | 679 | ||||||
Residential real estate |
234 | — | ||||||
Total non-accrual |
$ | 20,046 | 679 | |||||
Total restructured loans: |
||||||||
Commercial |
$ | 18,028 | 10,946 | |||||
Commercial real estate |
81,366 | 21,252 | ||||||
Residential real estate |
1,796 | 234 | ||||||
Total restructured loans |
$ | 101,190 | 32,432 | |||||
| (1) | Included in total non-performing loans. |
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Table of Contents
At December 31, 2010, the Company had $101.2
million in loans with modified terms. The $101.2
million in modified loans represents 129 credit
relationships in which economic concessions were
granted to certain borrowers to better align the
terms of their loans with their current ability to
pay. These actions were taken on a case-by-case
basis working with these borrowers to find a
concession that would assist them in retaining their
businesses or their homes and attempt to keep these
loans in an accruing status for the Company. Typical
concessions include reduction of the loan interest
rate to a rate considered lower than market and
other modification of terms including forgiveness of
all or a portion of the loan balance, extension of
the maturity date, and/or modifications from
principal and interest payments to interest-only
payments for a certain period.
Subsequent to its restructuring, any restructured
loan with a below market rate concession that
becomes nonaccrual, will remain classified by the
Company as a restructured loan for its duration and
will be included in the Company’s nonperforming
loans. Each restructured loan was reviewed for
collateral impairment at December 31, 2010 and
approximately $11.3 million of collateral impairment
was present and appropriately reserved for through
the Company’s normal reserving methodology in the
Company’s allowance for loan losses.
Potential Problem Loans
Management believes that any loan where there
are serious doubts as to the ability of such
borrowers to comply with the present loan repayment
terms should be identified as a non-performing loan
and should be included in the disclosure of “Past
Due Loans and Non-performing Assets.” Accordingly,
at the periods presented in this report, the Company
has no potential problem loans as defined by SEC
regulations.
Loan Concentrations
Loan concentrations are considered to exist
when there are amounts loaned to multiple borrowers
engaged in similar activities which would cause them
to be similarly impacted by economic or other
conditions. The Company had no concentrations of
loans exceeding 10% of total loans at December 31,
2010, except for loans included in the specialty
finance operating segment, which are diversified
throughout the United States.
Other Real Estate Owned
The table below presents a summary of other
real estate owned, excluding covered other real
estate owned, as of December 31, 2010 and shows the
activity for the respective periods and the balance
for each property type:
(Dollars in thousands)
| Year Ended | ||||||||
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Balance at beginning of period |
$ | 80,163 | 32,572 | |||||
Disposals/resolved |
(63,562 | ) | (56,000 | ) | ||||
Transfers in at fair value,
less costs to sell |
63,615 | 112,015 | ||||||
Fair value adjustments |
(9,002 | ) | (8,424 | ) | ||||
Balance at end of period |
$ | 71,214 | 80,163 | |||||
| Period End | ||||||||
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Balance by Property Type: |
||||||||
Residential real estate |
$ | 5,694 | 5,889 | |||||
Residential real estate development |
17,781 | 41,992 | ||||||
Commercial real estate |
47,739 | 32,282 | ||||||
Balance at end of period |
$ | 71,214 | 80,163 | |||||
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Table of Contents
Liquidity and Capital Resources
The Company and the banks are subject to various regulatory capital requirements established
by the federal banking agencies that take into account risk attributable to balance sheet and
off-balance sheet activities. Failure to meet minimum capital requirements can initiate certain
mandatory — and possibly discretionary — actions by regulators, that if undertaken could have a
direct material effect on the Company’s financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the banks must meet specific
capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The Federal
Reserve’s capital guidelines require bank holding companies 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. The Federal Reserve also requires a minimum leverage ratio of Tier 1
Capital to total assets of 3.0% for strong bank holding companies (those rated a composite “1”
under the Federal Reserve’s rating system). For all other bank holding companies, the minimum ratio
of Tier 1 Capital to total assets is 4.0%. In addition the Federal Reserve continues to consider
the Tier 1 leverage ratio in evaluating proposals for expansion or new activities.
The following table summarizes the capital guidelines for bank holding companies, as well as
certain ratios relating to the Company’s equity and assets as of December 31, 2010, 2009 and 2008:
| Wintrust’s | Wintrust’s | Wintrust’s | ||||||||||||||||||
| Well | Ratios at | Ratios at | Ratios at | |||||||||||||||||
| Minimum | Capitalized | Year-end | Year-end | Year-end | ||||||||||||||||
| Ratios | Ratios | 2010 | 2009 | 2008 | ||||||||||||||||
Tier 1 Leverage Ratio |
4.0 | % | 5.0 | % | 10.1 | % | 9.3 | % | 10.6 | % | ||||||||||
Tier 1 Capital to Risk-Weighted Assets |
4.0 | % | 6.0 | % | 12.5 | % | 11.0 | % | 11.6 | % | ||||||||||
Total Capital to Risk-Weighted Assets |
8.0 | % | 10.0 | % | 13.8 | % | 12.4 | % | 13.1 | % | ||||||||||
Total average equity to total average assets |
N/A | N/A | 10.0 | % | 9.5 | % | 8.0 | % | ||||||||||||
Dividend payout ratio |
N/A | N/A | 17.6 | % | 12.4 | % | 47.4 | % | ||||||||||||
As reflected in the table, each of the Company’s capital ratios at December 31, 2010,
exceeded the well-capitalized ratios established by the Federal Reserve. Refer to Note 20 of the
Consolidated Financial Statements for further information on the capital positions of the banks.
The Company’s principal sources of funds at the holding company level are dividends from its
subsidiaries, borrowings under its loan agreement with unaffiliated banks and proceeds from the
issuances of subordinated debt, junior subordinated debentures and additional equity. Refer to
Notes 12, 14, 16 and 24 of the Consolidated Financial Statements for further information on the
Company’s notes payable, subordinated notes, junior subordinated debentures and shareholders’
equity, respectively. Management is committed to maintaining the Company’s capital levels above the
“Well Capitalized” levels established by the Federal Reserve for bank holding companies.
In March 2010, the Company issued through a public offering a total of 6.67 million shares of its
common stock at $33.25 per share. Net proceeds to the Company totaled $210.3 million after
deducting underwriting discounts and commissions and estimated offering expenses. Additionally, in
December 2010, the Company sold 3.66 million shares of common stock at $30.00 per share and 4.6
million 7.50% tangible equity units (“TEU”) at a public offering price of $50.00 per unit. The
Company received net proceeds of $104.8 million and $222.7 million from the common stock and TEU,
respectively, after deducting underwriting discounts and commissions and estimated offering
expenses. Each tangible equity unit is a unit composed of a prepaid stock purchase contract and a
junior subordinated amortizing note due December 15, 2013. For additional discussion of these
offerings and the terms of the TEUs, see Note 24 — Shareholders’ Equity and Note 15 — Other Borrowings.
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Table of Contents
On December 22, 2010, the Company repurchased all
250,000 shares of its Series B Preferred Stock,
which it issued to the Treasury in December 2008
under the TARP CPP. The Series B Preferred Stock and
the accompanying warrant to purchase Wintrust common
stock were the only securities sold by the Company
to the federal government.
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
semi-annual dividends since that time. The payment
of dividends is also subject to statutory
restrictions and restrictions arising under the
terms of our 8.00% non-cumulative perpetual
convertible preferred stock, Series A, 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 entered into on October
30, 2009 (and amended on October 29, 2010), 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.
Prior to the repurchase of the Series B Preferred
Stock, noted above, declarations of dividends were
also limited by the terms of Series B Preferred
Stock. In January and July 2010, Wintrust declared
semi-annual cash dividends of $0.09 per common
share, and in January and July 2009, Wintrust
declared semi-annual cash dividends of $0.18 and
$0.09 per common share, respectively. Taking into
account the limitations on the payment of dividends,
the final determination of timing, amount and
payment of dividends is at the discretion of the
Company’s Board of Directors and will depend on the
Company’s earnings, financial condition, capital
requirements and other relevant factors.
Banking laws impose restrictions upon the amount of
dividends that can be paid to the holding company by
the banks. Based on these laws, the banks could,
subject to minimum capital requirements, declare
dividends to the Company without obtaining
regulatory approval in an amount not exceeding (a)
undivided profits, and (b) the amount of net income
reduced by dividends paid for the current and prior
two years.
At January 1, 2011, subject to minimum capital
requirements at the banks, approximately $69.4
million was available as dividends from the banks
without prior regulatory approval and without
compromising the banks’ well-capitalized positions.
Since the banks are required to maintain their
capital at the well-capitalized level (due to the
Company being a financial holding company), funds
otherwise available
as dividends from the banks are limited to the
amount that would not reduce any of the banks’
capital ratios below the well-capitalized level.
During 2010, 2009 and 2008 the subsidiaries paid
dividends to Win-trust totaling $11.5 million,
$100.0 million and $73.2 million, respectively.
Liquidity management at the banks involves planning
to meet anticipated funding needs at a reasonable
cost. Liquidity management is guided by policies,
formulated and monitored by the Company’s senior
management and each Bank’s asset/liability
committee, which take into account the marketability
of assets, the sources and stability of funding and
the level of unfunded commitments. The banks’
principal sources of funds are deposits, short-term
borrowings and capital contributions from the
holding company. In addition, the banks are eligible
to borrow under Federal Home Loan Bank advances and
certain banks are eligible to borrow at the Federal
Reserve Bank Discount Window, another source of
liquidity.
Core deposits are the most stable source of
liquidity for community banks due to the nature of
long-term relationships generally established with
depositors and the security of deposit insurance
provided by the FDIC. Core deposits are generally
defined in the industry as total deposits less time
deposits with balances greater than $100,000. Due to
the affluent nature of many of the communities that
the Company serves, management believes that many of
its time deposits with balances in excess of
$100,000 are also a stable source of funds. Standard
deposit insurance coverage is $250,000 per depositor
per insured bank, for each account ownership
category. In addition, each of our subsidiary banks
elected to participate in the Transaction Account
Guarantee Program (TAGP), which provides unlimited
FDIC insurance coverage for the entire account
balance in exchange for an additional insurance
premium to be paid by the depository institution for
accounts with balances in excess of the permanent
FDIC insurance limit of $250,000. This additional
insurance coverage expired on December 31, 2010.
Effective on that same date, the Dodd-Frank Act
provided unlimited deposit insurance coverage for
noninterest-bearing deposits through December 31,
2012. This unlimited insurance coverage is separate
from, and in addition to, the insurance coverage
provided to a depositor’s other accounts at a bank.
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While the Company obtains a portion of its total deposits through brokered deposits, the Company
does so primarily as an asset-liability management tool to assist in the management of interest
rate risk, and the Company does not consider brokered deposits to be a vital component of its
current liquidity resources. For example, as of December 31, 2010, Wintrust had approximately $1.0
billion of cash, overnight funds and interest-bearing deposits with other banks (primarily the
Federal Reserve) on its books, but only maintained $639.7 million of brokered deposits.
Historically, brokered deposits
have represented a small component of the Company’s total deposits outstanding, as set forth in the
table below:
(Dollars in thousands)
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Total Deposits |
$ | 10,803,673 | 9,917,074 | 8,376,750 | 7,471,441 | 7,869,240 | ||||||||||||||
Brokered Deposits (1) |
639,687 | 927,722 | 800,042 | 505,069 | 591,579 | |||||||||||||||
Brokered Deposits as a
percentage of Total Deposits
(1) |
5.9 | % | 9.4 | % | 9.6 | % | 6.8 | % | 7.5 | % | ||||||||||
| (1) | Brokered Deposits include certificates of deposit obtained through deposit brokers, deposits received through the Certificate of Deposit Account Registry Program (“CDARS”), as well as wealth management deposits of brokerage customers from unaffiliated companies which have been placed into deposit accounts of the banks. |
The banks routinely accept deposits from a variety of municipal entities. Typically, these
municipal entities require that banks pledge marketable securities to collateralize these public
deposits. At December 31, 2010 and 2009, the banks had approximately $875.7 million and $865.2
million, respectively, of securities collateralizing public deposits and other short-term
borrowings. Public deposits requiring pledged assets are not considered to be core deposits,
however they provide the Company with a more reliable, lower cost, short-term funding source than
what is available through other wholesale alternatives.
As discussed in Note 6 of the Consolidated Financial Statements, in September 2009, the Company’s
subsidiary, FIFC, sponsored a qualifying special-purpose entity (“QSPE”) that issued $600 million
in aggregate principal amount of its Notes. The QSPE’s obligations under the Notes are secured by
loans made to buyers of property and casualty insurance policies to finance the related premiums
payable by the buyers to the insurance companies for the policies. At the time of issuance, the
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 a non-TALF-eligible transaction.
Other than as discussed in this section, the Company is not aware of any known trends, commitments,
events, regulatory recommendations or uncertainties that would have any material adverse effect on
the Company’s capital resources, operations or liquidity.
82
Table of Contents
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
The Company has various financial obligations, including contractual obligations and commitments,
that may require future cash payments.
Contractual Obligations. The following table presents, as of December 31, 2010, significant fixed
and determinable contractual obligations to third parties by payment date. Further discussion of
the nature of each obligation is included in the referenced note to the Consolidated Financial
Statements:
| Payments Due In | ||||||||||||||||||||||||
| Note | One Year | 1-3 | 3-5 | Over | ||||||||||||||||||||
| Reference | or Less | Years | Years | 5 Years | Total | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
Deposits (1) |
11 | $ | 8,999,553 | 1,446,484 | 353,692 | 3,944 | 10,803,673 | |||||||||||||||||
Notes payable |
12 | — | — | 1,000 | — | 1,000 | ||||||||||||||||||
FHLB advances (1) (2) |
13 | — | 233,500 | 60,000 | 130,000 | 423,500 | ||||||||||||||||||
Subordinated notes |
14 | 15,000 | 25,000 | 10,000 | — | 50,000 | ||||||||||||||||||
Other borrowings |
15 | 90,513 | 770,107 | — | — | 860,620 | ||||||||||||||||||
Junior subordinated debentures |
16 | — | — | — | 249,493 | 249,493 | ||||||||||||||||||
Operating leases |
17 | 4,066 | 7,374 | 5,278 | 9,850 | 26,568 | ||||||||||||||||||
Purchase obligations (3) |
16,509 | 3,509 | 121 | 139 | 20,278 | |||||||||||||||||||
Total |
$ | 9,125,641 | 2,485,974 | 430,091 | 393,426 | 12,435,132 | ||||||||||||||||||
| (1) | Excludes basis adjustment for purchase accounting valuations. | |
| (2) | Certain advances provide the FHLB with call dates which are not reflected in the above table. | |
| (3) | Purchase obligations presented above primarily relate to certain contractual obligations for services related to the construction of facilities, data processing and the outsourcing of certain operational activities. |
The Company also enters into derivative contracts under which the Company is required to
either receive cash from or pay cash to counterparties depending on changes in interest rates.
Derivative contracts are carried at fair value representing the net present value of expected
future cash receipts or payments based on market rates as of the balance sheet date. Because the
derivative assets and liabilities recorded on the balance sheet at December 31, 2010 do not
represent the amounts that may ultimately be paid under these contracts, these assets and
liabilities are not included in the table of contractual obligations presented above.
Commitments. The following table presents a summary of the amounts and expected maturities of
significant commitments as of December 31, 2010. Further information on these commitments is
included in Note 21 of the Consolidated Financial Statements.
| One Year | 1-3 | 3-5 | Over | |||||||||||||||||
| or Less | Years | Years | 5 Years | Total | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
Commitment type: |
||||||||||||||||||||
Commercial, commercial real estate
and construction |
$ | 1,278,570 | 480,440 | 128,032 | 40,372 | 1,927,414 | ||||||||||||||
Residential real estate |
303,132 | — | — | — | 303,132 | |||||||||||||||
Revolving home equity lines of credit |
829,919 | — | — | — | 829,919 | |||||||||||||||
Letters of credit |
||||||||||||||||||||